SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
March 31, 1998
Commission File No. 1-9874
CALENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2213782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Former name, former address and former fiscal year, if changed
since last report. N/A
60,416,806 shares of Common Stock, $0.0675 par value were
outstanding as of March 31, 1998.
<PAGE>
CALENERGY COMPANY, INC.
Form 10-Q
March 31, 1998
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Independent Accountants' Report 3
Consolidated Balance Sheets, March 31, 1998 and December 31, 1997 4
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults on Senior Securities 27
Item 4. Submission of Matters to a Vote of
Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 29
Exhibit Index 30
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
CalEnergy Company, Inc.
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of
CalEnergy Company, Inc. and subsidiaries as of March 31, 1998,
and the related consolidated statements of operations and cash
flows for the three month periods ended March 31, 1998 and 1997.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of CalEnergy
Company, Inc. and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented
herein), and in our report dated February 12, 1998, we expressed
an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997
is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
April 22, 1998
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
________________________________
March 31 December 31
1998 1997
(unaudited)
ASSETS
Cash and cash equivalents $ 211,717 $ 1,445,338
Joint venture cash and investments 25,820 6,072
Restricted cash and investments 587,456 223,636
Short-term investments 41 1,282
Accounts receivable 384,638 376,745
Properties, plants, contracts and
equipment, net 4,327,389 3,528,910
Excess of cost over fair value of
net assets acquired, net 1,467,120 1,312,788
Equity investments 129,502 238,025
Deferred charges and other assets 369,933 354,830
Total assets $ 7,503,616 $ 7,487,626
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 208,693 $ 173,610
Other accrued liabilities 1,133,103 1,106,641
Parent company debt 1,303,860 1,303,845
Subsidiary and project debt 2,896,943 2,189,007
Deferred income taxes 542,474 509,059
Total liabilities 6,085,073 5,282,162
Deferred income 45,875 40,837
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary trusts 553,930 553,930
Preferred securities of subsidiary 56,076 56,181
Minority interest - 134,454
Common stock and options subject to
redemption (Note 3) - 654,736
Stockholders' equity:
Preferred stock - authorized 2,000
shares, no par value - -
Common stock - par value $0.0675 per share,
authorized 180,000 shares, issued 82,980
shares, outstanding 60,417 and 81,322 at
March 31, 1998 and December 31, 1997,
respectively 5,602 5,602
Additional paid in capital 1,238,891 1,261,081
Retained earnings 240,788 213,493
Common stock and options subject to
redemption (Note 3) - (654,736)
Treasury stock - 22,563 and 1,658 common
shares at March 31, 1998 and December 31,
1997, respectively, at cost (729,877) (56,525)
Accumulated other comprehensive income 7,258 (3,589)
Total stockholders' equity 762,662 765,326
Total liabilities and stockholders'
equity $ 7,503,616 $ 7,487,626
The accompanying notes are an integral part of these financial
statements.
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
____________(unaudited)___________
Three Months Ended
March 31
1998 1997
Revenues:
Operating revenue $ 621,851 $ 542,589
Interest and other income 22,460 23,387
Total revenues 644,311 565,976
Costs and expenses:
Cost of sales 312,645 270,947
Operating expense 102,647 90,046
General and administration 12,044 13,487
Depreciation and amortization 79,925 67,456
Loss on equity investment in Casecnan - 2,668
Interest expense 94,558 70,622
Less interest capitalized (13,418) (9,122)
Total costs and expenses 588,401 506,104
Income before provision for
income taxes 55,910 59,872
Provision for income taxes 18,531 22,249
Income before minority interest 37,379 37,623
Minority interest 10,084 10,175
Net income available to common
stockholders $ 27,295 $ 27,448
Net income per share-basic $ .45 $ .43
Basic common shares outstanding 61,081 63,511
Net income per share-diluted $ .43 $ .42
Diluted shares outstanding 69,343 69,846
The accompanying notes are an integral part of these financial
statements.
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31
1998 1997
Cash flows from operating activities:
Net income $ 27,295 $ 27,448
Adjustments to reconcile net cash flow from
operating activities:
Depreciation and amortization 69,314 60,362
Amortization of excess of cost over fair value
of net assets acquired 10,611 7,094
Amortization of deferred financing and other costs 4,638 10,081
Provision for deferred income taxes 13,146 7,048
Income on equity investments (482) (1,491)
Income applicable to minority interest 1,093 7,457
Changes in other items:
Accounts receivable 8,354 (5,287)
Accounts payable and accrued liabilities 4,071 (105,933)
Deferred income 5,038 (5,420)
Net cash flows from operating activities 143,078 1,359
Cash flows from investing activities:
Purchase of Kiewit Interests and Northern Electric,
net of cash acquired (502,916) (599,155)
Distributions from equity investments 2,187 6,165
Philippine construction (31,891) (16,297)
Indonesian construction (53,126) (16,886)
Exploration and other development costs (13,947) (3,429)
Capital expenditures relating to operations (98,927) (4,507)
Decrease (increase) in short-term investments 1,241 (2,767)
Decrease (increase) in restricted cash and investments (19,317) 24,915
Decrease (increase) in other assets (25,468) 29,070
Net cash flows from investing activities (742,164) (582,891)
Cash flows from financing activities:
Proceeds from subsidiary and project debt 47,342 531,058
Repayments of subsidiary and project debt (3,202) (2,808)
Proceeds from exercise of options 423 2,854
Decrease in amounts due from joint ventures 12,655 9,435
Deferred charges relating to debt financing (3,915) (9,064)
Purchase of treasury stock (674,652) -
Other (4,285) -
Proceeds from issuance of convertible preferred
securities of subsidiary trust - 180,000
Repayment of parent company debt - (195,000)
Net cash flows from financing activities (625,634) 516,475
Effect of exchange rate changes, net 10,847 (32,025)
Net decrease in cash and cash equivalents (1,213,873) (97,082)
Cash and cash equivalents at beginning of period 1,451,410 472,583
Cash and cash equivalents at end of period $ 237,537 $ 375,501
Supplemental disclosures:
Interest paid, net of amount capitalized $ 55,118 $ 47,625
Income taxes paid $ 20,759 $ 3,761
The accompanying notes are an integral part of these financial statements.
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
1. General:
In the opinion of the management of CalEnergy Company, Inc. (the
"Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
position as of March 31, 1998 and the results of operations for
the three months ended March 31, 1998 and 1997, and cash flows
for the three months ended March 31, 1998 and 1997. The results
of operations for the three months ended March 31, 1998 and 1997
are not necessarily indicative of the results to be expected for
the full year.
The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries, and its
proportionate share of the partnerships and joint ventures in
which it has an undivided interest in the assets and is
proportionally liable for its share of liabilities. Other
investments and corporate joint ventures where the Company has
the ability to exercise significant influence are accounted for
under the equity method. Investments, where the Company's
ability to influence is limited, are accounted for under the cost
method of accounting.
Certain amounts in the 1997 financial statements and supporting
footnote disclosures have been reclassified to conform to the
1998 presentation. Such reclassification did not impact
previously reported net income or retained earnings.
Reference is made to the Company's most recently issued annual
report that included information necessary or useful to the
understanding of the Company's business and financial statement
presentations.
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
2. Properties, Plants, Contracts and Equipment:
Properties, plants, contracts and equipment comprise the
following:
March 31, December 31,
1998 1997
(unaudited)
Operating assets:
Distribution system $1,280,014 $1,237,743
Power plants 1,735,338 1,464,885
Wells and resource development 408,119 395,314
Power sales agreements 265,873 227,535
Other assets 274,232 254,973
Total operating assets 3,963,576 3,580,450
Less accumulated depreciation and
amortization (572,407) (497,832)
Net operating assets 3,391,169 3,082,618
Mineral and gas reserves, net 336,299 297,048
Construction in progress:
Casecnan 195,102 -
Dieng 250,238 94,666
Patuha 146,252 49,612
Bali and other development 8,329 4,966
Total $ 4,327,389 $ 3,528,910
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
3. KDG Acquisition:
On September 11, 1997, the Company signed a definitive agreement
with Kiewit Diversified Group ("KDG"), a wholly owned subsidiary
of Peter Kiewit Sons', Inc. ("PKS"), for the Company to purchase
KDG's ownership interest in various project partnerships and
CalEnergy common shares (the "KDG Acquisition").
KDG's ownership interest in CalEnergy comprised approximately
20,231 shares of common stock (assuming exercise by KDG of one
million options to purchase CalEnergy shares), the 30% interest
in Northern Electric, as well as the following minority project
interests: Mahanagdong (45%), Casecnan (35%), Dieng (47%), Patuha
(44%) and Bali (30%) and other interests in international
development stage projects.
CalEnergy paid $1,159,215 for the KDG Acquisition and final
closing of the transaction occurred in January 1998. CalEnergy
funded this acquisition with available cash and the net proceeds
of the equity offering and the debt offering completed in October
1997. The KDG Acquisition is being accounted for under the
purchase method of accounting. The purchase price has been
allocated to assets acquired and liabilities assumed based on
preliminary valuations and the Company is awaiting final
valuations. The assets acquired will be amortized over their
estimated useful life and goodwill over a period of ten to forty
years.
Pro forma revenue and net income, as if the acquisition occurred
at the beginning of the period presented, was not materially
different from historical amounts.
4. Commitments and Contingencies:
Casecnan
In November 1995, CE Casecnan Water and Energy Company, Inc., a
Philippine Corporation ("CE Casecnan") which is currently
approximately 70% indirectly owned by the Company, closed the
financing and commenced construction of the Casecnan Project, a
combined irrigation and 150 net MW hydroelectric power generation
project (the "Casecnan Project") located in the central part of
the island of Luzon in the Republic of the Philippines.
The Casecnan Project was being constructed pursuant to a fixed-
price, date-certain, turnkey construction contract (the "Hanbo
Contract") on a joint and several basis by Hanbo Corporation
("Hanbo") and Hanbo Engineering and Construction Co., Ltd.
("HECC"), both of which are South Korean corporations. As of May
7, 1997, CE Casecnan terminated the Hanbo Contract due to
defaults by Hanbo and HECC including the insolvency of each such
company.
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
In connection with the Hanbo Contract termination, CE Casecnan
tendered a certificate of drawing for $79,329 to Korea First Bank
("KFB") on May 7, 1997, under the irrevocable standby letter of
credit issued by KFB as security under the Hanbo Contract to pay
for certain transition costs and other then ascertainable damages
under the Hanbo Contract. As a result of KFB's wrongful dishonor
of the draw request, CE Casecnan filed an action in New York
State Court.
On August 27, 1997, CE Casecnan announced that it had received a
favorable summary judgment ruling in New York State Court against
KFB. The judgment required KFB to honor the $79,329 drawing by
CE Casecnan on the $117,850 irrevocable standby letter of credit.
CE Casecnan subsequently tendered second, third and fourth
certificates of drawing for $10,828, $2,920 and $24,773,
respectively, to KFB which were also wrongfully dishonored.
On September 2, 1997, Hanbo and HECC filed a Request for
Arbitration before the International Chamber of Commerce ("ICC").
The Request for Arbitration asserted various claims by Hanbo and
HECC against CE Casecnan relating to the terminated Hanbo
Contract and sought damages. On October 10, 1997, CE Casecnan
served its answer and defenses in response to the Request for
Arbitration as well as counterclaims against Hanbo and HECC for
breaches of the Hanbo Contract.
On April 17, 1998, CE Casecnan announced that it and Hanbo, HECC,
Hanbo Steel Company, Ltd. and KFB had mutually agreed to settle
the differences among them related to the Casecnan Project.
Under the settlement, KFB has agreed to pay CE Casecnan $90
million and the parties have discontinued with prejudice the
pending arbitration and litigation proceedings and released each
other from all claims arising out of the litigation and
arbitration.
Indonesia
On September 20, 1997, a Presidential Decree (the "Decree") was
issued in Indonesia, providing for government action to the
effect that, in order to address certain recent fluctuations in
the value of the Indonesian currency, the start-up dates for a
number of private power projects would be: (i) continued
according to their initial schedule (because construction was
underway); (ii) postponed as to their start-up dates (because
they are not yet in construction) until economic conditions have
recovered; or (iii) reviewed with a view to being continued,
postponed or rescheduled, depending on the status of those
projects. In the Decree, Dieng Units 1, 2 and 3 are approved to
continue according to their initial schedule; Patuha Unit 1 and
Bali Units 1 and 2 are to receive further review to determine
whether or not they should be continued in accordance with their
initial schedule; and Bali Units 3 and 4, Patuha Units 2, 3 and 4
and Dieng Unit 4 are to be postponed for an unspecified period.
In this regard, the Company notes that its contracts and
government undertakings for the Dieng, Patuha and Bali projects
do not by their terms permit such categorization or delays by the
government and that the Company has obtained political risk
insurance coverage for its Dieng and Patuha projects.
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
Moreover, the Company intends to continue to take actions to
attempt to require the Government of Indonesia to honor its
contractual obligations; however, subsequent actions by the
Government of Indonesia and continued economic problems in
Indonesia have created further uncertainty as to whether the
contracts for such projects will be abrogated by the Indonesian
government and accordingly have created significant risks to the
completion of these projects.
Edison
On June 9, 1997, Edison filed a complaint alleging breach of the
power purchase agreements ("SO4 Agreements") between Edison and
Coso Finance Partners, Coso Power Partners and Coso Energy
Developers as a result of alleged improper venting of certain
noncondensible gases at the Coso geothermal energy project
located in California (partnerships in which CalEnergy holds an
approximate 50% ownership interest, collectively the "Coso
Partnerships"). In the complaint Edison seeks unspecified
damages, including the refund of certain amounts previously paid
under the SO4 Agreements, and termination of the SO4 Agreements.
In September 1997, the Coso Partnerships and the Company filed a
cross-complaint against Edison and its affiliates, The Mission
Group and Mission Power Engineering Company alleging, among other
things, that Edison's lawsuit violates the 1993 settlement
agreement which settled certain litigation arising from the
construction of certain units at the Coso geothermal project by
Edison affiliates. In addition, the Coso Partnerships filed a
separate complaint against Edison alleging breach of the SO4
Agreements, unfair business practices, slander and various other
tort and contract claims. The actions were effectively
consolidated in December 1997. As a result of certain procedural
actions by the parties and a November court order, Edison filed
an amended complaint on December 16, 1997 and the Coso
Partnerships amended their cross-complaint. The litigation is in
its early procedural stages and the pleadings have not been
settled. The Coso Partnerships believe that their claims and
defenses are meritorious and that they will prevail if the matter
is ultimately heard on its merits. The Coso Partnerships intend
to vigorously defend this action and prosecute all available
counterclaims against Edison.
NYSEG
On February 14, 1995, NYSEG filed with the FERC a Petition for a
Declaratory Order, Complaint, and Request for Modification of
Rates in Power Purchase Agreements Imposed Pursuant to the Public
Utility Regulatory Policies Act of 1978 ("Petition") seeking FERC
(i) to declare that the rates NYSEG pays under the Saranac PPA,
which was approved by the New York Public Service Commission (the
"PSC"), were in excess of the level permitted under PURPA and
(ii) to authorize the PSC to reform the Saranac PPA. On March
14, 1995, the Saranac Partnership intervened in opposition to the
Petition asserting, inter alia, that the Saranac PPA fully
complied with PURPA, that NYSEG's action was untimely and that
the FERC lacked authority to modify the Saranac PPA. On March
15, 1995, the Company intervened also in opposition to the
Petition and asserted similar arguments. On April 12, 1995, the
FERC by a unanimous (5-0) decision issued an order denying the
various forms of relief requested by NYSEG and finding that the
rates required under the Saranac PPA were consistent with PURPA
and the FERC's regulations. On May 11, 1995, NYSEG requested
rehearing of the
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
order and, by order issued July 19, 1995, the FERC unanimously (5-
0) denied NYSEG's request. On June 14, 1995, NYSEG petitioned
the United States Court of Appeals for the District of Columbia
Circuit (the "Court of Appeals") for review of FERC's April 12,
1995 order. FERC moved to dismiss NYSEG's petition for review on
July 28, 1995. On October 30, 1996, all parties filed final
briefs and the Court of Appeals heard oral arguments on December
2, 1996. On July 11, 1997, the Court of Appeals dismissed
NYSEG's appeal from FERC's denial of the petition on
jurisdictional grounds.
On August 7, 1997, NYSEG filed a complaint in the U.S. District
Court for the Northern District of New York against the FERC, the
PSC (and the Chairman, Deputy Chairman and the Commissioners of
the PSC as individuals in their official capacity), the Saranac
Partnership and Lockport Energy Associates, L.P. ("Lockport")
concerning the power purchase agreements that NYSEG entered into
with Saranac Partners and Lockport. NYSEG's suit asserts that
the PSC and the FERC improperly implemented PURPA in authorizing
the pricing terms that NYSEG, the Saranac Partnership and
Lockport agreed to in those contracts. The action raises similar
legal arguments to those rejected by the FERC in its April and
July 1995 orders. NYSEG in addition asks for retroactive
reformation of the contracts as of the date of commercial
operation and seeks a refund of $281 million from the Saranac
Partnership. Saranac and other parties have filed motions to
dismiss and oral arguments on those motions were heard on March
2, 1998. Saranac believes that NYSEG's claims are without merit
for the same reasons described in the FERC's orders.
5. Accounting Pronouncement:
In June 1997, the FASB adopted Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive
income and its components. Comprehensive income (loss) for the
three months ended March 31, 1998 and 1997 was $38,142 and
$(4,577), respectively.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations:
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included
in the accompanying statements of operations.
As a result of the acquisition of Northern Electric plc
("Northern"), the Company's future results will differ
significantly from the Company's historical results.
Acquisitions:
On September 11, 1997, the Company signed a definitive agreement
with Kiewit Diversified Group ("KDG"), a wholly owned subsidiary
of Peter Kiewit Sons', Inc. ("PKS"), for the Company to purchase
KDG's ownership interest in various project partnerships and
CalEnergy common shares (the "KDG Acquisition").
KDG's ownership interest in CalEnergy comprised approximately
20,231 shares of common stock (assuming exercise by KDG of one
million options to purchase CalEnergy shares), the 30% interest
in Northern Electric, as well as the following minority project
interests: Mahanagdong (45%), Casecnan (35%), Dieng (47%), Patuha
(44%) and Bali (30%) and other interests in international
development stage projects.
CalEnergy paid $1,159,215 for the KDG Acquisition and final
closing of the transaction occurred in January 1998. CalEnergy
funded this acquisition with available cash and the proceeds of
the equity offering and the debt offering completed in October
1997.
On December 24, 1996, CE Electric acquired majority ownership of
the outstanding ordinary share capital of Northern pursuant to
the tender offer ("Northern Tender Offer"). As of March 18,
1997, CE Electric effectively owned 100% of Northern's ordinary
shares.
Business of Northern:
A significant portion of the Company's results of operations are
attributable to Northern's operations which consist primarily of
the distribution and supply of electricity and other auxiliary
businesses. Northern's operations are seasonal in nature with a
disproportionate percentage of revenues and earnings historically
being earned in the Company's first and fourth quarters.
Northern receives electricity from the national grid transmission
system and distributes electricity to each customer's premises
using its network of transformers, switchgear and cables.
Substantially all of the customers in Northern's authorized area
are connected to Northern's network and can only be supplied
electricity through Northern's distribution system, regardless of
whether the electricity is supplied by Northern's supply business
or by other suppliers, thus providing Northern with distribution
volume that is stable from year to year. Northern charges its
customers access fees for the use of the distribution system.
The prices for distribution to most customers are controlled by a
prescribed formula that limits increases (and may require
decreases) based upon the rate of inflation in the United Kingdom
and other regulatory action.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Business of Northern: (continued)
Northern's supply business primarily involves the bulk purchase
of electricity, through a central pool, and subsequent resale to
individual customers. Currently Northern is the exclusive
supplier of electricity to premises in its authorized area,
except where the maximum demand of a customer is greater than
100kW. The supply business generally is a high volume business
which tends to operate at lower profitability levels than the
distribution business. Currently the income received by the
supply business from customers with demand under 100kW is
controlled by a prescribed formula, while income received from
other customers is not regulated. In 1998, liberalization of the
entire market is due to commence in stages beginning in October
with complete liberalization achieved by June 1999.
Northern also competes to supply gas inside and outside its
authorized area. Northern continues to expand its supply
customer base through the Dual Fuel marketing program.
Power Generation Projects:
For purposes of consistent financial presentation, plant capacity
factors for Navy I, Navy II, and BLM (collectively the "Coso
Project") are based upon a capacity amount of 80 net MW for each
plant. Plant capacity factors for Vulcan, Hoch (Del Ranch),
Elmore and Leathers (collectively the "Partnership Project") are
based on capacity amounts of 34, 38, 38, and 38 net MW
respectively, and for Salton Sea I, Salton Sea II, Salton Sea III
and Salton Sea IV plants (collectively the "Salton Sea Project")
are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW
respectively (the Partnership Project and the Salton Sea Project
are collectively referred to as the "Imperial Valley Project").
Plant capacity factors for Saranac, Power Resources, NorCon and
Yuma (collectively the "Gas Plants") are based on capacity
amounts of 240, 200, 80, and 50 net MW, respectively. Each plant
possesses an operating margin which allows for production in
excess of the amount listed above. Utilization of this operating
margin is based upon a variety of factors and can be expected to
vary between calendar quarters, under normal operating
conditions.
The Coso Project and the Partnership Project sell all electricity
generated by the respective plants pursuant to seven individual
long-term SO4 Agreements between the respective projects and
Southern California Edison Company ("Edison"). These SO4
Agreements provide for capacity payments, capacity bonus payments
and energy payments. Edison makes fixed annual capacity payments
and capacity bonus payments to the projects to the extent that
capacity factors exceed certain benchmarks. The price for
capacity and capacity bonus payments is fixed for the life of the
SO4 Agreements and the capacity payment is significantly higher
in the months of June through September. Energy is sold at
increasing scheduled rates for the first ten years after firm
operation and thereafter at Edison's Avoided Cost of Energy.
The scheduled energy price periods of the Coso Project SO4
Agreements extended until at least August 1997 for each of the
units operated by the Navy I Partnership and extend until at
least March 1999 and January 2000 for each of the units operated
by the BLM and Navy II Partnerships, respectively.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan
Partnership and extend until December 1998 for the Hoch (Del
Ranch) and Elmore Partnerships, and December 1999 for the
Leathers Partnership.
The Company's SO4 Agreements provide for energy rates ranging
from 14.6 cents per kWh in 1998 to 16.6 cents per kWh in 2000.
Salton Sea I sells electricity to Edison pursuant to a 30-year
negotiated power purchase agreement, as amended (the "Salton Sea
I PPA"), which provides for capacity and energy payments. The
energy payment is calculated using a Base Price which is subject
to quarterly adjustments based on a basket of indices. The time
period weighted average energy payment for Salton Sea I was 5.4 cents
per kWh during the three months ended March 31, 1998. As the
Salton Sea I PPA is not an SO4 Agreement, the energy payments do
not revert to Edison's Avoided Cost of Energy.
Salton Sea II and Salton Sea III sell electricity to Edison
pursuant to 30-year modified SO4 Agreements that provide for
capacity payments, capacity bonus payments and energy payments.
The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreements.
The energy payments for the first ten year period, which expires
in April 2000 for Salton Sea II and February 1999 for Salton Sea
III, are levelized at a time period weighted average of 10.6 cents per
kWh and 9.8 cents per kWh for Salton Sea II and Salton Sea III,
respectively. Thereafter, the monthly energy payments will be
Edison's Avoided Cost of Energy. For Salton Sea II only, Edison
is entitled to receive, at no cost, 5% of all energy delivered in
excess of 80% of contract capacity through September 30, 2004.
Salton Sea IV sells electricity to Edison pursuant to a modified
SO4 agreement which provides for contract capacity payments on 34
MW of capacity at two different rates based on the respective
contract capacities deemed attributable to the original Salton
Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW).
The capacity payment price for the 20 MW portion adjusts
quarterly based upon specified indices and the capacity payment
price for the 14 MW portion is a fixed levelized rate. The
energy payment (for deliveries up to a rate of 39.6 MW) is at a
fixed price for 55.6% of the total energy delivered by Salton Sea
IV and is based on an energy payment schedule for 44.4% of the
total energy delivered by Salton Sea IV. The contract has a 30-
year term but Edison is not required to purchase the 20 MW of
capacity and energy originally attributable to the Salton Sea I
PPA option after September 30, 2017, the original termination
date of the Salton Sea I PPA.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
For the three months ended March 31, 1998, Edison's average
Avoided Cost of Energy was 3.0 cents per kWh which is substantially
below the contract energy prices earned for the three months
ended March 31, 1998. Estimates of Edison's future Avoided Cost
of Energy vary substantially from year to year. The Company
cannot predict the likely level of Avoided Cost of Energy prices
under the SO4 Agreements and the modified SO4 Agreements at the
expiration of the scheduled payment periods. The revenues
generated by each of the projects operating under SO4 Agreements
could decline significantly after the expiration of the
respective scheduled payment periods.
The Upper Mahiao Project (the "Upper Mahiao Project") was deemed
complete in June 1996 and began receiving capacity payments
pursuant to the Upper Mahiao Energy Conversion Agreement ("ECA")
in July of 1996. The Upper Mahiao Project is structured as a ten
year build-own-operate-transfer ("BOOT"), in which the Company's
subsidiary CE Cebu Geothermal Power Company, Inc. ("CE Cebu"),
the project company, is responsible for providing operations and
maintenance during the ten year BOOT period. The electricity
generated by the Upper Mahiao geothermal power plant is sold to
the PNOC - Energy Development Corporation ("PNOC-EDC"), which is
also responsible for supplying the facility with the geothermal
steam. After the ten year cooperation period, and the recovery
by the Company of its capital investment plus incremental return,
the plant will be transferred to PNOC-EDC at no cost.
PNOC-EDC is obligated to pay for electric capacity that is
nominated each year by CE Cebu, irrespective of whether PNOC-EDC
is willing or able to accept delivery of such capacity. PNOC-EDC
pays to CE Cebu a fee (the "Capacity Fee") based on the plant
capacity nominated to PNOC-EDC in any year (which, at the plant's
design capacity, is approximately 95% of total contract revenues)
and a fee (the "Energy Fee") based on the electricity actually
delivered to PNOC-EDC (approximately 5% of total contract
revenues).
Payments under the Upper Mahiao ECA are denominated in U.S.
dollars, or computed in U.S. dollars and paid in Philippine pesos
at the then-current exchange rate, except for the Energy Fee.
Significant portions of the Capacity Fee and Energy Fee are
indexed to U.S. and Philippine inflation rates, respectively.
PNOC-EDC's payment requirements, and its other obligations under
the Upper Mahiao ECA are supported by the Government of the
Philippines through a performance undertaking.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
Unit I of the Malitbog Project (the "Malitbog Project") was
deemed complete in July 1996 and Units II and III in July 1997 at
which times such units commenced receiving capacity payments
under the Malitbog ECA. The Malitbog Project is owned and
operated by Visayas Geothermal Power Company ("VGPC"), a
Philippine general partnership that is wholly owned, indirectly,
by the Company. Under its contract, VGPC is to sell 100% of its
output on substantially the same basis as described above for the
Upper Mahiao Project to PNOC-EDC, which will in turn sell the
power to the National Power Corporation of the Philippines
("NPC"). However, VGPC receives 100% of its revenues from such
sales in the form of capacity payments. As with the Upper Mahiao
Project, the Malitbog Project is structured as a ten year BOOT,
in which the Company is responsible for providing operations and
maintenance for the ten year BOOT period. After a ten year
cooperation period, and the recovery by the Company of its
capital investment plus incremental return, the plant will be
transferred to PNOC-EDC at no cost.
The Mahanagdong Project (the "Mahanagdong Project") was deemed
complete in July 1997 and accordingly, the Mahanagdong Project
began receiving capacity payments pursuant to the Mahanagdong ECA
in August of 1997. The Mahanagdong Project is owned and operated
by CE Luzon Geothermal Power Company, Inc., a Philippine
corporation, that is expected to be indirectly owned by the
Company subject to a minority partner participation. The
electricity generated by the Mahanagdong Project will be sold to
PNOC-EDC on a "take or pay" basis, which is also responsible for
supplying the facility with the geothermal steam. The terms of
the Mahanagdong ECA are substantially similar to those of the
Upper Mahiao ECA. All of PNOC-EDC's obligations under the
Mahanagdong ECA are supported by the Government of the
Philippines through a performance undertaking. The capacity fees
are expected to be approximately 97% of total revenues at the
design capacity levels and the energy fees are expected to be
approximately 3% of such total revenues.
The Saranac Project sells electricity to New York State Electric
& Gas pursuant to a 15-year negotiated power purchase agreement
(the "Saranac PPA"), which provides for capacity and energy
payments. Capacity payments, which in 1998 total 2.3 cents per kWh,
are received for electricity produced during "peak hours" as
defined in the Saranac PPA and escalate at approximately 4.1%
annually for the remaining term of the contract. Energy payments,
which average 6.7 cents per kWh in 1998, escalate at approximately
4.4% annually for the remaining term of the contract. The
Saranac PPA expires in June of 2009.
The Power Resources Project sells electricity to Texas Utilities
Electric Company ("TUEC") pursuant to a 15-year negotiated power
purchase agreement (the "Power Resources PPA"), which provides
for capacity and energy payments. Capacity payments and energy
payments, which in 1998 are $3,138 per month and 3.03 cents per kWh,
respectively, escalate at 3.5% annually for the remaining term of
the contract. The Power Resources PPA expires in September 2003.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
The NorCon Project sells electricity to Niagara Mohawk Power
Corporation ("NIMO") pursuant to a 25-year negotiated power
purchase agreement (the "NorCon PPA") which provides for energy
payments calculated pursuant to an adjusting formula based on
NIMO's ongoing Tariff Avoided Cost and the contractual Long-Run
Avoided Cost. The NorCon PPA term extends through December 2017.
The NorCon Project has had a number of on-going contractual
disputes with NIMO which are unresolved and in August 1996 NIMO
proposed a buyout of the NorCon PPA as part of a generic
restructuring by NIMO of all its qualifying facility contracts in
an effort to restructure NIMO's purchased power obligations to
meet the challenge of industry deregulation and avoid what NIMO
alleges as the risk of a possible NIMO insolvency. The Company
believes that any contractual restructuring or even a NIMO
insolvency would not have a material adverse effect on its
consolidated financial results of operations.
The Yuma Project sells electricity to San Diego Gas & Electric
Company ("SDG&E") under an existing 30-year power purchase
contract. The energy is sold at SDG&E's Avoided Cost of Energy
and the capacity is sold to SDG&E at a fixed price for the life
of the power purchase contract. The contract term extends
through May 2024.
Results of Operations for Three Months Ended March 31, 1998 and
1997:
Operating revenue increased in the first quarter of 1998 to
$621,851 from $542,589 for the same period in 1997, a 14.6%
increase. The increase is primarily due to higher volumes of gas
supplied and franchise electricity revenues.
The following data represents the supply and distribution
operations at Northern:
Three Months Ended
March 31
1998 1997
Supply (GWh) 3,761 3,856
Distribution (GWh) 4,171 4,196
Gas Therms Supply (in thousands) 88.4 16.5
The decrease in units supplied and distributed in 1998 from 1997
primarily reflects changes in the customer mix and milder weather
in the U.K. The increase in therms supplied in 1998 from 1997
reflects the increased volume as the gas business in the U.K.
begins to open up to competition as a result of regulatory
changes.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations for Three Months Ended March 31, 1998 and
1997 (continued):
The following operating data represents the aggregate capacity
and electricity production of the domestic geothermal projects:
Three Months Ended
March 31
1998 1997
Overall capacity factor 93.8% 103.1%
kWh produced (in thousands) 1,028,000 1,129,700
Capacity NMW 507.4 507.4
The capacity factor decreased for the three months ended March
31, 1998 compared to the same periods in 1997 due to marginally
decreasing production at the Coso Project and scheduled turbine
overhauls at BLM, Elmore, Leathers and Salton Sea.
The following operating data represents the aggregate capacity
and electricity production of the Gas Plants:
Three Months Ended
March 31
1998 1997
Overall capacity factor 75.7% 89.3%
kWh produced (in thousands) 931,500 1,098,950
Installed capacity NMW 570 570
The capacity factor of the Gas Plants reflects certain
contractual curtailments. The capacity factors adjusted for
these contractual curtailments are 86.0% for the three months
ended March 31, 1998, compared with 98.2% for the same period in
1997. The decrease from the prior period was primarily due to
the severe winter snow and ice storms which caused transmission
curtailments at Saranac.
Interest and other income decreased in the first quarter of 1998
to $22,460 from $23,387 for the same period in 1997, a 4.0%
decrease. The decrease is primarily due to lower equity income
from Saranac partially offset by interest earned by Casecnan.
Cost of sales increased in the first quarter of 1998 to $312,645
from $270,947 for the same period in 1997, a 15.4% increase. The
increase is primarily due to higher volumes of gas supplied and
franchise electricity costs.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations for Three Months Ended March 31, 1998 and
1997 (Continued):
Operating expense increased in the first quarter of 1998 to
$102,647 from $90,046 for the same period in 1997, a 14.0%
increase. The increase is primarily due to an increase in gas
supply customer acquisition costs at Northern.
General and administration costs decreased in the first quarter
of 1998 to $12,044 from $13,487 for the same period in 1997, a
10.7% decrease. The decrease is primarily due to the continuing
integration of Northern's corporate costs.
Depreciation and amortization increased in the first quarter of
1998 to $79,925 from $67,456 for the same period in 1997, an
18.5% increase. The increase is primarily due to the commencement
of operations at Mahanagdong and Units II and III at Malitbog.
As a result of the KDG Acquisition, Casecnan is fully
consolidated into the Company's financial statements and is no
longer recorded as an equity investment. Therefore, the loss in
equity investment in Casecnan is not applicable.
Interest expense, less amounts capitalized, increased in the
first quarter of 1998 to $81,140 from $61,500 for the same period
in 1997, a 31.9% increase. The increase is primarily due to
interest expense at Casecnan and the commencement of operations
at Mahanagdong and Units II and III at Malitbog.
The provision for income taxes decreased in the first quarter of
1998 to $18,531 from $22,249 for the same period in 1997, a 16.7%
decrease. The decrease is due to lower pretax book income.
Minority interest decreased in the first quarter to $10,084 from
$10,175 for the same period in 1997. The decrease is primarily
due to the purchase of Northern and KDG's minority interests
offset by increased dividends on convertible preferred securities
of subsidiary trusts.
Net income available for common stockholders decreased in the
first quarter of 1998 to $27,295 from $27,448 for the same period
in 1997. Net income available for common stockholders per share
increased in the first quarter of 1998 to $.45 per share from
$.43 per share for the same period in 1997.
Liquidity and Capital Resources:
The Company's cash and cash equivalents were $211,717 at March
31, 1998 as compared to $1,445,338 at December 31, 1997. The
majority of this decrease was due to the KDG Acquisition. The
Company's share of joint venture cash and investments retained in
project control accounts at March 31, 1998 and December 31, 1997
was $25,820 and $6,072, respectively. Distributions out of the
project control accounts are made monthly to the Company for
operations and maintenance and capital costs and semiannually to
each Coso Project partner for profit sharing under a prescribed
calculation subject to mutual agreement by the partners. The
Company recorded separately restricted cash of $587,456 and
$223,636 at March 31, 1998 and December 31, 1997, respectively.
The restricted cash balance as of March 31, 1998 is comprised
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
primarily of amounts deposited in restricted accounts from which
the Company will fund the construction of the Casecnan Project,
the Dieng Project and the Patuha Project. The restricted cash
balance also includes the Coso Project royalty payment and the
Power Resources Project, the Upper Mahiao Project, the
Mahanagdong Project and the Malitbog Project cash reserves for
debt service reserve funds.
As of March 31, 1998, the Company holds 22,563 shares of treasury
stock at a cost of $729,877 primarily as a result of the KDG
Acquisition, in which the Company purchased 19,231 shares of
treasury stock. These treasury shares will provide shares for
issuance under the Company's employee stock option and share
purchase plan and other outstanding convertible securities.
On September 11, 1997, the Company signed a definitive agreement
with Kiewit Diversified Group ("KDG"), a wholly owned subsidiary
of Peter Kiewit Sons', Inc. ("PKS"), for the Company to purchase
KDG's ownership interest in various project partnerships and
CalEnergy common shares (the "KDG Acquisition").
KDG's ownership interest in CalEnergy comprised approximately
20,231 shares of common stock (assuming exercise by KDG of one
million options to purchase CalEnergy shares), the 30% interest
in Northern Electric, as well as the following minority project
interests: Mahanagdong (45%), Casecnan (35%), Dieng (47%),
Patuha (44%) and Bali (30%) and other interests in international
development stage projects.
CalEnergy paid $1,159,215 for the KDG Acquisition and final
closing of the transaction occurred in January 1998. CalEnergy
funded this acquisition with available cash and the proceeds of
the equity offering and the debt offering completed in October
1997.
In November 1995, CE Casecnan Water and Energy Company, Inc., a
Philippine Corporation ("CE Casecnan") which is currently
approximately 70% indirectly owned by the Company, closed the
financing and commenced construction of the Casecnan Project, a
combined irrigation and 150 net MW hydroelectric power generation
project (the "Casecnan Project") located in the central part of
the island of Luzon in the Republic of the Philippines.
CE Casecnan financed a portion of the costs of the Casecnan
Project through the issuance of $125,000 of its 11.45% Senior
Secured Series A Notes due 2005 and $171,500 of its 11.95% Senior
Secured Series B Bonds due 2010 and $75,000 of its Secured
Floating Rate Notes due 2002, pursuant to an indenture dated as
of November 27, 1995, as amended to date.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
The Casecnan Project was being constructed pursuant to a fixed-
price, date-certain, turnkey construction contract (the "Hanbo
Contract") on a joint and several basis by Hanbo Corporation
("Hanbo") and Hanbo Engineering and Construction Co., Ltd.
("HECC"), both of which are South Korean corporations. As of May
7, 1997, CE Casecnan terminated the Hanbo Contract due to
defaults by Hanbo and HECC including the insolvency of each such
company. On May 7, 1997, CE Casecnan entered into a new turnkey
engineering, procurement and construction contract to complete
the construction of the Casecnan Project (the "Replacement
Contract"). The work under the Replacement Contract is being
conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa working
together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and
Colenco Power Engineering Ltd. (collectively, the "Replacement
Contractor").
In connection with the Hanbo Contract termination, CE Casecnan
tendered a certificate of drawing for $79,329 to Korea First Bank
("KFB") on May 7, 1997, under the irrevocable standby letter of
credit issued by KFB as security under the Hanbo Contract to pay
for certain transition costs and other then ascertainable damages
under the Hanbo Contract. As a result of KFB's wrongful dishonor
of the draw request, CE Casecnan filed an action in New York
State Court.
On August 6, 1997, CE Casecnan announced that it had issued a
notice to proceed to the Replacement Contractor. The Replacement
Contractor was already on site and has fully mobilized and
commenced engineering, procurement and construction work on the
Casecnan Project.
On August 27, 1997, CE Casecnan announced that it had received a
favorable summary judgment ruling in New York State Court against
KFB. The judgment required KFB to honor the $79,329 drawing by
CE Casecnan on a $117,850 irrevocable standby letter of credit.
CE Casecnan subsequently tendered second, third and fourth
certificates of drawing for $10,828, $2,920 and $24,773,
respectively, to KFB which were also wrongfully dishonored.
On September 2, 1997, Hanbo and HECC filed a Request for
Arbitration before the International Chamber of Commerce ("ICC").
The Request for Arbitration asserted various claims by Hanbo and
HECC against CE Casecnan relating to the terminated Hanbo
Contract and sought damages. On October 10, 1997, CE Casecnan
served its answer and defenses in response to the Request for
Arbitration as well as counterclaims against Hanbo and HECC for
breaches of the Hanbo Contract.
On April 17, 1998, CE Casecnan announced that it and Hanbo, HECC,
Hanbo Steel Company, Ltd. and KFB had mutually agreed to settle
the differences among them related to the Casecnan Project.
Under the settlement, KFB has agreed to pay CE Casecnan $90
million and the parties have discontinued with prejudice the
pending arbitration and litigation proceedings and released each
other from all claims arising out of the litigation and
arbitration.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
On September 20, 1997, a Presidential Decree (the "Decree") was
issued in Indonesia, providing for government action to the
effect that, in order to address certain recent fluctuations in
the value of the Indonesian currency, the start-up dates for a
number of private power projects would be: (i) continued
according to their initial schedule (because construction was
underway); (ii) postponed as to their start-up dates (because
they are not yet in construction) until economic conditions have
recovered; or (iii) reviewed with a view to being continued,
postponed or rescheduled, depending on the status of those
projects. In the Decree, Dieng Units 1, 2 and 3 are approved to
continue according to their initial schedule; Patuha Unit 1 and
Bali Units 1 and 2 are to receive further review to determine
whether or not they should be continued in accordance with their
initial schedule; and Bali Units 3 and 4, Patuha Units 2, 3 and 4
and Dieng Unit 4 are to be postponed for an unspecified period.
In this regard, the Company notes that its contracts and
government undertakings for the Dieng, Patuha and Bali projects
do not by their terms permit such categorization or delays by the
government and that the Company has obtained political risk
insurance coverage for its Dieng and Patuha projects. Moreover,
the Company intends to continue to take actions to attempt to
require the Government of Indonesia to honor its contractual
obligations; however, subsequent actions by the Government of
Indonesia and continued economic problems in Indonesia have
created further uncertainty as to whether the contracts for such
projects will be abrogated by the Indonesian government and
accordingly have created significant risks to the completion of
these projects.
On December 2, 1994, a subsidiary of the Company, Himpurna
California Energy Ltd. ("HCE") executed a joint operation
contract (the "Dieng JOC") for the development of the geothermal
steam field and geothermal power facilities at the Dieng
geothermal field, located in Central Java (the "Dieng Project")
with Perusahaan Pertambangan Minyak Dan Gas Bumi Negara
("Pertamina"), the Indonesian national oil company, and executed
a "take-or-pay" energy sales contract (the "Dieng ESC") with both
Pertamina and P.T. PLN (Persero) ("PLN"), the Indonesian national
electric utility. HCE was formed pursuant to a joint development
agreement with P.T. Himpurna Enersindo Abadi ("P.T. HEA"), its
Indonesian partner, which is a subsidiary of Himpurna, whereby
the Company and P.T. HEA have agreed to work together on an
exclusive basis to develop the Dieng Project (the "Dieng Joint
Venture"). The Dieng Joint Venture is structured with
subsidiaries of the Company holding an approximate 94% interest
(including certain assignments of dividend rights representing an
economic interest of 4%) and P.T. HEA holding a 6% interest in
the Dieng Project. Financial closing and first disbursement of
construction loan funds occurred on October 3, 1996.
Construction of Dieng Unit I was completed in March 1998.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
Pursuant to the Dieng JOC and ESC, Pertamina has granted to HCE
the geothermal field and the wells and other facilities presently
located thereon and HCE may build, own and operate power
production units with an aggregate capacity of up to 400 MW. HCE
will accept the field operation responsibility for developing and
supplying the geothermal steam and fluids required to operate the
plant. The Dieng JOC is structured as a build own operate
transfer agreement and will expire (subject to extension by
mutual agreement) on the date which is the later of (i) 42 years
following effectiveness of the Dieng JOC and (ii) 30 years
following the date of commencement of commercial generation of
the final unit. Upon the expiration of the proposed Dieng JOC,
all facilities will be transferred to Pertamina at no cost.
HCE began well testing in the fourth quarter of 1995 and issued a
notice to proceed for the construction and supply of an initial
55 net MW unit ("Dieng Unit I") in the first quarter of 1996. PT
Kiewit/Holt Indonesia, a consortium consisting of Kiewit
Construction Group, Inc., a subsidiary of PKS ("KCG") is
constructing Dieng Unit I pursuant to a fixed price, date
certain, turnkey construction contract ("Construction Contract").
Affiliates of KCG are providing the engineered supply with
respect to Dieng Unit I pursuant to a fixed price, date certain,
turnkey supply contract ("Supply Contract"). The Construction
Contract and Supply Contract are sometimes referred to herein as
the "Dieng EPC" and KCG and their affiliates party to the
Construction Contract and Supply Contract are sometimes referred
to herein, collectively, as the "Construction Consortium." The
obligations of the Construction Consortium under the Construction
and Supply Contracts are supported by a guaranty of KCG. KCG is
the lead member of the Construction Consortium, with a 60%
interest. HCE will be responsible for operating and managing the
Dieng Project.
In the fourth quarter of 1997, HCE issued a notice to proceed for
the construction and supply of the Dieng Unit II 80 net MW
project. The same construction consortium as described above for
Dieng Unit I has contracted to construct Dieng Unit II under
similar terms. The Company has contributed the necessary equity
for the completion of Dieng Unit II and the construction loan of
$109,000 was arranged under the June 1997 CE Indonesia Funding
Corp. facility. However, pending resolution of the current
uncertainties associated with Indonesia, construction activities
on this project have been significantly reduced.
Patuha Power, Ltd. ("Patuha Power") is developing a geothermal
power plant in the Patuha geothermal field in Java, Indonesia
(the "Patuha Project"). On December 2, 1994, Patuha Power
executed both a joint operation contract and an energy sales
contract, each of which contains terms substantially similar to
those described above for the Dieng Project. Patuha Power began
well testing and exploration in the fourth quarter of 1995 and in
the third quarter of 1997, issued a notice to proceed for the
construction and supply of the Patuha Unit I 80 net MW project.
The same construction consortium as described above for Dieng
Unit I has contracted to construct Patuha Unit I under similar
terms. The Company has contributed the necessary equity for the
completion of Patuha Unit I and the construction loan of $150,000
was arranged under the June 1997 CE Indonesia Funding Corp.
facility. However, pending resolution of the current
uncertainties associated with Indonesia, construction activities
on this project have been significantly reduced.
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
The Company and PT Panutan Group, an Indonesian consortium of
energy, oil, gas and mining companies, have formed a joint
venture to pursue the development of geothermal resources in Bali
(the "Bali Project"). The PT Panutan Group is entitled to
contribute up to 40% of the total equity and obtain up to 40% of
the net profit of the Bali Project. The project company
developing the Bali Project, Bali Energy Ltd. ("Bali Energy"),
has executed both a joint operation contract and an energy sales
contract with terms similar to those at Dieng and Patuha.
However, pending resolution of the current uncertainties
associated with Indonesia, infrastructure construction and
drilling activities on this project have been significantly
reduced.
The Company developed and owns the rights to a proprietary
process for the extraction of minerals from elements in solution
in the geothermal brine and fluids utilized at its Imperial
Valley plants (the "Salton Sea Extraction Project") as well as
the production of power to be used in the extraction process.
The initial phase of the project would require delivery of 49 net
MW of power. A pilot plant has successfully produced commercial
quality zinc at Company's Imperial Valley Project. Zinc is
primarily used in galvanizing steel for use in the automobile
industry. The Company intends to sequentially develop manganese,
silver, gold, lead, boron, lithium and other products as it
further develops the extraction technology. The Company is also
investigating producing silica from the solids precipitated out
of the geothermal power process. Silica is used as a filler for
such products as paint, plastics and high temperature cement. If
successfully developed, the mineral extraction process will
provide an environmentally responsible and low cost minerals
recovery methodology.
Subsidiaries of Magma, a subsidiary of the Company, sought new
long-term final SO4 power purchase agreements in the Salton Sea
area through the bidding process adopted by the California Public
Utilities Commission ("CPUC") under its 1992 Biennial Resource
Plan Update ("BRPU"). In its BRPU, the CPUC cited the need for an
additional 9,600 MW of power production through 1999 among
California's three investor-owned utilities, Edison, SDG&E and
Pacific Gas and Electric Company. Of this amount, 275 MW was set
aside for bidding by independent power producers (such as Magma)
utilizing renewable resources. Pursuant to an order of the CPUC
dated June 22, 1994 (confirmed on December 21, 1994), Magma was
awarded 163 net MW for sale to Edison and SDG&E, with in-service
dates in 1997 and 1998. On February 23, 1995 the Federal Energy
Regulatory Commission ("FERC") issued an order finding that the
CPUC's BRPU program violated the Public Utilities Regulatory
Policies Act ("PURPA") and FERC's implementing regulations and
recommended negotiated settlements. In response, the CPUC
issued an Assigned Commissioners Ruling encouraging settlements
between the final winning bidders and the utilities. The
utilities are expected to continue to challenge the BRPU and, in
light of the regulatory uncertainty, there can be no assurance
that power sales contracts will be executed or that any such
projects will be completed. In light of these developments, the
Company agreed to execute an agreement with Edison on March 16,
1995 providing that in certain circumstances it would withdraw
its Edison BRPU bid in consideration for the payment of certain
sums. In December 1996, the Company entered into a
<PAGE>
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
confidential cash buyout agreement with SDG&E. These agreements
are subject to CPUC approval.
The Company is actively seeking to develop, construct, own and
operate new energy projects, 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 contracts
with other project participants, receipt of required governmental
permits and consents and timely implementation of construction.
There can be no assurance that development efforts on any
particular project, or the Company's development efforts
generally, will be successful.
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 the United States. The operation, financing,
construction and development of projects outside the United
States entail significant political and financial risks
(including, without limitation, uncertainties associated with
first time 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 or material impairment
of the value of the project being developed, which the Company
may not be fully capable of 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 government or may be
subject to risks of contract abrogation or other uncertainties
relating to changes in government policy or personnel or changes
in general economic conditions affecting the country. Projects
in operation, construction and development are subject to a
number of uncertainties more specifically described in the
Company's Form 8-K, dated March 6, 1998, filed with the
Securities and Exchange Commission.
<PAGE>
CALENERGY COMPANY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.
As of March 31, 1998, there are no material outstanding
lawsuits against the Company; however see Note 6,
Commitments and Contingencies regarding litigation involving
various of the Company's projects.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Defaults on Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 - Calculation of earnings per share.
Exhibit 15 - Awareness letter of Independent Accountants.
Exhibit 27 - Financial Data Schedule.
<PAGE>
CALENERGY COMPANY, INC.
PART II - OTHER INFORMATION
(b) Reports on Form 8-K:
During the quarter ended March 31, 1998 the Company filed
the following:
(i) Form 8-K dated January 5, 1998 reporting the
completion of the acquisition of Kiewit's interests
and repurchase of Company shares.
(ii)Form 8-K dated January 12, 1998 regarding the
Government of Indonesia's Presidential Decree
placing Patuha Unit I on reviewed status.
(iii) Form 8-K dated January 19, 1998 reporting
revenues and earnings for the 4th Quarter of 1997,
including the valuation impairment relating to
Indonesia.
(iv)Form 8-K dated March 6, 1998 describing cautionary
statements.
<PAGE>
SIGNATURES
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.
Date: May 15, 1998 /s/ Craig M. Hammett
Craig M. Hammett
Senior Vice President and
Chief Financial Officer
/s/ Patrick J. Goodman
Patrick J. Goodman
Vice President, Chief Accounting
Officer and Controller
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
11 Calculation of Earnings Per Share 31
15 Awareness Letter of Independent Accountants 32
27 Financial Data Schedule 33
<PAGE>
Exhibit 11
CALENERGY COMPANY, INC.
CALCULATION OF EARNINGS PER SHARE IN ACCORDANCE
WITH INTERPRETIVE RELEASE NO. 34-9083
(dollars in thousands, except per share amounts)
___________________
Three Months Ended
March 31
1998 1997
Actual weighted average shares outstanding
for the period 61,081,469 63,510,533
Dilutive stock options and warrants using
average market prices 588,240 1,273,610
Additional dilutive stock options assuming conversion
of convertible preferred securities of
subsidiary trusts(1) 7,672,883 5,062,165
Diluted shares outstanding 69,342,592 69,846,308
Net income available to common stockholders $ 27,295 $ 27,448
Net income per share $ .45 $ .43
Diluted income per share based on SEC
interpretive release No. 34-9083(1)(2) $ .43 $ .42
(1)-The convertible preferred securities of subsidiary trusts
issued on August 12, 1997 would be antidilutive to earnings per
share for the three months ended March 31, 1998. Therefore,
these items are excluded from diluted shares outstanding.
(2)-Net income available to common stockholders for the three
months ended March 31, 1998 and 1997 was increased by dividends
on convertible preferred securities of subsidiary trusts, net of
tax effect, of $2,751 and $1,666, respectively.
<PAGE>
Exhibit 15
CalEnergy Company, Inc.
Omaha, Nebraska
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of CalEnergy Company,
Inc. for the three month periods ended March 31, 1998 and 1997 as
indicated in our report dated April 22, 1998; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included
in your Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, is incorporated by reference in Registration Statements
No. 33-41152, No. 33-52147 and No. 333-30395 on Form S-8 and
Registration Statements No. 33-51363 and No. 333-32821 on Form S-
3.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act of 1933, is not considered a
part of a Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 14, 1998
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