1
Securities and Exchange Commission
Washington, DC 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act 1934
Date of Report March 6, 1998
(Date of earliest event reported)
CalEnergy Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-9874 94-2213782
(State of other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
302 South 36th Street, Suite 400, Omaha, NE 68131
(Address of principal executive offices) Zip Code
Registrant's Telephone Number, including area code:(402) 341-4500
N/A
(Former name or former address, if changed since last report)
Item 5. Other Events.
(a) Cautionary Statements. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"), CalEnergy Company, Inc. (the
"Company") is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results
to differ materially from those expressed or implied by forward-
looking statements of the Company made by or on behalf of the
Company, whether oral or written. The Company wishes to ensure
that any forward-looking statements are accompanied by meaningful
cautionary statements in order to maximize to the fullest extent
possible the protections of the safe harbor established in the
Reform Act. Accordingly, any such statements are qualified in
their entirety by reference to, and are accompanied by, the
following important factors, among others, that could cause the
Company's actual results to differ materially from those
expressed or implied by forward-looking statements of the
Company made by or on behalf of the Company.
The Company cautions that the following important factors,
among others (including but not limited to factors mentioned from
time to time in the Company's reports filed with the Securities
and Exchange Commission), could affect the Company's actual
results and could cause the Company's actual consolidated results
to differ materially from those expressed or implied by any
forward-looking statements of the Company made by or on behalf of
the Company. The factors included here are not exhaustive.
Forward looking statements, by their nature, are speculative and
are based on then current expectations involving a number of
known and unknown risks and uncertainties that could cause the
actual results and performance of the Company to differ
materially from any expected future results or performance,
expressed or implied, by the forward-looking statements.
Further, any forward-looking statement speaks only as of the date
on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can
it assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those expressed or
implied by any forward-looking statements. Therefore, forward-
looking statements should not be relied upon as a prediction of
actual future results.
1. Acquisitions. The Company's recent growth has been
achieved, in part, through strategic acquisitions in the energy
industry which complement and diversify the Company's existing
business. The Company intends to continue to pursue an
aggressive acquisition strategy for the foreseeable future. The
Company's ability to pursue acquisition opportunities
successfully will depend on many factors, including, among
others, the Company's ability to (i) identify suitable
acquisition opportunities, (ii) consummate the acquisition,
including obtaining any necessary financing, and (iii)
successfully integrate acquired businesses. The acquisition and
integration of acquired businesses entails numerous risks,
including, among others, the risk of diverting management's
attention from the day-to-day operations of the Company, the risk
that the acquired businesses will require substantial capital and
financial investments and the risk that the investments will fail
to perform in accordance with expectations. There can be no
assurance that future acquisition opportunities, if any, can be
consummated on favorable terms or that the Company's integration
efforts will be successful.
2. Development Uncertainty. The Company is actively
seeking to develop, construct, own and operate new energy
projects (including, without limitation, generation,
distribution, exploration/production, storage and supply
projects, and related services), both domestically and
internationally, the completion of any of which is subject to
substantial risk. Development can require the Company to expend
significant sums for preliminary engineering, permitting, fuel
supply, resource exploration, legal and other expenses in
preparation for competitive bids which the Company may not win or
before it can be determined whether a project is feasible,
economically attractive or capable of being financed. Successful
development and construction is contingent upon, among other
things, negotiation on terms satisfactory to the Company of
engineering, construction, fuel supply and power sales or other
contracts with other project participants, receipt of adequate
security for the obligations of project participants, receipt of
required governmental permits and consents and timely
implementation of construction. Further, there can be no
assurance that the Company, which is substantially leveraged,
will obtain access to the substantial debt and equity capital
required to continue to develop and construct energy projects or
to refinance projects. The future growth of the Company is
dependent, in large part, upon the demand for significant amounts
of additional energy (including the generation, distribution,
exploration/production, storage and supply thereof) and related
services and its ability to obtain contracts or favorable markets
to service portions of this demand . There can be no assurance
that development efforts on any particular project, or the
Company's development efforts generally, will be successful.
3. Uncertainties Related to Doing Business Outside the
United States. The Company has various projects under
construction outside the United States, a number of projects
under award outside the United States and a number of operating
projects doing business outside of the United States. The
financing, development and operation of projects conducting
business outside the United States entail significant political
and financial risks (including, without limitation, uncertainties
associated with privatization efforts in the countries involved,
currency exchange rate fluctuations, currency repatriation
restrictions, changes in law or regulation, changes in government
policy, political instability, civil unrest, contract abrogation
and expropriation) and other risk/structuring issues that have
the potential to cause substantial delays in respect of, or
material impairment of, the value of the project being developed,
constructed or operated, which the Company may not be capable of
fully insuring against. The uncertainty of the legal environment
in certain foreign countries in which the Company is developing
and may develop or acquire projects could make it more difficult
for the Company to enforce its rights under agreements relating
to such projects. In addition, the laws and regulations of
certain countries may limit the ability of the Company to hold a
majority interest in some of the projects that it may develop or
acquire. The Company's international projects may, in certain
cases, be delayed, suspended or terminated by the applicable
foreign governments or may be subject to risks of contract
abrogation or other uncertainties resulting from changes in
government policy or personnel or changes in general economic
conditions affecting the country. (In this regard, the Company
notes that it recorded a one-time charge of $87 million for the
fourth quarter of 1997 representing an asset valuation impairment
under Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets" relating to the Company's
assets in Indonesia. The charge was taken as a result of
uncertainties regarding possible contract abrogations by the
Government of Indonesia relating to the Company's Dieng, Patuha
and Bali projects.) Furthermore, the central bank of certain
countries may have the authority in certain circumstances to
suspend, restrict or otherwise impose conditions on foreign
exchange transactions or to approve distributions to foreign
investors. Although the Company may structure certain power
purchase agreements and other project revenue agreements to
provide for payments to be made in, or indexed to, United States
dollars or a currency freely convertible into United States
dollars, there can be no assurance that the Company will be able
to achieve this structure in all cases or that a power purchaser
or other customer will be able to obtain sufficient dollars or
other hard currency or that available dollars will be allocated
to pay such obligations. In addition, the Company's investment
in certain international projects, including without limitation,
Northern Electric plc ("Northern"), where payments are to be made
in the foreign currency and any dividends or distributions of
earnings in respect of such investment may be significantly
affected by fluctuations in the exchange rate between the United
States dollar and the British pound or other applicable foreign
currency. Although the Company may enter into certain
transactions to hedge risks associated with exchange rate
fluctuations, there can be no assurance that such transactions
will be successful in reducing such risks.
4. Leverage. The Company is substantially leveraged,
which presents the risk that the Company might not generate
sufficient cash to service the Company's indebtedness or that its
leveraged capital structure could limit its ability to finance
future acquisitions, develop additional projects, compete
effectively and operate successfully under adverse economic
conditions.
5. Holding Company Structure. The Company is a holding
company which derives substantially all of its operating income
from its subsidiaries and joint ventures. The Company expects
that its future development efforts will be similarly structured
to involve operating subsidiaries and joint ventures. The
Company is dependent on the earnings and cash flows of, and
dividends from, its subsidiaries and joint ventures to generate
the funds necessary to meet its obligations. The availability of
distributions from such entities is subject to the satisfaction
of various covenants and conditions contained in the applicable
subsidiaries' and joint ventures' financing documents and to
certain utility regulatory restrictions. Furthermore, the
Company is structuring other project financing arrangements
containing, and anticipates that future project level financing
will contain, certain conditions and similar restrictions on the
distribution of cash to the Company. Any right of the Company to
receive any assets of any of its subsidiaries or other affiliates
upon any liquidation or reorganization of the Company will be
effectively subordinated to the claims of any such subsidiary's
or other affiliates' creditors (including trade creditors and
holders of debt issued by such subsidiary or other affiliate).
6. Northern's Regulatory Environment. Northern's
electricity distribution and supply businesses are subject to
extensive regulation in the United Kingdom.
Pricing Regulation of Distribution. Revenue from
Northern's distribution business is controlled by a formula
(the "Distribution Price Control Formula") which determines
the maximum average price per unit of electricity (expressed
in kilowatt ("kW") hours, a "unit") that a regional
electricity company (a "REC") in the United Kingdom may
charge. The Distribution Price Control Formula is expected
to have a five year duration and is subject to review by the
Director General of Electricity Supply (the "Regulator")at
the end of each five-year period and at other times in the
discretion of the Regulator. At each review, the Regulator
can propose adjustments to the Distribution Price Control
Formula. In July 1994, a review resulted in a 17% reduction
in allowed distribution income compared to the original
formula, before allowing for inflation, effective April 1,
1995. In July 1995, a further review of distribution prices
was concluded by the Regulator for fiscal years 1997 to
2000. As a result of this further review, Northern's
allowed distribution from income was reduced by a further
11%, before allowing for inflation, effective April 1, 1996.
There can be no assurance that any future price reviews by
the Regulator will not have a material adverse effect on the
Company's results of operations.
Competition in Supply. Northern's supply business is
also subject to price control and is being progressively
opened to competition. Northern currently has an exclusive
right, subject to price cap regulation, to supply
electricity to customers in its authorized area with a
maximum demand of not more than 100 kW ("Franchise Supply
Customers"). The market for customers with a maximum demand
above 1 MW has been open to competition for suppliers of
electricity since privatization while the market for
customers with a maximum demand above 100 kW ("Non-Franchise
Supply Customers") became competitive in April 1994. The
final stage of this process is expected to occur in the fall
of 1998, when the exclusive right to supply electricity to
Franchise Supply Customers is scheduled to end. There can
be no assurance that competition among suppliers of
electricity will not have a material adverse effect on the
Company's results of operations. The domestic gas market is
also being opened to competition in phases and there can be
no assurance that competition among suppliers of gas will
not have a material adverse effect on the Company's results
of operations.
Pool Purchase Price Volatility. Northern's supply
business to Non-Franchise Supply Customers generally
involves entering into fixed price contracts to supply
electricity to its customers. Northern obtains the
electricity to satisfy its obligations under such contracts
primarily by purchases from the wholesale trading market for
electricity in England and Wales (the "Pool"). Because the
price of electricity purchased from the Pool can be
volatile, to the extent that Northern purchases electricity
from the Pool, Northern is exposed to risk arising from
differences between the fixed price at which it sells and
the fluctuating prices at which it purchases electricity,
unless it can effectively hedge such exposure. Northern's
ability to manage such risk at acceptable levels will
depend, in part, on the specifics of the supply contracts
that Northern enters into, Northern's ability to implement
and manage an appropriate hedging strategy and the
development of an adequate market for hedging instruments.
There can be no assurance that this risk will be effectively
mitigated.
Changes in Government Policy. In the general election
held in the United Kingdom on May 1, 1997, the Labour Party
won a majority of seats in the United Kingdom Parliament.
On July 31, 1997, the United Kingdom passed the so called
"windfall tax" assessed on privatized utilities which
resulted in a third quarter extraordinary item of $135.85
million. There can be no assurance that other possible
changes in tax or utility regulation by the United Kingdom
government, by whichever party it is controlled, would not
cause a material adverse effect on the Company's results of
operations.
7. Exploration, Development and Operation Uncertainties of
Geothermal Resources. Geothermal exploration, development and
operations are subject to uncertainties similar to those
typically associated with oil and gas exploration and
development, including dry holes and uncontrolled releases.
Because of the geological complexities of geothermal reservoirs,
the geographic area and sustainable output of geothermal
reservoirs can only be estimated and cannot be definitively
established. There is, accordingly, a risk of an unexpected
decline in the capacity of geothermal wells and a risk of
geothermal reservoirs not being sufficient for sustained
generation of the electrical power capacity desired. In
addition, geothermal power production poses unusual risks of
seismic activity. Accordingly, there can be no assurance that
earthquake, property damage or business interruption insurance
will be adequate to cover all potential losses sustained in the
event of serious seismic disturbances or that such insurance will
be available on commercially reasonable terms. The success of a
geothermal project depends on the quality of the geothermal
resource and operational factors relating to the extraction of
the geothermal fluids involved in such project. The quality of a
geothermal resource is affected by a number of factors, including
the size of the reservoir, the temperature and pressure of the
geothermal fluids in such reservoir, the depth and capacity of
the production and injection wells, and amount of dissolved
solids and noncondensible gases contained in such geothermal
fluids, and the permeability of the subsurface rock formations
containing such geothermal resource, including the presence,
extent and location of fractures in such rocks. The quality of a
geothermal resource may decline as a result of a number of
factors, including the intrusion of lower-temperature fluid into
the producing zone. An incorrect estimate by the Company of the
quality of geothermal resource, or a decline in such quality,
could have a material adverse effect on the Company's results of
operations. In addition, both the cost of operations and the
operating performance of geothermal power plants may be adversely
affected by a variety of resource operating factors. Production
and injection wells can require frequent maintenance or
replacement. Corrosion caused by high-temperature and high-
salinity geothermal fluids may compel the replacement or repair
of certain equipment, vessels or pipelines. New production and
injection wells may be required for the maintenance of operating
levels, thereby requiring substantial capital expenditures.
8. Exploration, Development and Production of Gas
Resources. The exploration development and production of gas
resources involve resource based and geologic risks similar to
those for geothermal resources described above, including dry
holes, uncontrolled releases and uncertainties relating to
resource production, required capital and operating expenditures,
and resource quality, quantity, extractability, sustainability
and extent of reserves.
9. General Operating Uncertainties. The operation of a
power plant involves many risks, including the breakdown or
failure of power generation equipment, pipelines, transmission
lines or other equipment or processes, fuel interruption, and
performance below expected levels of output or efficiency. Each
facility may depend on a single or limited number of entities to
purchase electricity or thermal energy, to supply water, to
supply gas, to transport gas, to dispose of wastes or to wheel
electricity. The failure of any such purchasing utility, steam
host, water or gas supplier, gas transporter, wheeling utility or
other relevant project participant to fulfill its contractual
obligations could have a material adverse impact on the Company.
10. Fuel Supply Operations. The primary fuel source for
certain of the Company's projects is natural gas and a
substantial portion of the operating expenses of such facilities
consists of the costs of obtaining natural gas through gas supply
agreements and transporting that gas to the projects under gas
transportation agreements. Although the Company believes that it
has contracted for natural gas supply and transportation in
sufficient quantities to satisfy the needs of its projects, the
gas suppliers are not required in all cases to provide dedicated
reserves in support of their contractual obligations. Unless the
gas projects were able to obtain substitute volumes of natural
gas, including the requisite transportation services, for such
volumes at a price not materially higher than the sum of the
contract price under the existing gas supply agreements and any
damages paid by the supplier for failure to deliver, the
sustained failure of a supplier to deliver natural gas in
accordance with its contract could have a material adverse effect
on the cash flows to the Company. In addition, under certain gas
supply contracts the Company is obligated to pay for a certain
minimum quantity of natural gas even if it cannot utilize it.
The Company intends to manage its requirements for contract
volumes under the gas supply agreements so as to meet the minimum
take requirements through a combination of utilization of
nominated volumes in operations and resales of the remainder of
the volumes to third-party customers, if necessary. Finally, the
state, federal and foreign regulatory authorities that have
jurisdiction over natural gas transportation have the right to
modify aspects of the rates, terms and conditions of those
contracts. It is possible that such a modification could
materially increase the fuel transportation costs of the projects
or give the transporter a right to terminate or suspend or
decrease its performance under its contract.
11. Present Dependence on Large Customer; Contract Risks.
The Company currently relies on long-term power purchase
"Standard Offer No. 4" contracts between subsidiaries (each, an
"SO4 Agreement") and a large customer, Southern California
Edison Company ("Edison"), to generate a substantial portion of
its operating revenues. Any material failure by Edison to
fulfill its contractual obligations under such contracts is
likely to have a material adverse effect on the Company's results
of operations. Each of the Company's subsidiaries' SO4
Agreements provides for both capacity payments and energy
payments for a term of between 20 and 30 years. During the first
ten years after achieving firm operation, energy payments under
each SO4 Agreement are based on a pre-set schedule. Thereafter,
while the basis for the capacity payment remains the same, the
required energy payment is Edison's then-current published
avoided cost of energy ("Avoided Cost of Energy"), as determined
by the California Public Utility Commission ("CPUC"). Estimates
of Edison's future Avoided Cost of Energy vary substantially in
any given year. The Company cannot predict the likely level of
Avoided Cost of Energy prices under its subsidiaries' SO4
Agreements with Edison at the expiration of the fixed-price
periods. Edison's Avoided Cost of Energy as determined by the
CPUC is currently substantially below the current scheduled
energy prices under the Company's respective SO4 Agreements and
is currently expected to remain so. Thus, the revenues generated
by each of the Company's subsidiaries' facilities operating under
SO4 Agreements are likely to decline significantly after the
expiration of the applicable fixed price period. Moreover, the
Company's subsidiaries have a number of ongoing contract disputes
with Edison involving litigation of the SO4 Agreements, which
create additional litigation uncertainties regarding such
contracts.
12. Competition and Domestic Deregulation; Industry
Restructuring. The international power production market is
characterized by numerous strong and capable competitors, many of
which have more extensive and more diversified developmental or
operating experience (including international experience) and
greater financial resources than the Company. Many of these
competitors also compete in the domestic market. Further, in
recent years, the domestic power production industry has been
characterized by strong and increasing competition with respect
to the industry's efforts to obtain new power sales agreements,
which has contributed to a reduction in prices offered to
utilities. In that regard, many utilities often engage in
"competitive bid" solicitations to satisfy new capacity demands.
In the domestic market, competition is expected to increase as
the electric utility industry becomes deregulated. In addition,
recent deregulation and industry restructuring activity may cause
certain utilities or other contract parties to attempt to
renegotiate contracts or otherwise fail to perform their
contractual obligations, which in turn could adversely affect the
Company's results of operations. In particular, the state of
California has adopted a bill to restructure the electric
industry by providing for a phased-in competitive power
generation industry, with a power pool and an independent system
operator, and for direct access to generation for all power
purchasers outside the power exchange under certain
circumstances. Although the bill contemplates that existing
qualifying facility power sales contracts will be honored, and
all the Company's California projects are qualifying facilities,
until the new system is fully implemented, it is impossible to
predict what impact, if any, it may have on the operations of
those projects.
13. Impact of Environmental, Energy and Other Regulations.
The Company is subject to a number of environmental and other
laws and regulations affecting many aspects of its present and
future operations, including the disposal of various forms of
waste, the construction or permitting of new facilities and the
drilling and operation of new and existing wells. Such laws and
regulations generally require the Company to obtain and comply
with a wide variety of licenses, permits and other approvals.
The Company also remains subject to a number of complex and
stringent laws and regulations that both public officials and
private individuals may seek to enforce. There can be no
assurance that existing regulations will not be revised or that
new regulations will not be adopted or become applicable to the
Company which could have an adverse impact on its operations.
The implementation of regulatory changes imposing more
comprehensive or stringent requirements on the Company, which
would result in increased compliance costs, could have a material
adverse effect on the Company's results of operations. In
addition, regulatory compliance for the construction of new
facilities is a costly and time-consuming process, and intricate
and rapidly changing environmental regulations may require major
expenditures for permitting and create the risk of expensive
delays or material impairment of project value if projects cannot
function as planned due to changing regulatory requirements or
local opposition.
The Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA"), and the Public Utility Holding Company Act of
1935, as amended ("PUHCA"), are two of the laws (including the
regulations thereunder) that affect the Company's operations.
PURPA provides to qualifying facilities ("QFs") certain
exemptions from federal and state laws and regulations, including
organizational, rate and financial regulation. PUHCA regulates
public utility holding companies and their subsidiaries. The
Company is not and will not be subject to regulation as a holding
company under PUHCA as long as the domestic power plants it owns
are QFs under PURPA or are exempted as exempt wholesale
generators ("EWGs"), and so long as its foreign utility
operations are exempted as EWGs or foreign utility companies or
are otherwise exempted under PUHCA. QF status is conditioned on
meeting certain criteria, and would be jeopardized, for example,
in the case of the Company's cogeneration facilities by the loss
of a steam customer or reduction of steam purchases below the
amount required by PURPA. The Company's four cogeneration
facilities have steam sales agreements with existing industrial
hosts which agreements must be maintained in effect or replaced
in order to maintain QF status. In the event the Company were
unable to avoid the loss of such status for one of its
facilities, such an event could result in termination of a given
project's power sales agreement and a default under the project
subsidiary's project financing agreements.
Currently, Congress is considering proposed legislation that
would amend PURPA by eliminating the requirement that utilities
purchase electricity from qualifying facilities at prices based
on Avoided Cost of Energy. The Company does not know whether
such legislation will be passed or what form it may take. The
Company believes that if any such legislation is passed, it would
apply to new projects only and thus, although potentially
impacting the Company's ability to develop new domestic projects,
it would not affect the Company's existing qualifying facilities.
There can be no assurance, however, that any legislation passed
would not adversely impact the Company's existing domestic
projects.
In addition, many states are implementing or considering
regulatory initiatives designed to increase competition in the
domestic power generation industry and increase access to
electric utilities' transmission and distribution systems for
independent power producers and electricity consumers. On
September 1, 1997, the California legislature adopted an industry
restructuring bill that would provide for a phased-in competitive
power generation industry with a power pool and independent
system operator and also would permit direct access to generation
for all power purchasers outside the power exchange under certain
circumstances. Under the bill, consistent with the requirements
of PURPA, existing qualifying facilities power sales agreements
would be honored. The Company cannot predict the final form or
timing of the proposed industry restructuring or the results of
its operations.
The structure of such federal and state energy regulations
have in the past, and may in the future, be the subject of
various challenges and restructuring proposals by utilities and
other industry participants. The implementation of regulatory
changes in response to such changes or restructuring proposals,
or otherwise imposing more comprehensive or stringent
requirements on the Company, which would result in increased
compliance costs, could have a material adverse effect on the
Company's results of operations.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CALENERGY COMPANY, INC.
Dated: March 6, 1998 By: /s/ Douglas L. Anderson
Douglas L. Anderson
Assistant Secretary and
Assistant General Counsel
