<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-62697
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 9, 1998
[CALENERGY LOGO]
$100,000,000
CALENERGY COMPANY, INC.
7.52% Senior Notes due 2008, Series B
------------------
CalEnergy Company, Inc. will pay interest on its 7.52% Senior Notes due 2008,
Series B on March 15 and September 15 of each year. The first interest payment
will be made on March 15, 1999. CalEnergy Company, Inc. may redeem some or all
of the securities at any time at par plus a make whole premium as described in
this prospectus supplement.
The securities will be senior unsecured obligations, ranking equally with our
existing and future senior unsecured indebtedness and senior in right of
payment to our existing and future subordinated indebtedness. They effectively
rank junior to our existing and future secured debt (to the extent secured debt
is permitted under the indenture for these securities) and junior to the debt
and other liabilities of our subsidiaries, projects and joint ventures (to the
extent of their assets). The indenture permits us to incur additional
indebtedness, subject to certain limitations.
The net proceeds of this securities offering are expected to be used to fund a
portion of the purchase price for our pending acquisition of MidAmerican Energy
Holdings Company. The balance of the MidAmerican purchase price is expected to
be funded from approximately $830 million of the net proceeds from our recent
$1.4 billion debt offering, approximately $500 million in net proceeds from a
contemplated offering of our equity securities and/or possible asset sales and
approximately $740 million in net proceeds from a contemplated offering of debt
securities by one of our subsidiaries which will be formed to acquire
MidAmerican and from cash on hand. The closing of this securities offering will
occur prior to, and is not conditioned upon, the closing of the acquisition of
MidAmerican or the completion of the related financings.
The Underwriter has agreed to purchase the securities from CalEnergy Company,
Inc. at a price equal to $100,742,641.47, which represents 102.24264147% of the
principal amount of each security, plus accrued interest, if any, from November
13, 1998, less assumed underwriting discounts and commissions equal to 1.50% of
the aggregate principal amount of the securities (or $1,500,000 in the
aggregate).
The Underwriter proposes to offer the securities from time to time for sale in
negotiated transactions or otherwise, at market prices prevailing at the time
of sale, at prices related to such prevailing prices or at negotiated prices.
INVESTING IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Delivery of the securities, in book-entry form only, will be made through
The Depository Trust Company on or about November 13, 1998, against payment in
immediately available funds.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated November 10, 1998.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU (INCLUDING THE DOCUMENTS INCORPORATED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS BY REFERENCE). WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
PROSPECTUS SUPPLEMENT SUMMARY .............................. S-1
USE OF PROCEEDS ............................................ S-13
CAPITALIZATION ............................................. S-14
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ......... S-15
SELECTED PRO FORMA FINANCIAL DATA .......................... S-18
THE BUSINESS OF THE COMPANY ................................ S-19
DESCRIPTION OF THE SECURITIES .............................. S-28
UNDERWRITING ............................................... S-31
NOTICE TO CANADIAN RESIDENTS ............................... S-32
LEGAL MATTERS .............................................. S-33
EXPERTS .................................................... S-33
INDEX TO FINANCIAL STATEMENTS .............................. F-1
INDEX TO PRO FORMA FINANCIAL DATA .......................... P-1
PROSPECTUS
AVAILABLE INFORMATION ...................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ............ 3
RISK FACTORS ............................................... 4
THE COMPANY ................................................ 11
RATIO OF EARNINGS TO FIXED CHARGES ......................... 12
USE OF PROCEEDS ............................................ 12
DESCRIPTION OF CAPITAL STOCK ............................... 13
DESCRIPTION OF PREFERRED STOCK ............................. 15
DESCRIPTION OF DEBT SECURITIES ............................. 20
PLAN OF DISTRIBUTION ....................................... 53
LEGAL MATTERS .............................................. 54
EXPERTS .................................................... 54
</TABLE>
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FORWARD-LOOKING INFORMATION
This prospectus supplement, the accompanying prospectus and the documents
incorporated herein and therein by reference contain forward-looking statements
which involve risks and uncertainties. Our actual results in the future could
differ significantly from the results discussed or implied in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein
or therein. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus
supplement, the accompanying prospectus or the documents incorporated herein or
therein by reference are discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which is incorporated by
reference herein, "The Business of the Company" in this prospectus supplement
and "Risk Factors" in the accompanying prospectus, as well as elsewhere in this
prospectus supplement and accompanying prospectus or in the documents that are
incorporated by reference herein or therein.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
As used in this prospectus supplement, the terms "Company," "we," "our"
and similar terms refer to CalEnergy Company, Inc. ("CalEnergy") and its
operating subsidiaries (including Northern) and joint ventures, and "Northern"
refers to Northern Electric plc and its operating subsidiaries, unless the
context otherwise requires. The following summary contains basic information
about this offering. It likely does not contain all the information that is
important to you. For a more complete understanding of this offering, we
encourage you to read this entire prospectus supplement, the accompanying
prospectus and the documents we have referred you to, including our financial
statements and the other documents incorporated herein and therein by reference.
THE COMPANY
OVERVIEW
We are a fast-growing global energy company with an increasingly
diversified portfolio of regulated and non-regulated assets. Our focus has
evolved over time from development and acquisition activities in the domestic
and international power generation market to strategic electric and gas utility
acquisitions, with a particular emphasis on investment-grade countries such as
the U.S., U.K., Australia, Canada, New Zealand and the countries of Western
Europe. This focus has provided us with increased scale, skill and revenue
diversity and enhanced credit quality of cash flows and additional growth
opportunities associated with each of the acquired businesses. Our proposed
acquisition (the "MidAmerican Merger") of MidAmerican Energy Holdings Company
("MidAmerican" or "MEC") is being implemented in furtherance of this strategy.
Our investments in related activities (e.g., producing gas fields and gas
reserves and advanced utility information systems) are primarily intended to
support and augment the profitability of our existing core businesses.
CalEnergy was founded in 1971 and, through its subsidiaries, manages and
currently owns interests in over 5,000 megawatts ("MW") of power generation
facilities in operation, construction and development worldwide, including 20
generating facilities which we currently operate. (This will increase to
approximately 9,000 MW and 30 operating facilities following the MidAmerican
Merger.) Since both the demand for electric power and the pace of electric
industry privatization continues to increase on a global basis, the power
generation segment will remain a significant investment and growth opportunity
for us in addition to our core utility operations. Our utility operations are
currently conducted through a subsidiary, Northern Electric plc ("Northern"),
which engages in the supply and distribution of electricity and gas to more
than 2 million customers in the U.K., as well as other related utility business
activities.
During the past five years, we have achieved significant growth in
earnings and assets while diversifying the underlying revenue base and
improving the associated credit quality of that base through: (i) strategic
acquisitions that broaden the geographic and business scope of our overall
activities and that expand our core competencies; (ii) enhancement of the
financial and technical performance of existing and acquired business
operations; and (iii) development, construction and acquisition of incremental
energy-related assets to support and expand the scope of existing operations
within focused geographic regions.
Our management team has a proven track record of project development,
operation, acquisition integration and portfolio diversification. Since 1991,
our operating and financial results have improved significantly through the
employment of a disciplined acquisition, development and management philosophy.
In 1991, our EBITDA was derived largely from non-regulated, domestic power
generation activities. After giving effect to this securities offering, our
recent $1.4 billion debt offering, the expected retirement of our 10 1/4%
Senior Discount Notes due 2004, the MidAmerican Merger and the proposed
financings discussed below for the balance of the purchase price for the
MidAmerican Merger, our adjusted pro forma EBITDA for the year ended
December 31, 1997 is approximately $1.3 billion and our total assets as of
June 30, 1998 are approximately $12.9 billion.
S-1
<PAGE>
Our goal is to continue to foster long-term sustained growth built upon a
solid foundation of diversified and high quality assets and skill sets. As part
of this strategy, we recently agreed to acquire MidAmerican, which provides us
with an attractive integrated U.S. utility growth platform. Following the
MidAmerican Merger, we expect that approximately 80% of our cash flows will be
derived from highly stable, investment-grade credit quality sources, of which
approximately 60% will be contributed from regulated U.S. and U.K. utility
operations. We can give no assurance that the MidAmerican Merger or the
completion of the related financings will be consummated.
A condensed financial structure overview reflecting the current ratings of
the principal senior debt securities issued by CalEnergy and its subsidiaries
(including MidAmerican as though the MidAmerican Merger had been consummated)
is presented below.(1)
<TABLE>
CALENERGY
COMPANY, INC.
Ba1/BB+/BB+
<S> <C> <C> <C> <C> <C>
OTHER
SALTON SEA SUBSIDIARIES AND
MIDAMERICAN COSO FUNDING FUNDING CORP. PROJECTS (U.S.,
ENERGY CE ELECTRIC CORP. Baa2/BBB- CE CASECNAN PHILIPPINES,
HOLDINGS U.K. FUNDING Baa2/BBB/BBB (IMPERIAL VALLEY PROJECT AUSTRALIA, POLAND
COMPANY Baa1/BBB+/A- (COSO PROJECTS) PROJECTS) Ba2/BB+ AND INDONESIA)
MIDAMERICAN NORTHERN
ENERGY COMPANY ELECTRIC PIC
A2/AA-(2) A3/BBB+/A
</TABLE>
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(1) Moody's Investors Services, Inc. ("Moody's") and Standard & Poor's
Ratings Group ("S&P"), respectively, published the above debt ratings
and, in the case of CalEnergy Company, Inc., CE Electric, Northern and
Coso, Duff & Phelps Credit Rating Co. also published debt ratings for
certain senior indebtedness of the respective issuers shown. The rating
agencies may change these ratings from time to time. On August 12, 1998,
each of Moody's and S&P, and on August 18, 1998, Duff & Phelps Credit
Rating Co., announced that they had placed the Company's long-term senior
debt rating on Credit Watch, with positive implications for a possible
upgrade following the MidAmerican Merger.
(2) MidAmerican Energy Company's long-term secured debt is currently rated A2
and AA-, by Moody's and S&P, respectively. On August 12, 1998, each of
S&P and Moody's announced that it had placed these debt ratings on Credit
Watch, with negative implications for a possible downgrade following the
MidAmerican Merger.
NORTHERN
In February 1997, we acquired Northern, one of the twelve U.K. regional
electric companies, which came into existence as a result of the restructuring
and subsequent privatization of the electricity industry that occurred in the
U.K. in 1990. Northern's principal business is the distribution of electricity
in its authorized area located in northeast England which covers approximately
14,400 square kilometers and has a population of approximately 3.2 million
people. As a regional platform, Northern's related activities also include: (i)
the supply of electricity and gas inside and outside its authorized area, and
(ii) ownership interests in producing gas fields in the North Sea and gas,
transmission and storage operations. Consistent with our goals, these related
activities serve to support the operations and growth of the Northern electric
and gas supply business. In addition, based on the skills and experience
developed in the U.K. deregulated energy market, we have developed proprietary
and advanced information systems ("Aurora/IT") which are currently being
utilized in the supply business in the U.K., and are expected to be directly
applicable to our other utility operations, such as MidAmerican's utility
operations.
S-2
<PAGE>
We financed our acquisition of Northern with $586 million of cash, and
approximately $700 million of non-recourse debt that was issued by a new
holding company for Northern ("CE Electric UK Funding Company") serviced solely
from Northern's cash flow. Following the acquisition, Moody's affirmed
Northern's ratings and S&P reduced its rating from A- to BBB+. The ratings for
CE Electric UK Funding Company are Baa1 and BBB+ from Moody's and S&P,
respectively.
Since the Northern acquisition, we have focused the goals and objectives
for Northern's key business units (Distribution, Utility Services, Supply and
Aurora/IT) as follows:
o Maintain the strength and stability of the core electric distribution
business;
o Grow the electricity and gas supply business prudently and profitably;
o Be a low-cost provider while maintaining reliable, high-quality
service; and
o Increase the profitability of and grow Northern's other regulated
businesses in a disciplined manner and within the financial means of
the Northern organization.
The results to date have exceeded our original expectations.
Accomplishments for and attributes of the respective U.K. business units
include:
Distribution and Utility Services
o Improved reliability and customer service, as measured by the Office
for Electricity Regulation; and
o Lower staff levels and reduced overtime.
Supply
o 1.5 million electricity customers;
o Added 640,000 new gas customers in the past year;
o Dual fuel offering (a first time innovation for the U.K. market);
o A tripling of business gas sales; and
o An increase in over 100kW electricity sales by 30%, 45% and 50% in the
last three contract rounds (now the third largest U.K. supplier in
this sector).
Aurora/IT
o System handles an average of 3,800 new gas and electricity customer
applications per day, with peak volume of 10,000 new applications per
day;
o Facilitates supply and billing to new gas and electricity customers;
and
o Increase in customer satisfaction through flexible pricing and payment
options.
OVERVIEW OF PENDING MIDAMERICAN MERGER
On August 11, 1998, we entered into an Agreement and Plan of Merger
pursuant to which we agreed to acquire, subject to the conditions set forth
therein, MidAmerican for approximately $2.6 billion in cash, in a transaction
in which approximately $1.6 billion in debt and preferred stock of MidAmerican
will remain outstanding. Pursuant to the MidAmerican Merger, CalEnergy will
reincorporate in Iowa and will be renamed MidAmerican Energy Holdings Company.
The CalEnergy securities will remain senior debt of CalEnergy, and
MidAmerican's existing debt and preferred stock will remain debt and preferred
stock of that utility subsidiary following the MidAmerican Merger.
S-3
<PAGE>
MidAmerican is the largest combined electric and gas utility in Iowa with
648,000 electric and 619,000 gas customers. It has gas and electric operations
in Iowa, Illinois and South Dakota and gas operations in Nebraska. The
regulated service area is comprised of 10,600 square miles with a total
population of 1.7 million. MidAmerican has an installed generation capacity of
approximately 4,000 MW, comprised of 71% coal, 19% natural gas and 10% nuclear
fuel sources. Due to its geographic location and fuel sources, MidAmerican is a
low cost producer of electricity in the Mid-Continent Area Power Pool.
Mid-American supplies from time to time electricity to other major energy
markets in the midwestern U.S. such as the Chicago area, St. Louis, Kansas
City, Milwaukee and Minneapolis. MidAmerican's gas operations are served by at
least four major gas pipelines.
We believe that the electric power industry within the U.S. will continue
its current pace of deregulation, with regulated distribution operations
expected to follow the established U.K. regulatory model (with incentive-based
rates or price caps). As a result, we believe that the MidAmerican Merger will
provide the opportunity to apply the knowledge, skills and systems gained at
Northern and, with the addition of a strong and complementary management team,
to establish a platform from which a domestic energy distribution and supply
business can be profitably managed and expanded over time.
Our shareholders and the MidAmerican shareholders approved the MidAmerican
Merger on October 30, 1998. The waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, expired on October 10, 1998.
The consummation of the MidAmerican Merger remains conditioned upon receipt of
approvals of the Nuclear Regulatory Commission, the Federal Energy Regulatory
Commission, the Iowa Utilities Board and certain other state certifications and
regulatory filings. In addition, the disposition of partial interests in
certain of our power generating facilities will be required prior to the
consummation of the MidAmerican Merger in order to maintain the qualifying
facilities status of such independent power generating facilities. We can give
no assurance as to the timing of the required regulatory approvals, the ability
to obtain regulatory approvals, that such approvals will contain satisfactory
terms and conditions or that the MidAmerican Merger will be consummated. See
"Risk Factors--Acquisition Uncertainties" in the accompanying prospectus.
Closing of the MidAmerican Merger is expected to occur by the end of the
first quarter of 1999.
BENEFITS OF PENDING MIDAMERICAN MERGER
We believe that the following economic and strategic benefits will be
realized from the MidAmerican Merger:
o Continues our transformation to an integrated global energy company
with the increased scale and skill base required to efficiently compete
as energy markets continue to deregulate throughout the world;
o Combines our existing competitive supply expertise with MidAmerican's
approximately 4,000 MW of efficient low cost, primarily coal-fired
generating capacity having access to high-priced markets (e.g., Chicago);
o Provides a platform for continued U.S. growth through the addition of a
strong and complementary management team able to identify midwest
regional development and expansion opportunities in both assets and
supply, as well as to apply the Aurora/IT technology to MidAmerican's
operations;
o Enhances CalEnergy's financial position through cash flow and earnings
accretion beginning with the first full year of operations following the
consummation of the transaction; and
o Improves CalEnergy's consolidated credit profile through increased
diversification of cash flow and earnings sources derived principally
from the investment-grade regulated utility operations.
S-4
<PAGE>
FINANCING PLAN; RECENT COMPANY DEBT OFFERING
We propose to fund the MidAmerican Merger utilizing a financing plan
substantially similar in nature to that previously employed for the Northern
acquisition, as illustrated below.
STRUCTURE
$500 Million of Equity/Asset Sales
CalEnergy $930 Million of Debt
$420 Million of Cash
$750 Million of Non-recourse
MidAmerican Debt
FinCo
MidAmerican
Holdings
$1,600 Million of existing
MidAmerican MidAmerican debt and preferred
Unregulated Energy (remains outstanding)
SOURCES & USES
SOURCES: IN MILLIONS
-----------
MidAmerican Finco Debt $750
Cash $420
Debt $930
Equity/Asset Sales $500
----
TOTAL SOURCES $2,600
======
USES:
Purchase Price
(including transaction costs) $2,600
------
TOTAL USES $2,600
======
On September 22, 1998, CalEnergy closed the sale of $1.4 billion in
aggregate principal amount of its Senior Notes and Senior Bonds (collectively,
the "Recent Company Debt Offering"), consisting of $215 million of its 6.96%
Senior Notes due 2003, $260 million of its 7.23% Senior Notes due 2005, $450
million of its 7.52% Senior Notes due 2008 and $475 million of its 8.48% Senior
Bonds due 2028. We expect to use approximately $830 million of the net proceeds
from the Recent Company Debt Offering to fund the MidAmerican Merger.
We propose to fund the balance of the MidAmerican Merger purchase price
from the net proceeds of this securities offering (the "Securities Offering")
and cash on hand and through the establishment of a wholly-owned,
special-purpose entity ("MidAmerican FinCo") which will issue approximately
$750 million of debt financing (the "Non-Recourse Financing") that will
partially fund the MidAmerican Merger, and that will be non-recourse to
CalEnergy and solely serviced with operating cash flow from MidAmerican. The
remaining acquisition financing of approximately $500 million is expected to be
raised through common securities and/or other equity-linked securities of
CalEnergy (the "Equity Offering"). We may replace certain of the proceeds of
the Equity Offering with proceeds from non-core asset sales. The timing and
composition of such financing elements are flexible and subject to optimization
and refinement as financing market conditions change. We can give no assurance
that the Non-Recourse Financing or the Equity Offering will be consummated.
S-5
<PAGE>
STRATEGY
Our diversification and growth strategy remains focused upon strategic
utility acquisitions and other investment opportunities created by the
continuing deregulation and privatization in energy sectors throughout the
world, particularly within investment-grade countries such as the U.S., U.K.,
Australia, Canada, New Zealand and the countries of Western Europe.
In each market, our strategy is principally comprised of the following key
elements:
o DIVERSIFICATION AND GROWTH THROUGH INTERNATIONAL AND DOMESTIC
ACQUISITIONS. We have successfully completed five acquisitions in the
past four years, each of which was accretive to earnings and cash flow,
and reflective of our disciplined investment philosophy. We believe that
several of these acquisitions have provided us with specialized skills
and an expertise base which enhances our competitive position in those
areas that we have targeted for future growth. For example, our
acquisition of Northern was the first step in our planned expansion into
the distribution and supply (electricity and gas) business segments in
the U.S. which will be achieved, in part, through the MidAmerican Merger.
As a direct result of the competitive experience afforded by progressive
U.K. energy deregulation, we believe that we possess the demonstrated
knowledge and skill base required to effectively compete in open supply
markets as such markets develop in the U.S. An additional benefit of the
Northern acquisition was the opportunity to develop Aurora/IT, a
proprietary array of sophisticated billing and information systems, which
we believe to be a critically important component of effective operations
in a deregulated utility environment. We further believe that there will
be immediate opportunities to apply Aurora/IT at MidAmerican and
elsewhere in the U.S. as such markets progressively deregulate.
o DIVERSIFICATION AND GROWTH THROUGH GREENFIELD DEVELOPMENT OF ENERGY
PROJECTS. We continue to view the domestic and international power
generation, transmission and distribution markets, particularly when
integrated with upstream natural gas operations, as an attractive market
for the selected development of new greenfield energy opportunities, an
area in which we have substantial expertise.
In addition, the price volatility recently experienced in tight summer
U.S. markets has highlighted the need for additional capacity in certain
regions such as the Midwest. Based on forecasts for those Midwest markets
as well as the regional market knowledge and experience at MidAmerican,
we have announced plans to jointly develop with MidAmerican a
non-regulated gas-fired plant with a generating capacity of up to
approximately 500 MW. We plan to continue a focused development effort on
power and integrated gas projects with a particular emphasis on
investment-grade countries such as the U.S., U.K., Australia, Canada, New
Zealand and the countries of Western Europe.
o CONTINUED ENHANCEMENT OF CREDIT QUALITY AND DIVERSIFICATION OF REVENUE
BASE, EARNINGS AND CASH FLOWS. We currently have a diversified revenue
base including our long-term contract-based power generation activities
and regulated utility operations. The MidAmerican Merger will provide for
further complementary and beneficial diversification of both our business
profile (through an increased weighting on regulated utility operations)
and revenue base (through an increase of investment-grade revenues
generated from stable, regulated sources). Following the MidAmerican
Merger, we expect that approximately 80% of our cash flows will be
derived from highly stable, investment-grade credit quality sources, of
which approximately 60% will be contributed from regulated U.S. and U.K.
utility operations.
o MAINTENANCE OF PRUDENT FINANCIAL AND RISK MANAGEMENT PRACTICES. We have
and will continue to consistently maintain what we believe to be prudent
financial and risk management practices. A primary component of our
financing philosophy is the demonstrated employment of investment-grade,
non-recourse financing at subsidiary levels. Such a financing strategy
provides for fundamental protection of our other assets since the
non-recourse structures we utilize require
S-6
<PAGE>
that (with certain minimal exceptions) the funds borrowed for the
purposes of financing such investments are serviced solely from the cash
flow generated by, and the assets of, that discrete investment. As
discussed previously, the MidAmerican Merger financing plan calls for a
MidAmerican FinCo financing structure that is similar to the structure
successfully employed at Northern.
This financing philosophy then permits us to act, in part, as a holding
company which utilizes portfolio management investment practices. We are
able to efficiently raise capital from a variety of sources to contribute
as equity into the non-recourse investment vehicles, typically in amounts
sufficient to achieve investment-grade levels at those vehicles. Our
continued adherence to our strict investment criteria has resulted in a
continued upward trend in our credit profile as evidenced by the
historical improvement in our credit ratings.
In addition, we plan to optimize our capital structure by refinancing
debt when market conditions permit.
o CONTINUED PROFIT ENHANCEMENT THROUGH OPERATING EFFICIENCIES WHILE
MAINTAINING QUALITY AND RELIABILITY OF SERVICE.
RECENT DEVELOPMENTS--SEPTEMBER 30, 1998 EARNINGS
On October 22, 1998, we reported our earnings for the three and nine month
periods ended September 30, 1998, which were as follows (compared to the same
periods in 1997):
Three Months Ended September 30, 1998
-------------------------------------
o Revenues increased 14% to $627.7 million from $551.9 million in 1997.
o Net income increased 3% to $47.6 million from $46.4 million in 1997
(before extraordinary item).
o Earnings before interest, taxes, depreciation and amortization
increased 16% to $253.0 million from $218.2 million in 1997.
Nine Months Ended September 30, 1998
------------------------------------
o Revenues increased 15% to $1.89 billion from $1.64 billion in 1997.
o Net income increased 3% to $107.4 million from $104.7 million in 1997
(before extraordinary item).
o Earnings before interest, taxes, depreciation and amortization
increased 16% to $698.8 million from $604.3 million in 1997.
---------------------
Our principal executive offices are located at 302 South 36th Street,
Suite 400, Omaha, Nebraska 68131, and our telephone number is (402) 341-4500.
CalEnergy was incorporated in 1971 under the laws of the State of Delaware.
S-7
<PAGE>
THE SECURITIES OFFERING
Total Amount of
Securities Offered......... $100,000,000 in principal amount of 7.52%
Senior Notes due 2008, Series B.
Maturity.................... September 15, 2008.
Interest.................... Annual rate--7.52%
Payment frequency--every six months on March 15
and September 15.
First payment--March 15, 1999.
Optional Redemption......... We may redeem some or all of the securities at
any time at par plus accrued interest plus a
premium aimed to "make whole" to comparable U.S.
Treasury securities plus 37.5 basis points.
Mandatory Offer
to Repurchase............... If we experience specific kinds of changes of
control, we must offer to repurchase the
securities at 101% of the principal amount, plus
accrued interest.
Ranking..................... The securities will be senior unsecured
obligations, ranking equally with our existing
and future senior unsecured indebtedness and
senior in right of payment to our existing
and future subordinated indebtedness. They
effectively rank junior to our existing and
future secured debt (to the extent secured debt
is permitted under the indenture for these
securities) and junior to the debt and other
liabilities of our subsidiaries, projects and
joint ventures (to the extent of their assets).
Assuming we had completed this Securities
Offering, the Recent Company Debt Offering, the
MidAmerican Merger, the Equity Offering and the
Non-Recourse Financing on June 30, 1998 and
applied the proceeds as intended, these
securities:
o would have ranked equally with $1,975
million of other senior debt; and
o would have been subordinated to $200 million
of secured limited recourse parent company
indebtedness (of which $0 is currently
recourse to CalEnergy) and $5,033 million of
our proportionate share of project, joint
venture and subsidiary debt.
S-8
<PAGE>
Basic Covenants
of Indenture................ We will issue the securities as a new series of
debt under our existing indenture. The indenture
will, among other things, restrict (subject to
certain exceptions) our ability and the ability
of our subsidiaries and joint ventures to:
o borrow money;
o pay dividends on stock or purchase stock;
o use assets as security in other
transactions;
o do business with related parties;
o enter into new lines of business;
o make investments; and
o sell substantially all of our assets or
merge with or into other companies.
For more details, see the section "Description
of Debt Securities" under the heading "Certain
Covenants" in the accompanying prospectus.
Change in Covenants When Securities
Become Investment Grade..... When the securities become investment grade
rated according to three specified nationally
recognized statistical rating organizations, we
and our subsidiaries and joint ventures will not
have to comply with most of the covenants
described above under the heading "Basic
Covenants of the Indenture." Instead, the
indenture will only restrict our ability to:
o use CalEnergy's assets as security in other
transactions; and
o sell substantially all of CalEnergy's assets
or merge CalEnergy with or into other
companies.
For more details, see the section "Description
of the Securities" under the heading "Change in
Covenants When Securities Rated Investment
Grade."
Use of Proceeds............. We expect to use the net proceeds from the
Securities Offering, together with approximately
$830 million of the net proceeds from the Recent
Company Debt Offering, approximately $500 million
of the net proceeds from the Equity Offering and
approximately $740 million of the net proceeds
from the Non-Recourse Financing and available
cash on hand from the general corporate funds of
the Company, to complete the MidAmerican Merger.
However, if for any reason the MidAmerican Merger
is not consummated, we will be able to use the
net proceeds for any of the other purposes
described under "Use of Proceeds" in this
prospectus supplement.
S-9
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
CALENERGY COMPANY, INC.
(ALL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following table presents summary historical consolidated financial and
operating data of the Company as of and for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998. The unaudited
consolidated financial statements of the Company as of and for the six months
ended June 30, 1997 and 1998 reflect all adjustments necessary in the opinion
of the Company's management (consisting of normal recurring accruals) for a
fair presentation of such data. You should read the financial data set forth
below in conjunction with the historical consolidated financial statements of
the Company and the notes thereto appearing elsewhere or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, (2)
-------------------------------------------- -------------------------------
1995 1996(1) 1997 1997 1998(3)
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues .................................... $ 398,723 $ 576,195 $2,270,911 $ 1,090,970 $ 1,264,829
Operating revenues ................................ 335,630 518,934 2,166,338 1,048,511 1,212,440
Income before income taxes ........................ 97,051 140,404 196,860 124,682 120,467
Interest expense, net of capitalized interest ..... 102,083 126,038 251,305 119,506 159,729
Net income (loss)(4) .............................. 63,415 92,461 (84,027) 58,337 59,761
Net income (loss) per share--basic(4)(5) .......... $ 1.32 $ 1.69 $ (1.25) $ .92 $ .99
Net income (loss) per share--diluted(4)(5) ........ $ 1.22 $ 1.54 $ (1.22) $ .88 $ .95
BALANCE SHEET DATA:
Properties, plants, contracts and equipment,
net ............................................. $1,781,255 $3,225,496 $3,528,910 $ 3,531,427 $ 4,358,649
Total assets ...................................... 2,654,038 5,630,156 7,487,626 6,186,435 7,481,881
Subsidiary and project debt ....................... 921,219 1,678,392 2,189,007 2,193,118 2,850,240
Total indebtedness ................................ 1,763,424 2,825,077 3,492,852 3,146,935 4,154,115
Convertible preferred securities of
subsidiary trusts ............................... -- 103,930 553,930 283,930 553,930
Stockholders' equity .............................. 543,532 880,790 765,326 917,912 779,604
OTHER FINANCIAL DATA:
Depreciation and amortization ..................... $ 72,249 $ 118,586 $ 276,041 $ 137,912 $ 165,584
Capital expenditures .............................. 398,623 341,706 380,649 182,190 304,140
EBITDA(6)(7) ...................................... 271,383 385,028 811,206 382,100 445,780
Ratio of EBITDA to fixed charges(7)(8) ............ 2.0 2.3 2.5 2.5 2.1
Ratio of earnings to fixed charges(8) ............. 1.5 1.6 1.4 1.7 1.4
</TABLE>
- ----------
(1) Reflects the acquisition of the remaining 50% of four geothermal power
projects located in the California Imperial Valley from a third party on
April 17, 1996, the acquisition of Falcon Seaboard on August 7, 1996 and
the acquisition of majority ownership of Northern by CE Electric U.K. plc
("CE Electric") on December 24, 1996. In March 1997, the Company
completed the acquisition of Northern.
(2) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(3) Reflects the acquisition of Kiewit Diversified Group's ownership
interests in various of our project partnerships and in CalEnergy's
common stock on January 2, 1998.
(4) Reflects a 1997 non-recurring charge of $87 million, or $1.29 per share,
and extraordinary item of $135,850, or $2.02 per share.
(5) The weighted average number of basic common shares outstanding was 47.2
million, 54.7 million, 67.3 million, 63.5 million and 60.7 million,
respectively, for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 and 1998. The number of diluted shares
outstanding was 56.2 million, 65.1 million, 68.7 million, 71.4 million
and 74.6 million, respectively, for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998.
(6) EBITDA means earnings before interest, taxes, depreciation, amortization,
and 1997 non-recurring item.
(7) Information concerning EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's ability to
service debt. EBITDA should not be construed as an alternative to either
(i) operating income (determined in accordance with GAAP) or (ii) cash
flow from operating activities (determined in accordance with GAAP).
(8) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate
of (a) the pre-tax income of the Company and (b) fixed charges, less
capitalized interest. "Fixed charges" represent interest (whether
expensed or capitalized), amortization of deferred financing and bank
fees, and the portion of rentals considered to be representative of the
interest factor (one-third of lease payments) and preferred stock
dividend requirements of majority-owned subsidiaries.
S-10
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
MIDAMERICAN ENERGY HOLDINGS COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary selected historical financial data of MidAmerican for the
years ended December 31, 1995, 1996 and 1997 set forth below have been derived
from audited financial statements. The summary selected historical financial
data of MidAmerican for the six months ended June 30, 1997 and June 30, 1998
set forth below have been derived from unaudited financial statements. You
should read the financial data set forth below in conjunction with the
historical consolidated financial statements of MidAmerican and related notes
thereto appearing elsewhere or incorporated by reference in this prospectus
supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ...................................... $ 1,649,341 $ 1,872,612 $ 1,922,281 $ 965,422 $ 864,951
Operating income (1) .......................... 292,354 343,638 270,506 132,628 130,983
Income from continuing operations (2) ......... 119,705 143,761 139,332 58,350 59,733
Average common shares outstanding ............. 100,401 100,752 98,058 99,534 94,675
Earnings per average common share from
continuing operations ........................ $ 1.19 $ 1.43 $ 1.42 $ .59 $ .63
Cash dividends declared per share ............. $ 1.18 $ 1.20 $ 1.20 $ .60 $ .60
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ................................. $ 4,470,097 $ 4,521,848 $ 4,278,091 $ 4,135,705 $ 4,407,497
Long-term debt (3) ........................... 1,468,617 1,474,701 1,178,769 1,239,287 1,263,169
Power purchase obligation (3) ................ 125,729 111,222 97,504 111,221 97,504
Short-term borrowings ........................ 184,800 161,990 138,054 146,185 167,429
Preferred stock:
Not subject to mandatory redemption ......... 89,945 31,769 31,763 31,765 31,760
Subject to mandatory redemption (4) ......... 50,000 150,000 150,000 150,000 150,000
Common stock equity (5) ...................... 1,225,715 1,239,946 1,301,286 1,186,313 1,311,583
Book value per common share (5) .............. $ 12.17 $ 12.31 $ 13.65 $ 12.15 $ 13.94
</TABLE>
- ----------
(1) MidAmerican 1995 operating income includes $33,400 of costs related to a
restructuring and workforce reduction plan implemented and completed in
1995.
(2) In 1997, MidAmerican recorded after-tax gains totaling $11,200 for sales
of assets of certain railcar businesses and portion of a common stock
investment that had appreciated significantly. MidAmerican recorded
after-tax losses of approximately $10,200 and $9,400 for the write-down
of certain nonregulated assets during 1995 and 1996, respectively. In
1996, MidAmerican incurred $8,700 of costs in connection with its merger
proposal to IES Industries, Inc.
(3) Includes amounts due within one year.
(4) Post-1995 years include MidAmerican-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely MidAmerican
junior subordinated debentures.
(5) Common equity increased in 1997 primarily due to recording at market
value an investment in McLeodUSA, Inc. common stock.
S-11
<PAGE>
SUMMARY SELECTED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following pro forma information reflects the Recent Company Debt
Offering, the Securities Offering and expected retirement of the Senior
Discount Notes. The following pro forma as adjusted information gives effect to
those transactions and to the MidAmerican Merger, the Equity Offering and the
Non-Recourse Financing as described in the notes to the Unaudited Pro Forma
Combined Condensed Financial Data included elsewhere in this prospectus
supplement. In each case, the information is presented as if such transactions
had occurred on June 30, 1998 with respect to the balance sheet data and on
January 1, 1997 with respect to the statement of operations data and other
financial data. You should read the pro forma financial information set forth
below in conjunction with the historical consolidated financial statements and
Unaudited Pro Forma Combined Condensed Financial Data of the Company and the
notes thereto appearing elsewhere or incorporated by reference in this
prospectus supplement and the accompanying prospectus. The Securities Offering
is not conditioned on the closing of the MidAmerican Merger, the Equity
Offering or the Non-Recourse Financing. See "--Overview of Pending MidAmerican
Merger," "Use of Proceeds" and "Selected Pro Forma Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998(1) DECEMBER 31, 1997
------------------------------- -------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ............................................ $ 1,264,829 $ 2,148,463 $ 2,270,911 $ 4,242,504
Operating revenues ........................................ 1,212,440 2,077,391 2,166,338 4,088,619
Income before income taxes ................................ 89,237 153,913 134,401 278,023
Interest expense, net of capitalized interest ............. 190,959 261,895 313,764 461,849
Net income ................................................ 41,023 70,321 14,348 92,807
Net income per share ...................................... $ .68 $ .92 $ .21 $ 1.11
Net income per share diluted .............................. $ .66 $ .89 $ .21 $ 1.09
Average number of basic shares ............................ 60,658 76,752 67,268 83,362
Average number of diluted shares .......................... 64,791 85,081 68,686 84,780
BALANCE SHEET DATA:
Properties, plants, contracts and equipment, net .......... $ 4,358,649 $ 7,132,598 N/A N/A
Total assets .............................................. 8,434,508 12,863,391 N/A N/A
Subsidiary and project debt ............................... 2,850,240 5,033,260 N/A N/A
Total indebtedness ........................................ 5,126,718 7,309,738 N/A N/A
Convertible preferred securities of subsidiary trusts ..... 553,930 553,930 N/A N/A
Stockholders' equity ...................................... 759,628 1,259,628 N/A N/A
OTHER FINANCIAL DATA:
Depreciation and amortization ............................. $ 165,584 $ 270,952 $ 276,041 $ 480,555
EBITDA(2)(3) .............................................. 445,780 686,760 811,206 1,307,427
Ratio of EBITDA to fixed charges(3)(4) .................... 1.8 2.2 2.1 2.4
Ratio of earnings to fixed charges(4) ..................... 1.2 1.3 1.2 1.4
</TABLE>
- ----------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(2) EBITDA means earnings before interest, taxes, depreciation, amortization,
and 1997 non-recurring item.
(3) Information concerning EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's ability to
service debt. EBITDA should not be construed as an alternative to either
(i) operating income (determined in accordance with GAAP) or (ii) cash
flow from operating activities (determined in accordance with GAAP).
(4) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate
of (a) the pre-tax income of the Company, and (b) fixed charges, less
capitalized interest. "Fixed charges" represent interest (whether
expensed or capitalized), amortization of deferred financing and bank
fees, and the portion of rentals considered to be representative of the
interest factor (one-third of lease payments) and preferred stock
dividend requirements of majority-owned subsidiaries.
S-12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Securities Offering are estimated
to be approximately $100.5 million (after payment of expenses). The Company
expects to use the net proceeds from the Securities Offering, together with
approximately $830 million of the net proceeds from the Recent Company Debt
Offering, approximately $500 million of the net proceeds from the Equity
Offering and approximately $740 million of net proceeds from the Non-Recourse
Financing and available cash on hand, to complete the MidAmerican Merger. The
closing of the Securities Offering will occur in advance of, and is not
conditioned upon, the closing of the MidAmerican Merger, the Equity Offering or
the Non-Recourse Financing. If for any reason the MidAmerican Merger was not
consummated, the net proceeds of the Securities Offering would be used to make
equity investments in future domestic or international energy projects, to fund
possible future stock or asset acquisitions, for the possible repayment of debt
and for other general corporate purposes.
S-13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at June 30, 1998, (ii) the pro forma consolidated capitalization of the
Company as if the Recent Company Debt Offering, the Securities Offering and the
expected retirement of the Senior Discount Notes had occurred on June 30, 1998,
and (iii) the pro forma consolidated capitalization of the Company as adjusted
for the transactions described in clause (ii) and the consummation of the
MidAmerican Merger, the Equity Offering and the Non-Recourse Financing as
described in the notes to the Unaudited Pro Forma Combined Condensed Financial
Data included elsewhere in this Prospectus Supplement. The table should be read
in conjunction with the Company's historical consolidated financial statements
and the notes thereto, and the pro forma financial statements and the notes
thereto, appearing elsewhere or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. The Securities Offering is not
conditioned upon the closing of the MidAmerican Merger, the Equity Offering or
the Non-Recourse Financing. See "Prospectus Supplement Summary--Overview of
Pending MidAmerican Merger," "Use of Proceeds" and "Selected Pro Forma
Financial Data."
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Indebtedness:
Parent company debt:
Senior discount notes ......................................... $ 529,640 -- --
Limited recourse senior secured notes (1) ..................... 200,000 $ 200,000 $ 200,000
Senior notes .................................................. 574,235 574,235 574,235
Recent Company Debt Offering .................................. -- 1,400,000 1,400,000
Securities Offering ........................................... -- 102,243 102,243
Subsidiary and project debt (2):
Construction loans ............................................ 192,478 192,478 192,478
Project finance loans ......................................... 767,711 767,711 767,711
Salton Sea notes and bonds .................................... 395,285 395,285 395,285
UK Funding Company Notes and Bonds ............................ 690,766 690,766 690,766
Northern Electric Bonds ....................................... 432,500 432,500 432,500
Casecnan Notes and Bonds ...................................... 371,500 371,500 371,500
MidAmerican FinCo Debt ........................................ -- -- 750,000
MidAmerican debt .............................................. -- -- 1,433,020
---------- ---------- ----------
Total consolidated indebtedness ................................ 4,154,115 5,126,718 7,309,738
Deferred income ................................................ 50,979 50,979 50,979
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trusts ..................... 553,930 553,930 553,930
Preferred securities of subsidiary ............................. 66,054 66,054 248,441
Stockholders' equity:
Preferred stock, no par value, 2,000 shares authorized ......... -- -- --
Common stock, $.0675 par value, 180,000 shares authorized,
82,980 shares issued and 60,033 outstanding--actual and
pro forma; no par value, 180,000 shares authorized, 99,074
issued and 76,127 outstanding--pro forma as adjusted .......... 5,602 5,602(3) --
Additional paid-in capital ..................................... 1,236,851 1,236,851 1,742,453
Retained earnings .............................................. 273,254 253,278 253,278
Treasury stock, 22,947 common shares at cost ................... (740,843) (740,843) (740,843)
Accumulated other comprehensive income ......................... 4,740 4,740 4,740
---------- ----------- ----------
Total stockholders' equity ..................................... 779,604 759,628 1,259,628
---------- ----------- ----------
Total capitalization ........................................... $5,604,682 $6,557,309 $9,422,716
========== =========== ==========
</TABLE>
- ----------
(1) The limited recourse senior secured notes are recourse to the Company
only to a limited extent, which is currently $0.
(2) Represents debt for which the repayment obligation is at the project or
subsidiary level and is non-recourse to the Company.
(3) Certain of the proceeds from the Equity Offering may be replaced with
proceeds of non-core asset sales.
S-14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
CALENERGY COMPANY, INC.
(ALL DATA IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
The following tables set forth selected historical consolidated financial
and operating data, which should be read in conjunction with the Company's
consolidated financial statements and related notes included herein and
incorporated by reference herein and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus. The selected consolidated data as of and for each of the five years
in the period ended December 31, 1997 have been derived from the audited
historical consolidated financial statements of the Company. The selected
consolidated data as of and for the six months ended June 30, 1997 and 1998
have been derived from the unaudited historical consolidated financial
statements of the Company and reflect all adjustments necessary in the opinion
of the Company's management (consisting of normal recurring accruals) for a
fair presentation of such data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995(2) 1996(3) 1997
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................... $ 132,059 $154,562 $ 335,630 $ 518,934 $2,166,338
Interest and other income ............ 17,194 31,292 63,093 57,261 104,573
--------- -------- --------- --------- ----------
Total revenue ........................ $ 149,253 $185,854 $ 398,723 $ 576,195 $2,270,911
Plant operations, cost of sales,
general and administrative,
royalty and other expenses .......... 46,794 55,915 127,340 191,167 1,459,705
Depreciation and amortization ........ 17,812 21,197 72,249 118,586 276,041
Interest expense, net of
capitalized interest ................ 23,389 52,906 102,083 126,038 251,305
Provision for income taxes ........... 18,184 17,002 30,631 41,821 99,044
Income before extraordinary item
and cumulative effect of
accounting principle(5)(7) .......... 43,074 38,834 63,415 92,461 51,873
Minority interest and dividends
on convertible preferred
securities of subsidiary trusts ..... -- -- 3,005 6,122 45,993
Extraordinary item(5)(6) ............. -- (2,007) -- -- (135,850)
Cumulative effect of change in
accounting principle(7) ............. 4,100 -- -- -- --
Net income (loss)(5) ................. 47,174 36,827 63,415 92,461 (84,027)
Preferred dividends .................. 4,630 5,010 1,080 -- --
Net income available to common
stockholders(5) ..................... 42,544 31,817 62,335 92,461 (84,027)
Income per share before
extraordinary item and
cumulative effect of change in
accounting principle ................ 1.08 1.02 1.32 1.69 0.77
Extraordinary item per share ......... -- (0.06) -- -- (2.02)
Cumulative effect of change in
accounting principle per share....... 0.12 -- -- -- --
Net income (loss) per share
basic ............................... 1.20 0.96 1.32 1.69 (1.25)
Net income (loss) per share
diluted ............................. 1.14 0.90 1.22 1.54 (1.22)
Weighted average shares
outstanding--basic .................. 35,455 33,188 47,249 54,739 67,268
OTHER DATA:
Capital expenditures ................. $ 87,191 $119,013 $ 398,623 $ 341,706 $ 380,649
EBITDA(8)(9) ......................... 102,459 129,939 271,383 385,028 811,206
Ratio of EBITDA to fixed
charges(8)(9)(10) ................... 3.4 2.1 2.0 2.3 2.5
Ratio of earnings to fixed
charges(10) ......................... 2.8 1.7 1.5 1.6 1.4
Dividends declared per share ......... -- -- -- -- --
<CAPTION>
SIX MONTHS ENDED
JUNE 30,(1)
-------------------------------
1997 1998(4)
--------------- ---------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................... $ 1,048,511 $ 1,212,440
Interest and other income ............ 42,459 52,389
----------- -----------
Total revenue ........................ $ 1,090,970 $ 1,264,829
Plant operations, cost of sales,
general and administrative,
royalty and other expenses .......... 708,870 819,049
Depreciation and amortization ........ 137,912 165,584
Interest expense, net of
capitalized interest ................ 119,506 159,729
Provision for income taxes ........... 46,591 40,483
Income before extraordinary item
and cumulative effect of
accounting principle(5)(7) .......... 58,337 59,761
Minority interest and dividends
on convertible preferred
securities of subsidiary trusts ..... 19,754 20,223
Extraordinary item(5)(6) ............. -- --
Cumulative effect of change in
accounting principle(7) ............. -- --
Net income (loss)(5) ................. 58,337 59,761
Preferred dividends .................. -- --
Net income available to common
stockholders(5) ..................... 58,337 59,761
Income per share before
extraordinary item and
cumulative effect of change in
accounting principle ................ .92 .99
Extraordinary item per share ......... -- --
Cumulative effect of change in
accounting principle per share....... -- --
Net income (loss) per share
basic ............................... .92 .99
Net income (loss) per share
diluted ............................. .88 .95
Weighted average shares
outstanding--basic .................. 63,521 60,658
OTHER DATA:
Capital expenditures ................. $ 182,190 $ 304,140
EBITDA(8)(9) ......................... 382,100 445,780
Ratio of EBITDA to fixed
charges(8)(9)(10) ................... 2.5 2.1
Ratio of earnings to fixed
charges(10) ......................... 1.7 1.4
Dividends declared per share ......... -- --
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,(1)
---------------------------------------------------------------- -------------------------
1993 1994 1995(2) 1996(3) 1997 1997 1998(4)
----------- ------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments ............... $127,756 $ 254,004 $ 72,114 $ 424,500 $1,445,338 $ 406,241 $ 265,543
Properties, plants, contracts and
equipment, net .................... 463,514 561,643 1,781,255 3,225,496 3,528,910 3,531,427 4,358,649
Total assets ....................... 715,984 1,131,145 2,654,038 5,630,156 7,487,626 6,186,435 7,481,881
Revolving credit facility .......... -- -- -- 95,000 -- -- --
Senior discount notes .............. -- 431,946 477,355 527,535 529,640 529,640 529,640
Senior notes ....................... -- -- -- 224,150 574,205 224,177 574,235
Limited recourse senior secured
notes ............................. -- -- 200,000 200,000 200,000 200,000 200,000
Convertible subordinated
debentures ........................ 100,000 100,000 100,000 -- -- -- --
Convertible debt ................... -- -- 64,850 -- -- -- --
CalEnergy credit facility .......... -- -- -- 100,000 -- -- --
12% Senior notes ................... 35,730 -- -- -- -- -- --
Construction loans ................. -- 31,503 211,198 300,951 416,744 346,573 192,478
Project finance loans .............. 246,880 233,080 257,933 270,844 215,912 243,021 767,711
Salton Sea notes and bonds ......... -- -- 452,088 538,982 448,754 493,868 395,285
UK Credit Facility ................. -- -- -- 128,423 -- 674,163 --
UK Funding Company Notes and
Bonds ............................. -- -- -- -- 679,865 -- 690,766
Casecnan Notes and Bonds ........... -- -- -- -- -- -- 371,500
Northern Electric Bonds ............ -- -- -- 439,192 427,732 435,493 432,500
Total liabilities .................. 425,393 867,703 2,084,474 4,181,052 5,282,162 4,708,134 6,031,314
Redeemable preferred stock ......... 58,800 63,600 -- -- -- -- --
Company-obligated mandatorily
redeemable convertible
preferred securities of
subsidiary trusts ................. -- -- -- 103,930 553,930 283,930 553,930
Total stockholders' equity ......... 211,503 179,991 543,532 880,790 765,326 917,912 779,604
</TABLE>
- ----------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full fiscal year.
(2) Reflects the acquisition of Magma Power Company which was completed on
February 24, 1995.
(3) Reflects the acquisition of the remaining 50% of the four geothermal
power projects located in the California Imperial Valley from a third
party on April 17, 1996, the acquisition of Falcon Seaboard on August 7,
1996 and the acquisition of majority ownership of Northern by CE Electric
on December 24, 1996. In March, 1997, the Company completed the
acquisition of Northern.
(4) Reflects the acquisition of Kiewit Diversified Group's ownership
interests in various of our project partnerships and in CalEnergy's
common stock on January 2, 1998.
(5) Reflects a 1997 non-recurring charge of $87 million, or $1.29 per share,
and an extraordinary item of $135,850, or $2.02 per share.
(6) The Company's 12% senior notes due 1995 were defeased in the first
quarter of 1994 in connection with the issuance of the Senior Discount
Notes, resulting in an extraordinary loss in 1994 in the amount of $2.0
million.
(7) On January 1, 1993, the Company adopted Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes, resulting in a cumulative
effect adjustment increasing net income by $4.1 million in 1993.
(8) EBITDA means earnings before interest, taxes, depreciation, amortization,
and non-recurring item (1997 asset valuation impairment).
(9) Information concerning EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's ability to
service debt. EBITDA should not be construed as an alternative to either
(i) operating income (determined in accordance with U.S. GAAP) or (ii)
cash flow from operating activities (determined in accordance with U.S.
GAAP).
(10) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate
of (a) the pre-tax income of the Company and (b) fixed charges, less
capitalized interest. "Fixed charges" represent interest (whether
expensed or capitalized), amortization of deferred financing and bank
fees, and the portion of rentals considered to be representative of the
interest factor (one-third of lease payments) and preferred stock
dividend requirements of majority-owned subsidiaries.
S-16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
MIDAMERICAN ENERGY HOLDINGS COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of MidAmerican for the years ended
December 31, 1995, 1996 and 1997 set forth below have been derived from audited
financial statements. The selected historical financial data of MidAmerican for
the six months ended June 30, 1997 and June 30, 1998 set forth below have been
derived from unaudited financial statements. The financial data set forth below
should be read in conjunction with the historical consolidated financial
statements of MidAmerican and related notes thereto appearing elsewhere or
incorporated by reference in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ...................................... $ 1,649,341 $ 1,872,612 $ 1,922,281 $ 965,422 $ 864,951
Operating income (1) .......................... 292,354 343,638 270,506 132,628 130,983
Income from continuing operations (2) ......... 119,705 143,761 139,332 58,350 59,733
Average common shares outstanding ............. 100,401 100,752 98,058 99,534 94,675
Earnings per average common share from
continuing operations ........................ $ 1.19 $ 1.43 $ 1.42 $ 0.59 $ 0.63
Cash dividends declared per share ............. $ 1.18 $ 1.20 $ 1.20 $ 0.60 $ 0.60
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ................................. $ 4,470,097 $ 4,521,848 $ 4,278,091 $ 4,135,705 $ 4,407,497
Long-term debt (3) ........................... 1,468,617 1,474,701 1,178,769 1,239,287 1,263,169
Power purchase obligation (3) ................ 125,729 111,222 97,504 111,221 97,504
Short-term borrowings ........................ 184,800 161,990 138,054 146,185 167,429
Preferred stock:
Not subject to mandatory redemption ......... 89,945 31,769 31,763 31,765 31,760
Subject to mandatory redemption (4) ......... 50,000 150,000 150,000 150,000 150,000
Common stock equity (5) ...................... 1,225,715 1,239,946 1,301,286 1,186,313 1,311,583
Book value per common share (5) .............. $ 12.17 $ 12.31 $ 13.65 $ 12.15 $ 13.94
</TABLE>
- ----------
(1) MidAmerican 1995 operating income includes $33,400 of costs related to a
restructuring and workforce reduction plan implemented and completed in
1995.
(2) In 1997, MidAmerican recorded after-tax gains totaling $11,200 for sales
of assets of certain railcar businesses and portion of a common stock
investment that had appreciated significantly. MidAmerican recorded
after-tax losses of approximately $10,200 and $9,400 for the write-down
of certain nonregulated assets during 1995 and 1996, respectively. In
1996, MidAmerican incurred $8,700 of costs in connection with its merger
proposal to IES Industries, Inc.
(3) Includes amounts due within one year.
(4) Post-1995 years include MidAmerican-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely MidAmerican
junior subordinated debentures.
(5) Common equity increased in 1997 primarily due to recording at market
value an investment in McLeodUSA, Inc. common stock.
S-17
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following pro forma information reflects the Recent Company Debt
Offering, the Securities Offering and expected retirement of the Senior
Discount Notes. The following pro forma as adjusted information gives effect to
those transactions and to the MidAmerican Merger, the Equity Offering and the
Non-Recourse Financing as described in the notes to the Unaudited Pro Forma
Combined Condensed Financial Data included elsewhere in this Prospectus
Supplement. In each case, the information is presented as if such transactions
had occurred on June 30, 1998 with respect to the balance sheet data and on
January 1, 1997 with respect to the statement of operations data and other
financial data. The pro forma financial information set forth below should be
read in conjunction with the historical consolidated financial statements and
Unaudited Pro Forma Combined Condensed Financial Data of the Company and the
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. The Securities Offering
is not conditioned on the closing of the MidAmerican Merger, the Equity
Offering or the Non-Recourse Financing. See "Prospectus Summary--Overview of
Pending MidAmerican Merger" and "Use of Proceeds."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998(1) DECEMBER 31, 1997
------------------------------- -------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ............................................ $ 1,264,829 $ 2,148,463 $ 2,270,911 $ 4,242,504
Operating revenues ........................................ 1,212,440 2,077,391 2,166,338 4,088,619
Income before income taxes ................................ 89,237 153,913 134,401 278,023
Interest expense, net of capitalized interest ............. 190,959 261,895 313,764 461,849
Net income ................................................ 41,023 70,321 14,348 92,807
Net income per share ...................................... .68 .92 .21 1.11
Net income per share diluted .............................. .66 .89 .21 1.09
Average number of basic shares ............................ 60,658 76,752 67,268 83,362
Average number of diluted shares .......................... 64,791 85,081 68,686 84,780
BALANCE SHEET DATA:
Properties, plants, contracts and equipment, net .......... $ 4,358,649 $ 7,132,598 N/A N/A
Total assets .............................................. 8,434,508 12,863,391 N/A N/A
Subsidiary and project debt ............................... 2,850,240 5,033,260 N/A N/A
Total indebtedness ........................................ 5,126,718 7,309,738 N/A N/A
Convertible preferred securities of subsidiary trusts ..... 553,930 553,930 N/A N/A
Stockholders' equity ...................................... 759,628 1,259,628 N/A N/A
OTHER FINANCIAL DATA:
Depreciation and amortization ............................. $ 165,584 $ 270,952 $ 276,041 $ 480,555
EBITDA(2)(3) .............................................. 445,780 686,760 811,206 1,307,427
Ratio of EBITDA to fixed charges(3)(4) .................... 1.8 2.2 2.1 2.4
Ratio of earnings to fixed charges(4) ..................... 1.2 1.3 1.2 1.4
</TABLE>
- ----------
(1) The Company's operations have historically been seasonal in nature;
therefore, operating results and ratios for interim periods are not
indicative of the results for the full year.
(2) EBITDA means earnings before interest, taxes, depreciation, amortization,
and 1997 non-recurring item.
(3) Information concerning EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's ability to
service debt. EBITDA should not be construed as an alternative to either
(i) operating income (determined in accordance with GAAP) or (ii) cash
flow from operating activities (determined in accordance with GAAP).
(4) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate
of (a) the pre-tax income of the Company, and (b) fixed charges, less
capitalized interest. "Fixed charges" represent interest (whether
expensed or capitalized), amortization of deferred financing and bank
fees, and the portion of rentals considered to be representative of the
interest factor (one-third of lease payments) and preferred stock
dividend requirements of majority-owned subsidiaries.
S-18
<PAGE>
THE BUSINESS OF THE COMPANY
GENERAL
The Company is a growing global energy company which, after consummation
of the MidAmerican Merger, will consist of the following operations: an
electric and gas utility services company in the U.S., an electric and gas
distribution and supply utility in the U.K., with over 3.2 million customers
and over $12 billion in assets, and a proven developer of profitable
independent power generation facilities around the world, with a particular
focus on investment grade countries such as the U.S., U.K., Australia, Canada,
New Zealand and the countries of Western Europe. The Company also owns and
develops natural gas reserves in markets where such reserves can be utilized as
an integral part of the Company's energy services business in that market
(e.g., the U.K.). The overall goal of the Company is to be a leading provider
of low cost energy services throughout the world as governments privatize or
deregulate electricity and gas markets.
The Company's strategy, which is more fully described in the "Strategy"
section at pages S-6 through S-7 herein, is comprised of the following key
elements:
o Diversification and growth through acquisition of international and
domestic utility and energy-related assets.
o Diversification and growth through greenfield development of energy
generation, transmission and distribution projects.
o Continued enhancement of the credit quality and diversification of its
revenue base, earnings and cash flows.
o Adherence to prudent financial and risk management practices and
strict investment criteria.
o Continued profit enhancement through operating efficiencies while
maintaining quality and reliability of service.
Utility Operations
Northern Electric
Northern is a regional electric company headquartered in Newcastle,
England providing electric and gas supply throughout England, Scotland and
Wales and electric distribution services in Northeast England. Supply and
distribution services are provided to more than 2 million customers throughout
England and Wales.
Northern operates in two primary businesses: (1) the distribution of
electricity and (2) the supply of electricity and gas. The distribution
business is a natural monopoly and as such is regulated by the Office for
Electricity Regulation (the "Regulator"). The primary means of regulation is a
tariff structure utilizing a price cap mechanism which sets the maximum price
to be charged and allows Northern to retain a portion of all profits achieved
through such tariffs. The price cap is reviewed periodically by the Regulator.
The United Kingdom has progressively deregulated its electric and gas
industry and a competitive market now exists in both. Northern has to date been
successful in profitably growing its customer base in the supply of electricity
and gas. Over the past two years, the number of customers serviced by Northern
has grown from approximately 1.4 million to more than 2.0 million. The country
has over 25 million electric customers and over 21 million gas customers.
For more information on Northern, see pages S-20 through S-23 herein.
MidAmerican Energy Company
The Company has entered into a merger agreement with MidAmerican Energy
Holdings Company, Inc., which is headquartered in Des Moines, Iowa and is the
parent of MidAmerican Energy Company. The transaction represents the
continuation of the Company's U.S. growth and diversification strategy to
acquire a high-quality U.S. utility and compete for customers for the supply of
electricity and/or gas utilizing MidAmerican's low cost generation assets and
distribution system as an operational platform.
S-19
<PAGE>
MidAmerican is the largest combined electric and gas utility in Iowa with
648,000 electric and 619,000 gas customers. It has gas and electric operations
in Iowa, Illinois and South Dakota and gas operations in Nebraska. The
regulated service area is comprised of 10,600 square miles with a total
population of 1.7 million. MidAmerican has an installed generation capacity of
approximately 4,000 MW, comprised of 71% coal, 19% natural gas and 10% nuclear
fuel sources. Due to its geographic location and fuel sources, MidAmerican is a
low cost producer of electricity in the Mid-Continent Area Power Pool. Mid-
American's transmission system interconnections also allow it to supply
electricity to other major energy markets in the midwestern U.S. such as the
Chicago area, St. Louis, Kansas City, Milwaukee and Minneapolis. MidAmerican's
gas operations are served by at least four major gas pipelines.
Following the MidAmerican Merger, the Company will own interests in
approximately 6,000 net MW of facilities in operation or construction having
the following fuel sources: 47% coal, 19% geothermal, 26% natural gas, 6%
nuclear and 2% hydroelectric.
For more information on MidAmerican, see pages S-23 through S-26 herein.
Non-Regulated Generation Operations: Power Project Portfolio
The Company has significant ownership interests in non-regulated
generation facilities both domestically and internationally. Currently, the
Company has net ownership interests of an aggregate of (i) 1,741 MW in 21
projects in operation representing an aggregate net capacity of 3,565 MW of
electric generating capacity, (ii) 334 MW in six projects under construction
representing an aggregate net capacity of 419 MW of electric generating
capacity, and (iii) 305 MW in projects in development representing an
aggregrate capacity of 580 MW of electric generating capacity.
For more information on the Company's power generation project portfolio,
see pages S-26 through S-27 herein.
Gas Operations
The Company has been active in acquiring and developing interests in
natural gas fields which have existing production and known reserves. The
acquisition of gas assets and operations supports the Company's growth strategy
in several ways: (1) gas operations are capable of providing stable, long-term
supply to generation facilities; (2) owned production will play an integral
role in the execution of supplying energy to the customer in competitive
markets; and (3) gas development efforts are a low cost method of gaining
entry, market intelligence and cash flow in new generation markets around the
world.
The Company has interests in producing gas fields in the North Sea, and in
the past year, the Company has acquired additional interests in gas fields and
a gas pipeline in the North Sea. These interests include a 25% interest in the
Esmond Transportation System which connects to the strategically important
European gas hub at Bacton, England. In addition, the Company acquired the
right to earn interests in the Yolla gas field offshore between Victoria and
Tasmania in Australia and the Gin Gin field onshore near Perth in Western
Australia.
For more information on the Company's producing gas field operations and
fields in development, see page S-27 herein.
BUSINESS OF NORTHERN
Key statistics regarding Northern's distribution and supply business are
set forth below, followed by a description of each of its additional functional
business units (which are operated separately) and a summary description of the
deregulated energy market in the U.K.
(SELECTED DATA ON NORTHERN,
AS OF AND FOR THE YEAR ENDED MARCH 31, 1998)
<TABLE>
<S> <C>
Operating Revenue ............................ (pounds sterling)980 million ($1.6 billion)
Number of Customers (Current) ................ 2.0 million
Kilometers of Distribution Lines ............. 43,000
Square Kilometers of Authorized Area ......... 14,400
</TABLE>
S-20
<PAGE>
Northern Electric Distribution Limited. Northern Electric Distribution
Limited ("Northern Distribution"), a subsidiary of Northern, receives
electricity from the national grid transmission system and distributes
electricity to each customer's premises using Northern's 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 with electricity through the Northern 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 Distribution serves approximately 1.5
million customers in Northern's area and charges its customers access fees for
the use of the distribution system.
At March 31, 1998, Northern's electricity distribution network (excluding
service connections to consumers) included approximately 17,000 kilometers of
overhead lines and approximately 26,000 kilometers of underground cables.
Substantially all substations are owned in freehold, and most of the balance
are held on leases which will not expire within 10 years. In addition to the
circuits referred to above, Northern's distribution facilities also include
approximately 24,000 transformers and approximately 24,000 substations.
Northern Electric and Gas Supply. Northern Electric and Gas Supply
("Northern Supply") focuses on Northern's supply business and is responsible
for marketing, tariff setting, contracts and customer service in connection
with the supply of both electricity and gas. Northern's electricity supply
business involves the bulk purchase of electricity, primarily from the Pool (as
defined below), and subsequent sale to individual customers. Northern's supply
business is subject to price control and is being progressively opened to
competition. This price control limits the prices that Northern can charge to
domestic and small non-domestic customers within its authorized area. Supplies
to other customers are not regulated since the Director General of Electricity
Supply ("the Regulator") has determined that the market is sufficiently
competitive not to require this.
Under its public electricity supply ("PES") or "first tier" licence
Northern has the right to supply electricity to all customers within its
authorised area. Under its various "second tier" licenses Northern has the
right to supply electricity in all other parts of Great Britain, subject to
certain conditions relating to the opening of competition in the case of
customers with demands below 100kW ("Franchise Supply Customers"). Northern
also holds an equivalent licence permitting it to supply electricity in
Northern Ireland. In Great Britain the market for electricity customers with a
maximum demand above 1 megawatt ("MW") has been open to competition since
privatisation and the market for customers with a maximum demand above 100kW
became competitive in April 1994. Northern is one of the largest suppliers in
the competitive and open electricity market in the United Kingdom and supplies
customers in all 15 PES areas in Great Britain and Northern Ireland. Northern
supplies substantially more sites than it had previously supplied prior to the
beginning of open competition in the supply business in the United Kingdom.
Northern Supply also competes to supply gas inside and outside its
authorized area.
Northern Utility Services. Northern Utility Services Limited ("Northern
Utility") is an engineering company whose role is to adapt, maintain and
restore the distribution network of Northern Distribution and to sell related
services to third parties. Northern Utility has been able to make significant
cost reductions for Northern during the past year by working with suppliers in
order to improve core processes, close selected depot locations, increase staff
productivity and reduce material and plant costs. Northern Utility has
pioneered techniques using innovative diagnostic testing equipment which
reduces the need for intrusive maintenance. The equipment can identify some of
the causes of potential systems failures before breakdown and subsequent loss
of supply occurs. Also, the continued development in the use of trenchless
technology has brought both financial and environmental benefits to Northern
and its customers. While Northern Utility's largest customer is Northern
Distribution, it currently sells an average of approximately 16% of its
services to third parties. Northern Utility is Northern's largest employer.
Northern Electric Retail Limited. Northern Electric Retail Limited
("Northern Retail"), a subsidiary of Northern, sells electrical and gas
appliances and provides account collection and customer services for Northern's
other businesses.
S-21
<PAGE>
Northern Electric Generation Limited. Northern Electric Generation Limited
("Northern Generation"), a subsidiary of Northern, focuses on electricity
generation, primarily through its 15.4% stock ownership in Teesside Power
Limited, a company that owns and operates a 1,875 MW combined cycle gas-fired
power station. Northern takes 400 MW of electricity from the plant pursuant to
a 15 year contract. Northern Generation has also developed two 50 MW
independent gas fired generation projects.
Northern Metering Services Limited. Northern Metering Services Limited
("Northern Metering"), a subsidiary of Northern, provides meter supply,
installation, refurbishment and certification services as well as meter
operator and data collection services. Northern Metering has developed an
energy profiling system which helps businesses reduce costs through the more
efficient use of all fuels, not just electricity.
The United Kingdom Deregulated Energy Market
General. The electricity industry in the United Kingdom has been
progressively deregulated since the privatization of electric supply and
distribution in 1990. The Electricity Act of 1989 established an industry
structure that permitted this phased-in privatization to occur. Since that
time, in England and Wales, electricity is produced by generators, the largest
of which are National Power, PowerGen, Eastern and British Energy. Electricity
is transmitted through the national grid transmission system by The National
Grid Company plc ("NGC") and distributed to customers by the twelve regional
electric companies ("RECs") in their respective authorized areas. Most
customers currently are supplied with electricity by their local REC, although
there are other suppliers holding second tier supply licenses, including other
generators and RECs, who can compete to supply larger customers in that REC's
authorized area. Under the current licensing regime, from September 1998
progressively, competition will be extended to include customers who are
currently Franchise Supply Customers, who will be free to choose their
electricity supplier.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. A generator that is a Pool
member and also a licensed supplier must nevertheless sell all the electricity
it generates into the Pool, and purchase all the electricity that it supplies
from the Pool. Because Pool prices fluctuate, generators and suppliers may
enter into bilateral arrangements, such as contracts for differences ("CFDs"),
to provide a degree of protection against such fluctuations.
Distribution. Each of the RECs is required to offer terms for connection
to its distribution system to any person, for use of its distribution system to
any authorized electricity operator. In providing use of its distribution
system, a REC must not discriminate between its own supply business and that of
any other authorized electricity operator, or between those of other authorized
electricity operators; nor may its charges differ except where justified by
differences in cost.
Most revenue of the distribution business is controlled by a distribution
price control formula. The Retail Price Index ("RPI") used in this formula
reflects the average of the 12 month inflation rates recorded for the previous
July to December period. The distribution price control formula also reflects
an XD factor which is established by the Regulator following review and is set
at 3% from April 1, 1997. This formula determines the maximum average price per
unit of electricity distributed (in pence per kilowatt hour) which a REC is
entitled to charge. The distribution price control formula permits RECs to
partially retain additional revenues due to increased distribution of units and
a predetermined increase in customer numbers. The price control does not seek
to constrain the profits of a REC from year to year. It is a control on income
which operates independently of the REC's costs. During the lifetime of the
price control additional cost savings therefore contribute directly to profit.
The distribution prices allowable under the current distribution price control
formula are expected to be reviewed by the Regulator at the expiration of the
formula's scheduled five-year duration, effective as of April 1, 2000. The
formula may be further reviewed at other times in the discretion of the
Regulator.
Supply. Subject to minor exceptions, all electricity customers in the
United Kingdom must be supplied by a licensed supplier. Licensed suppliers
purchase electricity and make use of the transmission and distribution networks
to achieve delivery to customers' premises.
There are two types of licensed suppliers: PES (or first tier) suppliers
and second tier suppliers. PESs are the RECs, Scottish Power and
Hydro-Electric, each supplying in its respective authorized area.
S-22
<PAGE>
Second tier suppliers include National Power, PowerGen, British Energy,
Scottish Power, Hydro-Electric and other PESs supplying outside their
respective authorized areas. There are also a number of independent second tier
suppliers.
Until the competitive market fully opens, a Franchise Supply Customer can
only buy electricity from the PES authorized to supply the relevant authorized
area. Franchise Supply Customers typically include domestic and small
commercial and small industrial customers. Non-Franchise Supply Customers with
demand over 100kW are not limited to buying electricity from the local PES and
can choose to buy from a second tier supplier. Such customers are typically
larger commercial, agricultural and industrial electricity users. Second tier
suppliers compete with one another and with the local PES to supply customers
in this competitive (or "non-franchise") sector of the market.
The supply of electricity to domestic and small non-domestic customers is
subject to price control regulation which effectively limits the tariffs that
can be charged to such customers and has, in recent years, generally resulted
in tariff reductions over time.
The Pool. The Pool was established at the time of privatization for bulk
trading of electricity in England and Wales between generators and suppliers.
The Pool reflects two principal characteristics of the physical generation and
supply of electricity from a particular generator to a particular supplier.
First, it is not possible to trace electricity from a particular generator to a
particular supplier. Second, it is not practicable to store electricity in
significant quantities, creating the need for a constant matching of supply and
demand. Subject to certain exceptions, all electricity generated in England and
Wales must be sold and purchased through the Pool. All licensed generators and
suppliers must become and remain signatories to the Pooling and Settlement
Agreement, which governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers. The Pool also
provides centralized settlement of accounts and clearing. The Pool does not
itself buy or sell electricity.
Prices for electricity are set by the Pool daily for each one-half hour of
the following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system stability,
security and other costs. A computerized system (the settlement system) is used
to calculate prices and to process metered, operational and other data and to
carry out the other procedures necessary to calculate the payments due under
the Pool trading arrangements. The settlement system is administered on a
day-to-day basis by Energy Settlements and Information Services, Limited, a
subsidiary of NGC, as settlement system administrator.
Suppliers and generators can enter into contracts for differences, which
act as a hedge against Pool price volatility. Generally, CFDs are contracts
between generators and suppliers that have the effect of fixing the price of
electricity for a contracted quantity of electricity over a specific time
period. Differences between the actual price set by the Pool and the agreed
prices give rise to difference payments between the parties to the particular
CFD. At any time, Northern's forecast franchise supply market demand is
substantially hedged through various types of agreements including CFDs.
THE BUSINESS OF MIDAMERICAN
MidAmerican established in 1997 the framework for a new approach to
managing its business. Beginning January 1, 1998, MidAmerican began operating
as four distinct business units: generation, transmission, energy delivery and
retail. Certain administrative functions are handled by a corporate services
group which supports all of the business units. Although specific functions may
be moved between business units as future circumstances warrant, the main focus
of each business unit has been established. Presently, significant functions of
the generation business unit include the production and purchase of energy and
the sale of wholesale energy. The transmission business unit coordinates all
activities related to MidAmerican's transmission facilities, including
monitoring access to and assuring the reliability of the transmission system.
Energy delivery includes the distribution of electricity and natural gas to
end-users, and related activities. Retail includes marketing, customer service
and related functions for core and complementary products and services.
MidAmerican is an exempt public utility holding company headquartered in
Des Moines, Iowa, and incorporated in the state of Iowa. MidAmerican's strategy
is to become the leading regional provider of
S-23
<PAGE>
energy and complementary services. MidAmerican's interests include 100% of the
common stock of MidAmerican Energy Company, MidAmerican Capital and Midwest
Capital and 95% of the common stock of MidAmerican Realty Services. MidAmerican
Energy Company is primarily engaged in the business of generating,
transmitting, distributing and selling electric energy and in distributing,
selling and transporting natural gas. MidAmerican Capital manages marketable
securities and passive investment activities, nonregulated wholesale and retail
natural gas businesses, security services and other energy-related,
nonregulated activities. Midwest Capital functions as a regional business
development company in MidAmerican's service territory. In an effort that began
in 1996, MidAmerican is continuing to redeploy investments and to invest in
other lines of business that support its strategy. For example, MidAmerican
Realty Services, with over 4,500 sales agents and 975 employees in seven
states, offers integrated real estate services including residential brokerage,
relocation, title and abstract services. On a consolidated basis, the real
estate brokerage operations rank second in the nation and MidAmerican believes
these operations will provide a strategically important customer access point
and an advertising and "branding" vehicle as energy markets deregulate, in
addition to being profitable businesses on a stand-alone basis.
For the year ended December 31, 1997, 86.5% of MidAmerican's operating
revenues were from MidAmerican Energy Company, 13.4% were from MidAmerican
Capital and 0.1% were from Midwest Capital.
MidAmerican distributes electric energy in Council Bluffs, Des Moines,
Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa, the Quad Cities
(Davenport and Bettendorf, Iowa and Rock Island, Moline and East Moline,
Illinois) and a number of adjacent communities and areas. MidAmerican
distributes natural gas in Cedar Rapids, Des Moines, Fort Dodge, Iowa City,
Sioux City and Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and
a number of adjacent communities and areas. As of December 31, 1997,
MidAmerican had 647,700 retail electric customers and 618,000 retail natural
gas customers.
MidAmerican's electric and gas operations are conducted under franchises,
certificates, permits and licenses obtained from state and local authorities.
The franchises, with various expiration dates, are typically for 25-year terms.
MidAmerican has a residential, agricultural, commercial and diversified
industrial customer group, in which no single industry or customer accounted
for more than 3.8% (food and kindred products industry) of its total 1997
electric operating revenues or 3.7% (food and kindred products industry) of its
total 1997 gas operating margin. Among the primary industries served by
MidAmerican are those which are concerned with the manufacturing, processing
and fabrication of primary metals, real estate, food products, farm and other
non-electrical machinery, and cement and gypsum products.
For the year ended December 31, 1997, MidAmerican derived approximately
68% of its gross operating revenues from its electric business and 32% from its
gas business. For 1996 and 1995, the corresponding percentages were 67%
electric and 33% gas, and 70% electric and 30% gas, respectively.
Historical electric sales by customer class as a percent of total electric
sales and retail electric sales data by state as a percent of total retail
electric sales are shown below:
Total Electric Sales of MidAmerican By Customer Class
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Residential .................... 20.9% 21.1% 23.2%
Small General Service .......... 16.5 16.2 19.1
Large General Service .......... 27.4 27.6 26.1
Other .......................... 4.4 4.5 4.7
Sales for Resale ............... 30.8 30.6 26.9
----- ----- -----
Total .......................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
S-24
<PAGE>
Retail Electric Sales of MidAmerican By State
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Iowa .................. 88.6% 88.7% 88.4%
Illinois .............. 10.7 10.6 11.0
South Dakota .......... 0.7 0.7 0.6
----- ----- -----
Total ................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Historical gas sales, excluding transportation throughput, by customer
class as a percent of total gas sales and by state as a percent of total retail
gas sales are shown below:
Total Gas Sales of MidAmerican By Customer Class
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Residential .................... 60.8% 61.1% 57.3%
Small General Service .......... 33.1 33.3 32.9
Large General Service .......... 4.2 4.6 6.2
Sales for Resale and
Other .......................... 1.9 1.0 3.6
----- ----- -----
Total .......................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Retail Gas Sales of MidAmerican By State
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Iowa .................. 79.1% 78.0% 77.1%
Illinois .............. 10.4 11.0 11.6
South Dakota .......... 9.8 10.3 10.6
Nebraska .............. 0.7 0.7 0.7
----- ----- -----
Total ................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
There are seasonal variations in MidAmerican's electric and gas businesses
which are principally related to the use of energy for air conditioning and
heating. In 1997, 38% of MidAmerican's electric revenues were reported in the
months of June, July, August and September, reflecting the use of electricity
for cooling, and 54% of MidAmerican's gas revenues were reported in the months
of January, February, March and December, reflecting the use of gas for
heating.
MidAmerican Electric Operations
The annual hourly peak demand on MidAmerican's electric system occurs
principally as a result of air conditioning use during the cooling season.
MidAmerican's highest hourly peak demand in 1997 was 3,548 MW, which was 5 MW
less than MidAmerican's record hourly peak of 3,553 MW set in 1995.
MidAmerican's accredited 1997 summer net generating capability was 4,293
MW. Accredited net generating capability represents the amount of Company-owned
generation available to meet the requirements on MidAmerican's energy system,
net of the effect of participation purchases and sales. The net generating
capability at any time may be less due to regulatory restrictions, fuel
restrictions and generating units being temporarily out of service for
inspection, maintenance, refueling or modifications.
MidAmerican is interconnected with certain Iowa and neighboring utilities
and is involved in an electric power pooling agreement known as MAPP. MAPP is a
voluntary association of electric utilities doing business in Iowa, Minnesota,
Nebraska and North Dakota and portions of Montana, South Dakota and Wisconsin
and the Canadian provinces of Saskatchewan and Manitoba. Its membership also
includes power marketers, regulatory agencies and independent power producers.
MAPP facilitates operation of the transmission system, serves as a power and
energy market clearing house and is responsible for the safety and reliability
of the bulk electric system.
S-25
<PAGE>
MidAmerican Owned Net Generating Capacity
The table below sets forth the owned net operating capacity of
MidAmerican's power plants. It operates these except as indicated with an
asterisk.
<TABLE>
<CAPTION>
OWNERSHIP
----------
<S> <C> <C>
Council Bluffs Energy Center units 1 & 2 .......... 100% 131 MW
Council Bluffs Energy Center unit 3 ............... 79% 534 MW
Louisa Generation Station ......................... 88% 616 MW
Neal Generation Station units 1 & 2 ............... 100% 435 MW
Neal Generation Station unit 3 .................... 72% 371 MW
Neal Generation Station unit 4 .................... 41% 253 MW
Ottumwa Generation Station* ....................... 52% 372 MW
Quad-Cities Power Station* ........................ 25% 383 MW
Riverside Generation Station ...................... 100% 135 MW
Combustion Turbines ............................... 100% 758 MW
Moline Water Power ................................ 100% 3 MW
---------
Total Net Generating Capacity ..................... 3,991 MW
=========
</TABLE>
THE COMPANY'S POWER GENERATION PROJECT PORTFOLIO
The following table sets out certain information concerning various
Company projects in operation, under construction and in development pursuant
to signed power sales agreements or awarded mandates.
<TABLE>
<CAPTION>
POLITICAL
FACILITY NET MW COMMERCIAL U.S. $ POWER RISK
PROJECT(1) NET MW OWNED(2) FUEL LOCATION OPERATION PAYMENTS PURCHASER(3) INSURANCE
- ---------- ---------- ---------- ------- -------------- ------------ ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROJECTS IN OPERATION
Coso ............................ 264 127 Geo California 1987-90 Yes Edison No
Dieng Unit I(4) ................. 55 52 Geo Indonesia 1998 Yes PLN (GOI) Yes
Imperial Valley ................. 268 268 Geo California 1986-96 Yes Edison No
Saranac ......................... 240 180 Gas New York 1994 Yes NYSEG No
Power Resources ................. 200 200 Gas Texas 1988 Yes TUEC No
NorCon .......................... 80 64 Gas Pennsylvania 1992 Yes NIMO No
Yuma ............................ 50 50 Gas Arizona 1994 Yes SDG&E No
Roosevelt Hot Springs ........... 23 17 Geo Utah 1984 Yes UP&L No
Desert Peak ..................... 10 10 Geo Nevada 1985 Yes SPPC No
Mahanagdong ..................... 165 149 Geo Philippines 1997 Yes PNOC-EDC GOP Yes
Malitbog ........................ 216 216 Geo Philippines 1996-97 Yes PNOC-EDC GOP Yes
Upper Mahiao .................... 119 119 Geo Philippines 1996 Yes PNOC-EDC GOP Yes
Teesside Power Limited .......... 1,875 289 Gas England 1993 No Various No
----- ---
Total Projects in Operation ..... 3,565 1,741
PROJECTS UNDER CONSTRUCTION
Casecnan(5) ..................... 150 105 Hydro Philippines 2000 Yes NIA (GOP) Yes
Dieng Unit II(4) ................ 80 75 Geo Indonesia 2000 Yes PLN (GOI) Yes
Patuha Unit I(4) ................ 80 70 Geo Indonesia 2000 Yes PLN (GOI) Yes
Viking .......................... 50 25 Gas England 1999 No Northern No
Salton Sea Unit 5/Zinc
Extraction ..................... 59 59 Geo California 2000 Yes TBD No
----- -----
Total Projects Under
Construction ................... 419 334
AWARDED AND OTHER
DEVELOPMENT PROJECTS(5)
Telephone Flat .................. 30 30 Geo California 2000 Yes BPA No
MEC Merchant Plant .............. 500 250 Gas Illinois 2000 Yes TBD No
Exeter Power Limited ............ 50 25 Gas England 1999 No Northern No
----- -----
Total Awarded and Other
Projects ....................... 580 305
----- -----
Total Power Generation
Projects ....................... 4,564 2,380
===== =====
</TABLE>
- ----------
(1) The Company operates all such projects other than Teesside Power Limited.
S-26
<PAGE>
(2) Actual MW may vary depending on operating and reservoir conditions and
plant design. Facility Net Capacity (in MW) represents facility gross
capacity (in MW) less parasitic load. Parasitic load is electrical output
used by the facility and not made available for sale to utilities or
other outside purchasers. Net MW owned indicates current legal ownership,
but, in some cases, does not reflect the current allocation of
partnership distributions.
(3) PNOC-Energy Development Corporation ("PNOC-EDC"); Government of the
Philippines ("GOP"); P.T. PLN (Persero) ("PLN"); Government of Indonesia
("GOI"); and Philippine National Irrigation Administration ("NIA") (NIA
also purchases water from this facility), Northern Electric plc
("Northern"). The Government of the Philippines undertaking supports
PNOC-EDC's and NIA's respective obligations. Southern California Edison
Company ("Edison"); San Diego Gas & Electric Company ("SDE&G"); Utah
Power & Light Company ("UP&L"); Sierra Pacific Power Company ("SPPC");
Bonneville Power Administration ("BPA"); New York State Electric & Gas
Corporation ("NYSEG"); Texas Utilities Electric Company ("TUEC"); and
Niagara Mohawk Power Corporation ("NIMO").
(4) The total contracts for Dieng and Patuha cover 400 MW each. The
Government of Indonesia is not making payments on Dieng I and not
otherwise honoring these contracts, which are the subject of
international arbitration. The Company believes it has fully reserved for
the Indonesian exposure as part of the $87,000 1997 asset impairment
charge.
(5) Significant contingencies exist in respect of awards, including without
limitation, the need to obtain financing, permits and licenses, and the
completion of construction. The Company is also pursuing a number of
other power projects which are in the preliminary stage of development.
THE COMPANY'S PRODUCING GAS FIELD OPERATIONS AND FIELDS IN DEVELOPMENT
CE Gas UK Limited. CE Gas UK Limited ("CE Gas") is a gas exploration and
production company which is focused on developing integrated upstream gas
projects. Its "upstream gas" business consists of the exploration, development
and production, including transportation and storage, of gas for delivery to a
point of sale into either a gas supply market or a power generation facility.
CE Gas holds various producing interests in the southern basin of the United
Kingdom sector of the North Sea, as indicated below. Also as is more fully
discussed below, CE Gas has recently been involved in certain gas development
and exploration activities relating to a large gas field prospect in Poland and
the Gingin and Yolla fields in Australia.
The Company's Producing Gas Field Operations and Fields in Development
<TABLE>
<CAPTION>
SHARE OF
PRODUCING GAS FIELDS PROVEN RESERVES BCF(1) % WORKING INTEREST LOCATION
- -------------------- ------------------------ -------------------- --------
<S> <C> <C> <C>
Windermere 14.1 20% U.K. Offshore (North Sea)
Victor 11.4 5% U.K. Offshore (North Sea)
Schooner 10.9 2% U.K. Offshore (North Sea)
Johnston field 20.5 18% U.K. Offshore (North Sea)
FIELDS IN DEVELOPMENT(2) SIZE KM2
- ------------------------ --------
Gingin Concession 2,960 30%(3) S.W. Australia Onshore (Perth Basin)
Yolla 550 20% S.E. Australia (Offshore) Tasmania
Pila Concession 13,000(4) 100% N.W. Poland (Polish Trough)
</TABLE>
- ----------
(1) Gas reserves in Billion cubic feet (or "Bcf") as of December 31, 1997.
The classification "Proven" means reserves which geophysical, geological
and engineering data indicate to be in place or recoverable (as the case
may be) to a high degree of certainty (90% probability the reserves will
exceed the estimate).
(2) No current Proven reserves.
(3) Currently CE Gas beneficially owns approximately 30% of Gingin Concession
with a right to earn up to a 50% working interest.
(4) Subject to 25% relinquishment after every 2 years during the 8 year
contract term (which commenced in 1997) based on work program results.
S-27
<PAGE>
DESCRIPTION OF THE SECURITIES
The following description of the particular terms of the Company's 7.52%
Senior Notes due 2008, Series B (the "Securities") supplements and, to the
extent inconsistent therewith, replaces the description of the general terms of
the Debt Securities set forth under the heading "Description of Debt
Securities" in the accompanying Prospectus. The following description does not
purport to be complete and is qualified in its entirety by reference to the
description in the accompanying Prospectus and to the instruments referred to
therein. The Securities will be issued pursuant to an Indenture dated as of
October 15, 1997, as supplemented by a Third Supplemental Indenture to be dated
as of November 13, 1998, between CalEnergy and IBJ Schroder Bank & Trust
Company, as trustee (the "Trustee") (as so supplemented, the "Indenture"). The
Indenture is referred to in the Prospectus as the "Senior Debt Indenture." The
Securities are "Senior Debt Securities" as that term is used in the Prospectus
and are also referred to in the Prospectus as the "Offered Debt Securities."
Provisions of the Senior Note Indenture are more fully described under the
caption "Description of Debt Securities" in the accompanying Prospectus.
Capitalized words not defined herein are used as defined in the accompanying
Prospectus.
GENERAL
The Securities will be senior unsecured obligations of CalEnergy, will
rank pari passu with all other senior unsecured indebtedness of CalEnergy, and
will be limited to $100,000,000 in aggregate principal amount.
The Securities will bear interest at the rate of 7.52% per annum and will
mature on September 15, 2008. Interest on the Securities will be payable
semi-annually in arrears on each March 15 and September 15, commencing March
15, 1999, to the Holders thereof at the close of business on the preceding
March 1 and September 1, respectively. Interest on the Securities will be
computed on the basis of a 360-day year of twelve 30-day months.
The Securities will be issued without coupons and in fully registered form
only in denominations of $1,000 and integral multiples thereof.
CalEnergy is subject to the informational reporting requirements of
Sections 13 and 15(d) under the Exchange Act and, in accordance therewith,
files certain reports and other information with the Commission. See "Available
Information" in the accompanying Prospectus. In addition, if Sections 13 and
15(d) cease to apply to CalEnergy, CalEnergy will covenant in the Indenture to
file comparable reports and information with the Trustee and the Commission,
and mail such reports and information to holders of Securities at their
registered addresses, for so long as any Securities remain outstanding.
OPTIONAL REDEMPTION
The Securities are subject to optional redemption, in whole or in part,
pro rata at par plus accrued interest to the redemption date plus a premium
calculated to "make whole" to comparable U.S. Treasury securities plus 37.5
basis points.
SINKING FUND
The Securities will not be subject to any mandatory sinking fund.
RANKING
The Securities will be general, unsecured senior obligations of CalEnergy
and will rank pari passu in right of payment with all other existing and future
senior unsecured obligations of CalEnergy and senior in right of payment to all
existing and, to the extent permitted under the Indenture, future subordinated
indebtedness of CalEnergy. The Securities will be effectively subordinated to
all existing and future secured indebtedness of CalEnergy and to all
indebtedness and other liabilities of CalEnergy's subsidiaries, projects and
joint ventures to the extent of the assets of such entities. At June 30, 1998,
on a pro forma basis, after giving effect to the Recent Company Debt Offering,
the MidAmerican Merger, the Equity Offering, the Non-Recourse Financing, and
the Securities Offering and the use of the net proceeds therefrom, CalEnergy
would have had $200 million of secured limited recourse parent company
indebtedness (of which $0 is currently recourse to CalEnergy) and approximately
$5,033 million of
S-28
<PAGE>
indebtedness that represented the Company's proportionate share of project and
joint venture and subsidiary debt, all such debt would be effectively senior to
the Securities, and approximately $1,975 million of indebtedness that would be
pari passu with the Securities. See "Capitalization."
CHANGE IN COVENANTS WHEN SECURITIES RATED INVESTMENT GRADE
Following the first date upon which the Securities are rated Baa3 or
better by Moody's Investors Service, Inc., BBB- or better by Standard & Poor's
Corporation and BBB- or better by Duff & Phelps Credit Rating Co. (or, in any
case, if such person ceases to rate the Securities for reasons outside the
control of the Company, the equivalent investment grade credit rating from any
other "nationally recognized statistical rating organization" (within the
meaning of Rule 15c3-1(c)(2)(vi)(F) under the Securities Exchange Act of 1934)
selected by the Company as a replacement rating agency) (the "Rating Event
Date") (and provided no Event of Default or event which with notice or passage
of time would constitute an Event of Default shall exist on the Rating Event
Date), the provisions described under "Mergers, Consolidations and Sales of
Assets" in the Prospectus and the covenants specifically listed and described
under "Certain Covenants" in the accompanying Prospectus (other than
"--Purchase of Debt Securities Upon a Change in Control" in the accompanying
Prospectus) will no longer be applicable to the Securities and in their place
the covenants and provisions described below under "Restrictions on Liens" and
"Consolidation, Merger, Sale of Assets" will be applicable. There can be no
assurance that a Rating Event Date will occur or, if one occurs, that the
Securities will continue to maintain an investment grade rating. In the event
that subsequent to a Rating Event Date an Event of Default or event which with
notice or passage of time would constitute an Event of Default shall exist with
respect to the Securities or the Securities shall thereafter be rated less than
Baa3 by Moody's Investors Service, Inc., less than BBB- by Standard & Poor's
Corporation and less than BBB- by Duff & Phelps Credit Rating Co. (or such
other rating agency selected by the Company as aforesaid) the provisions and
covenants contained in the Indenture at the time of the issuance of the
Securities that cease to be applicable after the Rating Event Date will not be
reinstated. See "Description of Debt Securities--Certain Covenants" in the
accompanying Prospectus.
Restrictions on Liens
Following the Rating Event Date and so long as any of the Securities are
outstanding, CalEnergy shall not pledge, mortgage, hypothecate or permit to
exist any mortgage, pledge or other lien upon any property or assets at any
time directly owned by CalEnergy to secure any indebtedness for money borrowed
which is incurred, issued, assumed or guaranteed by CalEnergy ("Indebtedness"),
without making effective provisions whereby the Securities shall be equally and
ratably secured with any and all such Indebtedness and with any other
Indebtedness similarly entitled to be equally and ratably secured; provided
however, that this restriction shall not apply to or prevent the creation or
existence of : (i) liens existing on the Rating Event Date; (ii) purchase money
liens which do not exceed the cost or value of the purchased property or
assets; (iii) liens not to exceed 10% of Consolidated Net Tangible Assets and
(iv) liens on property or assets granted in connection with extending,
renewing, replacing or refinancing in whole or in part the Indebtedness
(including, without limitation, increasing the principal amount of such
Indebtedness) secured by liens described in the foregoing clauses (i) through
(iii), provided that the liens in connection with any such extension, renewal,
replacement or refinancing will be limited to the specific property or assets
that was subject to the original lien.
In the event that CalEnergy shall propose to pledge, mortgage or
hypothecate or permit to existing any pledge, mortgage or other lien upon any
property or assets at any time directly owned by it to secure any Indebtedness,
other than as permitted by clauses (i) through (iv) of the previous paragraph
CalEnergy will give prior written notice thereof to the Trustee and CalEnergy
will, prior to or simultaneously with such pledge, mortgage or hypothecation,
effectively secure all the Securities equally and ratably with such
Indebtedness.
The foregoing covenant will not restrict the ability of CalEnergy's
Subsidiaries and Affiliates to pledge, mortgage, hypothecate or permit to exist
any mortgage, pledge or lien upon their property or assets, in connection with
project financings or otherwise.
S-29
<PAGE>
Consolidation, Merger, Sale of Assets
Following the Rating Event Date, and so long as any of the Securities are
outstanding, CalEnergy shall not consolidate with or merge with or into any
other Person, or convey, transfer or lease its consolidated properties and
assets substantially as an entirety to any Person, or permit any Person to
merge into or consolidate with CalEnergy, unless (i) CalEnergy is the surviving
or continuing corporation or the surviving or continuing corporation or
purchaser or lessee is a corporation incorporated under the laws of the United
States of America, one of the States thereof or the District of Columbia or
Canada and assumes CalEnergy's obligations under the Securities and under the
Indenture and (ii) immediately before and after such transaction, no Event of
Default shall have occurred and be continuing.
Except for a sale of the consolidated properties and assets of CalEnergy
substantially as an entirety as provided above, and other than properties or
assets required to be sold to conform with laws or governmental regulations,
CalEnergy will not be permitted, directly or indirectly, to sell or otherwise
dispose of any of its consolidated properties or assets (other than short-term,
readily marketable investments purchased for cash management purposes with
funds not representing the proceeds of other asset sales) if on a pro forma
basis, the aggregate net book value of all such sales during the most recent
12-month period would exceed 10% of Consolidated Net Tangible Assets computed
as of the end of the most recent quarter preceding such sale; provided,
however, that any such sales shall be disregarded for purposes of this 10%
limitation if the net proceeds are invested in properties or assets in similar
or related lines of business of CalEnergy and its Subsidiaries and, provided
further, that CalEnergy may sell or otherwise dispose of consolidated
properties and assets in excess of such 10% limitation if the net proceeds from
such sales or dispositions, which are not reinvested as provided above, are
retained by CalEnergy as cash or Cash Equivalents or used to retire
Indebtedness of CalEnergy (other than Indebtedness which is subordinated to the
Securities) and its Subsidiaries.
Events of Default / Change of Control
After the Rating Event Date, the Events of Default and Change of Control
provisions described in the Prospectus will continue to be applicable to the
Securities. See "Description of Debt Securities--Events of Default" and
"Certain Covenants--Purchase of Debt Securities Upon a Change of Control" in
the accompanying Prospectus.
Certain Defined Terms
"Consolidated Net Tangible Assets" means, as of the date of any
determination thereof, the total amount of all assets of the Company determined
on a consolidated basis in accordance with GAAP as of such date less the sum of
(a) the consolidated current liabilities of the Company determined in
accordance with GAAP and (b) assets properly classified as Intangible Assets.
"Intangible Assets" means, as of the date of determination thereof, all
assets of the Company properly classified as intangible assets determined on a
consolidated basis in accordance with GAAP.
GLOBAL SECURITIES
The Securities will be issued in the form of Global Securities deposited
with, or on behalf of, the Depositary and registered in the name of a nominee
of the Depositary. Except under the limited circumstances described in the
Prospectus under the caption "Book-Entry System," owners of beneficial
interests in the Global Securities will not be entitled to physical delivery of
the Securities in certificated form. The Global Securities may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depository to the Depositary or another nominee of the
Depository or by the Depositary or any nominee to a successor of the Depositary
or a nominee of such successor.
A further description of the Depositary's procedures with respect to the
Global securities is set forth in the Prospectus under the caption "Book-Entry
System."
S-30
<PAGE>
UNDERWRITING
Under the terms of and subject to the conditions contained in an
underwriting agreement (the "Underwriting Agreement"), between the Company and
Credit Suisse First Boston Corporation (the "Underwriter"), the Underwriter has
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriter, the entire principal amount of the Securities.
The Underwriter has advised the Company that it proposes to offer the
Securities for sale from time to time, in one or more transactions (which may
include block transactions), in negotiated transactions or otherwise, or a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The Underwriter may effect such transactions by selling the Securities
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter and/or
the purchasers of the Securities for whom it may act as agent. In connection
with the sale of the Securities, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting discounts, and the
Underwriter may also receive commissions from the purchasers of the Securities
for whom it may act as agent. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Securities may be deemed to be
underwriters, and any discounts or commissions received by them and any profit
on the resale of the Securities by them may be deemed to be underwriting
discounts or commissions.
The Underwriter is purchasing the Securities from the Company at a price
equal to $100,742,641.47, which represents 102.24264147% of the principal
amount of the Securities, plus accrued interest, if any, from November 13,
1998, less assumed underwriting discounts and commissions aggregating 1.5% of
the principal amount of the Securities (or $1,500,000 in the aggregate). The
Underwriting Agreement provides that the obligation of the Underwriter to
purchase the Securities is subject to the approval of certain legal matters by
counsel and to certain other conditions and that if any of the Securities are
purchased by the Underwriter pursuant to the Underwriting Agreement, all of the
Securities agreed to be purchased by the Underwriter pursuant to the
Underwriting Agreement must be so purchased.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriter may be required to make in respect thereof.
The Securities are new securities for which there currently is no market.
The Company does not intend to apply for listing of the Securities on any
securities exchange. Although the Underwriter has advised the Company that it
presently intends to make a market in the Securities, the Underwriter is not
obligated to do so and any such market-making activities may be discontinued at
any time without notice in the sole discretion of the Underwriter. Accordingly,
no assurance can be given as to the development or liquidity of any market for
the Securities, or, if a market does develop, at what prices the Securities
will trade. If the Underwriter ceases to act as a market maker for the
Securities for any reason, there can be no assurance that another firm or
person will make a market in the Securities.
The Underwriter and its affiliates have provided from time to time, and
expect to provide in the future, various investment banking and commercial
banking services for the Company, for which such Underwriter has received and
will receive customary fees and commissions. In addition, the Underwriter also
acted as one of the financial advisors to the Company in connection with the
MidAmerican Merger.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the Securities in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriter to reclaim a selling concession
from a syndicate member when the Securities originally sold by such syndicate
member are purchased in a syndicate covering
S-31
<PAGE>
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Securities to be higher than it would otherwise be in the absence of such
transactions. These transactions, if commenced, may be discontinued at any
time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Securities in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Securities are effected. Accordingly, any resale of
the Securities in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Securities.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Securities in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is entitled
under applicable provincial securities laws to purchase such Securities without
the benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Securities to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Securities acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Securities acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Securities should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the
Securities in their particular circumstances and with respect to the
eligibility of the Securities for investment by the purchaser under relevant
Canadian legislation.
S-32
<PAGE>
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Steven A. McArthur, Executive Vice President and General Counsel of
the Company, and by Willkie Farr & Gallagher. Certain matters will be passed
upon on behalf of the Underwriter by Skadden, Arps, Slate, Meagher & Flom LLP.
As of October 31, 1998, Mr. McArthur beneficially owned approximately 200,000
shares of the Company's common stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 included in this
Prospectus Supplement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this Prospectus Supplement
and incorporated herein by reference and are so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
With respect to the Company's unaudited interim financial information for
the periods ended March 31, 1998 and 1997 and June 30, 1998 and 1997, included
and incorporated by reference in this Prospectus Supplement, Deloitte & Touche
LLP have applied limited procedures in accordance with professional standards
for a review of such information. However, as stated in their reports included
in the Company's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998 and June 30, 1998, and included herein, they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of the Registration Statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Securities Act.
The consolidated financial statements and financial statement schedules of
MidAmerican and its subsidiaries as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 included or
incorporated by reference in this Prospectus Supplement have been audited by
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.), independent
auditors, as stated in their reports appearing in this Prospectus Supplement
and incorporated herein by reference and are so included and incorporated by
reference in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
S-33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CALENERGY COMPANY, INC.
Consolidated Financial Statements:
Independent Auditors' Report ....................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ....................... F-3
Consolidated Statements of Operations for the Three Years Ended December 31, 1997 .. F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1997 ................................................................ F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 .. F-6
Notes to Consolidated Financial Statements ......................................... F-7
Interim Consolidated Financial Statements:
Independent Accountants' Report .................................................... F-36
Consolidated Balance Sheets, June 30, 1998 and December 31, 1997 ................... F-37
Consolidated Statements of Operations for the Three and Six Months Ended June 30,
1998 and 1997 .................................................................... F-38
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and
1997 ............................................................................. F-39
Notes to Consolidated Financial Statements ......................................... F-40
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
MIDAMERICAN ENERGY HOLDINGS COMPANY
Consolidated Financial Statements:
Report of Independent Accountants .................................................. F-45
Consolidated Statements of Income for the Three Years Ended December 31, 1997 ...... F-46
Consolidated Balance Sheets as of December 31, 1997 and 1996 ....................... F-47
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997 .. F-48
Consolidated Statements of Capitalization as of December 31, 1997 and 1996 ......... F-49
Consolidated Statements of Retained Earnings for the Three Years Ended
December 31, 1997 ................................................................ F-51
Notes to Consolidated Financial Statements ......................................... F-52
Interim Consolidated Financial Statements:
Consolidated Statements of Income for the Three, Six and Twelve Months Ended June
30, 1998 and 1997 ................................................................ F-77
Consolidated Statements of Comprehensive Income for the Three, Six and Twelve
Months Ended June 30, 1998 and 1997 .............................................. F-78
Consolidated Balance Sheets as of June 30, 1998 and 1997 and December 31, 1997 ..... F-79
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30,
1998 and 1997 .................................................................... F-80
Notes to Consolidated Financial Statements ......................................... F-81
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
CalEnergy Company, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of CalEnergy
Company, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CalEnergy Company, Inc. and
subsidiaries at December 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 12, 1998
F-2
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Cash and cash equivalents (Note 3) .................................... $ 1,445,338 $ 424,500
Joint venture cash and investments .................................... 6,072 47,764
Restricted cash ....................................................... 223,636 106,968
Short-term investments ................................................ 1,282 4,921
Accounts receivable ................................................... 376,745 342,307
Properties, plants, contracts and equipment, net ...................... 3,528,910 3,225,496
Excess of cost over fair value of net assets acquired, net ............ 1,312,788 790,920
Equity investments .................................................... 238,025 238,856
Deferred charges and other assets ..................................... 354,830 448,424
----------- -----------
Total assets ....................................................... $ 7,487,626 $ 5,630,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ...................................................... $ 173,610 $ 218,164
Other accrued liabilities ............................................. 1,106,641 668,612
Parent company debt ................................................... 1,303,845 1,146,685
Subsidiary and project debt ........................................... 2,189,007 1,678,392
Deferred income taxes ................................................. 509,059 469,199
----------- -----------
Total liabilities .................................................. 5,282,162 4,181,052
----------- -----------
Deferred income ....................................................... 40,837 29,067
Commitments and contingencies (Notes 3, 18, 19 and 20)
Company -- obligated mandatorily redeemable convertible preferred
securities of subsidiary trusts ...................................... 553,930 103,930
Preferred securities of subsidiary .................................... 56,181 136,065
Minority interest ..................................................... 134,454 299,252
Common stock and options subject to redemption ........................ 654,736 --
Stockholders' equity:
Preferred stock -- authorized 2,000 shares, no par value .............. -- --
Common stock -- par value $.0675 per share, authorized 180,000
shares, issued 82,980 and 63,747 shares, outstanding 81,322 and
63,448 shares, respectively .......................................... 5,602 4,303
Additional paid in capital ............................................ 1,261,081 563,567
Retained earnings ..................................................... 213,493 297,520
Cumulative effect of foreign currency translation adjustment .......... (3,589) 29,658
Common stock and options subject to redemption ........................ (654,736) --
Treasury stock -- 1,658 and 299 common shares at cost ................. (56,525) (8,787)
Unearned compensation -- restricted stock ............................. -- (5,471)
----------- -----------
Total stockholders' equity ......................................... 765,326 880,790
----------- -----------
Total liabilities and stockholders' equity ......................... $ 7,487,626 $ 5,630,156
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Operating revenue ............................................... $ 2,166,338 $ 518,934 $ 335,630
Interest and other income ....................................... 104,573 57,261 63,093
----------- --------- ---------
Total revenues ............................................... 2,270,911 576,195 398,723
----------- --------- ---------
Costs and expenses:
Cost of sales ................................................... 1,055,195 31,840 --
Operating expense ............................................... 345,833 132,655 103,602
General and administration ...................................... 52,705 21,451 23,376
Depreciation and amortization ................................... 276,041 118,586 72,249
Loss on equity investment in Casecnan ........................... 5,972 5,221 362
Interest expense ................................................ 296,364 165,900 134,637
Less interest capitalized ....................................... (45,059) (39,862) (32,554)
Non-recurring charge -- asset valuation impairment .............. 87,000 -- --
----------- --------- ---------
Total costs and expenses ..................................... 2,074,051 435,791 301,672
----------- --------- ---------
Income before provision for income taxes ........................ 196,860 140,404 97,051
Provision for income taxes ...................................... 99,044 41,821 30,631
----------- --------- ---------
Income before minority interest ................................. 97,816 98,583 66,420
Minority interest ............................................... 45,993 6,122 3,005
----------- --------- ---------
Income before extraordinary item ................................ 51,823 92,461 63,415
Extraordinary item, net of minority interest of $58,222 ......... (135,850) -- --
----------- --------- ---------
Net income (loss) ............................................... (84,027) 92,461 63,415
Preferred dividends ............................................. -- -- 1,080
----------- --------- ---------
Net income (loss) available to common stockholders .............. $ (84,027) $ 92,461 $ 62,335
=========== ========= =========
Income per share before extraordinary item ...................... $ 0.77 $ 1.69 $ 1.32
----------- --------- ---------
Extraordinary item .............................................. $ (2.02) $ -- $ --
----------- --------- ---------
Net income (loss) per share ..................................... $ (1.25) $ 1.69 $ 1.32
=========== ========= =========
Income per share before extraordinary item -- diluted ........... $ 0.75 $ 1.54 $ 1.22
----------- --------- ---------
Extraordinary item -- diluted ................................... $ (1.97) $ -- $ --
----------- --------- ---------
Net income (loss) per share -- diluted .......................... $ (1.22) $ 1.54 $ 1.22
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS AND SHARES IN THOUSANDS
<TABLE>
<CAPTION>
OUTSTANDING ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS
------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Balance December 31, 1994 ....... 31,849 $ 2,407 $ 100,421 $ 142,937
Equity offering ................. 18,170 1,004 240,825 --
Restricted stock ................ 500 -- 848 --
Exercise of stock options and
other equity transactions ...... 176 10 446 --
Purchase of treasury stock ...... (102) -- -- --
Preferred stock dividends,
Series C, including cash
distribution of $43 ............ -- -- -- (1,293)
Tax benefit from stock plan ..... -- -- 866 --
Net income before preferred
dividends ...................... -- -- -- 63,415
------ ------- ---------- ---------
Balance December 31, 1995 ....... 50,593 3,421 343,406 205,059
Exercise of stock options and
other equity transactions ...... 5,263 337 53,030 --
Purchase of treasury stock ...... (472) -- -- --
Conversion of debt .............. 8,064 545 164,912 --
Tax benefit from stock plan ..... -- -- 2,219 --
Foreign currency translation
adjustment ..................... -- -- -- --
Net income ...................... -- -- -- 92,461
------ ------- ---------- ---------
Balance December 31, 1996 ....... 63,448 4,303 563,567 297,520
Equity offering ................. 19,100 1,289 697,315 --
Exercise of stock options and
other equity transactions ...... 396 10 (2,757) --
Purchase of treasury stock ...... (1,622) -- -- --
Common stock and options
subject to redemption .......... -- -- -- --
Tax benefit from stock plan ..... -- -- 2,956 --
Foreign currency translation
adjustment ..................... -- -- -- --
Net loss ........................ -- -- -- (84,027)
------ ------- ---------- ---------
Balance December 31, 1997 ....... 81,322 $ 5,602 $1,261,081 $ 213,493
====== ======= ========== =========
<PAGE>
<CAPTION>
COMMON STOCK
FOREIGN & OPTIONS
CURRENCY SUBJECT TO TREASURY UNEARNED
ADJUST. REDEMPTION STOCK COMPENSATION TOTAL
------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 ....... $ -- $ -- $ (65,774) $ -- $ 179,991
Equity offering ................. -- -- 56,801 -- 298,630
Restricted stock ................ -- -- 8,652 (9,500) --
Exercise of stock options and
other equity transactions ...... -- -- 563 2,494 3,513
Purchase of treasury stock ...... -- -- (1,590) -- (1,590)
Preferred stock dividends,
Series C, including cash
distribution of $43 ............ -- -- -- -- (1,293)
Tax benefit from stock plan ..... -- -- -- -- 866
Net income before preferred
dividends ...................... -- -- -- -- 63,415
------- --------- ---------- --------- ---------
Balance December 31, 1995 ....... -- -- (1,348) (7,006) 543,532
Exercise of stock options and
other equity transactions ...... -- -- 4,569 1,535 59,471
Purchase of treasury stock ...... -- -- (12,008) -- (12,008)
Conversion of debt .............. -- -- -- -- 165,457
Tax benefit from stock plan ..... -- -- -- -- 2,219
Foreign currency translation
adjustment ..................... 29,658 -- -- -- 29,658
Net income ...................... -- -- -- -- 92,461
------- --------- ---------- --------- ---------
Balance December 31, 1996 ....... 29,658 -- (8,787) (5,471) 880,790
Equity offering ................. -- -- -- -- 698,604
Exercise of stock options and
other equity transactions ...... -- -- 7,767 5,471 10,491
Purchase of treasury stock ...... -- -- (55,505) -- (55,505)
Common stock and options
subject to redemption .......... -- (654,736) -- -- (654,736)
Tax benefit from stock plan ..... -- -- -- -- 2,956
Foreign currency translation
adjustment ..................... (33,247) -- -- -- (33,247)
Net loss ........................ -- -- -- -- (84,027)
------- --------- ---------- --------- ---------
Balance December 31, 1997 ....... $(3,589) $(654,736) $ (56,525) $ -- $ 765,326
======= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ (84,027) $ 92,461 $ 63,415
Adjustments to reconcile net cash flow from operating activities:
Non-recurring charge-asset valuation impairment ..................... 87,000 -- --
Depreciation and amortization ....................................... 239,234 109,447 65,244
Amortization of excess of cost over fair value of net assets
acquired .......................................................... 36,807 9,139 7,005
Amortization of original issue discount ............................. 2,160 50,194 45,409
Amortization of deferred financing costs ............................ 26,161 9,677 8,979
Amortization of unearned compensation ............................... 5,471 1,535 2,494
Provision for deferred income taxes ................................. 55,584 12,252 13,983
Loss (income) on equity investments ................................. (16,068) (910) 362
Income (loss) applicable to minority interest ....................... (35,387) 1,431 3,005
Changes in other items: .............................................
Accounts receivable ................................................. (34,146) (13,936) 213
Accounts payable, accrued liabilities and deferred income ......... 29,799 2,093 12,103
------------ ---------- ------------
Net cash flows from operating activities ............................ 312,588 273,383 222,212
------------ ---------- ------------
Cash flows from investing activities:
Purchase of Northern, Falcon Seaboard, Partnership Interest and
Magma, net of cash acquired ......................................... (632,014) (474,443) (907,614)
Distributions from equity investments ................................ 23,960 8,222 --
Capital expenditures relating to operating projects .................. (194,224) (24,821) (27,120)
Philippine construction .............................................. (27,334) (167,160) (289,655)
Indonesian and other development ..................................... (155,963) (81,068) (8,973)
Salton Sea IV construction ........................................... -- (63,772) (62,430)
Pacific Northwest, Nevada, and Utah exploration costs ................ (3,128) (4,885) (10,445)
Decrease in short-term investments ................................... 2,880 33,998 80,565
Decrease (increase) in restricted cash ............................... (116,668) 63,175 (17,452)
Other ................................................................ 60,390 (2,910) 11,514
Investment in Casecnan ............................................... -- -- (61,177)
------------ ---------- ------------
Net cash flows from investing activities ............................ (1,042,101) (713,664) (1,292,787)
------------ ---------- ------------
Cash flows from financing activities:
Proceeds from sale of common and treasury stock and exercise of
stock options ....................................................... 703,624 54,935 299,649
Proceeds from convertible preferred securities of subsidiary trusts 450,000 103,930 --
Proceeds from issuance of parent company debt ........................ 350,000 324,136 200,000
Repayment of parent company debt ..................................... (100,000) -- --
Net proceeds from revolver ........................................... (95,000) 95,000 --
Proceeds from subsidiary and project debt ............................ 795,658 428,134 654,695
Repayments of subsidiary and project debt ............................ (271,618) (210,892) (176,664)
Deferred charges relating to debt financing .......................... (48,395) (36,010) (34,733)
Purchase of treasury stock ........................................... (55,505) (12,008) (1,590)
Other ................................................................ 13,142 10,756 (29,169)
------------ ---------- ------------
Net cash flows from financing activities ............................. 1,741,906 757,981 912,188
------------ ---------- ------------
Effect of exchange rate changes ...................................... (33,247) 4,860 --
------------ ---------- ------------
Net increase (decrease) in cash and investments ...................... 979,146 322,560 (158,387)
------------ ---------- ------------
Cash and cash equivalents at beginning of year ....................... 472,264 149,704 308,091
------------ ---------- ------------
Cash and cash equivalents at end of year ............................. $ 1,451,410 $ 472,264 $ 149,704
============ ========== ============
Supplemental Disclosures:
Interest paid (net of amounts capitalized) ........................... $ 316,060 $ 92,829 $ 50,840
============ ========== ============
Income taxes paid .................................................... $ 44,483 $ 23,211 $ 14,812
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
DOLLARS, POUNDS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. BUSINESS
CalEnergy Company, Inc. (the "Company") is a United States-based global
power company which generates, distributes and supplies electricity to
utilities, government entities, retail customers and other customers located
throughout the world. The Company was founded in 1971 and through its
subsidiaries is primarily engaged in the development, ownership and operation
of environmentally responsible independent power production facilities
worldwide utilizing geothermal, natural gas, hydroelectric and other energy
sources. In addition, the Company is engaged in the distribution and supply of
electricity to approximately 1.5 million customers primarily in northeast
England as well as the generation and supply of electricity (together with
other related business activities) throughout England and Wales. The Company is
also active in supplying gas and has applications for over 400,000 customers in
those areas of England, Wales and Scotland where retail gas competition has
been introduced.
The Company has organized several partnerships and joint ventures (herein
referred to as the "Coso Joint Ventures") in order to develop geothermal energy
at the China Lake Naval Air Weapons Station, Coso Hot Springs, China Lake,
California. Collectively, the projects undertaken by these Coso Joint Ventures
are referred to as the Coso Project. In 1992, the Company entered into the
natural gas-fired electrical generation market through the purchase of a
development opportunity in Yuma, Arizona which commenced commercial operation
in May 1994. In 1993, the Company started developing a number of international
power project opportunities where private power generating programs have been
initiated, including the Philippines and Indonesia. In 1995, the Company
acquired Magma Power Company ("Magma"). Magma's operating assets included four
projects referred to as the Partnership Project in which Magma had a 50%
interest, and three projects referred to as the Salton Sea Project of which
Magma owned 100%. A fourth project included in the Salton Sea Project was
constructed after the acquisition of Magma and commenced operations in June
1996. In addition, in April 1996, the Company acquired the remaining 50%
interest in the Partnership Project. In August 1996, the Company acquired
Falcon Seaboard Resources, Inc. ("Falcon Seaboard") which includes significant
interests in three operating gas-fired cogeneration facilities and a related
natural gas pipeline. On December 24, 1996, CE Electric UK plc ("CE Electric"),
which in 1997 was 70% owned indirectly by the Company and 30% owned indirectly
by Peter Kiewit Sons', Inc. ("PKS"), acquired majority ownership of the
outstanding ordinary share capital of Northern Electric plc ("Northern")
pursuant to a tender offer ("Tender Offer"). As of March 18, 1997, CE Electric
effectively owned 100% of Northern ordinary shares.
Northern is one of the twelve regional electricity companies ("RECs")
which came into existence as a result of the restructuring and subsequent
privatization of the electricity industry in the United Kingdom in 1990.
Northern is primarily engaged in the distribution and supply of electricity.
Northern was granted a Public Electricity Supply ("PES") license under the
Electricity Act to supply electricity in Northern's Authorized Area
("Authorized Area"). Northern's Authorized Area covers approximately 14,400
square kilometers with a population of approximately 3.2 million people and
includes the counties of Northumberland, Tyne and Wear, Durham, Cleveland and
North Yorkshire. Northern supplies electricity outside its Authorized Area
pursuant to second tier licenses. Northern also is involved in non-regulated
activities, including the supply of gas within England, Wales and Scotland, the
generation of electricity, electrical appliance retailing and gas exploration
and production.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company,
its wholly-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 of accounting.
Investments, where the Company's ability to
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
influence is limited, are accounted for under the cost method of accounting.
All significant inter-enterprise transactions and accounts have been
eliminated. The results of operations of the Company include the Company's
proportionate share of results of operations of entities acquired as of the
date of each acquisition.
CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH
The Company considers all investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Restricted
cash is not considered a cash equivalent.
Investments other than restricted cash are primarily commercial paper and
money market securities. The restricted cash balance includes such securities
and mortgage backed securities, and is mainly composed of amounts deposited in
restricted accounts from which the Company will source its equity contributions
and debt service reserve requirements relating to the projects. These funds are
restricted by their respective project debt agreements to be used only for the
related project.
At December 31, 1997, all of the Company's investments are classified as
held-to-maturity and are accounted for at their amortized cost basis. The
carrying amount of the investments approximates the fair value based on quoted
market prices as provided by the financial institution which holds the
investments.
PROPERTIES, PLANTS, CONTRACTS, EQUIPMENT AND DEPRECIATION
The cost of major additions and betterments are capitalized, while
replacements, maintenance, and repairs that do not improve or extend the lives
of the respective assets are expensed.
Depreciation of the operating power plant costs, net of salvage value, is
computed on the straight line method over the estimated useful lives, between
10 and 30 years. Depreciation of furniture, fixtures and equipment which are
recorded at cost, is computed on the straight line method over the estimated
useful lives of the related assets, which range from three to ten years.
The Northern, Falcon Seaboard, Partnership Interest and Magma acquisitions
by the Company have been accounted for as purchase business combinations. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the cost of acquiring the respective companies equal to their fair values at
the date of the acquisition and include the following:
Property and equipment of Northern is depreciated using a systematic
method, which approximates the straight line method over the estimated
useful lives of the related assets which range from 3-40 years.
Power sales agreements are amortized separately over (1) the remaining
portion of the scheduled price periods of the power sales agreements and
(2) for the Partnership Interest and Magma acquisitions the 20 year avoided
cost periods of the power sales agreements using the straight line method.
Capitalized costs for gas reserves, other than costs of unevaluated
exploration projects and projects awaiting development consent, are depleted
using the unit of production method. Depletion is calculated based on
hydrocarbon reserves of properties in the evaluated pool estimated to be
commercially recoverable and include anticipated future development costs in
respect of those reserves.
Expenditures on major information technology systems are capitalized and
depreciated on a straight line basis over the useful life of the developed
systems which range from 3-10 years.
WELL, RESOURCE DEVELOPMENT AND EXPLORATION COSTS
The Company follows the full cost method of accounting for costs incurred
in connection with the exploration and development of geothermal and natural
gas resources. All such costs, which include dry
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
hole costs and the cost of drilling and equipping production wells and directly
attributable administrative and interest costs, are capitalized and amortized
over their estimated useful lives when production commences. The estimated
useful lives of production wells are ten to twenty years depending on the
characteristics of the underlying resource; exploration costs and development
costs, other than production wells, are generally amortized over the weighted
average remaining term of the Company's power and steam purchase contracts.
EXCESS OF COST OVER FAIR VALUE
Total acquisition costs in excess of the fair values assigned to the net
assets acquired are amortized over a 40 year period for the Northern and Magma
acquisitions and a 25 year period for the Falcon Seaboard acquisition, both
using the straight line method.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized whenever evidence exists that the carrying value is not recoverable.
DEFERRED WELL AND REWORK COSTS
Well rework costs are deferred and amortized over the estimated period
between reworks. These deferred costs, net of accumulated amortization, are
$5,421 and $8,371 at December 31, 1997 and 1996, respectively, and are included
in other assets.
REVENUE RECOGNITION
Revenues are recorded based upon service rendered and electricity and
steam delivered, distributed or supplied to the end of the month. Where there
is an overrecovery of supply or distribution business revenues against the
maximum regulated amount, revenues are deferred equivalent to the overrecovered
amount. The deferred amount is deducted from revenue and included in other
liabilities. Where there is an underrecovery, no anticipation of any potential
future recovery is made.
CAPITALIZATION OF INTEREST AND DEFERRED FINANCING COSTS
Prior to the commencement of operations, interest is capitalized on the
costs of the plants and geothermal resource development to the extent incurred.
Capitalized interest and other deferred charges are amortized over the lives of
the related assets.
Deferred financing costs are amortized over the term of the related
financing using the effective interest method.
DEFERRED INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on the
difference between the financial statement and tax bases of assets and
liabilities using estimated tax rates in effect for the year in which the
differences are expected to reverse. The Company intends to repatriate earnings
of foreign subsidiaries in the foreseeable future. As a result, deferred income
taxes are provided for retained earnings of international subsidiaries and
corporate joint ventures which are intended to be remitted.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as discussed herein. Fair
values have been estimated based on quoted market prices for debt issues listed
on exchanges. Fair values of financial instruments that are not actively traded
are based on market prices of similar instruments and/or valuation techniques
using market assumptions.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
The Company assumes that the carrying amount of short-term financial
instruments approximates their fair value. For these purposes, short-term is
defined as any item that matures, reprices, or represents a cash transaction
between willing parties within six months or less of the measurement date.
PENSIONS
Northern contributes to the Electricity Supply Pension Scheme and
contributions to the scheme are charged to the income statement. The capital
cost of ex gratia and supplementary pensions are normally charged to the income
statement in the period in which they are granted. Variations in pension cost,
which are identified as a result of actuarial valuations/reviews, are amortized
over the average expected remaining working lives of employees in proportion to
their expected payroll costs. Differences between the amounts funded and the
amounts charged to the profit and loss account are treated as either provisions
or prepayments in the balance sheet.
NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS 128 replaced primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively.
Basic and diluted earnings per common share are based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share also assumes the conversion of the convertible preferred
securities of subsidiary trusts, when dilutive, and the exercise of all
dilutive stock options outstanding at their option prices, with the option
exercise proceeds and tax benefits used to repurchase shares of common stock at
the average market price using the treasury stock method.
A reconciliation of basic earnings per share before extraordinary item to
diluted earnings per share before extraordinary item follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
PER-SHARE PER-SHARE
-------------------------------- --------------------------------
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- -------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
before extraordinary item ......... $ 51,823 67,268 $ 0.77 $ 92,461 54,739 $ 1.69
Effect of dilutive securities
Stock options ..................... -- 1,418 -- 1,881
Convertible preferred
securities of subsidiary
trusts(1) ......................... -- -- 2,840 2,517
Convertible debt ................... -- -- 4,968 5,935
-------- ------ --------- ------
Diluted earnings per share
before extraordinary item ......... $ 51,823 68,686 $ 0.75 $ 100,269 65,072 $ 1.54
======== ====== ======= ========= ====== =======
<PAGE>
<CAPTION>
1995
--------------------------------
PER-SHARE
--------------------------------
INCOME SHARES AMOUNT
----------- -------- -----------
<S> <C> <C> <C>
Basic earnings per share
before extraordinary item ......... $ 62,335 47,249 $ 1.32
Effect of dilutive securities
Stock options ..................... -- 1,688
Convertible preferred
securities of subsidiary
trusts(1) ......................... -- --
Convertible debt ................... 6,038 7,258
-------- ------
Diluted earnings per share
before extraordinary item ......... $ 68,373 56,195 $ 1.22
======== ====== =======
</TABLE>
- ----------
(1) The convertible preferred securities of subsidiary trusts were
antidilutive in 1997.
RECLASSIFICATION
Certain amounts in the fiscal 1996 and 1995 financial statements and
supporting footnote disclosures have been reclassified to conform to the fiscal
1997 presentation. Such reclassification did not impact previously reported net
income or retained earnings.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB adopted SFAS No. 130, "Reporting Comprehensive
Income", and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about
a company's operating segments. Both statements will be effective for the
Company beginning January 1, 1998. The Company has not yet determined the
impact of these statements on current disclosures.
3. KDG ACQUISITION
On September 11, 1997, the Company signed a definitive agreement with
Kiewit Diversified Group ("KDG"), a wholly owned subsidiary of PKS, for the
Company to purchase KDG's ownership interest in various project partnerships
and CalEnergy common shares (the "KDG Acquisition"). Accordingly, common stock
and options subject to redemption have been reclassified in the consolidated
balance sheet.
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.
4. ACQUISITIONS
NORTHERN
On December 24, 1996, CE Electric UK plc ("CE Electric"), which in 1997
was 70% owned indirectly by the Company and 30% owned indirectly by PKS,
acquired majority ownership of the outstanding ordinary share capital of
Northern Electric plc ("Northern") pursuant to a tender offer (the "Northern
Tender Offer") commenced in the United Kingdom on November 5, 1996. As of March
18, 1997, CE Electric effectively acquired the remaining ordinary shares and
owned 100% of Northern's ordinary shares.
The Company and PKS contributed to CE Electric approximately $410,000 and
$176,000 respectively, of the approximately $1,200,000 required to acquire all
of Northern's ordinary and preference shares in connection with the Tender
Offer. The Company obtained such funds from cash on hand, short-term
borrowings, and borrowings of approximately $100,000 under a Credit Agreement
entered into with Credit Suisse on October 28, 1996 (the "CalEnergy Credit
Facility"). The Company has repaid the entire CalEnergy Credit Facility through
the use of proceeds of the Trust Securities offering. The remaining funds
necessary to consummate the Tender Offer were provided from a \P560,000 Term
Loan and Revolving Facility Agreement, dated October 28, 1996 (the "U.K. Credit
Facility"). CE Electric has repaid the entire U.K. Credit Facility through the
use of proceeds of the senior note and sterling bond offerings of CE Electric
UK Funding Company.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
The Northern acquisition has been accounted for as a purchase business
combination. All identifiable assets acquired and liabilities assumed were
assigned a portion of the cost of acquiring Northern, equal to their fair
values at the date of the acquisition. Minority interest was recorded at
historical cost.
In 1993, Northern entered into a contract relating to the purchase of 400
MW of capacity from a 15.4% owned related party, Teesside Power Limited
("Teesside"), for a period of 15 years beginning April 1, 1993. The contract
sets escalating purchase prices at predetermined levels. Currently the
escalating contract prices exceed those paid by the Company to the electricity
pool (the "Pool") which is operated by the National Grid Group. However, under
current price cap regulation expected to expire in 1998 the Company is able to
recover these costs. For the period after the price cap regulation ends, the
Company has established a liability for the estimated loss as a result of this
contract.
Northern utilizes contracts for differences ("CFDs") to mitigate its
exposure to volatility in the prices of electricity purchased through the Pool.
Such contracts allow the Company to effectively convert the majority of its
anticipated Pool purchases from market to fixed prices. As of December 31,
1997, CFDs were in place to hedge a portion of electricity purchases of
approximately 55,000 GWh through the year 2008.
FALCON SEABOARD
On August 7, 1996 the Company completed the acquisition of Falcon Seaboard
for a cash price of $229,500 including acquisition costs. Through the
acquisition, the Company indirectly acquired significant ownership interests in
three operating gas-fired cogeneration facilities and a related natural-gas
pipeline. The plants are located in Texas, Pennsylvania and New York and total
520 MW in capacity.
The Falcon Seaboard acquisition has been accounted for as a purchase
business combination. All identifiable assets acquired and liabilities assumed
were assigned a portion of the cost of acquiring Falcon Seaboard, equal to
their fair values at the date of the acquisition.
EDISON MISSION ENERGY'S PARTNERSHIP INTEREST
On April 17, 1996 the Company completed the acquisition of Edison Mission
Energy's Partnership Interests in four geothermal operating facilities in
California for a cash purchase price of $71,000 including acquisition costs.
The four projects, Vulcan, Hoch (Del Ranch), Leathers and Elmore, are located
in the Imperial Valley of California. Prior to this transaction, the Company
was a 50% owner of these facilities.
The Partnership Interest acquisition has been accounted for as a purchase
business combination. All identifiable assets acquired and liabilities assumed
were assigned a portion of the cost of acquiring the Partnership Interest,
equal to their fair values at the date of the acquisition.
Unaudited pro forma combined revenue, income and basic earnings per share
before extraordinary item of the Company, Northern, Falcon Seaboard, and the
Partnership Interest for the twelve months ended December 31, 1997 and 1996, as
if the acquisitions had occurred at the beginning of 1996 after giving effect
to certain pro forma adjustments related to the acquisitions were $2,270,911,
$52,430, and $0.78 compared to $2,162,381, $64,811 and $1.18, respectively.
Excluding the $87,000, $1.29 per share, non-recurring charge, pro forma income
before extraordinary item would have been $139,430 in 1997.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
5. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment comprise the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Operating project costs:
Distribution system .................................... $ 1,237,743 $ 928,575
Power plants ........................................... 1,464,885 1,277,663
Wells and resource development ......................... 395,314 377,731
Power sales agreements ................................. 227,535 227,535
Other assets ........................................... 254,973 176,483
----------- ----------
Total operating assets ................................. 3,580,450 2,987,987
Less accumulated depreciation and amortization ......... (497,832) (271,216)
----------- ----------
Net operating assets ................................... 3,082,618 2,716,771
----------- ----------
Mineral and gas reserves, net .......................... 297,048 270,851
Construction in progress:
Malitbog .............................................. -- 152,411
Indonesia ............................................. 140,172 81,875
Other development ...................................... 9,072 3,588
----------- ----------
Total .................................................. $ 3,528,910 $3,225,496
=========== ==========
</TABLE>
COSO PROJECT OPERATING FACILITIES
The Coso Project operating facilities comprise the Company's proportionate
share of the assets of three of its Coso Joint Ventures: Coso Finance Partners
("Navy I Joint Venture"), Coso Energy Developers ("BLM Joint Venture"), and
Coso Power Developers ("Navy II Joint Venture"). The Navy I power plant is
located on land owned by and leased from the U.S. Navy to December 2009, with a
10 year extension at the option of the Navy. Under terms of the Navy I Joint
Venture, current profits and losses are allocated 46.4% to the Company. The BLM
power plant is situated on lands leased from the U.S. Bureau of Land Management
under a geothermal lease agreement that extends until October 31, 2035. The
lease may be extended to 2075 at the option of the BLM. Under the terms of the
BLM Joint Venture agreement, the Company's share of profits and losses is 48%.
Under terms of the Navy II Joint Venture, all profits, losses and capital
contributions for Navy II are divided equally by the two partners.
The amount of royalties paid by Navy I to the U.S. Navy to develop
geothermal energy for Navy I, Unit 1 on the lands owned by the Navy comprises
(i) a fee payable during the term of the contract based on the difference
between the amounts paid by the Navy to Edison for specified quantities of
electricity and the price as determined under the contract (which currently
approximates 73% of that paid by the Navy to Edison), and (ii) $25,000 payable
in December 2009, of which the Company's share is $11,600. The $25,000 payment
is secured by funds placed on deposit monthly, which funds, plus accrued
interest, will aggregate $25,000. The monthly deposit is currently $50. As of
December 31, 1997, the balance of funds deposited approximated $6,337, which
amount is included in restricted cash.
Units 2 and 3 of Navy I and the Navy II power plants are on Navy lands,
for which the Navy receives a royalty based on electric sales revenue at the
initial rate of 4% escalating to 22% by the end of the contract in December
2019. The BLM is paid a royalty of 10% of the value of steam produced by the
geothermal resource supplying the BLM Plant.
The Coso Joint Ventures had royalty expense included in operating expenses
of $13,458, $13,412 and $13,623 in the years ended December 31, 1997, 1996 and
1995, respectively.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
IMPERIAL VALLEY PROJECT OPERATING FACILITIES
The Company currently operates eight geothermal power plants in the
Imperial Valley in California. The Partnership Project consists of the Vulcan,
Hoch (Del Ranch), Elmore, and Leathers Partnerships. The remaining four plants
which comprise the Salton Sea Project are indirect wholly owned subsidiaries of
the Company. These geothermal power plants consist of Salton Sea I, Salton Sea
II, Salton Sea III and Salton Sea IV. The Partnership Project and the Salton
Sea Project are collectively referred to as the Imperial Valley Project. The
Imperial Valley Project commencement dates and nominal capacities are as
follows:
<TABLE>
<CAPTION>
IMPERIAL VALLEY COMMENCEMENT NOMINAL
PLANTS DATE CAPACITY
--------------- ------------ --------
<S> <C> <C>
Vulcan February 10, 1986 34 MW
Hoch (Del Ranch) January 2, 1989 38 MW
Elmore January 1, 1989 38 MW
Leathers January 1, 1990 38 MW
Salton Sea I July 1, 1987 10 MW
Salton Sea II April 5, 1990 20 MW
Salton Sea III February 13, 1989 49.8 MW
Salton Sea IV May 24, 1996 39.6 MW
</TABLE>
The Partnership Project pays royalties based on both energy revenues and
total electricity revenues. Hoch (Del Ranch) and Leathers pay royalties of
approximately 5% of energy revenues and 1% of total electricity revenue. Elmore
pays royalties of approximately 5% of energy revenues. Vulcan pays royalties of
4.167% of energy revenues.
The Salton Sea Project's weighted average royalty expense in 1997 was
approximately 6.1%. The royalties are paid to numerous recipients based on
varying percentages of electrical revenue or steam production multiplied by
published indices.
The Imperial Valley Projects had royalty expense included in operating
expenses of $14,343, $10,228 and $10,398 in the years ended December 31, 1997,
1996 and 1995, respectively.
SIGNIFICANT CUSTOMERS AND CONTRACTS
All of the Company's sales of electricity from the Coso Project and
Imperial Valley Project, which comprise approximately 20% of 1997 operating
revenue, are to Southern California Edison Company ("Edison") and are under
long-term power purchase contracts.
The Coso Project and the Partnership Project sell all electricity
generated by the respective plants pursuant to seven long-term SO4 Agreements
between the projects and Edison. These SO4 Agreements provide for capacity
payments, capacity bonus payments and energy payments. Edison makes fixed
annual capacity 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. 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. The
Company's share of aggregate annual capacity payments is approximately $17,000
and its share of aggregate bonus payments is approximately $3,000.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (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, December 1998, and December 1999 for each of the Hoch (Del
Ranch), Elmore and Leathers Partnerships, respectively. The annual capacity
payments are approximately $24,500 and the bonus payments are approximately
$4,400 in aggregate for the four plants.
Excluding Navy I and Vulcan, which are receiving Edison's Avoided Cost of
Energy, the Company's SO4 Agreements provide for energy rates ranging from
12.8\c per kWh in 1997 to 15.6\c per kWh in 1999. The weighted average energy
rate for all of the Company's SO4 Agreements was 12.0\c per kWh in 1997.
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 5.3\c per
kWh during 1997. As the Salton Sea I PPA is not an SO4 Agreement, the energy
payments do not revert to Edison's Avoided Cost of Energy. The capacity payment
is approximately $1,100 per annum.
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 period
expires in April 2000 and February 1999 are levelized at a time period weighted
average of 10.6\c per kWh and 9.8\c 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. The annual capacity and bonus payments for Salton
Sea II and Salton Sea III are approximately $3,300 and $9,700, respectively.
The Salton Sea IV Project 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.
For the year ended December 31, 1997, and 1996 Edison's average Avoided
Cost of Energy was 3.3\c and 2.5\c, respectively, per kWh which is
substantially below the contract energy prices earned for the year ended
December 31, 1997. 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.
PHILIPPINE PROJECTS
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 project is structured as a ten year
build-own-operate-transfer project ("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 PNOC-Energy Development Corporation
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
("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.
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
(after the KDG Acquisition) 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.
GAS PROJECTS
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
1997 total 2.2\c 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
6.6\c per kWh in 1997, escalate at approximately 4.4% annually for the
remaining term of the Saranac PPA. 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 1997 are
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
$3,032 per month and 2.96\c per kWh, respectively, escalate at 3.5% annually
for the remaining term of the Power Resources PPA. The Power Resources PPA
expires in September 2003.
The NorCon Project sells electricity to Niagara Mohawk Power Corporation
("Niagara") 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 Niagara's ongoing Tariff Avoided Cost and the
contractual Long-Run Avoided Cost. The NorCon PPA term extends through December
2017. The Company and Niagara are currently engaged in discussions regarding a
potential restructuring or buyout and termination of the NorCon PPA.
The Yuma Project sells electricity to 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.
NEVADA AND UTAH PROPERTIES
Roosevelt Hot Springs. The Company operates and owns an approximately 70%
interest in a geothermal steam field which supplies geothermal steam to a 23
net MW power plant owned by Utah Power & Light Company ("UP&L") located on the
Roosevelt Hot Springs property under a 30-year steam sales contract.
The Company obtained approximately $20,317 cash under a pre-sale agreement
with UP&L whereby UP&L paid in advance for the steam produced by the steam
field. The Company must make certain penalty payments to UP&L if the steam
produced does not meet certain quantity and quality requirements.
Desert Peak. The Company is the owner and operator of a geothermal plant
at Desert Peak, Nevada that is currently selling electricity to Sierra Pacific
Power Company ("Sierra") at Sierra's Avoided Cost. Subsequent to year end, an
indirect subsidiary of the Company entered into a lease agreement whereby they
will lease the facility to another power producer and receive rental payments.
SALTON SEA MINERALS EXTRACTION
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. A pilot plant has successfully produced commercial quality zinc at the
Company's Imperial Valley Project. The Company is also investigating producing
silica from the solids precipitated out of the geothermal power process.
TELEPHONE FLAT
Under a Bonneville Power Administration ("BPA") geothermal pilot program,
the Company has been developing a 30 net MW geothermal project which was
originally located in the Newberry Known Geothermal Resource Area in Deschutes
County, Oregon (the "Telephone Flat Project"). Pursuant to an amended power
sales contract the project has been relocated to Telephone Flat and BPA has
agreed to purchase 30 MW from the project with an option to purchase up to an
additional 100 MW. The movement of the project to this alternative location and
BPA's purchase obligation are subject to obtaining a final environmental impact
statement relating to the new site location. Completion of this project is
subject to a number of significant uncertainties and cannot be assured.
6. EQUITY INVESTMENTS
At December 31, 1997, the Company had an indirect ownership of
approximately 35% in the Casecnan Project, a combined irrigation and 150 net MW
hydroelectric power generation project located
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
on the island of Luzon in the Philippines. The Company is expected to
indirectly own approximately 70% of the Casecnan Project after the KDG
Acquisition.
The Company had an indirect ownership of 50% in the Mahanagdong Project,
subject to a minority partner participation. The Company will indirectly own
100% of the Mahanagdong Project after the KDG Acquisition.
The Company has an approximate 45% economic interest in Saranac Power
Partners, L.P. and a 20% economic interest in NorCon Power Partners, L.P. as
part of the Falcon Seaboard acquisition.
Summary financial information for these equity investments follows:
<TABLE>
<CAPTION>
CASECNAN SARANAC NORCON MAHANAGDONG
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
As of and for the year ended December 31, 1997:
Assets ........................................ $ 482,527 $ 315,671 $ 118,415 $ 294,250
Liabilities ................................... 384,369 211,299 115,487 197,575
Net income (loss) ............................. (11,267) 43,097 4,072 14,996
As of and for the year ended December 31, 1996:
Assets ........................................ 492,166 325,174 125,956 240,222
Liabilities ................................... 380,737 213,326 121,223 168,512
Net income (loss) ............................. (11,207) 40,005 (53) N/A
</TABLE>
7. PARENT COMPANY DEBT
Parent company debt comprises the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Senior discount notes ........................... $ 529,640 $ 527,535
9.5% senior notes ............................... 224,205 224,150
7.63% senior notes .............................. 350,000 --
Limited recourse senior secured notes* .......... 200,000 200,000
CalEnergy credit facility ....................... -- 100,000
Revolving credit facility ....................... -- 95,000
----------- -----------
$ 1,303,845 $ 1,146,685
=========== ===========
</TABLE>
- ----------
* The amount of recourse obligation to the parent was $0 at December 31,
1997.
SENIOR DISCOUNT NOTES
In March 1994, the Company issued $400,000 of 10 1/4% Senior Discount
Notes which accrete to an aggregate principal amount of $529,640 at maturity in
2004. The original issue discount was amortized from the issue date through
January 15, 1997, during which time no cash interest was paid on the Senior
Discount Notes. Cash interest on the Senior Discount Notes is payable
semiannually on January 15 and July 15 of each year, commencing July 15, 1997.
The Senior Discount Notes are redeemable at any time on or after January 15,
1999 initially at a redemption price of 105.125% declining to 100% on January
15, 2002 plus accrued interest to the date of redemption. The Senior Discount
Notes are unsecured senior obligations of the Company.
The Senior Discount Notes prohibit payment of cash dividends unless
certain financial ratios are met and unless the dividends do not exceed 50% of
the Company's accumulated adjusted consolidated net income as defined,
subsequent to April 1, 1994, plus the proceeds of any stock issuance.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
9.5% SENIOR NOTES
On September 20, 1996, the Company issued $225,000 of 9.5% Senior Notes
(the "9.5% Senior Notes") due 2006. Interest on the 9.5% Senior Notes is
payable semiannually on March 15 and September 15 of each year, commencing
March 15, 1997. The 9.5% Senior Notes are redeemable at any time on or after
September 15, 2001 initially at a redemption price of 104.75% declining to 100%
on September 15, 2004 plus accrued interest to the date of redemption. The 9.5%
Senior Notes are unsecured senior obligations of the Company.
7.63% SENIOR NOTES
On October 28, 1997, the Company issued $350,000 of 7.63% Senior Notes
(the "7.63% Senior Notes") due 2007. Interest on the 7.63% Senior Notes will be
payable semiannually on April 15 and October 15 of each year, commencing April
15, 1998. The 7.63% Senior Notes are unsecured senior obligations of the
Company.
LIMITED RECOURSE SENIOR SECURED NOTES
On July 21, 1995, the Company issued $200,000 of 9 7/8% Limited Recourse
Senior Secured Notes Due 2003 (the "Notes"). Interest on the Notes is payable
on June 30 and December 30 of each year, commencing December 1995. The Notes
are secured by an assignment and pledge of 100% of the outstanding capital
stock of Magma and are recourse only to such Magma capital stock, the Company's
interest in a secured Magma note and general assets of the Company equal to the
Restricted Payment Recourse Amount, as defined in the Note Indenture ("Note
Indenture"), which was $0 at December 31, 1997.
At any time or from time to time on or prior to June 30, 1998, the Company
may, at its option, use all or a portion of the net cash proceeds of a Company
equity offering (as defined in the Note Indenture) and shall at any time use
all of the net cash proceeds of any Magma equity offering (as defined in the
Note Indenture) to redeem up to an aggregate of 35% of the principal amount of
the Notes originally issued at a redemption price equal to 109.875% of the
principal amount thereof plus accrued interest to the redemption date. On or
after June 30, 2000, the Notes are redeemable at the option of the Company, in
whole or in part, initially at a redemption price of 104.9375% declining to
100% on June 30, 2002 and thereafter, plus accrued interest to the date of
redemption.
CALENERGY CREDIT FACILITY
On October 28, 1996, the Company obtained a $100,000 credit facility (the
"CalEnergy Credit Facility") of which the Company had drawn $100,000 as of
December 31, 1996. The Company has repaid the entire balance of the CalEnergy
Credit Facility.
REVOLVING CREDIT FACILITY
On July 8, 1996, the Company obtained a $100,000 three year revolving
credit facility. On November 26, 1997, the credit facility was amended and
increased to $400,000 and extended to November 2000. The facility is unsecured
and is available to fund working capital requirements and finance future
business expansion opportunities.
ANNUAL REPAYMENTS OF PARENT COMPANY DEBT
There are no annual repayments of the parent company debt due for the next
five years.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
8. SUBSIDIARY AND PROJECT DEBT:
Project loans held by subsidiaries and projects which are non recourse to
the Company comprise the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Salton Sea Notes and Bonds ............................. $ 448,754 $ 538,982
Northern eurobonds ..................................... 427,732 439,192
U.K. credit facility ................................... -- 128,423
CE Electric UK Funding Company Senior Notes ............ 357,331 --
CE Electric UK Funding Company Sterling Bonds .......... 322,534 --
Power Resources project debt ........................... 103,334 114,571
Coso Funding Corp. project loans ....................... 106,616 148,346
Construction loans ..................................... 416,744 300,951
Other .................................................. 5,962 7,927
----------- -----------
$ 2,189,007 $ 1,678,392
=========== ===========
</TABLE>
Each of the Company's direct or indirect subsidiaries is organized as a
legal entity separate and apart from the Company and its other subsidiaries.
Pursuant to separate project financing agreements, the assets of each
subsidiary are pledged or encumbered to support or otherwise provide the
security for their own project or subsidiary debt. It should not be assumed
that any asset of any such subsidiary will be available to satisfy the
obligations of the Company or any of its other such subsidiaries; provided,
however, that unrestricted cash or other assets which are available for
distribution may, subject to applicable law and the terms of financing
arrangements of such parties, be advanced, loaned, paid as dividends or
otherwise distributed or contributed to the Company or affiliates thereof.
"Subsidiaries" means all of CalEnergy's direct or indirect subsidiaries (1)
owning interests in the Coso, Imperial Valley, Saranac, NorCon, Power
Resources, Mahanagdong, Malitbog, Upper Mahiao, Casecnan, Dieng and Patuha
projects or (2) owning interests in the subsidiaries that own interests in the
foregoing projects.
SALTON SEA NOTES AND BONDS
The Salton Sea Funding Corporation, a wholly owned subsidiary of the
Company, (the "Funding Corporation") debt securities are as follows:
<TABLE>
<CAPTION>
FINAL
SENIOR SECURED SERIES DATE RATE 1997 1996
----------------------- -------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
July 21, 1995 A Notes May 30, 2000 6.69% $ 97,354 $ 161,732
July 21, 1995 B Bonds May 30, 2005 7.37% 133,000 133,000
July 21, 1995 C Bonds May 30, 2010 7.84% 109,250 109,250
June 20, 1996 D Notes May 30, 2000 7.02% 44,150 70,000
June 20, 1996 E Bonds May 30, 2011 8.30% 65,000 65,000
--------- ---------
$ 448,754 $ 538,982
========= =========
</TABLE>
Principal and interest payments are made in semi-annual installments. The
Salton Sea Notes and Bonds are secured by the Company's four existing Salton
Sea plants as well as an assignment of the right to receive various royalties
payable to Magma in connection with its Imperial Valley properties and
distributions from the Partnership Project. The Salton Sea Notes and Bonds are
nonrecourse to the Company.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
Pursuant to a depository agreement, Funding Corporation established a debt
service reserve fund in the form of a letter of credit in the amount of $70,430
from which scheduled interest and principal payments can be made.
NORTHERN EUROBONDS
The Northern debt includes a debenture due in 1999, which bears a fixed
interest rate of 12.661%. The debt also includes bearer bonds repayable in 2005
and 2020, bearing fixed interest rates of 8.625% and 8.875%, respectively.
The balance at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Debenture due 1999 ............. $ 97,530 $ 99,924
Bearer bonds due 2005 .......... 165,236 171,130
Bearer bonds due 2020 .......... 164,966 168,138
--------- ---------
$ 427,732 $ 439,192
========= =========
</TABLE>
U.K. CREDIT FACILITY
On October 28, 1996, CE Holdings, an indirect subsidiary of the Company,
obtained a pounds sterling 560,000 five year term loan and revolving credit
facility (the "U.K. Credit Facility"). The Company did not guarantee, nor was
it otherwise subject to recourse for, amounts borrowed under the U.K. Credit
Facility. The agreement placed restrictions on distributions from CE Electric
to any of its shareholders based on certain financial ratios. CE Electric has
repaid the entire U.K. Credit Facility through the use of proceeds from the
senior note and sterling bond offerings of CE Electric UK Funding Company
described below.
CE ELECTRIC UK FUNDING COMPANY SENIOR NOTES AND STERLING BONDS
On December 15, 1997, CE Electric UK Funding Company, an indirect
subsidiary of the Company (the "Funding Company"), issued $125,000 of 6.853%
senior notes due 2004, and $237,000 of 6.995% senior notes due 2007
(collectively, the "CE Electric UK Funding Company Senior Notes"), and
\P200,000 of 7.25% Sterling Bonds due 2022. The CE Electric UK Funding Company
Senior Notes and Sterling Bonds prohibit distributions to any of its
shareholders unless certain financial ratios are met by the Funding Company.
POWER RESOURCES PROJECT FINANCING DEBT
Power Resources, an indirect wholly-owned subsidiary, has project
financing debt consisting of a term loan payable to a consortium of banks with
interest and principal due quarterly through October 2003. The debt carries
fixed interest rates of 10.385% and 10.625%.
COSO FUNDING CORP. PROJECT LOANS
The Coso Funding Corp. project loans are from Coso Funding Corp., a
single-purpose corporation formed to issue notes for its own account and act as
an agent on behalf of the Coso Project. The Coso Funding Corp. project loans
carry a fixed interest rate with weighted average interest rates of 8.65% and
8.46% at December 31, 1997 and 1996, respectively. The loans have scheduled
repayments through December 2001. The Coso Project has established irrevocable
letters of credit of $67,850 as a debt service reserve fund.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
ANNUAL REPAYMENTS OF SUBSIDIARY AND PROJECT DEBT
The annual repayments of the subsidiary and project debt, excluding
construction loans, for the years beginning January 1, 1998 and thereafter are
as follows:
<TABLE>
<CAPTION>
CE ELECTRIC UK
SALTON SEA FUNDING COMPANY COSCO
NOTES AND NORTHERN SENIOR NOTES POWER FUNDING
BONDS EUROBONDS STERLING BONDS RESOURCES CORP. OTHER TOTAL
------------ ----------- ----------------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 ............... $ 106,938 $ -- $ -- $ 12,805 $ 38,912 $ 1,544 $ 160,199
1999 ............... 57,836 97,530 -- 14,268 31,717 1,297 202,648
2000 ............... 25,072 -- -- 16,087 4,080 1,051 46,290
2001 ............... 22,376 -- -- 18,119 31,907 838 73,240
2002 ............... 24,298 -- -- 20,312 -- 1,232 45,842
Thereafter ......... 212,234 330,202 679,865 21,743 -- -- 1,244,044
--------- --------- --------- --------- --------- ------- -----------
$ 448,754 $ 427,732 $ 679,865 $ 103,334 $ 106,616 $ 5,962 $ 1,772,263
========= ========= ========= ========= ========= ======= ===========
</TABLE>
CONSTRUCTION LOANS
The Company's allocable share of non-recourse project construction loans
comprise the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Upper Mahiao ........................ $ 150,628 $ 150,628
Malitbog ............................ 176,657 137,881
CE Indonesia Funding Corp. .......... 89,459 12,442
--------- ---------
$ 416,744 $ 300,951
========= =========
</TABLE>
The Upper Mahiao and Malitbog construction loans are scheduled to be
replaced by non-recourse term project financing upon completion of construction
and commencement of commercial operations.
UPPER MAHIAO CONSTRUCTION LOAN
Draws on the construction loan for the Upper Mahiao geothermal power
project at December 31, 1997 totaled $150,628. A consortium of international
banks provided the construction financing with variable interest rates based on
LIBOR or "Prime" with interest payments due every quarter and at LIBOR
maturity. The weighted average interest rate at December 31, 1997 and 1996 is
approximately 8.43% and 8.01%, respectively. The Export-Import Bank of the U.S.
("Ex-Im Bank") is providing political risk insurance to commercial banks on the
construction loan. The construction loan is expected to be converted to a term
loan promptly after NPC completes the full capacity transmission line, which is
currently expected in 1998. The largest portion of the term loan for the
project will also be provided by Ex-Im Bank. The term financing for the Ex-Im
Bank loan will be at a fixed interest rate of 5.95%.
MALITBOG CONSTRUCTION LOAN
Draws on the construction loan for the Malitbog geothermal power project
at December 31, 1997 totaled $176,657. International banks and the Overseas
Private Investment Corporation ("OPIC") have provided the construction and term
loan facilities at variable interest rates (weighted average of 8.48% and 8.15%
at December 31, 1997 and 1996, respectively). The international bank portion of
the debt will be insured by OPIC against political risks and the Company's
equity contribution to Visayas Geothermal
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
Power Company ("VGPC") is covered by political risk insurance from the
Multilateral Investment Guarantee Agency and OPIC. The construction loan is
expected to be converted to a term loan promptly after NPC completes the full
capacity transmission line, which is currently expected in 1998.
CE INDONESIA FUNDING CORP.
In June 1997, the Company's indirect special-purpose subsidiary, CE
Indonesia Funding Corp., entered into a $400,000 revolving credit facility
(which is nonrecourse to the Company) to finance the development and
construction of the Company's geothermal power facilities in Indonesia. This
credit facility was used in part to replace the original project financing for
Himpurna California Energy's Dieng Unit I. At December 31, 1997, the Company's
share of the credit facility relating to Dieng Unit I was $50,481 and carried a
variable interest rate (weighted average of 7.44% at December 31, 1997).
On November 18, 1997, Himpurna California Energy announced the funding of
the Dieng Unit II project pursuant to the CE Indonesia Funding Corp. facility
arranged in June 1997. At December 31, 1997, the Company's share of the credit
facility relating to Dieng Unit II was $11,211 and carried a variable interest
rate (weighted average of 7.48% at December 31, 1997).
On September 2, 1997, Patuha Power announced the funding of the Patuha
Unit I project pursuant to the CE Indonesia Funding Corp. facility arranged in
June 1997. At December 31, 1997, the Company's share of the credit facility
relating to Patuha was $27,767 and carried a variable interest rate (weighted
average of 7.44% at December 31, 1997).
9. INCOME TAXES
Provision for income taxes is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Currently payable:
State ............ $ 5,084 $ 7,520 $ 5,510
Federal .......... 33,114 19,873 11,138
Foreign .......... 5,262 2,176 --
------- ------- -------
43,460 29,569 16,648
------- ------- -------
Deferred:
State ............ (264) 1,619 921
Federal .......... 14,579 9,209 13,062
Foreign .......... 41,269 1,424 --
------- ------- -------
55,584 12,252 13,983
------- ------- -------
Total ............ $99,044 $41,821 $30,631
======= ======= =======
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
A reconciliation of the federal statutory tax rate to the effective tax
rate applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate .................................... 35.00% 35.00% 35.00%
Percentage depletion in excess of cost depletion .......... (3.77) (6.12) (7.38)
Investment and energy tax credits ......................... ( .64) (8.34) (1.80)
State taxes, net of federal tax effect .................... 1.59 4.38 4.09
Goodwill amortization ..................................... 2.06 2.51 2.53
Non-deductible expense .................................... 1.33 .84 1.10
Lease investment .......................................... -- -- (2.18)
Dividends on convertible preferred securities of
subsidiary trusts* ....................................... (4.12) (1.17) --
Tax effect of foreign income .............................. 2.64 2.54 --
Asset valuation impairment ................................ 15.47 -- --
Other ..................................................... .75 .15 .20
----- ----- -----
Effective tax rate ........................................ 50.31% 29.79% 31.56%
===== ===== =====
</TABLE>
- ----------
* Dividends on convertible preferred securities of subsidiary trusts are
included in minority interest.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Depreciation and amortization, net .......................... $ 802,215 $ 725,366
Pensions .................................................... 19,441 22,883
Unremitted foreign earnings ................................. 10,781 2,857
Other ....................................................... 3,324 3,262
---------- ----------
835,761 754,368
---------- ----------
Deferred contract costs ..................................... (193,996) (128,745)
Deferred income ............................................. (12,690) (9,298)
Energy and investment tax credits ........................... (42,049) (55,931)
Advance corporation tax ..................................... -- (20,205)
Alternative minimum tax credits ............................. (39,402) (50,819)
Accruals not currently deductible for tax purposes .......... (31,561) (13,372)
Other ....................................................... (7,004) (6,799)
---------- ----------
(326,702) (285,169)
---------- ----------
Net deferred taxes .......................................... $ 509,059 $ 469,199
========== ==========
</TABLE>
The Company has unused investment and geothermal energy tax credit
carryforwards of approximately $42,049 expiring between 2004 and 2012. The
Company also has approximately $39,402 of alternative minimum tax credit
carryforwards which have no expiration date.
10. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS
The Company has organized special purpose Delaware business trusts ("Trust
I", "Trust II" and "Trust III" or collectively, the "Trusts") pursuant to their
respective amended and restated declarations of trusts (collectively, the
"Declarations"). On April 12, 1996, February 26, 1997 and August 12, 1997, the
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
Company, through these Trusts, issued Company-obligated mandatorily redeemable
convertible preferred securities (collectively, the "Trust Securities") as
follows:
<TABLE>
<CAPTION>
ISSUER ISSUE DATE RATE AMOUNT CONVERSION RATE
-------- ------------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
CalEnergy Capital Trust I April 12, 1996 6.25% $103,930 1.6728
CalEnergy Capital Trust II February 26, 1997 6.25% $180,000 1.1655
CalEnergy Capital Trust III August 12, 1997 6.50% $270,000 1.047
</TABLE>
The Company owns all of the common securities of the Trusts. The Trust
Securities have a liquidation preference of fifty dollars each and represent
undivided beneficial ownership interests in each of the Trusts. The assets of
the Trusts consist solely of the Company's Convertible Subordinated Debentures
due March 10, 2016, February 25, 2012 and September 1, 2027, respectively, in
outstanding aggregate principal amounts of $103,930, $180,000 and $270,000,
respectively (collectively, the "Junior Debentures") issued pursuant to their
respective indentures. The indentures include agreements by the Company to pay
expenses and obligations incurred by the Trusts. Each Trust Security with a par
value of $50 is convertible at the option of the holder at any time into shares
of CalEnergy Common Stock based on the conversion rate and subject to customary
anti-dilution adjustments.
Until converted into the Company's Common Stock, the Trust Securities will
have no voting rights with respect to the Company and, except under certain
limited circumstances, will have no voting rights with respect to the Trusts.
Distributions on the Trust Securities (and Junior Debentures) are cumulative,
accrue from the date of initial issuance and are payable quarterly in arrears.
The Junior Debentures are subordinated in right of payment to all senior
indebtedness of the Company and the Junior Debentures are subject to certain
covenants, events of default and optional and mandatory redemption provisions,
all as described in the Junior Debenture indentures.
Pursuant to Preferred Securities Guarantee Agreements (collectively, the
"Guarantees"), between the Company and a preferred guarantee trustee, the
Company has agreed irrevocably to pay to the holders of the Trust Securities,
to the extent that the Trustee has funds available to make such payments,
quarterly distributions, redemption payments and liquidation payments on the
Trust Securities. Considered together, the undertakings contained in the
Declarations, Junior Debentures, Indentures and Guarantees constitute full and
unconditional guarantees by the Company of the Trusts' obligations under the
Trust Securities.
11. PREFERRED STOCK
On December 1, 1988, the Company distributed a dividend of one preferred
share purchase right ("right") for each outstanding share of common stock. The
rights are not exercisable until ten days after a person or group acquires or
has the right to acquire, beneficial ownership of 20% or more of the Company's
common stock or announces a tender or exchange offer for 30% or more of the
Company's common stock. Each right entitles the holder to purchase one
one-hundredth of a share of Series A junior preferred stock for $52. The rights
may be redeemed by the Board of Directors up to ten days after an event
triggering the distribution of certificates for the rights. The rights will
expire, unless previously redeemed or exercised, on November 30, 1998. The
rights are automatically attached to, and trade with, each share of common
stock.
12. STOCK OPTIONS AND RESTRICTED STOCK
The Company has issued various stock options. As of December 31, 1997, a
total of 6,949 shares are reserved for stock options, of which 6,780 shares
have been granted and remain outstanding at prices of $3.74 to $40.81 per
share.
The Company has stock option plans under which shares were reserved for
grant as incentive or non-qualified stock options, as determined by the Board
of Directors. The plans allow options to be
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
granted at 85% of their fair market value at the date of grant. Generally,
options are issued at 100% of fair market value at the date of grant. Options
granted under the 1996 Plan become exercisable over a period of two to five
years and expire if not exercised within ten years from the date of grant or,
in some instances, a lesser term. Prior to the 1996 Plan, the Company granted
256 options at fair market value at date of grant which had terms of ten years
and were exercisable at date of grant. In addition, the Company had issued
approximately 138 options to consultants on terms similar to those issued under
the 1996 Plan. The non-1996 plan options are primarily options granted to
Kiewit.
The Company granted 500 shares of restricted common stock with an
aggregate market value of $9,500 in exchange for the relinquishment of 500
stock options which were canceled by the Company. The shares have all rights of
a shareholder, subject to certain restrictions on transferability and risk of
forfeiture. Unearned compensation equivalent to the market value of the shares
at the date of issuance was charged to stockholders' equity. Such unearned
compensation was amortized over the vesting period of which 125 shares were
immediately vested and the remaining 375 shares vested through January 1, 1998.
Accordingly, $5,471, $1,535 and $2,494 of unearned compensation was charged to
general and administrative expense in 1997, 1996 and 1995, respectively.
TRANSACTIONS IN STOCK OPTIONS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
SHARES AVAILABLE
FOR GRANT UNDER OPTION PRICE WEIGHTED AVG
1996 OPTION PLAN SHARES PER SHARES OPTION PRICE TOTAL
------------------ ----------- ----------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 ......... 86 9,601 $3.00 - $19.00 $ 12.84 $ 123,277
-- ----- ----------------- -------- ---------
Options granted ................... (396) 396 $15.81 - $19.00 18.15 7,188
Options terminated ................ 571 (571) $14.88 - $19.00 18.69 (10,673)
Options exercised ................. -- (135) $3.00 - $15.94 3.41 (460)
---- ----- ----------------- -------- ---------
Balance December 31, 1995 ......... 261 9,291 $3.00 - $19.00 12.84 119,332
Options granted ................... (1,157) 1,157 $25.06 - $30.38 28.17 32,590
Options terminated ................ 468 (468) $3.00 - $19.00 17.96 (8,406)
Options exercised ................. -- (5,203) $3.00 - $21.68 11.13 (57,931)
Additional shares reserved
under 1996 Option Plan ........... 739 -- -- -- --
------ ------ ------- -------- ---------
Balance December 31, 1996 ......... 311 4,777 $3.00 - $30.38 17.92 85,585
------ ------ ----------------- -------- ---------
Options granted ................... (2,307) 2,513 $29.06 - $40.81 34.80 87,457
Options terminated ................ 165 (165) $3.00 - $29.06 20.04 (3,307)
Options exercised ................. -- (345) $3.74 - $29.06 13.28 (4,583)
Additional shares reserved
under 1996 Option Plan ........... 2,000 -- -- -- --
------ ------ --------------- -------- ---------
Balance December 31, 1997 ......... 169 6,780 $3.74 -$40.81 $ 24.36 $ 165,152
====== ====== =============== ======== =========
Options exercisable at:
December 31, 1995 ................ 8,229 $3.00 - $19.00 $ 12.26 $ 100,886
December 31, 1996 ................ 3,071 $3.00 - $30.38 $ 14.25 $ 43,770
December 31, 1997 ................ 3,665 $3.74 - $40.19 $ 18.12 $ 66,425
====== =============== ======== =========
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ---------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$3.74 $11.99 1,161 $ 11.22 3 years 1,161 $ 11.22
12.00 21.99 2,020 16.90 6 years 1,739 16.82
22.00 31.99 1,092 28.10 8 years 311 28.25
32.00 40.81 2,507 34.83 9 years 454 34.12
- ----------------- ----- --------- ------------------- ----- ---------
6,780 $ 24.36 7 years 3,665 $ 18.12
----- --------- ------------------- ----- ---------
</TABLE>
The Company applies the intrinsic value based method of accounting for its
stock-based employee compensation plans. If the fair value based method had
been applied for 1997, non-cash compensation expense and the effect on net
income available to common stockholders and earnings per share would have been
approximately $3,600, or $0.05 per share. If the fair value based method had
been applied for 1996 and 1995, non-cash compensation expense and the effect on
net income available to common stockholders and earnings per share would have
been immaterial. The fair value for stock options was estimated using the
Black-Scholes option pricing model with assumptions for the risk-free interest
rate of 5.50% in 1997 and 6.00% in 1996 and 1995, expected volatility of 25% in
1997 and 22% in 1996 and 1995, expected life of approximately 3.7 years in 1997
and 4.5 years in 1996 and 1995, and no expected dividends. The weighted average
fair value of options granted during 1997, 1996 and 1995 was $9.55, $8.62 and
$5.72 per option, respectively.
13. COMMON STOCK SALES & RELATED OPTIONS
On October 17, 1997, the Company completed the public offering of 17,100
shares of its common stock ("Common Stock") at $37 7/8 per share (the "Public
Offering"). In addition, 2,000 shares of Common Stock were purchased from
CalEnergy in a direct sale by a trust affiliated with Walter Scott, Jr., the
Chairman and Chief Executive Officer of PKS (the "Direct Sale"),
contemporaneously with the closing of the Public Offering. Proceeds from the
Public Offering and the Direct Sale were approximately $699,920.
Simultaneous with the acquisition of the remaining equity interest of
Magma on February 24, 1995, the Company completed a public offering (the
"Offering") of 18,170 shares of common stock, which amount included a direct
sale by the Company to Kiewit of 1,500 shares and the exercise of underwriter
over-allotment options for 1,500 shares, at a price of $17.00 per share. The
Company received proceeds of $300,388 from the Offering.
14. ASSET VALUATION IMPAIRMENT CHARGE
The non-recurring charge of $87,000 represents an asset valuation
impairment charge under Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets," relating to CalEnergy's assets in
Indonesia. Moreover, the Company intends to continue to take actions to attempt
to require the Government of Indonesia to honor its contractual obligations;
however, the ultimate outcome of the current uncertain situation in Indonesia
with respect to the possible abrogation by the Indonesian government of the
Dieng, Patuha and Bali contracts adds significant risk to the completion of
those projects. Consequently, the charge of $87,000 represents the amount by
which the carrying amount of such assets exceed the fair value of the assets
determined by discounting the expected future net cash flows of the Indonesia
projects, assuming proceeds from political risk insurance and no tax benefits.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
15. EXTRAORDINARY ITEM
On July 31, 1997, the Finance Act in the United Kingdom was passed by
Parliament and included the introduction of a one time so-called "windfall tax"
equal to 23% of the difference between the price paid for Northern upon
privatization and the Labour government's assessed "value" of Northern as
calculated by reference to a formula set forth in the July budget. This
amounted to $135,850, net of minority interest of $58,222, which was recorded
as an extraordinary item. The first installment was paid December 1, 1997 and
the second installment is payable on December 1, 1998.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Although management uses its best
judgment in estimating the fair value of these financial instruments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amounts which
the Company could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Debt instruments -- The fair value of all debt issues listed on exchanges
has been estimated based on the quoted market prices.
Other financial instruments -- All other financial instruments of a
material nature fall into the definition of short-term and fair value is
estimated as the carrying amount.
The carrying amounts in the table below are included under the indicated
captions in Notes 7, 8 and 10.
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Senior discount notes ......................................... $529,640 $569,148 $527,535 $556,971
9.5% Senior notes ............................................. 224,205 243,615 224,150 229,866
7.63% Senior notes ............................................ 350,000 352,857 -- --
Limited recourse senior secured notes ......................... 200,000 217,829 200,000 212,560
CalEnergy credit facility ..................................... -- -- 100,000 100,000
Revolving line of credit ...................................... -- -- 95,000 95,000
Salton Sea notes and bonds .................................... 448,754 463,720 538,982 531,807
Northern eurobonds ............................................ 427,732 482,064 439,192 445,830
Construction loans ............................................ 416,744 416,744 300,951 300,951
Coso Funding Corp. project loans .............................. 106,616 112,932 148,346 153,650
CE Electric UK Funding Company Senior Notes ................... 357,331 357,331 -- --
CE Electric UK Funding Company Sterling Bonds ................. 322,534 333,257 -- --
Power Resources project debt .................................. 103,334 103,334 114,571 114,571
U.K. credit facility .......................................... -- -- 128,423 128,423
Other ......................................................... 5,962 5,962 7,927 7,927
Convertible preferred securities of subsidiary trusts ......... 553,930 514,373 103,930 128,354
-------- -------- -------- --------
</TABLE>
17. INTEREST RATE SWAP AGREEMENTS
On December 15, 1997, CE Electric UK Funding Company entered into certain
interest rate swap agreements for the CE Electric UK Funding Company Senior
Notes with two large multi-national
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
financial institutions. The swap agreements effectively convert the U.S. dollar
fixed interest rate to a fixed rate in Sterling. For the $125,000 of 6.853%
senior notes, the agreements extend until December 30, 2004 and convert the
U.S. dollar interest rate to a fixed Sterling rate of 7.744%. For the $237,000
of 6.995% senior notes, the agreements extend until December 30, 2007 and
convert the U.S. dollar interest rate to a fixed Sterling rate of 7.737%. The
estimated fair value of these swap agreements is approximately $4,929 based on
quotes from the counter party to these instruments and represents the estimated
amount that the Company would expect to pay to terminate these agreements. It
is the Company's intention to hold the swap agreements to their intended
maturity.
18. REGULATORY MATTERS
Northern is subject to price cap regulation. Price control formulas for
the supply and distribution businesses are enforced by the Office of
Electricity Regulation ("OFFER").
In the distribution business the current price control is expected to last
until 2000. The formula was reviewed with effect from April 1, 1995 and April
1, 1996 which resulted in one-time reductions in allowed income per unit
distributed of about 17% and 13% respectively, with continuing real reductions
in each of the subsequent three years 1997/98 to 1999/2000. The current formula
requires that each year regulated distribution income per unit is increased or
decreased by RPI-Xd where RPI reflects the average of the twelve month
inflation rates recorded for the previous July to December period and Xd is set
at 3%. The formula also takes account of the changes in system electrical
losses, the number of customers connected and the voltage at which customers
receive the units of electricity distributed.
In the supply business the current formula applies only to customers with
demands below 100kW. Under the current formula the purchase cost of electricity
and the cost of transmission, distribution and the fossil fuel levy are passed
through to customers in full. That part of the formula governing Northern's own
supply business costs requires that this element of the permitted income falls
by 2% per annum in real terms. The current formula is due to be replaced from
April 1, 1998 with a new formula which will require Northern to reduce prices
to those customers protected by the new price control from the level prevailing
at August 1, 1997 by about 4.2% (minus inflation) with effect from April 1,
1998 and a further 3% (minus inflation) with effect from April 1, 1999.
The market for electricity supplied to customers with demands over 1MW was
opened to competition in 1990. In 1994 this limit was reduced to 0.1MW. In
1998, liberalization of the entire market is due to commence in stages with
complete liberalization achieved by June 1999.
19. PENSION COMMITMENTS
Northern participates in the Electricity Supply Pension Scheme, which
provides pension and other related defined benefits, based on final pensionable
pay, to substantially all employees throughout the Electricity Supply Industry
in the United Kingdom.
The actuarial computation for December 31, 1997 and 1996 assumed interest
rates of 6.75% and 7.75%, respectively, an expected return on plan assets of
7.25% and 8.25%, respectively, and annual compensation increases of 4.75% and
5.75%, respectively, over the remaining service lives of employees covered
under the plan. Amounts funded to the pension are primarily invested in equity
and fixed income securities. Northern's funding policy for the plan is to
contribute annually at a rate that is intended to remain a level percentage of
compensation for the covered employees.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
The following table details the funded status and the amount recognized in
the balance sheet of the Company as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits ......................................... $ 847,694 $797,932
Nonvested benefits ...................................... -- --
--------- --------
Accumulated benefit obligation ........................... 847,694 797,932
Effect of future increase in compensation ................ 40,898 58,218
--------- --------
Projected benefit obligation ............................. 888,592 856,150
Fair value of plan assets ................................ 1,012,601 919,163
--------- --------
Assets in excess of projected benefit obligation ......... 124,009 63,013
Unrecognized net gain .................................... 61,265 --
--------- --------
Prepaid pension asset .................................... $ 62,744 $ 63,013
========= ========
</TABLE>
Net periodic pension cost for 1997 included the following components (the
components for the period from the acquisition date of Northern to December 31,
1996 are not meaningful):
<TABLE>
<S> <C>
Service cost -- benefits earned during the period ......... $ 12,600
Interest cost on projected benefit obligation ............. 62,300
Actual return on plan assets .............................. (71,300)
---------
Net periodic pension cost ................................. $ 3,600
=========
</TABLE>
20. COMMITMENTS AND CONTINGENCIES
CASECNAN
In November 1995, 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 Water and Energy Company, Inc., a Philippine Corporation ("CE
Casecnan") which is expected to be approximately 70% indirectly owned by the
Company (after the KDG Acquisition), is developing the Casecnan Project. 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.
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
Impressa Pizzarottie & C. Spa working together with Siemens A.G., Sulzer Hydro
Ltd., Black & Veatch and Colenco Power Engineering Ltd. (collectively, the
"Replacement Contractor").
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
In connection with the Hanbo Contract termination, CE Casecnan tendered a
certificate of drawing 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 presently 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. That Court
granted CE Casecnan's request for a temporary restraining order requiring KFB
to deposit $79,329, the amount of the requested draw, in an interest bearing
account with an independent financial institution in the United States. KFB
appealed this order, but the appellate court denied KFB's appeal and on May 19,
1997, KFB transferred funds in the amount of $79,329 to a segregated New York
bank account pursuant to the Court order. If KFB were to fail to honor its
obligations under the Casecnan letter of credit, such action could have a
material adverse effect on the Casecnan Project and CE Casecnan.
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,
which has been appealed by the bank, requires KFB to honor the $79,329 drawing
by CE Casecnan on the $117,850 irrevocable standby letter of credit.
On September 29, 1997, CE Casecnan tendered a second certificate of
drawing for $10,828 to KFB and on December 30, 1997, CE Casecnan tendered a
third certificate of drawing for $2,920 to KFB. KFB also wrongfully dishonored
these draws, but pursuant to a stipulation agreed to deposit the draw amounts
in an interest bearing account with the same independent financial institution
in the United States pending resolution of the appeal regarding the first draw
and agreed to expedite the appeal.
The receipt of the letter of credit funds from KFB remains essential and
CE Casecnan will continue to press KFB to honor its clear obligations under the
letter of credit and to pursue Hanbo and KFB for any additional damages arising
out of their actions to date. If KFB were to fail to honor its obligations
under the Casecnan letter of credit, such action could have a material adverse
effect on the Casecnan Project and CE Casecnan.
On September 2, 1997, Hanbo and HECC filed a Request for Arbitration
before the International Chamber of Commerce ("ICC"). The Request for
Arbitration asserts various claims by Hanbo and HECC against CE Casecnan
relating to the terminated Hanbo Contract and seeking 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. The arbitration proceedings before the ICC are ongoing and CE
Casecnan intends to pursue vigorously its claims against Hanbo, HECC and KFB in
the proceedings described above.
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
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
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. As a result, the Company recorded a SFAS 121 asset valuation
impairment charge of $87,000 in the fourth quarter of 1997. This charge
includes all reasonably estimated asset valuation impairments associated with
the Company's assets in Indonesia and gives effect to the political risk
insurance on such investments.
EDISON
On June 9, 1997, Edison filed a complaint alleging breach of the power
purchase agreements ("SO4 Agreements") between Edison and the Coso Joint
Ventures as a result of alleged improper venting of certain noncondensible
gases at the Coso geothermal energy project. 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 Joint Ventures 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 Joint Ventures 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 Joint Ventures amended their
cross-complaint. The litigation is in its early procedural stages and the
pleadings have not been settled. The Coso Joint Ventures believe that their
claims and defenses are meritorious and that they will prevail if the matter is
ultimately heard on its merits. The Coso Joint Ventures 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 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.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
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.
LEASES
Certain retail facilities, buildings and equipment are leased. The leases
expire in periods ranging from one to 75 years and some provide for renewal
options.
At December 31, 1997, the Company's future minimum rental payments with
respect to non-cancelable operating leases were as follows:
<TABLE>
<S> <C>
1998 ............... $ 5,321
1999 ............... 4,970
2000 ............... 4,914
2001 ............... 4,742
2002 ............... 4,643
Thereafter ......... 53,905
--------
$ 78,495
========
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
21. GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment: the generation,
distribution and supply of electricity to customers located throughout the
world. Europe consists primarily of Northern. The Company's operations by
geographic area are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Americas ................ $ 570,587 $ 486,189 $ 386,833
Asia .................... 102,960 33,282 --
Europe .................. 1,566,442 39,191 --
Corporate/Other ......... 30,922 17,533 11,890
---------- --------- ---------
$2,270,911 $ 576,195 $ 398,723
========== ========= =========
OPERATING INCOME*
Americas ................ $ 301,589 $ 259,665 $ 209,872
Asia .................... 61,131 16,766 --
Europe .................. 191,299 6,163 --
Corporate/Other ......... (12,882) (10,931) (10,376)
---------- --------- ---------
$ 541,137 $ 271,663 $ 199,496
========== ========= =========
</TABLE>
- ----------
* Operating income excludes the loss on equity investment in Casecnan, net
interest expense and the non-recurring charge.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
IDENTIFIABLE ASSETS
Americas ................ $ 2,268,629 $2,364,448
Asia .................... 835,616 649,053
Europe .................. 2,937,686 2,384,789
Corporate/Other ......... 1,445,695 231,866
----------- ----------
$ 7,487,626 $5,630,156
=========== ==========
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (CONTINUED)
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations
for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED*
------------------------------------------------------------------
1997:(1) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Operating revenue ............................... $542,589 $505,922 $527,896 $589,931
Total revenue ................................... 565,976 524,994 551,893 628,048
Total costs and expenses ........................ 506,104 460,184 467,900 639,863
-------- -------- -------- --------
Income (loss) before income taxes ............... 59,872 64,810 83,993 (11,815)
Provision for income taxes ...................... 22,249 24,342 27,929 24,524
-------- -------- -------- --------
Income (loss) before minority interest .......... 37,623 40,468 56,064 (36,339)
Minority interest ............................... 10,175 9,579 9,656 16,583
-------- -------- -------- --------
Income (loss) before extraordinary item ......... 27,448 30,889 46,408 (52,922)
Extraordinary item .............................. -- -- (135,850) --
-------- -------- --------- --------
Net income (loss) attributable to common
stockholders ................................... 27,448 30,889 (89,442) (52,922)
-------- -------- --------- --------
Income (loss) per share before
extraordinary item ............................. $ .43 $ .49 $ .73 $ (.67)
Extraordinary item .............................. -- -- (2.14) --
-------- -------- --------- --------
Net income (loss) per share ..................... $ .43 $ .49 $ (1.41) $ (.67)
-------- -------- --------- --------
Income (loss) per share before
extraordinary item -- diluted .................. $ .42 $ .46 $ .67 $ (.67)
Extraordinary item -- diluted ................... -- -- (1.80) --
-------- -------- --------- --------
Net income (loss) per share -- diluted .......... $ .42 $ .46 $ (1.13) $ (.67)
======== ======== ========= ========
THREE MONTHS ENDED*
-----------------------------------------------------------------
1996:(1) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------- ------------- ------------- ---------------- ---------------
Operating revenue ............................... $ 75,944 $104,735 $165,487 $172,768
Total revenue ................................... 90,356 115,794 179,048 190,997
Total costs and expenses ........................ 69,398 86,039 121,545 158,809
--------- --------- -------- --------
Income before income taxes ...................... 20,958 29,755 57,503 32,188
Provision for income taxes ...................... 6,497 9,040 18,325 7,959
--------- --------- -------- --------
Income before minority interest ................. 14,461 20,715 39,178 24,229
Minority interest ............................... -- 1,443 1,624 3,055
--------- --------- -------- --------
Net income attributable to common
stockholders ................................... $ 14,461 $ 19,272 $ 37,554 $ 21,174
--------- --------- -------- --------
Net income per share ............................ $ .28 $ .37 $ .71 $ .34
--------- --------- -------- --------
Net income per share -- diluted ................. $ .27 $ .34 $ .61 $ .33
========= ========= ======== ========
</TABLE>
- ----------
* The Company's operations are seasonal in nature.
(1) Reflects acquisitions of Northern, Falcon Seaboard and the Partnership
Interest.
F-35
<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 June 30, 1998, and the related
consolidated statements of operations for the three and six month periods ended
June 30, 1998 and 1997 and the related consolidated statements of cash flows
for the six month periods ended June 30, 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
July 23, 1998
F-36
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................................... $ 265,543 $ 1,445,338
Joint venture cash and investments ................................. 6,903 6,072
Restricted cash and investments .................................... 407,289 223,636
Accounts receivable ................................................ 479,704 376,745
Properties, plants, contracts and equipment, net ................... 4,358,649 3,528,910
Excess of cost over fair value of net assets acquired, net ......... 1,449,972 1,312,788
Equity investments ................................................. 128,110 238,025
Deferred charges and other assets .................................. 385,711 356,112
----------- -----------
Total assets .................................................... $ 7,481,881 $ 7,487,626
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ................................................... $ 192,172 $ 173,610
Other accrued liabilities .......................................... 1,134,383 1,106,641
Parent company debt ................................................ 1,303,875 1,303,845
Subsidiary and project debt ........................................ 2,850,240 2,189,007
Deferred income taxes .............................................. 550,644 509,059
----------- -----------
Total liabilities ............................................... 6,031,314 5,282,162
----------- -----------
Deferred income .................................................... 50,979 40,837
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary trusts ............. 553,930 553,930
Preferred securities of subsidiary ................................. 66,054 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
60,033 and 81,322 at June 30, 1998 and
December 31, 1997, respectively ................................... 5,602 5,602
Additional paid in capital ......................................... 1,236,851 1,261,081
Retained earnings .................................................. 273,254 213,493
Common stock and options subject to redemption (Note 3) ............ -- (654,736)
Treasury stock -- 22,947 and 1,658 common
shares at June 30, 1998 and December 31,
1997, respectively, at cost ....................................... (740,843) (56,525)
Accumulated other comprehensive income ............................. 4,740 (3,589)
----------- -----------
Total stockholders' equity ...................................... 779,604 765,326
----------- -----------
Total liabilities and stockholders' equity ...................... $ 7,481,881 $ 7,487,626
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Operating revenue ............................ $ 590,589 $ 505,922 $ 1,212,440 $1,048,511
Interest and other income .................... 29,929 19,072 52,389 42,459
--------- --------- ----------- ----------
Total revenues ............................ 620,518 524,994 1,264,829 1,090,970
--------- --------- ----------- ----------
Costs and expenses:
Cost of sales ................................ 269,768 241,548 582,413 512,495
Operating expense ............................ 111,131 76,880 213,778 166,926
General and administration ................... 10,814 12,005 22,858 25,492
Depreciation and amortization ................ 85,659 70,456 165,584 137,912
Loss on equity investment in Casecnan ........ -- 1,289 -- 3,957
Interest expense ............................. 93,648 71,644 188,206 142,266
Less interest capitalized .................... (15,059) (13,638) (28,477) (22,760)
--------- --------- ----------- ----------
Total costs and expenses .................. 555,961 460,184 1,144,362 966,288
--------- --------- ----------- ----------
Income before provision for income taxes ..... 64,557 64,810 120,467 124,682
Provision for income taxes ................... 21,952 24,342 40,483 46,591
--------- --------- ----------- ----------
Income before minority interest .............. 42,605 40,468 79,984 78,091
Minority interest ............................ 10,139 9,579 20,223 19,754
--------- --------- ----------- ----------
Net income available to common
stockholders ................................ $ 32,466 $ 30,889 $ 59,761 $ 58,337
========= ========= =========== ==========
Net income per share -- basic ................ $ .54 $ .49 $ .99 $ .92
========= ========= =========== ==========
Basic common shares outstanding .............. 60,235 63,531 60,658 63,521
========= ========= =========== ==========
Net income per share -- diluted .............. $ .51 $ .46 $ .95 $ .88
========= ========= =========== ==========
Diluted shares outstanding ................... 74,346 72,759 74,641 71,357
========= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------------
1998 1997
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 59,761 $ 58,337
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization ....................................... 143,598 124,437
Amortization of excess of cost over fair value of net assets acquired 21,986 13,475
Amortization of deferred financing and other costs .................. 8,458 21,047
Provision for deferred income taxes ................................. 21,316 23,418
Income on equity investments ........................................ (4,023) (4,676)
Income applicable to minority interest .............................. 2,242 12,600
Changes in other items:
Accounts receivable ............................................... (86,712) (2,219)
Accounts payable and accrued liabilities .......................... (12,319) (83,447)
Deferred income ................................................... 10,142 (5,998)
------------ ----------
Net cash flows from operating activities ............................ 164,449 156,974
Cash flows from investing activities:
Purchase of Kiewit Interests and Northern Electric, net of cash
acquired ............................................................ (502,916) (629,094)
Distributions from equity investments ................................ 7,120 13,219
Acquisition of gas assets ............................................ (35,677) --
Philippine construction .............................................. (61,002) (32,946)
Indonesian construction .............................................. (71,800) (40,652)
Exploration and other development costs .............................. (15,046) (7,426)
Capital expenditures relating to operations .......................... (120,615) (101,166)
Decrease (increase) in short-term investments ........................ 1,256 (1,983)
Decrease in restricted cash and investments .......................... 160,850 22,503
Decrease (increase) in other assets .................................. (26,596) 71,301
------------ ----------
Net cash flows from investing activities ............................ (664,426) (706,244)
Cash flows from financing activities:
Proceeds from subsidiary and project debt ............................ 107,234 598,280
Repayments of subsidiary and project debt ............................ (103,402) (71,602)
Proceeds from exercise of options .................................... 2,357 4,983
Decrease in amounts due from joint ventures .......................... 16,861 10,732
Deferred charges relating to debt financing .......................... (20,094) (11,813)
Purchase of treasury stock ........................................... (689,592) (1,875)
Purchase of stock options from Kiewit ................................ (21,313) --
Other ................................................................ 20,633 --
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 ............................ (687,316) 513,705
Effect of exchange rate changes, net ................................. 8,329 (26,705)
Net decrease in cash and cash equivalents ............................ (1,178,964) (62,270)
------------ ----------
Cash and cash equivalents at beginning of period ..................... 1,451,410 472,583
------------ ----------
Cash and cash equivalents at end of period ........................... $ 272,446 $ 410,313
============ ==========
Supplemental disclosures:
Interest paid, net of amount capitalized ............................. $ 139,395 $ 123,802
============ ==========
Income taxes paid .................................................... $ 29,417 $ 22,629
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
1. GENERAL:
In the opinion of 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 June 30, 1998 and the results of operations
for the three and six months ended June 30, 1998 and 1997, and cash flows for
the six months ended June 30, 1998 and 1997. The results of operations for the
three and six months ended June 30, 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.
2. SUBSEQUENT EVENT:
On August 12, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger with MidAmerican Energy Holdings Company
("MidAmerican"), pursuant to which the Company agreed (i) to pay $27.15 in cash
for each outstanding share of MidAmerican common stock (valuing MidAmerican at
approximately $4 billion, including $1.4 billion of debt and preferred stock
which will remain outstanding at MidAmerican) in a merger, pursuant to which
MidAmerican will become a wholly owned subsidiary of the Company, and (ii) to
reincorporate in the state of Iowa and be renamed MidAmerican Energy Holdings
Company. Closing of the transaction is subject to the approval of the
shareholders of both companies and the obtaining of certain regulatory
approvals.
F-40
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT:
Properties, plants, contracts and equipment comprise the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Operating assets:
Distribution system .......................................... $1,292,035 $1,237,743
Power plants ................................................. 1,865,892 1,464,885
Wells and resource development ............................... 451,494 395,314
Power sales agreements ....................................... 268,212 227,535
Other assets ................................................. 278,357 254,973
---------- ----------
Total operating assets ....................................... 4,155,990 3,580,450
Less accumulated depreciation and amortization ............... (642,298) (497,832)
---------- ----------
Net operating assets ......................................... 3,513,692 3,082,618
Mineral and gas reserves and exploration assets, net ......... 361,492 297,048
Construction in progress:
Casecnan ................................................... 224,213 --
Dieng ...................................................... 96,994 94,666
Patuha ..................................................... 149,954 49,612
Bali and other development ................................. 12,304 4,966
---------- ----------
Total ........................................................ $4,358,649 $3,528,910
========== ==========
</TABLE>
4. 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.
F-41
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
5. CONVERSION OF PHILIPPINE TERM LOANS:
On April 8, 1998, the Company converted the construction project financing
for its Malitbog geothermal power project to term loans of $170,726. The
Overseas Private Investment Corporation ("OPIC") is providing term loan
financing of $60,904 that was fixed as of June 15, 1998 at an interest rate of
9.176%, maturing in 2005. A syndicate of international commercial banks is
providing the remaining $109,822 of term loan financing at a variable interest
rate based on LIBOR, maturing in 2005.
On May 5, 1998, the Company converted the construction project financing
for its Upper Mahiao geothermal power project to term loans of $155,517.
Export-Import Bank of the United States ("Ex-Im Bank") is providing term loan
financing of $145,517 at a fixed interest rate of 5.95%, maturing in 2006.
United Coconut Planters Bank of the Philippines is providing the remaining
$10,000 of term loan financing at a variable interest rate based on LIBOR,
maturing in 2003.
On June 18, 1998, the Company converted the construction project financing
for its Mahanagdong geothermal power project to term loans of $220,378. Ex-Im
Bank is providing term loan financing of $180,378 at a fixed interest rate of
6.92%, maturing in 2007. OPIC is providing the remaining $40,000 of term loan
financing at a variable interest rate based on LIBOR, maturing in 2007.
6. COMMITMENTS AND CONTINGENCIES:
CASECNAN
On April 17, 1998, CE Casecnan Water and Energy Company, Inc., a
Philippine Corporation ("CE Casecnan") which is currently approximately 70%
indirectly owned by the Company, announced that it and Hanbo Corporation, Hanbo
Engineering and Construction Co., Ltd., Hanbo Steel Company, Ltd. and Korea
First Bank ("KFB") had reached a settlement with regard to certain disputed
terminated contracts and standby letter of credit issues. Under the settlement,
KFB agreed to pay CE Casecnan $90,000 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. In
accordance with the terms of such settlement, CE Casecnan received $10,000 from
KFB on April 17, 1998 and the remaining $80,000, including interest, on July 3,
1998.
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 were not yet
under construction) until economic conditions recover; 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 were approved to continue
according to their initial schedule; Patuha Unit 1 and Bali Units 1 and 2 were
to receive further review to determine whether or not they would be continued
in accordance with their initial schedule; and Bali Units 3 and 4, Patuha Units
2, 3 and 4 and Dieng Unit 4 were 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.
F-42
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company believes it has fully reserved for the Indonesian exposure as
part of the $87,000 1997 fourth quarter asset valuation impairment charge.
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. In addition, the Court has struck
Edison's request to terminate the SO4 Agreements and obtain a refund of all
funds paid to the Coso Partnerships. 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 (a partnership in which CalEnergy holds an approximate 45%
economic interest) 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 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.
F-43
<PAGE>
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER KWH AMOUNTS)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
7. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which established standards for reporting and display of
comprehensive income and its components. Comprehensive income for the three
months ended June 30, 1998 and 1997 was $29,948 and $36,209, respectively.
Comprehensive income for the six months ended June 30, 1998 and 1997 was
$68,090 and $31,632, respectively. Comprehensive income differs from net income
due to foreign currency translation adjustments.
8. ACCOUNTING PRONOUNCEMENTS:
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is effective
for financial statements for fiscal years beginning after December 15, 1998.
The Company has not yet determined the impact of this accounting pronouncement.
In April 1998, the AcSEC issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that costs of start-up activities and
organization costs be expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company has
not yet determined the impact of this accounting pronouncement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not yet determined the impact of this
accounting pronouncement.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of MidAmerican Energy Holdings Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of MidAmerican Energy Holdings Company and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MidAmerican
Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
January 23, 1998
F-45
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING REVENUES
Electric utility .............................................. $1,126,300 $1,099,008 $1,094,647
Gas utility ................................................... 536,306 536,753 459,588
Nonregulated .................................................. 259,675 236,851 95,106
---------- ---------- ----------
1,922,281 1,872,612 1,649,341
---------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ............................ 235,760 234,317 230,261
Cost of gas sold ............................................. 346,016 345,014 279,025
Other operating expenses ..................................... 429,794 350,174 399,648
Maintenance .................................................. 98,090 88,621 85,363
Depreciation and amortization ................................ 170,540 164,592 158,950
Property and other taxes ..................................... 101,317 92,630 96,350
---------- ---------- ----------
1,381,517 1,275,348 1,249,597
---------- ---------- ----------
Nonregulated:
Cost of sales ................................................ 240,182 218,256 70,209
Other ........................................................ 30,076 35,370 37,181
---------- ---------- ----------
270,258 253,626 107,390
---------- ---------- ----------
Total operating expenses ..................................... 1,651,775 1,528,974 1,356,987
---------- ---------- ----------
OPERATING INCOME .............................................. 270,506 343,638 292,354
---------- ---------- ----------
NON-OPERATING INCOME
Interest income ............................................... 5,318 4,012 4,485
Dividend income ............................................... 13,792 16,985 16,954
Realized gains and losses on securities, net .................. 7,798 1,895 688
Other, net .................................................... 22,111 (4,020) (10,467)
---------- ---------- ----------
49,019 18,872 11,660
---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt .................................... 89,898 102,909 105,550
Other interest expense ........................................ 10,034 10,941 9,449
Preferred dividends of subsidiaries ........................... 14,468 10,689 8,059
Allowance for borrowed funds .................................. (2,597) (4,212) (5,552)
---------- ---------- ----------
111,803 120,327 117,506
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......... 207,722 242,183 186,508
INCOME TAXES .................................................. 68,390 98,422 66,803
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ............................. 139,332 143,761 119,705
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (Loss) from operations (net of income taxes) ........... (118) 2,117 3,059
Loss on disposal (net of income taxes) ........................ (4,110) (14,832) --
---------- ---------- ----------
(4,228) (12,715) 3,059
---------- ---------- ----------
NET INCOME .................................................... $ 135,104 $ 131,046 $ 122,764
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING ............................. 98,058 100,752 100,401
EARNINGS PER COMMON SHARE
Continuing operations ......................................... $ 1.42 $ 1.43 $ 1.19
Discontinued operations ....................................... ( 0.04) ( 0.13) 0.03
---------- ---------- ----------
Earnings per average common share ............................. $ 1.38 $ 1.30 $ 1.22
========== ========== ==========
DIVIDENDS DECLARED PER SHARE .................................. $ 1.20 $ 1.20 $ 1.18
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric ............................................................. $4,084,920 $ 4,010,847
Gas .................................................................. 756,874 723,491
---------- -----------
4,841,794 4,734,338
Less accumulated depreciation and amortization ....................... 2,275,099 2,153,058
---------- -----------
2,566,695 2,581,280
Construction work in progress ........................................ 55,418 49,305
---------- -----------
2,622,113 2,630,585
---------- -----------
POWER PURCHASE CONTRACT .............................................. 173,107 190,897
---------- -----------
INVESTMENT IN DISCONTINUED OPERATIONS ................................ -- 166,320
---------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................................ 10,468 97,749
Receivables, less reserves of $347 and $2,093, respectively........... 207,471 312,015
Inventories .......................................................... 86,091 90,864
Other ................................................................ 18,452 11,031
---------- -----------
322,482 511,659
---------- -----------
INVESTMENTS .......................................................... 799,524 622,972
---------- -----------
OTHER ASSETS ......................................................... 360,865 399,415
---------- -----------
TOTAL ASSETS ......................................................... $4,278,091 $ 4,521,848
========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity .......................................... $1,301,286 $ 1,239,946
MidAmerican preferred securities, not subject to
mandatory redemption ................................................ 31,763 31,769
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities .................................... 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures ......... 100,000 100,000
Long-term debt (excluding current portion) ........................... 1,034,211 1,395,103
---------- -----------
2,517,260 2,816,818
---------- -----------
CURRENT LIABILITIES
Notes payable ........................................................ 138,054 161,990
Current portion of long-term debt .................................... 144,558 79,598
Current portion of power purchase contract ........................... 14,361 13,718
Accounts payable ..................................................... 145,855 169,806
Taxes accrued ........................................................ 92,629 82,254
Interest accrued ..................................................... 22,355 28,513
Other ................................................................ 38,766 22,830
---------- -----------
596,578 558,709
---------- -----------
OTHER LIABILITIES
Power purchase contract .............................................. 83,143 97,504
Deferred income taxes ................................................ 761,795 722,300
Investment tax credit ................................................ 83,127 88,842
Other ................................................................ 236,188 237,675
---------- -----------
1,164,253 1,146,321
---------- -----------
TOTAL CAPITALIZATION AND LIABILITIES ................................. $4,278,091 $ 4,521,848
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 135,104 $ 131,046 $ 122,764
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .................................. 197,454 190,511 181,636
Net decrease in deferred income taxes and
investment tax credit, net ................................... (71,191) (7,894) (961)
Amortization of other assets ................................... 33,761 20,541 19,630
Cash proceeds from accounts receivable sale .................... 70,000 -- --
Capitalized cost of real estate sold ........................... 1,859 3,568 1,744
Loss (income) from discontinued operations ..................... 4,228 12,715 (3,059)
Gain on sale of securities, assets and other investments ....... (9,996) (10,132) (1,050)
Other-than-temporary decline in value of investments ........... 3,795 15,566 17,971
Impact of changes in working capital, net of effects
from discontinued operations ................................. 28,098 (53,752) (21,024)
Other .......................................................... (867) 19,218 19,369
---------- ---------- ----------
Net cash provided ............................................ 392,245 321,387 337,020
---------- ---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................... (166,932) (154,198) (190,771)
Quad Cities Nuclear Power Station decommissioning trust fund..... (9,819) (8,607) (8,636)
Deferred energy efficiency expenditures ......................... (12,258) (20,390) (35,841)
Nonregulated capital expenditures ............................... (14,066) (55,788) (12,881)
Purchase of securities .......................................... (159,770) (198,947) (164,521)
Proceeds from sale of securities ................................ 180,890 243,290 94,493
Proceeds from sale of assets and other investments .............. 57,433 33,285 34,263
Investment in discontinued operations ........................... 181,321 (5,984) (9,752)
Other investing activities, net ................................. (1,360) 8,308 6,946
---------- ---------- ----------
Net cash provided (used) ....................................... 55,439 (159,031) (286,700)
---------- ---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ........................................... (117,605) (120,770) (118,828)
Issuance of long-term debt, net of issuance cost ................ -- 99,500 12,750
Retirement of long-term debt, including reacquisition cost ...... (122,300) (136,616) (110,351)
Reacquisition of preferred shares ............................... (6) (58,176) (10)
Reacquisition of common shares .................................. (96,618) -- --
Issuance of preferred shares, net of issuance cost .............. -- 96,850 --
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility ............................ (174,500) 44,500 95,000
Issuance of common shares ....................................... -- -- 15,083
Net increase (decrease) in notes payable ........................ (23,936) (22,810) 60,300
----------- ---------- ----------
Net cash used .................................................. (534,965) (97,522) (46,056)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (87,281) 64,834 4,264
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 97,749 32,915 28,651
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 10,468 $ 97,749 $ 32,915
=========== ========== ==========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ....................... $ 96,805 $ 107,179 $ 116,843
=========== ========== ==========
Income taxes paid ............................................... $ 130,521 $ 85,894 $ 69,319
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------
1997 1996
----------------------- ------------------------
<S> <C> <C> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
95,300,882 and 100,751,713 shares outstanding, respectively ......... $ 753,873 $ 801,431
Retained earnings .................................................... 409,296 440,971
Valuation allowance, net of income taxes ............................. 138,117 (2,456)
---------- ----------
1,301,286 51.7% 1,239,946 44.0%
---------- ---- ---------- ----
MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,481 and 49,523 shares, respectively ................ 4,948 4,952
$3.75 Series, 38,310 and 38,320 shares, respectively ................ 3,831 3,832
$3.90 Series, 32,630 shares ......................................... 3,263 3,263
$4.20 Series, 47,369 shares ......................................... 4,737 4,737
$4.35 Series, 49,945 and 49,950 shares, respectively ................ 4,994 4,995
$4.40 Series, 50,000 shares ......................................... 5,000 5,000
$4.80 Series, 49,898 shares ......................................... 4,990 4,990
---------- ----------
31,763 1.2% 31,769 1.1%
---------- ---- ---------- ----
Cumulative shares outstanding; subject to mandatory redemption:
$5.25 Series, 100,000 shares ........................................ 10,000 10,000
$7.80 Series, 400,000 shares ........................................ 40,000 40,000
---------- ----------
50,000 2.0% 50,000 1.8%
---------- ---- ---------- ----
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% Series, 4,000,000 shares ...................................... 100,000 4.0% 100,000 3.6%
---------- ---- ---------- ----
LONG-TERM DEBT
MidAmerican mortgage bonds:
5.05% Series, due 1998 .............................................. -- 49,100
6.25% Series, due 1998 .............................................. -- 75,000
7.875% Series, due 1999 ............................................. 60,000 60,000
6% Series, due 2000 ................................................. 35,000 35,000
6.75% Series, due 2000 .............................................. 75,000 75,000
7.125% Series, due 2003 ............................................. 100,000 100,000
7.70% Series, due 2004 .............................................. 55,630 60,000
7% Series, due 2005 ................................................. 90,500 100,000
7.375% Series, due 2008 ............................................. 75,000 75,000
8% Series, due 2022 ................................................. 50,000 50,000
7.45% Series, due 2023 .............................................. 6,940 26,500
8.125% Series, due 2023 ............................................. 100,000 100,000
6.95% Series, due 2025 .............................................. 12,500 21,500
MidAmerican pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003 ................ 8,064 8,424
5.95% Series, due 2023 (secured by general mortgage bonds) .......... 29,030 29,030
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------------------------------------
1997 1996
-------------------------- ------------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017 (3.7% and 3.5%, respectively) ................... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage
bonds, 3.7% and 3.5%, respectively) .............................. 28,295 28,295
Due 2023 (3.7% and 3.5%, respectively) ............................ 6,850 6,850
Due 2024 (3.7% and 3.6%, respectively) ............................ 34,900 34,900
Due 2025 (3.7% and 3.5%, respectively) ............................ 12,750 12,750
MidAmerican notes:
8.75% Series, due 2002 .............................................. 240 240
6.5% Series, due 2001 ............................................... 100,000 100,000
6.4% Series, due 2003 through 2007 .................................. 2,000 2,000
Obligation under capital lease ...................................... 2,104 2,218
Unamortized debt premium and discount, net .......................... (3,192) (4,009)
----------- ----------
Total utility ..................................................... 919,211 1,085,398
----------- ----------
Nonregulated subsidiaries notes:
7.34% Series, due 1998 .............................................. -- 20,000
7.76% Series, due 1999 .............................................. 45,000 45,000
8.52% Series, due 2000 through 2002 ................................. 70,000 70,000
8% Series, due annually through 2004 ................................ -- 205
Borrowings under unsecured revolving credit facility (6.2%) ......... -- 64,000
Borrowings under unsecured revolving credit facility (6.1%) ......... -- 26,000
Borrowings under unsecured revolving credit facility (6.1%) ......... -- 84,500
----------- ----------
Total nonregulated subsidiaries ................................... 115,000 309,705
----------- ----------
1,034,211 41.1% 1,395,103 49.5%
----------- ----- ---------- -----
TOTAL CAPITALIZATION ................................................. $ 2,517,260 100.0% $2,816,818 100.0%
=========== ===== ========== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
BEGINNING OF YEAR ..................................... $ 440,971 $ 430,589 $ 426,683
--------- --------- ---------
NET INCOME ............................................ 135,104 131,046 122,764
--------- --------- ---------
DEDUCT (ADD):
Loss on repurchase of common shares ................... 49,174 -- --
Dividends declared on common shares of $1.20, $1.20 and
$1.18 per share, respectively......................... 117,605 120,770 118,828
Other ................................................. -- (106) 30
--------- --------- ---------
166,779 120,664 118,858
--------- --------- ---------
END OF YEAR ........................................... $ 409,296 $ 440,971 $ 430,589
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MERGER AND FORMATION OF THE COMPANY:
MidAmerican Energy Holdings Company (Company or Holdings) is a holding
company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital
Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest
Capital). Prior to December 1, 1996, MidAmerican held the capital stock of
MidAmerican Capital and Midwest Capital. Effective December 1, 1996, each share
of MidAmerican common stock was exchanged for one share of Holdings common
stock. As part of the transaction, MidAmerican distributed the capital stock of
MidAmerican Capital and Midwest Capital to Holdings.
MidAmerican was formed on July 1, 1995, as a result of the merger of
Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc.
(Midwest Resources) and its utility subsidiary, Midwest Power Systems Inc.
(Midwest Power). Each outstanding share of preferred and preference stock of
the predecessor companies was converted into one share of a similarly
designated series of MidAmerican preferred stock, no par value. Each
outstanding share of common stock of Midwest Resources and Iowa-Illinois was
converted into one share and 1.47 shares, respectively, of MidAmerican common
stock, no par value. The merger was accounted for as a pooling-of-interest and
the financial statements included herein are presented as if the merger and the
formation of the holding company had occurred as of the earliest period shown.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and
its wholly owned subsidiaries, MidAmerican, MidAmerican Capital and Midwest
Capital. All significant intercompany transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(C) REGULATION:
MidAmerican's utility operations are subject to the regulation of the Iowa
Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission
(FERC). MidAmerican's accounting policies and the accompanying Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican's electric and gas
utility operations currently meet the criteria of SFAS 71, but its
applicability is periodically reexamined. On December 16, 1997, MidAmerican's
generation operations serving Illinois were no longer subject to the provisions
of SFAS 71 due to passage of restructuring legislation in Illinois. Thus,
MidAmerican was required to write off regulatory assets and liabilities from
its balance sheet related to its Illinois generation operations. The net amount
of such write-off's were immaterial. If other utility operations no longer meet
the criteria of SFAS 71, MidAmerican would be required to write off the related
regulatory assets and liabilities from its balance
F-52
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sheet and thus, a material adjustment to earnings in that period could result.
The following regulatory assets, primarily included in Other Assets in the
Consolidated Balance Sheets, represent probable future revenue to MidAmerican
because these costs are expected to be recovered in charges to utility
customers (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred income taxes .......................... $143,851 $140,649
Energy efficiency costs ........................ 111,471 112,244
Debt refinancing costs ......................... 34,923 40,230
FERC Order 636 transition costs ................ 9,279 25,033
Environmental costs ............................ 20,417 22,577
Retirement benefit costs ....................... 595 11,025
Enrichment facilities decommissioning .......... 8,781 11,089
Unamortized costs of retired plant ............. 5,771 8,953
Other .......................................... 4,201 2,655
-------- --------
Total ........................................ $339,289 $374,455
======== ========
</TABLE>
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
records unbilled revenues, and related energy costs, representing the estimated
amount customers will be billed for services rendered between the meter-reading
dates in a particular month and the end of such month. Accrued unbilled
revenues were $80.2 million and $70.1 million at December 31, 1997 and 1996,
respectively, and are included in Receivables on the Consolidated Balance
Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and the majority of its total
retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican to adjust the amounts charged for electric and gas service as the
costs of gas, fuel for generation or purchased power change. The costs
recovered in revenues through use of the adjustment clauses are charged to
expense in the same period.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican's provisions for depreciation and amortization for its utility
operations are based on straight-line composite rates. The average depreciation
and amortization rates for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Electric .......... 3.8% 3.8% 3.9%
Gas ............... 3.4% 3.7% 3.7%
</TABLE>
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to
plant accounts. The cost of depreciable units of utility plant retired or
disposed of in the normal course of business is eliminated from the utility
plant accounts and such cost, plus net removal cost, is charged to accumulated
depreciation.
An allowance for the estimated annual decommissioning costs of the Quad
Cities Nuclear Power Station (Quad Cities) equal to the level of funding is
included in depreciation expense. See Note 4(e) for additional information
regarding decommissioning costs.
F-53
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) INVESTMENTS:
Investments, managed primarily through the Company's nonregulated
subsidiaries, include the following amounts as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Investments:
Marketable securities ...................... $467,207 $219,890
Equipment leases ........................... 73,928 89,791
Nuclear decommissioning trust fund ......... 93,251 76,304
Energy projects ............................ 21,180 24,467
Special-purpose funds ...................... 10,057 44,863
Real estate ................................ 42,424 45,457
Corporate owned life insurance ............. 33,471 27,395
Coal transportation ........................ 14,516 18,623
Communications ............................. 10,000 56,333
Security ................................... 8,551 5,367
Other ...................................... 24,939 14,482
-------- --------
Total ...................................... $799,524 $622,972
======== ========
</TABLE>
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value with net
unrealized gains and losses reported as a net of tax amount in Common
Shareholders' Equity until realized. Investments in marketable securities that
are classified as held-to-maturity are reported at amortized cost. An
other-than-temporary decline in the value of a marketable security is
recognized through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities units are classified as available-for-sale and are reported at fair
value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The Company considers all cash and highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Receivables ........................ $ 34,544 $ (84,802) $ (31,314)
Inventories ........................ 4,773 (5,629) 7,013
Other current assets ............... (7,421) 6,732 (4,140)
Accounts payable ................... (23,950) 47,751 15,903
Taxes accrued ...................... 10,375 356 (9,755)
Interest accrued ................... (6,158) (2,122) (24)
Other current liabilities .......... 15,935 (16,038) 1,293
--------- --------- ---------
Total ............................ $ 28,098 $ (53,752) $ (21,024)
========= ========= =========
</TABLE>
F-54
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District (NPPD), expiring in 2004, MidAmerican purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican's fixed obligation to pay 50% of
NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like
amount representing MidAmerican's right to purchase power is shown as an asset.
Capital improvement costs prior to July 11, 1997, including carrying
costs, were deferred, and are being amortized and recovered in rates over
either a five-year period or the term of the NPPD contract. Beginning July 11,
1997, capital improvement costs are recovered currently from customers and are
expensed as incurred.
The fuel cost portion of the power purchase contract is included in Cost
of Fuel, Energy and Capacity on the Consolidated Statements of Income. All
other costs MidAmerican incurs in relation to its long-term power purchase
contract with NPPD are included in Other Operating Expenses on the Consolidated
Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The Company is exposed to market value risk from changes in interest rates
for certain fixed rate sinking fund preferred and perpetual preferred stocks
(fixed rate preferred stocks) included in Investments on the Consolidated
Balance Sheets. The Company reviews the interest rate sensitivity of these
securities and purchases put options on U.S. Treasury securities (put options)
to reduce interest rate risk on preferred stocks. The Company does not purchase
or sell put options for speculative purposes. The Company's intent is to
substantially offset any change in market value of the fixed rate preferred
stocks due to a change in interest rates with a change in market value of the
put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a valuation allowance
in shareholders' equity. Unrealized gains and losses on the associated put
options are included in the determination of the fair value of the preferred
stocks. The fair value of the put options, including unrealized gains and
losses, included in the determination of the fair value of the preferred
securities as of December 31, 1997 and 1996 was $1.9 million and $5.1 million,
respectively. Realized gains and losses on the put options are included in
Realized Gains and Losses on Securities, Net in the Consolidated Statements
Income in the period the underlying hedged fixed rate preferred stocks are
sold. At December 31, 1997, the Company held put options with a notional value
of $3.2 million.
2) Gas Futures Contracts and Swaps:
The Company uses gas futures contracts and swap contracts to reduce its
exposure to changes in the price of natural gas purchased to meet the needs of
its customers and to manage margins on natural gas storage opportunities.
Investments in natural gas futures contracts, which total $1.6 million and $0.8
million as of December 31, 1997 and 1996, are included in Receivables on the
Consolidated Balance Sheets. Gains and losses on gas futures contracts that
qualify for hedge accounting are deferred and reflected as adjustments to the
carrying value of the hedged item or included in Other Assets on the
Consolidated Balance Sheets until the underlying physical transaction is
recorded if the instrument is used to hedge an anticipated future transaction.
The net gain or loss on gas futures contracts is included in the determination
of income in the same period as the expense for the physical delivery of the
natural gas.
F-55
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized gains and losses on gas futures contracts and the net amounts
exchanged or accrued under the natural gas swap contracts are included in Cost
of Gas Sold, Other Net or Nonregulated-Costs of Sales consistent with the
expense for the physical commodity. Deferred net gains (losses) related to the
Company's gas futures contracts are $(0.4) million and $0.8 million as of
December 31, 1997 and 1996, respectively.
The Company periodically evaluates the effectiveness of its natural gas
hedging programs. If a high degree of correlation between prices for the
hedging instruments and prices for the physical delivery is not achieved, the
contracts are recorded at fair value and the gains or losses are included in
the determination of income. At December 31, 1997 the Company held the
following hedging instruments:
<TABLE>
<CAPTION>
NOTIONAL VOLUME WEIGHTED AVERAGE
(MMBTU) (PER MMBTU)
----------------- -----------------
<S> <C> <C>
Natural Gas Futures (Long) .................... 3,670,000 $2.277
Natural Gas Futures (Short) ................... 1,670,000 $2.305
Natural Gas Swaps (Fixed to Variable) ......... 2,497,400
Weighted average variable price .............. $2.558
Weighted average fixed price ................. $3.114
Natural Gas Swaps (Variable to Fixed) ......... 6,806,952
Weighted average variable price .............. $2.536
Weighted average fixed price ................. $2.473
</TABLE>
(2) LONG-TERM DEBT:
The Company's sinking fund requirements and maturities of long-term debt
for 1998 through 2002 are $145 million, $106 million, $134 million, $125
million and $25 million, respectively.
The interest rate on the Company's Adjustable Rate Series Mortgage Bonds
is reset every two years at 160 basis points over the average yield to maturity
of 10-year Treasury securities. The rate was reset in 1997.
The Company's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of the
bonds in the short-term tax-exempt market. The Company, at its option, may
change the mode of interest calculation for these bonds by selecting from among
several alternative floating or fixed rate modes. The interest rates shown in
the Consolidated Statements of Capitalization are the weighted average interest
rates as of December 31, 1997 and 1996. The Company maintains dedicated
revolving credit facility agreements or renewable lines of credit to provide
liquidity for holders of these issues.
Substantially all the former Iowa-Illinois utility property and
franchises, and substantially all of the former Midwest Power electric utility
property in Iowa, or approximately 82% of gross utility plant, is pledged to
secure mortgage bonds.
MidAmerican Capital has $64 million and $50 million unsecured revolving
credit facility agreements which mature in 1998. Borrowings under these
agreements may be on a fixed rate, floating rate or competitive bid rate basis.
All subsidiary long-term borrowings outstanding at December 31, 1997, are
without recourse to Holdings.
F-56
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
had undivided interests at December 31, 1997, in jointly owned generating
plants as shown in the table below.
The dollar amounts below represent MidAmerican's share in each jointly
owned unit. Each participant has provided financing for its share of each unit.
Operating Expenses on the Consolidated Statements of Income include
MidAmerican's share of the expenses of these units (dollars in millions).
<TABLE>
<CAPTION>
NUCLEAR COAL FIRED
------------- -------------------------------------------------------------
COUNCIL
QUAD CITIES NEAL BLUFFS NEAL OTTUMWA LOUISA
UNITS UNIT UNIT UNIT UNIT UNITS
NO. 1 & 2 NO. 3 NO. 3 NO. 4 NO. 1 NO. 1
------------- ---------- ---------- ---------- --------- ----------
IN SERVICE DATE 1972 1975 1978 1979 1981 1983
<S> <C> <C> <C> <C> <C> <C>
Utility plant in service ......... $ 240 $ 128 $ 298 $ 159 $ 210 $ 531
Accumulated depreciation ......... $ 87 $ 78 $ 164 $ 87 $ 103 $ 235
Unit capacity-MW ................. 1,529 515 675 624 716 700
Percent ownership ................ 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1998 are estimated to be $201
million, including $13 million for Quad Cities nuclear fuel. Nonregulated
capital expenditures depend upon the availability of investment opportunities
and other factors. During 1998, such expenditures are estimated to be
approximately $10 million.
(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant facilities may pose a threat to
the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial action.
MidAmerican is evaluating 26 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at seventeen of the sites and has
completed investigations at one of the sites. In addition, MidAmerican has
completed removals at three of the sites. MidAmerican is continuing to evaluate
several of the sites to determine the future liability, if any, for conducting
site investigations or other site activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of December 31, 1997 is $21 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The ICC has
approved the use of a tariff rider which permits recovery of the actual costs
of litigation, investigation and remediation relating to former MGP sites.
MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP
costs. MidAmerican intends to pursue recovery of the remediation costs from
other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has
F-57
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
potential legal liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. If so, the costs of
performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. As the investigation is performed and if it is
determined remedial action is required, the best estimate of remediation costs
is accrued. If necessary, the estimate is revised when a consent order is
issued. The estimated recorded liabilities for these properties include
incremental direct costs of the remediation effort, costs for future monitoring
at sites and costs of compensation to employees for time expected to be spent
directly on the remediation effort. The estimated recorded liabilities for
these properties are based upon preliminary data. Thus, actual costs could vary
significantly from the estimates. The estimate could change materially based on
facts and circumstances derived from site investigations, changes in required
remedial action and changes in technology relating to remedial alternatives. In
addition, insurance recoveries for some or all of the costs may be possible,
but the liabilities recorded have not been reduced by any estimate of such
recoveries.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican's financial position or results of operations.
(C) CLEAN AIR ACT:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any areas that do not
meet the air quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as nonattainment area(s), the
state is required to submit a State Implementation Plan specifying how it will
reach attainment of the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. If
MidAmerican's operations contribute to nonattainment and modifications to
MidAmerican's operations or facilities are necessary, the cost of making
emissions reductions to meet the air quality standards will be dependent upon
the level of emissions reductions required and the available technology.
MidAmerican will continue to evaluate the potential impact of the new
regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will
continue to closely monitor this rulemaking proceeding.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican's share of
nuclear fuel cost (including nuclear fuel disposal) based on energy delivered.
The debt service portion is approximately $1.5 million per month for 1998 and
is not contingent upon the plant being in service. In addition, MidAmerican
pays one-half of NPPD's decommissioning funding related to Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to NPPD
were $13.8 million, $14.5 million and $12.0 million and the net interest
component was $3.8 million, $3.6 million and $4.6 million each for the years
1997, 1996 and 1995, respectively.
F-58
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MidAmerican's payments for the debt principal portion of the power
purchase contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $14.4 million, $15.0 million, $15.8 million, $16.6
million, $17.4 million and $18.3 million for 1998 through 2003, respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican's share of expected decommissioning costs for Cooper and Quad
Cities, in 1997 dollars, is $247 million and $230 million, respectively. In
Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. Such costs are reflected
as base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
assumes that decommissioning costs will escalate at an annual rate of 4.0%.
Although Cooper's operating license expires in 2014, the funding plan assumes
decommissioning will start in 2004, the anticipated plant shutdown date.
As of December 31, 1997, MidAmerican's share of funds set aside by NPPD in
internal and external accounts for decommissioning was $78.2 million. In
addition, the funding plan also assumes various funds and reserves currently
held to satisfy NPPD bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually. NPPD
is recognizing decommissioning costs over the life of the power sales contract.
MidAmerican makes payments to NPPD related to decommissioning Cooper. These
payments are included in MidAmerican's power purchase costs. The Cooper
decommissioning component of MidAmerican's payments to NPPD was $11.3 million,
$9.9 million and $8.9 million for the years 1997, 1996, and 1995, respectively,
and is included in Other Operating Expenses in the Consolidated Statements of
Income. Earnings from the internal and external trust funds, which are
recognized by NPPD as the owner of the plant, are tax exempt and serve to
reduce future funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities units. The total accrued balance as of December
31, 1997, was $93.3 million and is included in Other Liabilities and a like
amount is reflected in Investments and represents the value of the assets held
in the trusts.
MidAmerican's provision for depreciation included costs for Quad Cities
nuclear decommissioning of $9.8 million, $8.6 million and $8.6 million for
1997, 1996 and 1995, respectively. The provision charged to expense is equal to
the funding that is being collected in rates. The decommissioning funding
component of MidAmerican's Illinois tariffs assumes decommissioning costs,
related to the Quad Cities unit, will escalate at an annual rate of 5.3% and
the assumed annual return on funds in the trust is 6.5%. The Quad Cities
decommissioning funding component of MidAmerican's Iowa tariffs assumes
decommissioning costs will escalate at an annual rate of 6.3% and the assumed
annual return on funds in the trust is 6.5%. Earnings on the assets in the
trust fund were $5.0 million, $3.5 million and $2.5 million for 1997, 1996 and
1995, respectively.
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cites and Cooper through a combination of
insurance purchased by NPPD (the owner and operator of Cooper) and Commonwealth
Edison (the joint owner and operator of Quad Cities), insurance
F-59
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchased directly by MidAmerican, and the mandatory industry-wide loss funding
mechanism afforded under the Price-Anderson Amendments Act of 1988. The
coverage falls into three categories: nuclear liability, property coverage and
nuclear worker liability.
NPPD and Commonwealth Edison each purchase nuclear liability insurance in
the maximum available amount of $200 million. In accordance with the
Price-Anderson Amendments Act of 1988, excess liability protection above that
amount is provided by a mandatory industry-wide program under which the owners
of nuclear generating facilities could be assessed for liability incurred due
to a serious nuclear incident at any commercial nuclear reactor in the United
States. Currently, MidAmerican's maximum potential share of such an assessment
is $79.3 million per incident, payable in installments not to exceed $10
million annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities, Commonwealth Edison purchases
primary and excess property insurance protection for the combined interest in
Quad Cities totalling $2.1 billion. For Cooper, NPPD purchases primary property
insurance in the amount of $500 million. Additionally, MidAmerican and NPPD
separately purchase coverage for their respective obligation of $1.125 billion
each in excess of the $500 million primary layer purchased by NPPD. This
structure provides that both MidAmerican and NPPD are covered for their
respective 50% obligation in the event of a loss totalling $2.75 billion.
MidAmerican also directly purchases extra expense/business interruption
coverage to cover the cost of replacement power and/or other continuing costs
in the event of a covered accidental outage at Cooper or Quad Cities. The
coverages purchased directly by MidAmerican, and the primary and excess
property coverages purchased by Commonwealth Edison, contain provisions for
retrospective premium assessments should two or more full policy-limit losses
occur in one policy year. Currently, the maximum retrospective amounts that
could be assessed against MidAmerican from industry mutual insurance companies
for its obligations associated with Cooper and Quad Cities combined total $11.6
million.
The master nuclear worker liability coverage is an industry-wide policy
with an aggregate limit of $200 million for the nuclear industry as a whole,
which is in effect to cover tort claims of workers as a result of radiation
exposure on or after January 1, 1988. MidAmerican's share, based on its
interest in Cooper and Quad Cities, of a maximum potential share of a
retrospective assessment under this program is $3.0 million.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican has entered into supply and related transportation contracts
for its fossil fueled generating stations. The contracts, with expiration dates
ranging from 1998 to 2003, require minimum payments of $132.2 million, $88.8
million, $57.8 million, $26.3 million and $3.1 million and $3.1 million for the
years 1998 through 2003, respectively. The Company expects to supplement these
coal contracts with spot market purchases to fulfill its future fossil fuel
needs.
The Company has entered into various natural gas supply and transportation
contracts for its utility operations. The minimum commitments under these
contracts are $88 million, $63 million, $37 million, $32 million and $16
million for the years 1998 through 2002, respectively, and $76 million for the
total of the years thereafter. During 1993 FERC Order 636 became effective,
requiring interstate pipelines to restructure their services. The pipeline will
recover the transition costs related to Order 636 from the local distribution
companies. The Company has recorded a liability and regulatory asset for the
transition costs which are being recovered by the Company through the purchased
gas adjustment clause. The unrecovered balance recorded by the Company as of
December 31, 1997, was $9.3 million.
F-60
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- -----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of
year ..................... $ 801,431 100,752 $801,227 100,752 $786,420 99,687
Changes due to:
Repurchase of
common shares .......... (47,444) (5,451) -- -- -- --
Issuance of common
shares ................. -- -- -- -- 15,083 1,065
Stock options ............ 210 -- 623 -- -- --
Capital stock expense (289) -- (419) -- (276) --
Other .................... (35) -- -- -- -- --
--------- ------- -------- ------- -------- ------
Balance, end of year ..... $ 753,873 95,301 $801,431 100,752 $801,227 100,752
========= ======= ======== ======= ======== =======
</TABLE>
(6) RETIREMENT PLANS:
The Company has noncontributory defined benefit pension plans covering
substantially all employees. Benefits under the plans are based on
participants' compensation, years of service and age at retirement.
Funding is based upon the actuarially determined costs of the plans and
the requirements of the Internal Revenue Code and the Employee Retirement
Income Security Act. MidAmerican has been allowed to recover funding
contributions in rates.
Net periodic pension cost includes the following components for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost-benefit earned during the period ................... $ 10,092 $ 12,323 $ 9,817
Interest cost on projected benefit obligation ................... 29,623 31,109 27,934
Decrease in pension costs from actual return on assets .......... (79,580) (58,460) (63,593)
Net amortization and deferral ................................... 39,446 26,223 32,126
One-time charge ................................................. -- -- 15,683
Regulatory deferral of incurred cost ............................ 5,423 568 (10,470)
--------- --------- ---------
Net periodic pension cost ....................................... $ 5,004 $ 11,763 $ 11,497
========= ========= =========
</TABLE>
During 1995, the Company incurred a one-time charge of $15.7 million
related to the early retirement portion of its restructuring plan. Of such
cost, $3.0 million was charged to expense and the remaining amount was deferred
for future recovery through the regulatory process.
The plan assets are stated at fair market value and are primarily
comprised of insurance contracts, United States government debt and corporate
equity securities. The plans in which accumulated benefits exceed assets
consist entirely of nonqualified defined benefit plans. Although the plans have
no assets, the Company purchases corporate owned life insurance to provide
funding for the future cash requirements. The cash value of such insurance was
$21.5 million and $17.3 million at December 31, 1997 and 1996,
F-61
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. The following table presents the funding status of the plans and
amounts recognized in the Consolidated Balance Sheets as of December 31
(dollars in thousands):
<TABLE>
<CAPTION>
PLANS IN WHICH:
---------------------------------------------------------------
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
------------------------------- -----------------------------
1997 1996 1997 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ..................... $ (325,770) $ (298,237) $ (40,080) $ (36,574)
Nonvested benefit obligation .................. (3,623) (3,454) (242) (1,925)
---------- ---------- --------- ---------
Accumulated benefit obligation ................ (329,393) (301,691) (40,322) (38,499)
Provision for future pay increases ............ (52,027) (79,790) (8,301) (8,733)
---------- ---------- --------- ---------
Projected benefit obligation .................. (381,420) (381,481) (48,623) (47,232)
Plan assets at fair value ...................... 483,668 427,828 -- --
---------- ---------- --------- ---------
Projected benefit obligation (greater) less than
plan assets ................................... 102,248 46,347 (48,623) (47,232)
Unrecognized prior service cost ................ 592 18,636 21,147 21,544
Unrecognized net loss (gain) ................... (93,770) (63,173) (1,281) --
Unrecognized net transition asset .............. (16,339) (18,929) -- --
Other ......................................... -- -- (11,565) (12,811)
---------- ---------- --------- ---------
Pension liability recognized in the Consolidated
Balance Sheets ................................ $ (7,269) $ (17,119) $ (40,322) $ (38,499)
========== ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Assumptions used were:
Discount rate ................................................... 7.0% 7.5%
Rate of increase in compensation levels ......................... 5.0% 5.0%
Weighted average expected long-term rate of return on assets..... 9.0% 9.0%
</TABLE>
The Company currently provides certain health care and life insurance
benefits for retired employees. Under the plans, substantially all of the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company. However, the Company retains the
right to change these benefits anytime at its discretion.
In January 1993, the Company adopted SFAS No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. The Company began expensing
these costs on an accrual basis for its Illinois customers and certain of its
Iowa customers in 1993 and including provisions for such costs in rates for
these customers. For its remaining Iowa customers, the Company deferred the
portion of these costs above the "pay-as-you-go" amount already included in
rates until recovery on an accrual basis was established in 1995. The Company
is currently amortizing the deferral, expensing the SFAS No. 106 accrual and
including provisions for these costs in rates.
F-62
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost includes the following components
for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefit earned during the period ............... $ 2,680 $ 2,118 $ 1,583
Interest cost ............................................... 8,822 8,341 7,185
Increase (decrease) in benefit cost from actual return on
assets ..................................................... (2,285) (1,598) (2,090)
Amortization of unrecognized transition obligation .......... 5,291 5,291 5,291
Amortization of unrecognized service cost ................... 650 -- --
Amortization of unrecognized prior year (loss) .............. (298) -- --
Other ....................................................... (288) (297) (262)
One-time charge for early retirement ........................ -- -- 4,353
Regulatory recognition of incurred cost ..................... 4,888 5,112 5,140
-------- -------- --------
Net periodic postretirement benefit cost .................... $ 19,460 $ 18,967 $ 21,200
======== ======== ========
</TABLE>
During 1995, the Company recorded a one-time expense of $4.4 million
related to the early retirement portion of its restructuring plan.
The Company has established external trust funds to meet its expected
postretirement benefit obligations. The trust funds are comprised primarily of
guaranteed rate investment accounts and money market investment accounts. A
reconciliation of the funded status of the plan to the amounts realized as of
December 31 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Accumulated present value of benefit obligations:
Retiree benefit obligation ........................... $ (74,534) $ (78,935)
Active employees fully eligible for benefits ......... (6,466) (2,798)
Other active employees ............................... (46,347) (34,772)
---------- ----------
Accumulated benefit obligation ....................... (127,347) (116,505)
Plan assets at fair value ............................. 52,174 36,783
---------- ----------
Accumulated benefit obligation greater than plan assets (75,173) (79,722)
Unrecognized net gain ................................. (11,248) (8,810)
Prior service cost .................................... 8,277 --
Unrecognized transition obligation .................... 79,370 84,662
---------- ----------
Postretirement benefit liability recognized in the
Consolidated Balance Sheets ........................... $ 1,226 $ (3,870)
========== ==========
Assumptions used were:
Discount rate ........................................ 7.0% 7.5%
Weighted average expected long-term rate of return
on assets (after taxes) ............................ 6.5% 6.7%
</TABLE>
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 10.0% in 1998, and that the rate of increase thereafter will decline by 1.0%
annually to an ultimate rate of 5.5% by the year 2003. For covered individuals
age 65 and older, it is assumed health care costs will increase by 7.0% in
1998, and that the rate of increase thereafter will decline by 1.0% annually to
an ultimate rate of 5.5% by the year 2000.
If the assumed health care trend rates used to measure the expected cost
of benefits covered by the plans were increased by 1%, the total service and
interest cost would increase by $1.8 million and the accumulated postretirement
benefit obligation would increase by $15.4 million.
F-63
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees. The Company's contributions to the plans,
which are based on the participants' level of contribution and cannot exceed
four percent of the participants' salaries or wages, were $4.6 million, $4.4
million and $3.7 million for 1997, 1996 and 1995, respectively.
(7) STOCK-BASED COMPENSATION PLANS:
The company has stock-based compensation arrangements as described below.
The company accounts for these plans under Accounting Principles Board Opinion
No. 25 and the related interpretations. The total compensation cost recognized
in income for stock-based compensation awards was $1.3 million, $0.6 million,
and $1.8 million for 1997, 1996, and 1995 respectively. Had the company used
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), pro-forma net income for common stock would be $135.3
million, $130.9 million, and $122.6 million, while earnings per share would be
$1.38, $1.30, and $1.22 for the years ended 1997, 1996, and 1995 respectively.
Stock options and performance share awards have been granted pursuant to
the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the "Plan"). Up
to four million shares are authorized to be granted under the Plan.
Stock Options -- Under the Plan, the Board of Directors have granted options to
purchase shares of MidAmerican Holdings common stock (the "Options") at the
fair market value of the shares on the date of the grant. The options vest over
a 4-year period at a rate of 25% per year and expire ten years after the date
of grant. Stock option activity for 1997, 1996, and 1995 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXEERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year ........... 800,000 $14.66 700,000 $14.50 -- --
Granted .................................. 46,666 $17.36 100,000 $15.75 700,000 $14.50
Exercised ................................ 165,000 $14.58 -- -- -- --
Forfeited ................................ 115,000 $14.93 -- -- -- --
Expired .................................. -- -- -- -- -- --
Outstanding, end of year ................. 566,666 $15.12 800,000 $14.66 700,000 $14.50
Exercisable, end of year ................. 315,000 $14.54 175,000 $14.50 -- --
Weighted average fair value of options
granted during year ..................... $ 1.66 $ 1.48 $ 1.58
</TABLE>
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Dividend rate per share .......... $1.20 $1.20 $1.20
Expected volatility .............. 16.55% 17.62% 23%
Expected life .................... 10 Years 10 Years 10 Years
Risk free interest rate .......... 6.14% 6.53% 6.28%
</TABLE>
The options outstanding at December 31, 1997 have an exercise price range
of $14.50 to $17.785, with a weighted average contractual life of 8.25 years.
Performance Shares -- Under the Plan, participants are granted contingent
shares of common stock. The shares are contingent upon the attainment of
specified performance measures within a 3-year performance period. During the
performance period, the participant is entitled to receive dividends and vote
the stock. The stock is vested upon achievement of the performance measures. If
the specified
F-64
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
criteria is not met within the 3-year performance period, the shares are
forfeited. The following table provides certain information regarding
contingent performance incentive shares granted under the Plan:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Number of performance shares granted ................ 77,105 68,189 86,277
Fair value at date of grant (in thousands) .......... $ 1,335 $ 1,176 $ 1,251
Weighted average per share amounts .................. $ 17.3125 $17.2500 $14.5000
End of performance period ........................... 6/30/2000 6/30/99 6/30/98
</TABLE>
In addition, the company has granted 800 restricted shares to each
non-employee director in 1997, 1996 and 1995. Non-employee directors are
restricted from disposing of granted shares until such time as they cease to be
a director of the company. The following table provides certain information
regarding the directors restricted shares granted under the Plan.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Number of shares granted ............................ 11,200 12,000 13,600
Fair value at date of grant (in thousands) .......... $ 194 $ 207 $ 197
Weighted average price per share amounts ............ $17.3125 $17.2500 $14.5000
</TABLE>
Employee Stock Ownership Plan -- Employees of the Company are allowed to
purchase company stock up to the lesser of 15% or $25,000 of their annual
compensation at a 15% discount. The number of shares acquired by employees
under the plan were 140,943, 150,899, and 182,707 in 1997, 1996 and 1995,
respectively. The Company currently acquires shares in the open market for this
plan. Participants who purchase shares under the Plan are required to hold
purchased shares for 180 days.
(8) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program
may be obtained from the sale of commercial paper or short-term borrowing from
banks. Information regarding short-term debt follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance at year-end ...................... $ 138,054 $ 161,990 $ 184,800
Weighted average interest rate on year-end
balance ................................ 5.9% 5.4% 5.7%
Average daily amount outstanding during
the year ............................... $ 117,482 $ 151,318 $ 114,036
Weighted average interest rate on average
daily amount outstanding during the
year ................................... 5.7% 5.5% 6.0%
</TABLE>
MidAmerican has authority from FERC to issue short-term debt in the form
of commercial paper and bank notes aggregating $400 million. As of December 31,
1997, MidAmerican had a $250 million revolving credit facility agreement and a
$10 million line of credit and Holdings had lines of credit totaling $120
million. MidAmerican's commercial paper borrowings are supported by the
revolving credit facility and the line of credit.
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
F-65
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 27, 1997, the Iowa Utilities Board (IUB) issued an order in a
consolidated rate proceeding involving MidAmerican's pricing proposal and a
filing by the Iowa Office of Consumer Advocate (OCA). The order approved a
March 1997 settlement agreement between MidAmerican, the OCA and other parties
to the proceeding. The agreement includes a number of characteristics of
MidAmerican's pricing proposal. Prices for residential customers were reduced
$8.5 million annually and $10.0 million annually, effective November 1, 1996,
and July 11, 1997, respectively, and will be reduced an additional $5.0 million
annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates
for commercial and industrial customers will be reduced a total of $10 million
annually by June 1, 1998, through pilot projects, negotiated rates with
individual customers and, if needed, a base rate reduction effective June 1,
1998. The agreement includes a tracking mechanism to currently recover the cost
of capital improvements required by the Cooper Nuclear Station Power Purchase
Contract. The tracking mechanism will offset approximately $9 million of these
reductions.
In addition, the agreement accepted MidAmerican's proposal to eliminate
the Iowa energy adjustment clause (EAC) which was the mechanism through which
fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC
flows the cost of fuel to customers on a current basis, and thus, fuel costs
had little impact on net income. Prospectively, base rates for Iowa customers
will include a factor for recovery of a representative level of fuel costs. To
the extent actual fuel costs vary from that factor, pre-tax earnings will be
impacted. The fuel cost factor will be reviewed in February 1999 and adjusted
prospectively if actual 1998 fuel costs vary 15% above or below the factor
included in base rates.
Under the agreement, if MidAmerican's annual Iowa electric jurisdictional
return on common equity exceeds 12%, then an equal sharing between customers
and shareholders of earnings above the 12% level begins; if it exceeds 14%,
then two-thirds of MidAmerican's share of those earnings will be used for
accelerated recovery of certain regulatory assets. The agreement permits
MidAmerican to file for increased rates if the return falls below 9%. Other
parties signing the agreement are prohibited from filing for reduced rates
prior to 2001 unless the return, after reflecting credits to customers, exceeds
14%.
The agreement also provides that MidAmerican will develop a pilot program
for a market access service which allows customers with at least 4 MW of load
to choose energy suppliers. The pilot program, which is subject to approval by
the IUB and the Federal Energy Regulatory Commission (FERC), is limited to 60
MW of participation the first year and can be expanded by 15 MW annually until
the conclusion of the program. Any loss of revenues associated with the pilot
program will be considered part of the $10 million annual reduction for
commercial and industrial customers as described above, but may not be
recovered from other customer classes. The program was filed with the IUB and
the FERC in September 1997. The Company anticipates that the necessary
approvals will be received before the end of the second quarter of 1998.
(10) DISCONTINUED OPERATIONS:
In the third quarter of 1996, the Company announced the discontinuation of
certain nonstrategic businesses in support of its strategy of becoming the
leading regional energy and complementary services provider. In November of
1996, the Company signed a definitive agreement with KCS Energy, Inc. (KCS) to
sell an oil and gas exploration and development subsidiary and completed the
sale on January 3, 1997. The Company recorded an after-tax loss of $7.1 million
for the disposition in 1996 and an additional $0.9 million in 1997. In October
1997, the company sold its subsidiary that developed and continues to operate a
computerized information system facilitating the real-time exchange of power in
the electric industry. The Company recorded a $4.0 million estimated after-tax
loss on disposal in the third quarter of 1996 and an additional $3.2 million in
September 1997. In addition, in the third quarter of 1996 the Company received
a final settlement from the sale of a coal mining subsidiary which was
reflected as a discontinued operation by a predecessor company in 1982. The
final settlement, which resulted in an after-tax loss of $3.3 million, included
the reacquisition of preferred equity by the buyer and the settlement of
reclamation reserves.
F-66
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds received from the disposition of the oil and gas subsidiary
included $210 million in cash and 870,000 warrants, after a stock split in
1997, to purchase KCS common stock. The warrants were valued at $6 million.
Proceeds received from the disposition of the subsidiary that operates a
computerized information system for the exchange of power in the electric
industry included an unsecured note receivable for $0.7 million and warrants to
purchase twenty percent of the acquirer which have been valued at zero.
Proceeds received from the disposition of the coal mining subsidiary settlement
were $15 million. Net assets of the discontinued operations are separately
presented on the Consolidated Balance Sheets as Investment in Discontinued
Operations.
Revenues from discontinued activities, as well as the results of
operations and the estimated loss on the disposal of discontinued operations
for the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING REVENUES ......................... $ -- $ 233,952 $ 81,637
========= ========= ========
INCOME FROM OPERATIONS
Income (loss) before income taxes .......... $ (200) $ 1,638 $ 4,704
Income tax benefit (expense) ............... 82 479 (1,645)
--------- --------- --------
Income (loss) from Operations .............. $ (118) $ 2,117 $ 3,059
========= ========= ========
LOSS ON DISPOSAL
Income (loss) before income taxes .......... $ (10,106) $ 9,047 $ --
Income tax benefit (expense) ............... 5,996 (23,879) --
--------- --------- --------
Loss on disposal ........................... $ (4,110) $ (14,832) $ --
========= ========= ========
</TABLE>
(11) CONCENTRATION OF CREDIT RISK:
The Company's electric utility operations serve 560,000 customers in Iowa,
85,000 customers in western Illinois and 3,000 customers in southeastern South
Dakota. The Company's gas utility operations serve 486,000 customers in Iowa,
65,000 customers in western Illinois, 63,000 customers in southeastern South
Dakota and 4,000 customers in northeastern Nebraska. The largest communities
served by the Company are the Iowa and Illinois Quad-Cities; Des Moines, Sioux
City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux
Falls, South Dakota. The Company's utility operations grant unsecured credit to
customers, substantially all of whom are local businesses and residents. As of
December 31, 1997, billed receivables from the Company's utility customers
totalled $14.8 million. As described in Note 18, billed receivables related to
utility services have been sold to a wholly owned unconsolidated subsidiary.
MidAmerican Capital has investments in preferred stocks of companies in
the utility industry. As of December 31, 1997, the total cost of these
investments was $96 million.
MidAmerican Capital has entered into leveraged lease agreements with
companies in the airline industry. As of December 31, 1997, the receivables
under these agreements totalled $35 million.
(12) PREFERRED SHARES:
During 1996, MidAmerican redeemed all shares of the $1.7375 Series of
preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
The $5.25 Series Preferred Shares, which are not redeemable prior to
November 1, 1998 for any purpose, are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100
per share each May 1, beginning in 2001 through May 1, 2006.
F-67
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total outstanding cumulative preferred stock of MidAmerican not
subject to mandatory redemption requirements may be redeemed at the option of
the Company at prices which, in the aggregate, total $31.8 million. The
aggregate total the holders of all preferred stock outstanding at December 31,
1997, are entitled to upon involuntary bankruptcy is $181.8 million plus
accrued dividends. Annual dividend requirements for all preferred stock
outstanding at December 31, 1997, total $12.9 million.
(13) SEGMENT INFORMATION:
Information related to segments of the Company's business is as follows
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
UTILITY
Electric:
Operating revenues ........................ $1,126,300 $1,099,008 $1,094,647
Cost of fuel, energy and capacity ......... 235,760 234,317 230,261
Depreciation and amortization expense ..... 145,931 140,939 136,324
Other operating expenses .................. 502,109 424,594 459,344
---------- ---------- ----------
Operating income .......................... $ 242,500 $ 299,158 $ 268,718
========== ========== ==========
Gas:
Operating revenues ........................ $ 536,306 $ 536,753 $ 459,588
Cost of gas sold .......................... 346,016 345,014 279,025
Depreciation and amortization expense ..... 24,609 23,653 22,626
Other operating expenses .................. 127,092 106,831 122,017
---------- ---------- ----------
Operating income .......................... $ 38,589 $ 61,255 $ 35,920
========== ========== ==========
Operating income ........................... $ 281,089 $ 360,413 $ 304,638
Other income (expense) ..................... 14,699 3,998 (4,074)
Fixed charges ............................. 100,018 96,753 92,036
---------- ---------- ----------
Income from continuing operations before
income taxes .............................. 195,770 267,658 208,528
Income taxes ............................... 76,317 112,927 84,098
---------- ---------- ----------
Income from continuing operations .......... $ 119,453 $ 154,731 $ 124,430
========== ========== ==========
Capital Expenditures--
Electric .................................. $ 128,544 $ 116,243 $ 133,490
Gas ....................................... $ 38,388 $ 37,955 $ 57,281
</TABLE>
F-68
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- ------------
<S> <C> <C> <C>
NONREGULATED
Revenues ................................. $ 259,675 $ 236,851 $ 95,106
Cost of sales ............................ 240,182 218,256 70,351
Depreciation and amortization ............ 3,436 4,854 6,010
Other operating expenses ................. 26,640 30,516 31,029
--------- --------- ---------
Operating income (loss) .................. (10,583) (16,775) (12,284)
Other income ............................. 34,320 14,874 15,734
Fixed charges ............................. 11,785 23,574 25,470
--------- --------- ---------
Income (loss) from continuing
operations before income taxes ......... 11,952 (25,475) (22,020)
Income taxes ............................. (7,927) (14,505) (17,295)
--------- --------- ---------
Income (loss) from continuing
operations ............................. $ 19,879 $ (10,970) $ (4,725)
========= ========= =========
Capital expenditures ..................... $ 14,066 $ 55,788 $ 12,881
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
ASSET INFORMATION
Identifiable utility assets:
Electric (a) ............................. $2,825,573 $2,954,324 $2,947,832
Gas (a) .................................. 677,991 692,993 699,539
Used in overall utility operations ....... 11,341 114,545 30,084
Nonregulated ............................. 763,186 593,666 615,342
Investment in discontinued operations .... -- 166,320 177,300
---------- ---------- ----------
Total assets ........................... $4,278,091 $4,521,848 $4,470,097
========== ========== ==========
</TABLE>
- ----------
(a) Utility plant less accumulated provision for depreciation,
receivables, inventories, nuclear decommissioning trust fund and
regulatory assets.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for the Company's utility
services are established based on historical cost ratemaking. Therefore, the
impact of any realized gains or losses related to financial instruments
applicable to the Company's utility operations is dependent on the treatment
authorized under future ratemaking proceedings.
Cash and cash equivalents -- The carrying amount approximates fair value
due to the short maturity of these instruments.
Quad Cities nuclear decommissioning trust fund -- Fair value is based on
quoted market prices of the investments held by the fund.
Marketable securities -- Fair value is based on quoted market prices.
Debt securities -- Fair value is based on the discounted value of the
future cash flows expected to be received from such investments.
Equity investments carried at cost -- Fair value is based on an estimate
of the Company's share of partnership equity, offers from unrelated third
parties or the discounted value of the future cash flows expected to be
received from such investments.
F-69
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable -- Fair value is estimated to be the carrying amount due to
the short maturity of these issues.
Preferred shares -- Fair value of preferred shares with mandatory
redemption provisions is estimated based on the quoted market prices for
similar issues.
Long-term debt -- Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Instruments Owned by the Company:
Equity investments carried at cost ................... $ 33,979 $ 36,491 $ 95,339 $ 273,311
Financial Instruments Issued by the Company:
MidAmerican preferred securities; subject to
mandatory redemption ............................... $ 50,000 $ 53,650 $ 50,000 $ 52,920
MidAmerican-obligated preferred securities; subject
to mandatory redemption .............................. $ 100,000 $ 104,250 $ 100,000 $ 100,490
Long-term debt, including current portion ............. $1,178,769 $1,214,951 $1,474,701 $1,522,500
</TABLE>
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent merger
with Consolidated Communications Inc. prohibit the Company from selling or
otherwise disposing of any of the common stock of McLeodUSA prior to September
24, 1998, without approval of McLeodUSA's board of directors. As a result of
the agreements, the Company's investment was considered restricted stock and as
such, was recorded at cost in all periods prior to September 1997. Beginning in
September 1997, the investment is no longer considered restricted for
accounting purposes and is recorded at fair value. At December 31, 1997 the
cost and fair value of the McLeodUSA investment were $45.2 million and $257.9
million, respectively. The unrealized gain is recorded, net of income taxes, as
a valuation allowance in common shareholders' equity. At December 31, 1997, the
net unrealized gain and deferred income taxes for this investment were $212.7
million and $74.4 million, respectively.
F-70
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities ................... $257,316 $226,747 $(10,522) $473,541
Municipal bonds ..................... 35,217 2,116 (1) 37,332
U. S. Government securities ......... 18,753 800 (4) 19,549
Corporate securities ................ 13,579 222 (3) 13,798
Cash equivalents .................... 9,862 -- -- 9,862
-------- -------- ---------- --------
$334,727 $229,885 $(10,530) $554,082
======== ======== ========== ========
Held-to-maturity:
Equity securities ................... $ 6,376 $ -- $ -- $ 6,376
Debt securities ..................... 4,567 345 -- 4,912
-------- -------- ---------- --------
$ 10,943 $ 345 $ -- $ 11,288
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Equity securities .................. $208,226 $4,883 $ (8,325) $204,784
Municipal bonds .................... 41,800 3,041 (356) 44,485
U.S. Government securities ......... 26,814 137 (157) 26,794
Cash equivalents ................... 11,152 -- -- 11,152
-------- ------ -------- --------
$287,992 $8,061 $ (8,838) $287,215
======== ====== ======== ========
Held-to-maturity:
Equity securities .................. $ 6,435 $ -- $ (196) $ 6,239
Debt securities .................... 15,445 252 -- 15,697
-------- ------ -------- --------
$ 21,880 $ 252 $ (196) $ 21,936
======== ====== ======== ========
</TABLE>
At December 31, 1997, the debt securities held by the Company had the
following maturities (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Within 1 year .............. $ 2,971 $ 2,987 $1,718 $2,014
1 through 5 years .......... 14,057 14,377 2,137 2,143
5 through 10 years ......... 26,821 28,119 139 147
Over 10 years .............. 23,700 25,196 573 608
</TABLE>
During 1996, the Company sold a portion of its held-to-maturity securities
due to a significant deterioration in the issuer's credit worthiness. Such
securities had a carrying value of $4.8 million and proceeds from the sale were
$4.3 million.
F-71
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds and the gross realized gains and losses on the disposition of
investments held by the Company for the years ended December 31, are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sales ............ $211,691 $250,772 $106,910
Gross realized gains ........... 14,320 9,920 3,923
Gross realized losses .......... (6,480) (7,950) (3,082)
</TABLE>
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Current
Federal ........................... $ 91,627 $ 80,165 $ 54,430
State ............................. 21,619 22,100 13,330
--------- -------- --------
113,246 102,265 67,760
--------- -------- --------
Deferred
Federal ........................... (29,257) 2,627 5,750
State ............................. (8,242) (264) 1,470
--------- -------- --------
(37,499) 2,363 7,220
Investment tax credit, net ......... (7,357) (6,206) (8,177)
--------- -------- --------
Total ............................. $ 68,390 $ 98,422 $ 66,803
========= ======== ========
</TABLE>
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets
Related to:
Investment tax credits ................................ $ 55,998 $ 61,349
Unrealized losses ..................................... 7,880 12,034
Pensions .............................................. 17,339 17,648
AMT credit carry forward .............................. -- 10,188
Nuclear reserves and decommissioning .................. 15,287 8,233
Other ................................................. 1,589 5,839
-------- --------
Total ................................................ $ 98,093 $115,291
======== ========
1997 1996
--------- ---------
Deferred tax liabilities
Related to:
Depreciable property .................................. $504,594 $545,459
Income taxes recoverable through future rates ......... 197,877 201,998
Unrealized gains ...................................... 81,501 --
Energy efficiency ..................................... 40,902 44,734
Reacquired debt ....................................... 15,346 14,265
FERC Order 636 ........................................ 2,857 9,023
Other ................................................. 16,811 22,112
--------- ---------
Total ................................................ $859,888 $837,591
========= =========
</TABLE>
F-72
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of subsidiary, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Effective federal and state income tax rate .................. 31% 39% 34%
Amortization of investment tax credit ........................ 3 2 4
State income tax, net of federal income tax benefit .......... (4) (6) (5)
Dividends received deduction ................................. 2 2 2
Other ........................................................ 3 (2) --
--- --- ---
Statutory federal income tax rate ............................ 35% 35% 35%
=== === ===
</TABLE>
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Materials and supplies, at average cost .......... $31,425 $ 32,222
Coal stocks, at average cost ..................... 14,225 32,293
Gas in storage, at LIFO cost ..................... 35,430 23,915
Fuel oil, at average cost ........................ 2,344 1,264
Other ............................................ 2,667 1,170
------- --------
Total ........................................... $86,091 $ 90,864
======= ========
</TABLE>
At December 31, 1997 prices, the current cost of gas in storage was $50.3
million.
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a
wholly-owned statutory business trust of MidAmerican, issued 4,000,000 shares
of 7.98% Series MidAmerican-obligated mandatorily redeemable preferred
securities (the Preferred Securities). The sole assets of the Trust are $103.1
million of MidAmerican 7.98% Series A Debentures due 2045 (the Debentures).
There is a full and unconditional guarantee by MidAmerican of the Trust's
obligations under the Preferred Securities. MidAmerican has the right to defer
payments of interest on the Debentures by extending the interest payment period
for up to 20 consecutive quarters. If interest payments on the Debentures are
deferred, distributions on the Preferred Securities will also be deferred.
During any deferral, distributions will continue to accrue with interest
thereon and MidAmerican may not declare or pay any dividend or other
distribution on, or redeem or purchase, any of its capital stock.
The Debentures may be redeemed by MidAmerican on or after December 18,
2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion thereof, are redeemed, the Trust must
redeem a like amount of the Preferred Securities. If a termination of the Trust
occurs, the Trust will distribute to the holders of the Preferred Securities a
like amount of the Debentures unless such a distribution is determined not to
be practicable. If such determination is made, the holders of the Preferred
Securities will be entitled to receive, out of the assets of the trust after
satisfaction of its liabilities, a liquidation amount of $25 for each Preferred
Security held plus accrued and unpaid distributions.
F-73
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its
billed accounts receivable to MidAmerican Energy Funding Corporation (Funding
Corp.), a special purpose entity established to purchase accounts receivable
from MidAmerican. Funding Corp. in turn has sold receivable interests to
outside investors. In consideration of the sale, MidAmerican received $70
million in cash and the remaining balance in the form of a subordinated note
from Funding Corp. The agreement is structured as a true sale under which the
creditors of Funding Corp. will be entitled to be satisfied out of the assets
of Funding Corp. prior to any value being returned to MidAmerican or its
creditors and, as such, the accounts receivable sold are not reflected on
Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997,
$130.0 million, net of reserves, was sold under the agreement.
(19) EARNINGS PER SHARE
Reconciliation for the Income and Shares of the Basic and Diluted per
share computations for income from continuing operations for the years ended
December 31 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
--------------------------------- -----------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- -------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS ......... $139,332 $143,761
BASIC EPS
Income Available to Common
Shareholders ............................. $139,332 98,058 $1.42 $143,761 100,752 $ 1.43
===== ======
EFFECT OF DILUTIVE SECURITIES
Stock Options ............................. -- 107 -- 89
-------- ------ -------- -------
DILUTED EPS
Income Available to Common
Shareholders ............................. $139,332 98,165 $1.42 $143,761 100,841 $ 1.43
======== ====== ===== ======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------
PER
SHARE
INCOME SHARES AMOUNT
----------- --------- -------
<S> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS ............... $119,705
BASIC EPS
Income Available to Common Shareholders ......... $119,705 100,401 $1.19
=====
EFFECT OF DILUTIVE SECURITIES
Stock Options ................................... -- 20
-------- -------
DILUTED EPS
Income Available to Common Shareholders ......... $119,705 100,421 $1.19
======== ======= =====
</TABLE>
F-74
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues ................................. $584,395 $390,615 $440,698 $506,573
Operating income ................................... 77,233 55,395 97,948 39,930
Income from continuing operations .................. 34,174 24,176 49,705 31,277
Income (loss)from discontinued operations .......... (234) 408 (2,793) (1,609)
Earnings on common stock ........................... 33,940 24,584 46,912 29,668
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations .................. $ 0.34 $ 0.24 $ 0.51 $ 0.33
Income (loss) from discontinued operations ......... -- 0.01 (0.03) (0.02)
-------- -------- -------- --------
$ 0.34 $ 0.25 $ 0.48 $ 0.31
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues ................................. $ 507,596 $ 391,466 $ 434,678 $ 538,872
Operating income ................................... 100,141 65,004 97,919 80,574
Income from continuing operations .................. 48,405 25,099 40,548 29,709
Income (loss) from discontinued operations ......... 2,642 3,896 (17,992) (1,261)
Earnings on common stock ........................... 51,047 28,995 22,556 28,448
Earnings per average common share and Earnings
per average common share assuming dilution:
Income from continuing operations .................. $ 0.48 $ 0.25 $ 0.40 $ 0.29
Income (loss) from discontinued operations ......... 0.03 0.04 (0.18) (0.01)
--------- --------- --------- ---------
$ 0.51 $ 0.29 $ 0.22 $ 0.28
========= ========= ========= =========
</TABLE>
The quarterly data reflect seasonal variations common in the utility
industry.
F-75
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) OTHER INFORMATION:
The Company completed a merger-related restructuring plan during 1995.
Other operating expenses in the Consolidated Statements of Income for 1995
includes $33.4 million related to the restructuring plan.
Non-Operating -- Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Other-than-temporary declines in value of investments and
other assets ............................................... $ (3,443) $ (15,566) $ (17,971)
IES merger costs ............................................ -- (8,689) --
Special purpose fund income ................................. 1,989 3,301 1,863
Energy efficiency carrying charges .......................... 4,993 3,255 3,092
Gain on sale of cushion gas ................................. 855 3,182 --
Incentive gas purchase plan award ........................... 4,914 2,677 --
Agency gas sales, net ....................................... 1,184 1,840 228
Gain (loss) on reacquisition of long-term debt .............. (556) 1,105 --
Gain on sale of assets, net ................................. 10,213 974 8,570
MidAmerican merger costs .................................... -- -- (4,624)
Allowance for equity funds used during construction ......... -- -- 481
Income (loss) from equity method investments ................ 1,273 2,510 (312)
NPPD settlement ............................................. 2,248 -- --
Other ....................................................... (1,559) 1,391 (1,794)
-------- --------- ---------
Total ...................................................... $ 22,111 $ (4,020) $ (10,467)
======== ========= =========
</TABLE>
F-76
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
------------------------ ----------------------- ---------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Electric utility ................................. $287,094 $261,801 $543,448 $516,117 $1,153,631 $1,086,271
Gas utility ...................................... 67,288 80,913 240,488 292,478 484,316 547,627
Nonregulated ..................................... 39,041 42,549 81,015 156,827 183,863 305,074
-------- -------- -------- -------- ---------- ----------
393,423 385,263 864,951 965,422 1,821,810 1,938,972
-------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES
Utility:
Cost of fuel, energy and capacity ............... 57,085 52,141 102,284 111,424 226,620 229,243
Cost of gas sold ................................ 32,648 45,099 137,969 186,932 297,053 360,521
Other operating expenses ........................ 111,746 98,691 218,523 192,298 456,019 364,703
Maintenance ..................................... 30,740 22,349 53,323 46,098 105,315 90,844
Depreciation and amortization ................... 44,191 42,060 88,382 84,068 174,854 166,654
Property and other taxes ........................ 24,295 24,853 49,765 50,343 100,739 93,871
-------- -------- -------- -------- ---------- ----------
300,705 285,193 650,246 671,163 1,360,600 1,305,836
-------- -------- -------- -------- ---------- ----------
Nonregulated:
Cost of sales ................................... 24,197 37,243 63,233 146,213 157,202 287,219
Other ........................................... 14,180 7,432 20,489 15,418 35,147 34,796
-------- -------- -------- -------- ---------- ----------
38,377 44,675 83,722 161,631 192,349 322,015
-------- -------- -------- -------- ---------- ----------
Total operating expenses ........................ 339,082 329,868 733,968 832,794 1,552,949 1,627,851
-------- -------- -------- -------- ---------- ----------
OPERATING INCOME ................................. 54,341 55,395 130,983 132,628 268,861 311,121
-------- -------- -------- -------- ---------- ----------
NON-OPERATING INCOME
Interest income .................................. 2,178 1,562 4,630 3,115 6,833 4,603
Dividend income .................................. 2,738 3,707 5,452 7,255 11,989 15,338
Realized gains and losses on securities, net ..... 954 98 2,019 616 9,201 (723)
Other, net ....................................... 778 3,279 6,435 7,264 21,282 (1,484)
-------- -------- -------- -------- ---------- ----------
6,648 8,646 18,536 18,250 49,305 17,734
-------- -------- -------- -------- ---------- ----------
FIXED CHARGES
Interest on long-term debt ....................... 20,324 22,829 40,608 46,292 84,214 97,496
Other interest expense ........................... 3,416 4,119 6,628 5,448 11,214 10,666
Preferred dividends of subsidiaries .............. 3,233 3,231 6,465 8,000 12,933 14,028
Allowance for borrowed funds ..................... (921) (603) (1,675) (1,312) (2,960) (3,068)
-------- -------- -------- -------- ---------- ----------
26,052 29,576 52,026 58,428 105,401 119,122
-------- -------- -------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES .................................... 34,937 34,465 97,493 92,450 212,765 209,733
INCOME TAXES ..................................... 13,937 10,289 37,760 34,100 72,050 81,126
-------- -------- -------- -------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ................ 21,000 24,176 59,733 58,350 140,715 128,607
-------- -------- -------- -------- ---------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations (net of
income taxes) ................................... -- 408 -- 698 (816) (3,723)
Loss on disposal (net of income taxes) ........... -- -- -- (524) (3,586) (15,356)
-------- -------- -------- -------- ---------- ----------
-- 408 -- 174 (4,402) (19,079)
-------- -------- -------- -------- ---------- ----------
NET INCOME ....................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524 $ 136,313 $ 109,528
======== ======== ======== ======== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING ................ 94,473 98,621 94,675 99,534 95,619 100,096
EARNINGS PER COMMON SHARE
--BASIC AND DILUTED:
Continuing operations ............................ $ 0.22 $ 0.24 $ 0.63 $ 0.59 $ 1.47 $ 1.28
Discontinued operations .......................... -- 0.01 -- -- (0.04) (0.19)
-------- -------- -------- -------- ---------- ----------
Earnings per average common share ................ $ 0.22 $ 0.25 $ 0.63 $ 0.59 $ 1.43 $ 1.09
======== ======== ======== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE ..................... $ 0.30 $ 0.30 $ 0.60 $ 0.60 $ 1.20 $ 1.20
======== ======== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
------------------------- ----------------------- -------------------------
1998 1997 1998 1997 1998 1997
------------ ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME ................................ $ 21,000 $ 24,584 $59,733 $58,524 $136,313 $109,528
--------- -------- ------- ------- -------- --------
OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on securities:
Unrealized holding gains (losses) during
period ................................... (29,603) (1,104) 53,253 3,022 274,158 5,810
Less reclassification adjustment for
realized gains (losses) reflected in net
income during period ................... 954 95 2,019 613 9,193 (729)
--------- -------- ------- ------- -------- --------
(30,557) (1,199) 51,234 2,409 264,965 6,539
Income tax (benefit) expense .............. (10,535) (429) 18,014 789 92,792 2,234
--------- -------- ------- ------- -------- --------
Other comprehensive income, net .......... (20,022) (770) 33,220 1,620 172,173 4,305
--------- -------- ------- ------- -------- --------
COMPREHENSIVE INCOME ...................... $ 978 $ 23,814 $92,953 $60,144 $308,486 $113,833
========= ======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
--------------------------------------------
JUNE 30 DECEMBER 31
----------------------------- ------------
1998 1997 1997
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
UTILITY PLANT
Electric ........................................................ $4,106,986 $4,050,767 $4,084,920
Gas ............................................................. 766,127 731,978 756,874
---------- ---------- ----------
4,873,113 4,782,745 4,841,794
Less accumulated depreciation and amortization .................. 2,350,265 2,215,077 2,275,099
---------- ---------- ----------
2,522,848 2,567,668 2,566,695
Construction work in progress ................................... 82,671 37,880 55,418
---------- ---------- ----------
2,605,519 2,605,548 2,622,113
---------- ---------- ----------
POWER PURCHASE CONTRACT ......................................... 168,430 190,504 173,107
---------- ---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS ........................... -- 6,610 --
---------- ---------- ----------
CURRENT ASSETS
Cash and cash equivalents ....................................... 121,720 57,297 10,468
Receivables ..................................................... 160,212 203,511 207,471
Inventories ..................................................... 64,471 69,796 86,091
Other ........................................................... 14,970 10,227 18,452
---------- ---------- ----------
361,373 340,831 322,482
---------- ---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ...................... 883,797 605,669 799,524
---------- ---------- ----------
OTHER ASSETS .................................................... 388,378 386,543 360,865
---------- ---------- ----------
TOTAL ASSETS .................................................... $4,407,497 $4,135,705 $4,278,091
========== ========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity ..................................... $1,311,583 $1,186,313 $1,301,286
MidAmerican preferred securities, not subject to mandatory
redemption ..................................................... 31,760 31,765 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities ............................... 50,000 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures..... 100,000 100,000 100,000
Long-term debt (excluding current portion) ...................... 1,043,909 1,109,531 1,034,211
---------- ---------- ----------
2,537,252 2,477,609 2,517,260
---------- ---------- ----------
CURRENT LIABILITIES
Notes payable ................................................... 167,429 146,185 138,054
Current portion of long-term debt ............................... 219,260 129,756 144,558
Current portion of power purchase contract ...................... 14,361 13,717 14,361
Accounts payable ................................................ 90,593 87,515 145,855
Taxes accrued ................................................... 108,916 81,795 92,629
Interest accrued ................................................ 21,637 26,457 22,355
Other ........................................................... 69,475 48,969 38,766
---------- ---------- ----------
691,671 534,394 596,578
---------- ---------- ----------
OTHER LIABILITIES
Power purchase contract ......................................... 83,143 97,504 83,143
Deferred income taxes ........................................... 772,609 710,431 761,795
Investment tax credit ........................................... 80,274 85,985 83,127
Other ........................................................... 242,548 229,782 236,188
---------- ---------- ----------
1,178,574 1,123,702 1,164,253
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ............................ $4,407,497 $4,135,705 $4,278,091
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------ -------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ................................... 49,624 47,573 98,060 95,982
Net decrease in deferred income taxes and investment tax
credit, net ................................................... (4,748) (6,795) (10,121) (11,948)
Amortization of other assets .................................... 10,133 5,596 19,345 12,474
Capitalized cost of real estate sold ............................ 308 506 458 796
Loss from discontinued operations ............................... -- (408) -- (174)
Gain on sale of securities, assets and other investments ........ (1,063) (362) (8,595) (1,827)
Other-than-temporary decline in value of investments ............ 72 92 110 252
Impact of changes in working capital, net of effects from
discontinued operations ....................................... (31,556) (77,780) 63,377 71,709
Other ........................................................... 13,826 3,584 15,902 (751)
--------- --------- --------- ----------
Net cash provided (used) ......................................... 57,596 (3,410) 238,269 225,037
--------- --------- --------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................ (43,906) (37,426) (68,592) (64,029)
Quad Cities Nuclear Power Station decommissioning trust fund ..... (2,844) (2,140) (5,658) (4,280)
Deferred energy efficiency expenditures .......................... -- (2,626) -- (6,349)
Nonregulated capital expenditures ................................ (17,485) (4,377) (38,683) (7,002)
Purchase of real estate brokerage company ........................ (78,985) -- (78,985) --
Purchase of securities ........................................... (45,125) (53,064) (98,354) (116,407)
Proceeds from sale of securities ................................. 52,772 53,397 104,817 132,049
Proceeds from sale of assets and other investments ............... 20,145 526 28,344 13,670
Investment in discontinued operations ............................ -- (1,822) -- 145,193
Other investing activities, net .................................. 2,765 (289) (13) 52
--------- --------- --------- ----------
Net cash (used) provided ......................................... (112,663) (47,821) (157,124) 92,897
--------- --------- --------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ............................................ (28,310) (29,544) (56,686) (59,723)
Issuance of long-term debt, net of issuance cost ................. 158,440 -- 158,440 --
Retirement of long-term debt, including reacquisition cost ....... (391) (34,672) (75,422) (61,790)
Reacquisition of preferred shares ................................ (1) (1) (3) (4)
Reacquisition of common shares ................................... (10,754) (26,235) (25,597) (46,564)
Decrease in MidAmerican Capital Company unsecured revolving
credit facility ................................................. (3,200) -- -- (174,500)
Net increase (decrease) in notes payable ......................... 26,366 105,975 29,375 (15,805)
----------- ---------- ----------- -----------
Net cash provided (used) ........................................ 142,150 15,523 30,107 (358,386)
----------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 87,083 (35,708) 111,252 (40,452)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 34,637 93,005 10,468 97,749
----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 121,720 $ 57,297 $ 121,720 $ 57,297
=========== ========== =========== ===========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ........................ $ 18,865 $ 19,708 $ 43,999 $ 49,978
=========== ========== =========== ===========
Income taxes paid ................................................ $ 33,927 $ 76,690 $ 34,651 $ 76,753
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) GENERAL:
The consolidated financial statements included herein have been prepared
by Holdings, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company, all adjustments have been
made to present fairly the financial position, the results of operations,
comprehensive income and the changes in cash flows for the periods presented.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's latest Annual Report on Form
10-K.
B) ENVIRONMENTAL MATTERS:
1) Manufactured Gas Plant Facilities:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas plant (MGP) facilities may pose a
threat to the public health or the environment if such contaminants are in
sufficient quantities and at such concentrations as to warrant remedial action.
MidAmerican is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at seventeen of the sites and has
completed investigations at one of the sites. In addition, MidAmerican has
completed removals at three of the sites. MidAmerican is continuing to evaluate
several of the sites to determine its responsibility, if any, for conducting
site investigations or other site activity.
MidAmerican's present estimate of probable remediation costs for the sites
discussed above as of June 30, 1998 is $25 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The
Illinois Commerce Commission (ICC) has approved the use of a tariff rider which
permits recovery of the actual costs of litigation, investigation and
remediation relating to former MGP sites. MidAmerican's present rates in Iowa
provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue
recovery of the remediation costs from other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has potential legal liability
for the site and whether information exists to indicate that contaminated
wastes remain at the site. Second, if potential legal liability exists, the
costs of performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. Finally, as the investigation is performed and
if it is determined remedial action is required, the best estimate of
remediation costs is accrued. If necessary, the estimate is revised when a
consent order is issued. The estimated recorded liabilities for these
properties include incremental direct costs of the remediation effort, costs
for future monitoring at sites and costs of compensation to employees for time
expected to be spent directly on the remediation effort. The estimated recorded
liabilities for these properties are based upon preliminary data. Thus, actual
costs could vary significantly from the estimates. The estimate could change
materially based on facts and circumstances derived from site investigations,
changes in required remedial action and changes in technology relating to
remedial alternatives. In addition, insurance recoveries for some or all of the
costs may be possible, but the liabilities recorded have not been reduced by
any estimate of such recoveries.
F-81
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B) ENVIRONMENTAL MATTERS: (CONTINUED)
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican's financial position or results of operations.
2) Clean Air Act:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) for ozone and a new standard for fine particulate
matter. Based on data to be obtained from monitors located throughout each
state, the EPA will determine which states have areas that do not meet the air
quality standards (i.e., areas that are classified as nonattainment). If a
state has area(s) classified as nonattainment area(s), the state is required to
submit a State Implementation Plan specifying how it will reach attainment of
the standards through emission reductions or other means.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these
emissions reduction requirements as EPA's rule is currently drafted, and, as
such, MidAmerican does not anticipate that its facilities will be subject to
additional emissions reductions as a result of this initiative. The EPA
anticipates issuing its final rules in September 1998. MidAmerican will
continue to closely monitor this rulemaking proceeding.
C) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced
its Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other
parties in a consolidated rate proceeding involving MidAmerican's electric
pricing proposal and a filing by the OCA. The agreement includes a number of
components of MidAmerican's pricing proposal. Six major components of the
settlement and their status are as follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5
million.
2) Rates for industrial customers will be reduced by $6 million annually
and rates for commercial customers will be reduced by $4 million annually.
MidAmerican has been given permission to implement these reductions through a
retail access pilot project and through negotiated individual contracts. In the
event that these contracts in the aggregate do not reduce rates by $6 million
and $4 million, respectively, MidAmerican is required to apply any remaining
amount to across-the-board rate reductions to customers who do not enter into
contracts.
F-82
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C) RATE MATTERS: (CONTINUED)
The effective date for these rate reductions was set for June 1, 1998 in
the IUB Order approving the settlement. However, MidAmerican has pending before
the IUB a request to extend the deadlines until September 1, 1998 for
industrial customers, and December 31, 1998 for commercial customers. That
request would involve an obligation to increase the amount of the reduction on
a one-time basis to reflect the time value of money between June 1, 1998 and
the new requested deadlines. MidAmerican estimates it will not have any
interest obligation with respect to the industrial contracts, and will not
incur any material interest obligation with respect to its commercial
contracts.
The negotiated contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose
programs, tax changes, and transition costs. While the contract prices are
fixed (except for the potential adjustment elements), the costs MidAmerican
incurs to fulfill these contracts will vary. On an aggregate basis the annual
revenues under contract are approximately $125 million.
The IUB is currently considering the contracting process in two
proceedings. The outcome of those proceedings could impact further contracting
efforts, as well as determine whether any of the contracts will need to be
renegotiated, and the extent to which the annualized rate reduction will take
the form of negotiated contracts versus across-the-board rate reductions.
3) A tracking mechanism (Cooper Tracker) is being used to currently
recover costs for capital improvements required by the Cooper Nuclear Station
Power Purchase Contract which will offset approximately $6 million of the rate
reductions in 1998. Other operating expenses will correspondingly increase due
to currently expensing the related costs.
4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, and thus, fuel costs had little impact on net income.
Since then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. To the extent actual fuel costs vary from
that factor, pre-tax earnings are impacted. The fuel cost factor will be
reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs
vary 15% above or below the factor included in base rates.
5) If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement permits MidAmerican to file for
increased rates if the return falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.
6) MidAmerican will develop a pilot program for a market access service
which allows customers with at least 4 MW of load to choose energy suppliers.
The pilot program, which is subject to approval by the IUB and the Federal
Energy Regulatory Commission (FERC), is limited to 60 MW of participation the
first year and can be expanded by 15 MW annually until the conclusion of the
program. Any loss of revenues associated with the pilot program will be
considered part of the $10 million annual reduction for commercial and
industrial customers as described above, but may not be recovered from other
customer classes. The program was filed with the IUB and the FERC in September
1997. The Company anticipates that the necessary approvals will be received by
the fourth quarter of 1998.
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71
F-83
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: (CONTINUED)
allows, among other things, the deferral of costs that would otherwise be
expensed when incurred. A possible consequence of the changes in the utility
industry is the discontinued applicability of SFAS 71. The majority of
MidAmerican's electric and gas utility operations currently meet the criteria
of SFAS 71, but its applicability is periodically reexamined. On December 16,
1997, MidAmerican's generation operations serving Illinois were no longer
subject to the provisions of SFAS 71 due to passage of restructuring
legislation in Illinois. Thus, MidAmerican was required to write off regulatory
assets and liabilities from its balance sheet related to its Illinois
generation operations. The net amount of such write-offs were immaterial. If
other utility operations no longer meet the criteria of SFAS 71, MidAmerican
would be required to write off the related regulatory assets and liabilities
from its balance sheet and thus, a material adjustment to earnings in that
period could result. As of June 30, 1998, MidAmerican had approximately $312
million of regulatory assets in its Consolidated Balance Sheet because these
costs are expected to be recovered in future charges to utility customers.
E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:
The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures
included in the Consolidated Balance Sheets were issued by MidAmerican Energy
Financing I (the Trust), a wholly-owned statutory business trust of
MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican
7.98% Series A Debentures due 2045.
F) COMMON SHAREHOLDERS' EQUITY:
In March 1997, Holdings announced its plan to repurchase up to $200
million of the Company's common stock. The Company plans to purchase the shares
from time to time as market conditions warrant. As of June 30, 1998, the
Company had repurchased approximately 6.2 million shares for $114.8 million
under the plan. In addition, a subsidiary has acquired 437,131 shares of
Holdings common stock which are also excluded from shares outstanding.
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES:
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income refers,
in general, to changes in the Company's equity, except those resulting from
transactions with shareholders. "Unrealized holding gains (losses)" reflects
the overall increase (decrease) in the market value of marketable securities
held by the Company as available-for-sale. The "reclassification adjustment"
removes any gains (losses) that have been realized from sales of those
securities and reflected in the Company's Net Income.
F-84
<PAGE>
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G) DETAIL OF OTHER COMPREHENSIVE INCOME -- INCOME TAXES: (CONTINUED)
The following table shows the income tax expense or benefit related to
each component (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30
---------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holding (losses)/gains
during period
Before income taxes .................. $ (29,603) $ (1,104) $ 53,253 $3,022 $ 274,158 $ 5,810
Income tax benefit/(expense) ......... 10,195 392 (18,697) (949) (95,903) (1,954)
--------- -------- --------- ------ --------- --------
(19,408) (712) 34,556 2,073 178,255 3,856
--------- -------- --------- ------ --------- --------
Less reclassification adjustment for
realized gains/(losses) reflected in
net income during period
Before income taxes .................. 954 95 2,019 613 9,193 (729)
Income tax (expense)/benefit ......... (340) (37) (683) (160) (3,111) 280
--------- -------- --------- ------ --------- --------
614 58 1,336 453 6,082 (449)
--------- -------- --------- ------ --------- --------
Other Comprehensive Income,
Net ................................. $ (20,022) $ (770) $ 33,220 $1,620 $ 172,173 $ 4,305
========= ======== ========= ====== ========= ========
</TABLE>
H) MCLEODUSA INCORPORATED INVESTMENT:
Included in investments on the Consolidated Balance Sheets is the
Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA).
McLeodUSA common stock has been publicly traded since June 14, 1996. Investor
agreements related to McLeodUSA's initial public offering and subsequent merger
with Consolidated Communications Inc. prohibit the Company from selling or
otherwise disposing of any of the common stock of McLeodUSA prior to September
24, 1998, without approval of McLeodUSA's board of directors. As a result of
the agreements, the Company's investment was considered restricted stock and,
as such, was recorded at cost in all periods prior to September 1997. Beginning
in September 1997, the investment is no longer considered restricted for
accounting purposes and is recorded at fair value. At June 30, 1998, the cost
and fair value of the McLeodUSA investment were $45.2 million and $313.3
million, respectively. The unrealized gain is recorded, net of income taxes, as
accumulated comprehensive income in common shareholders' equity. At June 30,
1998, the unrealized gain and deferred income taxes for this investment were
$268.1 million and $93.8 million, respectively.
I) SUBSEQUENT EVENT:
On August 11, 1998, a definitive merger agreement was entered into between
the Company and CalEnergy, a global provider of energy services. Under the
terms of the agreement, the shareholders of the Company will receive $27.15
cash for each share of their common stock reflecting a 36 percent premium over
the August 11, 1998 closing price. The merger will need to be approved by the
shareholders of both companies, the Federal Energy Regulatory Commission, and
the Nuclear Energy Regulatory Commission. Filings will also be made with the
Iowa Utilities Board, which has the right to review the merger and to
disapprove it only if found not in the public interest, the Federal Trade
Commission and the Department of Justice. State regulators in Illinois will be
notified of the merger. Management believes completion of the merger could
occur by the first quarter of 1999.
F-85
<PAGE>
INDEX TO PRO FORMA FINANCIAL DATA
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Data
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1998 ........... P-3
Unaudited Pro Forma Combined Condensed Statement of Operations for the Six Months
Ended June 30, 1998 .............................................................. P-4
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations for
the Year Ended December 31, 1997 ................................................. P-5
Notes to Unaudited Pro Forma Combined Condensed Financial Data ..................... P-6
</TABLE>
P-1
<PAGE>
The following unaudited pro forma combined condensed financial statements
are based on the historical consolidated financial statements of CalEnergy and
MidAmerican, combined and adjusted to give effect on a pro forma basis to the
Recent Company Debt Offering, the Securities Offering and expected refinancing
of the Senior Discount Notes, and on a pro forma as adjusted basis, to those
transactions and the MidAmerican Merger and the transactions contemplated
thereby (including the related financing), as described in the notes thereto.
Certain amounts in the MidAmerican financial statements have been reclassified
to conform to CalEnergy's presentation. These statements should be read in
conjunction with the historical financial statements and notes thereto which
are included and incorporated by reference in this Prospectus Supplement. See
"Incorporation by Reference."
The unaudited pro forma combined condensed statements of earnings for the
year ended December 31, 1997 and for the six months ended June 30, 1998 present
the results for CalEnergy and MidAmerican as if the MidAmerican Merger had
occurred at the beginning of each period presented. The accompanying unaudited
pro forma combined condensed balance sheet as of June 30, 1998 gives effect to
the MidAmerican Merger as of that date.
The pro forma adjustments are based upon preliminary estimates,
information currently available and certain assumptions that management
believes are reasonable under the circumstances. CalEnergy's actual
consolidated financial statements will reflect the effects of the MidAmerican
Merger on and after the effective time of the MidAmerican Merger rather than
the dates indicated above. The unaudited pro forma combined condensed financial
statements neither purport to represent what the combined results of operations
or financial condition actually would have been had the MidAmerican Merger and
related transactions in fact occurred on the assumed dates, nor to project the
combined results of operations and financial position for any future period.
The MidAmerican Merger will be accounted for by the purchase method and,
therefore, assets and liabilities of MidAmerican will be recorded at their fair
values. The excess of the purchase cost over the fair value of net assets
acquired at the effective time of the MidAmerican Merger will be recorded as
goodwill. Allocations included in the pro forma statements are based on
analysis which is not yet completed. Accordingly, the final value of the
purchase price and its allocation may differ, perhaps significantly, from the
amounts included in these pro forma statements.
At the effective time of the MidAmerican Merger, the MidAmerican
shareholders will receive $27.15 in cash for each issued and outstanding share
of MidAmerican common stock. The pro forma combined condensed financial
statements assume that all MidAmerican shares were tendered for the cash
consideration of $27.15 per share. The total consideration for the transaction
using this value was approximately $2.6 billion.
P-2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECENT
COMPANY RETIREMENT
DEBT OF SENIOR SECURITIES
CALENERGY OFFERING DISCOUNT NOTES OFFERING PRO FORMA
------------- ------------- ---------------- ------------ -------------
(NOTE 1) (NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........ $ 272,446 $1,375,000 $ (543,466) $100,493 $1,204,473
Restricted cash and
investments ..................... 407,289 -- -- -- 407,289
Marketable securities ............ -- -- -- -- --
Accounts receivable .............. 479,704 -- -- -- 479,704
Property, plants, contracts
and equipment, net .............. 4,358,649 -- -- -- 4,358,649
Excess of cost over fair value
of net assets acquired, net ..... 1,449,972 -- -- -- 1,449,972
Equity investments ............... 128,110 -- -- -- 128,110
Deferred charges and other
assets .......................... 385,711 25,000 (6,150) 1,750 406,311
---------- ---------- ---------- -------- ----------
Total assets ................... $7,481,881 $1,400,000 $ (549,616) $102,243 $8,434,508
========== ========== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable ................. $ 192,172 $ -- $ -- $ -- $ 192,172
Accrued interest and other
liabilities ..................... 1,134,383 -- -- -- 1,134,383
Parent company debt .............. 1,303,875 1,400,000 (529,640) 102,243 2,276,478
Subsidiary and project debt ...... 2,850,240 -- -- -- 2,850,240
Deferred income taxes ............ 550,644 -- -- 550,644
---------- ---------- -------- ----------
Total liabilities .............. 6,031,314 1,400,000 (529,640) 102,243 7,003,917
Deferred income .................. 50,979 -- -- -- 50,979
Company-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
trusts .......................... 553,930 -- -- -- 553,930
Preferred securities of
subsidiary ...................... 66,054 -- -- -- 66,054
Total stockholders' equity ....... 779,604 -- (19,976) -- 759,628
---------- ---------- ---------- -------- ----------
Total liabilities and
stockholders' equity .......... $7,481,881 $1,400,000 $ (549,616) $102,243 $8,434,508
========== ========== ========== ======== ==========
<PAGE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ---------- ------------- ----------------- --------------
(NOTE 4) (NOTE 5) (NOTES 6, 7 & 8)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........ $740,000 $500,000 $ 121,720 $ (2,563,075) $ 3,118
Restricted cash and
investments ..................... -- -- -- -- 407,289
Marketable securities ............ -- -- 619,878 -- 619,878
Accounts receivable .............. -- -- 160,212 -- 639,916
Property, plants, contracts
and equipment, net .............. -- -- 2,773,949 -- 7,132,598
Excess of cost over fair value
of net assets acquired, net ..... -- -- -- 1,373,226 2,823,198
Equity investments ............... -- -- -- -- 128,110
Deferred charges and other
assets .......................... 10,000 -- 731,738 (38,765) 1,109,284
-------- -------- ---------- ------------ -----------
Total assets ................... $750,000 $500,000 $4,407,497 $ (1,228,614) $12,863,391
======== ======== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable ................. $ -- $ -- $ 90,593 $ -- $ 282,765
Accrued interest and other
liabilities ..................... -- -- 620,354 142,405 1,897,142
Parent company debt .............. -- -- -- -- 2,276,478
Subsidiary and project debt ...... 750,000 -- 1,430,598 2,422 5,033,260
Deferred income taxes ............ -- -- 772,609 (62,485) 1,260,768
-------- -------- ---------- ------------ -----------
Total liabilities .............. 750,000 -- 2,914,154 82,342 10,750,413
Deferred income .................. -- -- -- -- 50,979
Company-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
trusts .......................... -- -- -- -- 553,930
Preferred securities of
subsidiary ...................... -- -- 181,760 627 248,441
Total stockholders' equity ....... -- 500,000 1,311,583 (1,311,583) 1,259,628
-------- -------- ---------- ------------ -----------
Total liabilities and
stockholders' equity .......... $750,000 $500,000 $4,407,497 $ (1,228,614) $12,863,391
======== ======== ========== ============ ===========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-3
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECENT
COMPANY RETIREMENT
DEBT OF SENIOR SECURITIES
CALENERGY OFFERING DISCOUNT NOTES OFFERING PRO FORMA
------------- ------------ ---------------- ------------ -------------
(NOTE 1) (NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue .............. $1,212,440 $ -- $ -- $ -- $1,212,440
Interest and other income ...... 52,389 -- -- -- 52,389
---------- --------- ---------- -------- ----------
Total revenues ............... 1,264,829 -- -- -- 1,264,829
COSTS AND EXPENSES:
Cost of sales .................. 582,413 -- -- -- 582,413
Operating expense .............. 213,778 -- -- -- 213,778
Corporate administration ....... 22,858 -- -- -- 22,858
Depreciation and
amortization .................. 165,584 -- -- -- 165,584
Interest expense ............... 188,206 55,150 (27,768) 3,848 219,436
Less capitalized interest ...... (28,477) -- -- -- (28,477)
---------- --------- ---------- -------- ----------
Total costs and expenses 1,144,362 55,150 (27,768) 3,848 1,175,592
---------- --------- ---------- -------- ----------
Income before tax .............. 120,467 (55,150) 27,768 (3,848) 89,237
Provision for income taxes ..... 40,483 (22,060) 11,107 (1,539) 27,991
---------- --------- ---------- -------- ----------
Income before minority
interest ...................... 79,984 (33,090) 16,661 (2,309) 61,246
Minority interest .............. 20,223 -- -- -- 20,223
---------- --------- ---------- -------- ----------
Net income ..................... $ 59,761 $ (33,090) $ 16,661 $ (2,309) $ 41,023
========== ========= ========== ======== ==========
Net income per share ........... $ 0.99 $ 0.68
========== ==========
Net income per
share--diluted ................ $ 0.95 $ 0.66
========== ==========
Basic shares outstanding ....... 60,658 60,658
========== ==========
Diluted shares outstanding ..... 74,641 (9,850) 64,791
========== ========= ==========
<PAGE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ---------- ------------- ----------------- --------------
(NOTE 4) (NOTE 5) (NOTES 6, 7 & 8)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue .............. $ -- $ -- $864,951 $ -- $2,077,391
Interest and other income ...... -- -- 18,536 147 71,072
--------- -------- -------- --------- ----------
Total revenues ............... -- -- 883,487 147 2,148,463
COSTS AND EXPENSES:
Cost of sales .................. -- -- 303,486 (2,884) 883,015
Operating expense .............. -- -- 335,104 (215) 548,667
Corporate administration ....... -- -- 6,996 167 30,021
Depreciation and
amortization .................. -- -- 88,382 16,986 270,952
Interest expense ............... 25,375 -- 47,236 -- 292,047
Less capitalized interest ...... -- -- (1,675) -- (30,152)
--------- -------- -------- --------- ----------
Total costs and expenses 25,375 -- 779,529 14,054 1,994,550
--------- -------- -------- --------- ----------
Income before tax .............. (25,375) -- 103,958 (13,907) 153,913
Provision for income taxes ..... (10,150) -- 37,760 1,303 56,904
--------- -------- -------- --------- ----------
Income before minority
interest ...................... (15,225) -- 66,198 (15,210) 97,009
Minority interest .............. -- -- 6,465 -- 26,688
--------- -------- -------- --------- ----------
Net income ..................... $ (15,225) $ -- $ 59,733 $ (15,210) $ 70,321
========= ======== ======== ========= ==========
Net income per share ........... $ 0.92
==========
Net income per
share--diluted ................ $ 0.89
==========
Basic shares outstanding ....... 16,094 76,752
======== ==========
Diluted shares outstanding ..... 16,094 4,196 85,081
======== ========= ==========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-4
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECENT
COMPANY RETIREMENT
DEBT OF SENIOR SECURITIES
CALENERGY OFFERING DISCOUNT NOTES OFFERING PRO FORMA
------------- ------------- ---------------- ------------ -------------
(NOTE 1) (NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue ................... $2,166,338 $ -- $ -- $ $2,166,338
--
Interest and other income ........... 104,573 -- -- -- 104,573
---------- ---------- ---------- ---------- ----------
Total revenues .................... 2,270,911 -- -- -- 2,270,911
COSTS AND EXPENSES:
Cost of sales ....................... 1,055,195 -- -- -- 1,055,195
Operating expense ................... 345,833 -- -- -- 345,833
Corporate administration ............ 52,705 -- -- -- 52,705
Depreciation and amortization ....... 276,041 -- -- -- 276,041
Loss on equity investment in
Casecnan ........................... 5,972 -- -- -- 5,972
Interest expense .................... 296,364 110,300 (55,536) 7,695 358,823
Less capitalized interest ........... (45,059) -- -- -- (45,059)
Non-recurring charge--asset
valuation impairment ............... 87,000 -- -- -- 87,000
---------- ---------- ---------- ---------- ----------
Total costs and expenses .......... 2,074,051 110,300 (55,536) 7,695 2,136,510
---------- ---------- ---------- ---------- ----------
Income before tax ................... 196,860 (110,300) 55,536 (7,695) 134,401
Provision for income taxes .......... 99,044 (44,120) 22,214 (3,078) 74,060
---------- ---------- ---------- ---------- ----------
Income before minority interest ..... 97,816 (66,180) 33,322 (4,617) 60,341
Minority interest ................... 45,993 -- -- -- 45,993
---------- ---------- ---------- ---------- ----------
Net income .......................... $ 51,823 $ (66,180) $ 33,322 $ (4,617) $ 14,348
========== ========== ========== ========== ==========
Net income per share ................ $ 0.77 $ 0.21
========== ==========
Net income per share--diluted ....... $ 0.75 $ 0.21
========== ==========
Basic shares outstanding ............ 67,268 67,268
========== ==========
Diluted shares outstanding .......... 68,686 68,686
========== ==========
<PAGE>
<CAPTION>
NON-RECOURSE EQUITY MIDAMERICAN PRO FORMA
FINANCING OFFERING MIDAMERICAN MERGER AS ADJUSTED
-------------- ---------- ------------- ----------------- --------------
(NOTE 4) (NOTE 5) (NOTES 6, 7 & 8)
<S> <C> <C> <C> <C> <C>
REVENUES:
Operating revenue ................... $ -- $ -- $1,922,281 $ -- $4,088,619
Interest and other income ........... -- -- 49,019 293 153,885
--------- -------- ---------- --------- ----------
Total revenues .................... -- -- 1,971,300 293 4,242,504
COSTS AND EXPENSES:
Cost of sales ....................... -- -- 821,958 (5,767) 1,871,386
Operating expense ................... -- -- 645,083 (429) 990,487
Corporate administration ............ -- -- 14,194 333 67,232
Depreciation and amortization ....... -- -- 170,540 33,974 480,555
Loss on equity investment in
Casecnan ........................... -- -- -- -- 5,972
Interest expense .................... 50,750 -- 99,932 -- 509,505
Less capitalized interest ........... -- -- (2,597) -- (47,656)
Non-recurring charge--asset
valuation impairment ............... -- -- -- -- 87,000
--------- -------- ---------- --------- ----------
Total costs and expenses .......... 50,750 -- 1,749,110 28,111 3,964,481
--------- -------- ---------- --------- ----------
Income before tax ................... (50,750) -- 222,190 (27,818) 278,023
Provision for income taxes .......... (20,300) -- 68,390 2,605 124,755
--------- -------- ---------- --------- ----------
Income before minority interest ..... (30,450) -- 153,800 (30,423) 153,268
Minority interest ................... -- -- 14,468 -- 60,461
--------- -------- ---------- --------- ----------
Net income .......................... $ (30,450) $ -- $ 139,332 $ (30,423) $ 92,807
========= ======== ========== ========= ==========
Net income per share ................ $ 1.11
==========
Net income per share--diluted ....... $ 1.09
==========
Basic shares outstanding ............ 16,094 83,362
========= ==========
Diluted shares outstanding .......... 16,094 84,780
========= ==========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data
P-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The Unaudited Pro Forma Combined Condensed Financial Data are based on the
following assumptions:
1. Issuance of $1,400 million 7.7% senior debt, net of $25 million debt issue
costs.
2. Retirement of the $529.6 million 10.25% Senior Discount Notes including a
call premium of $27.1 million and write off of deferred financing costs of
$6.1 million.
3. Issuance of $100 million 7.52% senior debt at 102.24264147%, net of $1.75
million debt issue costs.
4. Issuance of $750 million 6.5% notes of a subsidiary, prior to the
MidAmerican Merger, net of $10 million debt issue costs.
5. Issuance of 16.1 million shares of Common Stock of CalEnergy for $500
million, net, prior to the MidAmerican Merger.
6. The use of the proceeds of the debt and equity offerings described above to
purchase MidAmerican for $2,587.1 million, including transaction costs.
7. The preliminary adjustments which have been made to the assets and
liabilities of MidAmerican to reflect the effect of the acquisition
accounted for as a purchase business combination follow (in thousands):
<TABLE>
<S> <C>
Goodwill ..................................... $1,373,226
Other assets ................................. (38,765)
Other liabilities ............................ (118,405)
Long-term debt ............................... (2,422)
Deferred taxes ............................... 62,485
Preferred securities of subsidiaries ......... (627)
----------
$1,275,492
==========
</TABLE>
8. A. Included in other assets is primarily an adjustment to reflect the fair
value of MidAmerican's investments in real estate.
B. Included in other liabilities are adjustments to reflect MidAmerican's
compensation obligations and to reflect MidAmerican's long-term contracts
at fair value based on the estimated market prices for similar purchases
with similar remaining maturities.
C. Record amortization of the excess purchase price over the net assets
acquired using the straight line method over 40 years.
D. Record amortization of the purchase price accounting adjustments using
the straight line or other applicable method over the remaining estimated
lives.
E. Includes income tax expense for the effects of the pro forma adjustments
which affect taxable income at an effective rate of 40%.
F. For the six months ended June 30, 1998, earning per share--diluted is
further adjusted for certain convertible securities which are
antidilutive on a pro forma and a pro forma as adjusted basis.
9. Excluding the $87.0 million Indonesian asset impairment charge from the year
ended December 31, 1997 actual, pro forma and pro forma as adjusted
amounts, basic earnings per share would have been $2.06, $1.51 and $2.16,
respectively.
P-6
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PROSPECTUS
$1,926,587,500
CALENERGY COMPANY, INC.
COMMON STOCK, PREFERRED STOCK AND DEBT SECURITIES
CalEnergy Company, Inc. (the "Company") may from time to time offer,
together or separately, (i) shares of its common stock, par value $.0675 per
share ("Common Stock"), (ii) shares of its preferred stock, no par value
("Preferred Stock"), (iii) senior debt securities ("Senior Debt Securities")
and (iv) subordinated debt securities ("Subordinated Debt Securities" and
together with Senior Debt Securities, the "Debt Securities"). The Common Stock,
the Preferred Stock and the Debt Securities are collectively referred to herein
as the "Securities." The Securities in respect of which this Prospectus is
being delivered (the "Offered Securities") may be offered, separately or
together, in separate series, in amounts, at prices and on terms to be set
forth in a supplement to this Prospectus (a "Prospectus Supplement").
By separate prospectus, the form of which is included in the Registration
Statement of which this Prospectus forms a part, three Delaware statutory
business trusts (individually, a "CalEnergy Trust" and collectively, the
"CalEnergy Trusts"), which are wholly owned subsidiaries of the Company, may
from time to time severally offer preferred securities guaranteed by the
Company to the extent set forth therein and the Company may offer from time to
time junior subordinated debt securities either directly or to a CalEnergy
Trust. The aggregate public offering price of the securities to be offered by
this Prospectus and such other prospectus shall not exceed $1,926,587,500 (or
its equivalent in one or more foreign currencies, currency units or composite
currencies).
Specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in an applicable Prospectus
Supplement, that includes, where applicable, the following: (i) in the case of
Common Stock, the specific designation, number of shares, purchase price and
the rights and privileges thereof, together with any qualifications or
restrictions thereon and any listing on a securities exchange; (ii) in the case
of Preferred Stock, the specific designation, number of shares, purchase price
and the rights, preferences and privileges thereof and any qualifications or
restrictions thereon (including dividends, liquidation value, voting rights,
terms for the redemption, conversion or exchange thereof and any other specific
terms of the Preferred Stock) and any listing on a securities exchange; and
(iii) in the case of the Debt Securities, the specific designation, aggregate
principal amount, authorized denomination, maturity, premium, or discount, if
any, exchangeability, redemption, conversion, prepayment or sinking fund
provisions, if any, interest rate (which may be fixed or variable), if any,
method, if any, of calculating interest payments and dates for payment thereof,
dates on which premium, if any, will be payable, the right of the Company, if
any, to defer payment of interest on the Debt Securities and the maximum length
of such deferral period, the initial public offering price, any listing on a
securities exchange and other specific terms of the offering. Unless otherwise
indicated in the Prospectus Supplement, the Company does not intend to list any
of the Securities other than the Common Stock on a national securities
exchange. Any Prospectus Supplement relating to any series of Offered
Securities will contain information, where applicable, concerning certain
United States federal income tax considerations for the Offered Securities.
The Common Stock and Preferred Stock and Debt Securities offered pursuant
to this Prospectus may be denominated in U.S. dollars or one or more foreign
currencies, currency units or composite securities to be determined at or prior
to the time of any offering. The Debt Securities offered pursuant to this
Prospectus may consist of bonds, debentures, notes or other evidences of
indebtedness in one or more series and in amounts, at prices and on terms to be
determined at or prior to the time of any such offering. Unless otherwise
disclosed in a Prospectus Supplement, the Company's obligations under the
Senior Debt Securities will be unsecured obligations of the Company ranking
pari passu in right of payment of principal and interest and with all other
existing and future unsecured obligations of the Company. If security for the
Debt Securities is to be provided it will be described in an applicable
Prospectus Supplement. The Company's obligations under the Subordinated Debt
Securities will be subordinated in right of payment to the prior payment in
full of all Senior Debt.
The Offered Securities may be offered directly, through agents designated
from time to time, to or through dealers or to or through underwriters. Such
agents or underwriters may act alone or with other agents or underwriters. Any
such agents, dealers or underwriters will be set forth in a Prospectus
Supplement. If an agent of the Company, or a dealer or underwriter, is involved
in the offering of the Offered Securities, the agent's commission, dealer's
purchase price, underwriter's discount and net proceeds to the Company, as the
case may be, will be set forth in, or may be calculated from, the Prospectus
Supplement. Any underwriters, dealers or agents participating in the offering
may be deemed "underwriters" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act").
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER PRIOR TO AN INVESTMENT IN ANY OF THE
SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement. Any statement contained in this
Prospectus will be deemed to be modified or superseded by any inconsistent
statement contained in an accompanying Prospectus Supplement.
The date of this Prospectus is September 9, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy and
information statements and other information filed by the Company with the SEC
can be inspected and copied at the Public Reference Section of the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a
Web site that contains reports, proxy and information statements and other
materials that are filed through the SEC's Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system. This Web site can be accessed at
http://www.sec.gov. Such reports, proxy and information statements and other
information can also be inspected at the offices of the New York Stock Exchange
Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the SEC a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth or incorporated by reference in the Registration Statement and the
exhibits and schedules related thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the SEC. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits
filed or incorporated as a part thereof. Statements contained in this
Prospectus as to the contents of any documents referred to are not necessarily
complete and, in each such instance, are qualified in all respects by reference
to the applicable documents filed with the SEC.
This Prospectus and the periodic filings of the Company under the Exchange
Act contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These forward-looking
statements express the beliefs and expectations of management regarding the
Company's future results and performance.
Such statements are based on current expectation and involve a number of
known and unknown risks and uncertainties that could cause the actual results,
performance and/or other achievements of the Company to differ materially from
any expected future results, performance or achievements, expressed or implied
by the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements and any such statement is
qualified by reference to the following cautionary statements. In connection
with the safe harbor provisions of the Reform Act, the Company's management has
identified important factors that could cause actual results to differ
materially from management's expectations. Reference is made to the Company's
Current Report on Form 8-K dated March 6, 1998, incorporated herein by
reference. The Company is not required to publicly release any changes to these
forward-looking statements for events occurring after the date thereof or to
reflect any other unanticipated events.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC (File No. 1-9874) are
incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
(ii) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1998 and June 30, 1998;
(iii) the Company's Current Reports on Form 8-K dated January 12, 1998,
January 16, 1998, January 29, 1998, March 6, 1998, April 8, 1998, April 17,
1998, August 12, 1998 and September 9, 1998; and
(iv) the description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A filed under the Exchange Act
and any amendments or reports filed for the purpose of updating such
description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the filing of a post-effective amendment which indicates the termination of
this offering shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in any other subsequently
filed document which is also incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part of this Prospectus except as so modified or
superseded.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated into this Prospectus by reference,
other than exhibits to such documents. Requests for such copies should be
directed to Investor Relations, CalEnergy Company, Inc., 302 South 36th Street,
Suite 400, Omaha, Nebraska 68131, telephone number (402) 341-4500.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in
this Prospectus or a Prospectus Supplement, in connection with the offering
contemplated hereby and thereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any underwriter, dealer or agent. This Prospectus and a Prospectus
Supplement do not constitute an offer to sell or a solicitation of an offer to
buy any Securities other than the Securities to which they relate and do not
constitute an offer to sell or a solicitation of an offer to buy any Securities
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus or a
Prospectus Supplement, nor any sale made hereunder or thereunder, shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or thereof or that the information
contained or incorporated by reference herein or therein is correct as of any
time subsequent to such date.
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RISK FACT0RS
Prospective investors should carefully consider the risk factors set forth
below, in addition to the other information appearing in or incorporated by
reference in this Prospectus. This Prospectus contains or incorporates by
reference forward-looking statements which involve risks and uncertainties. The
Company's actual results in the future could differ significantly from the
results discussed or implied in the forward-looking statements. Factors that
could cause or contribute to such a difference include, but are not limited to,
the following risk factors and risk factors described in the documents
incorporated herein by reference. The term "Company" refers to CalEnergy
Company, Inc. and its operating subsidiaries, unless the context otherwise
requires.
ACQUISITION UNCERTAINTIES. 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 has recently completed several major acquisitions, including the
acquisition of Magma Power Company ("Magma"), Falcon Seaboard Resources, Inc.
("Falcon Seaboard") and Northern Electric plc ("Northern"). The Company has
successfully integrated Magma, Falcon Seaboard and Northern. In addition, on
August 11, 1998, the Company entered into an Agreement and Plan of Merger
pursuant to which it has agreed to acquire, subject to the conditions set forth
therein, MidAmerican Energy Holdings Company ("MidAmerican") for approximately
$2.6 billion in cash, in a transaction in which approximately $1.4 billion in
debt and preferred stock of MidAmerican will remain outstanding (the
"MidAmerican Merger"). See "The Company--Recent Developments; MidAmerican
Merger."
Achieving the expected benefits of the MidAmerican Merger will depend in
part upon the integration of the businesses of MidAmerican and the Company in
an efficient manner, and despite the Company's prior experience in successfully
integrating acquired businesses, there can be no assurance that this will
occur. Any substantial diversion of management attention and any substantial
difficulties encountered in the transition and integration process could have a
material adverse effect on the revenues, levels of expenses and operating
results of the combined company.
The consummation of the MidAmerican Merger is conditioned upon receipt of
approvals of the shareholders of the Company and MidAmerican, as well as the
Nuclear Regulatory Commission (the "NRC"), the Federal Energy Regulatory
Commission (the "FERC"), the Iowa Utilities Board (the "IUB"), and the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In addition,
certain partial dispositions of interests in certain of the Company's
facilities will need to be divested prior to the consummation of the
MidAmerican Merger in order to maintain the qualifying facilities status of
certain of the Company's independent generating facilities. There can be no
assurance as to the timing of the required regulatory approvals, the ability to
obtain such approvals or that such approvals will contain satisfactory terms
and conditions.
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 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 the MidAmerican
Merger will be consummated, that additional acquisition opportunities, if any,
can be consummated on favorable terms or that the Company's integration efforts
will be successful.
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 and acquisition
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, including the
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payment of principal, interest and premium, if any, on the Debt Securities. 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 financings
will contain, certain conditions and similar restrictions on the distribution
of cash to the Company.
The Company's subsidiaries, partnerships and joint ventures are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due pursuant to the Debt Securities or to make any funds
available therefor, whether by dividends, loans or other payments, and do not
guarantee the payment of interest on, premium, if any, or principal of the Debt
Securities. 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 (and the consequent right of the holders of the Debt Securities to
participate in the distribution of, or to realize proceeds from, those assets)
will be effectively subordinated to the claims of any such subsidiary's or
other affiliate's creditors (including trade creditors and holders of debt
issued by such subsidiary or other affiliate). At June 30, 1998 the Company had
approximately $6,031 million of total consolidated indebtedness, which included
approximately $2,850 million of the Company's proportionate share of joint
venture and subsidiary debt, which would be effectively senior to the Debt
Securities, substantially all of which would have been secured by the assets of
such joint ventures and subsidiaries. At such date, the Company also had
approximately $554 million of subordinated debt issued in connection with
Capital Trust Convertible Preferred Securities.
LEVERAGE. The Company is substantially leveraged. At June 30, 1998, the
Company's total consolidated liabilities were approximately $6,031 million
(excluding deferred income), its obligations in respect of the Trust
Convertible Preferred Securities and the TIDES Securities were approximately
$554 million, its total consolidated assets were approximately $7,482 million
and its total stockholders' equity was approximately $780 million. The
Company's leverage level presents the risk that the Company might not generate
sufficient cash to service the Company's indebtedness, including the Debt
Securities or Preferred Stock, 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.
The Company is also a holding company which derives substantially all of its
operating income from its subsidiaries and joint ventures. Distributions from
such entities are restricted under various covenants and conditions contained
in financing documents by which they are bound and the stock or assets of
substantially all of such entities is directly or indirectly pledged, to secure
various of such financings or such entities are otherwise subject to regulatory
restrictions. See "Risk Factors--Holding Company Structure."
NORTHERN'S REGULATORY ENVIRONMENT. Northern's electricity distribution and
supply business are subject to extensive regulation in the United Kingdom.
Price 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. The next review of the Distribution Price Control Formula is
expected to occur in April 2000. There can be no assurance that any further
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. The market for
customers with a maximum demand above 1
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megawatt ("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 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 Northern will be successful in such competition among
suppliers of gas.
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.
Change 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 Parliament passed the
windfall tax which was levied on privatized utilities and resulted in a 1997
third quarter extraordinary item of $135.85 million. See the Company's Current
Report on Form 8-K dated July 7, 1997, incorporated herein by reference. 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
have a material adverse effect on the Company's results of operations.
DEVELOPMENT UNCERTAINTY. The Company is actively seeking to develop,
construct, own and operate new energy projects (including, without limitation,
generation, distribution, transmission, exploration/production, storage and
supply projects and related activities, infrastructure and 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 contracts with other 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 electric power 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, transmission, exploration/ production,
storage and supply projects and related activities, infrastructure and
services) and related services and the Company's ability to obtain contracts to
supply portions of this demand. There can be no assurance that development
efforts on any particular project, or the Company's efforts generally, will be
successful.
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
and development of projects 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 and expropriation) and other risk/structuring issues that have the
potential to cause substantial delays in respect of, or material
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<PAGE>
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. Furthermore, the central bank of any
such country 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, 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.
The Company's international projects may, in certain cases, be subject to
the risks of being 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 political or economic conditions effecting the country. In
this regard, reference is made to the substantial uncertainties associated with
the Company's Indonesian projects, the contracts for which are currently not
being honored by the Government of Indonesia and which are presently the
subject of international arbitration.
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, the
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 a 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.
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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.
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.
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 Canadian 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.
PRESENT DEPENDENCE ON LARGE CUSTOMER; CONTRACT UNCERTAINTIES. The Company
currently relies on long-term power purchase "Standard Offer No. 4" contracts
(each, an "SO4 Agreement") with 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 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"). The initial ten-year period expired in August 1997 for the Company's
Navy I Project and will expire in March 1999 for its BLM Project and January
2000 for its Navy II Project, which three projects comprise the Coso Project in
California (the "Coso Project"). Such ten-year period expired in 1996 with
respect to one of the eight geothermal plants in the Imperial Valley in
California ("Imperial Valley Projects") and expires in 1999 for three of its
Imperial Valley Projects and in 2000 for the remaining two Imperial Valley
Projects that operate under SO4 Agreements.
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 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
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respective SO4 Agreements and is currently expected to remain so. For the year
ended December 31, 1997, the time period-weighted average of Edison's Avoided
Cost of Energy was 3.3 cents per kWh, compared to the time period-weighted
average for the year ended December 31, 1997 selling prices for energy of
approximately 12.0 cents per kWh for the Company's SO4 Agreements. Thus, the
revenues generated by each of the Company's 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.
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 restructured its 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
existing qualifying facility power sales contracts are to be honored under such
restructuring, and all of the Company's California operating 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. In addition, if the MidAmerican Merger is consummated, future
industry restructuring efforts by states in the Midwest (such as Iowa or
Illinois) where MidAmerican has substantial operations could impact the results
of operations of MidAmerican in a manner which is difficult to predict, since
such effects will depend on the form and timing of such restructuring.
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. Without limiting the generality of the
foregoing, if the MidAmerican Merger is consummated, regulatory requirements
applicable in the future to coal or nuclear generating facilities could
adversely affect the results of operations of MidAmerican. 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
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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 Costs 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.
As noted above, if the MidAmerican Merger is consummated, industry
restructuring efforts by states in the Midwest (such as Iowa and Illinois)
where MidAmerican has substantial operations could affect MidAmerican's
operations in a manner which is difficult to predict, since such effects will
depend on the form and timing of such restructuring. 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.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE. Pursuant to the Company's
1996 Stock Option Plan (the "1996 Plan"), as of June 30, 1998, the Company had
outstanding various options to its officers, directors and employees for the
purchase of 5,694,745 shares of Common Stock. All of the shares of Common Stock
issuable upon exercise of said options have been registered pursuant to
registration statements on Form S-8, and, when fully vested and exercised, are
available for immediate resale. Sales of substantial amounts of Common Stock or
the availability of Common Stock for sale, could have an adverse impact on the
market price of the Common Stock and on the Company's ability to raise
additional capital through the sale of Common Stock.
LACK OF PUBLIC MARKET FOR THE DEBT SECURITIES AND THE PREFERRED
STOCK. There is no existing public trading market for the Debt Securities and
the Preferred Stock and there can be no assurance regarding the future
development of a market for either the Debt Securities or the Preferred Stock,
or the ability of holders of such securities to sell their Debt Securities
and/or Preferred Stock or the price at which such holders may be able to sell
their Securities. If such a market were to develop, the Debt Securities and/or
Preferred Stock could trade at prices that may be higher or lower than their
initial offering price depending on many factors, including prevailing interest
rates, the price of Common Stock, the Company's operating results and the
market for similar securities. Historically, the market for non-investment
grade debt has demonstrated substantial volatility in the prices of securities
similar to the Debt Securities. There can be no assurance that the future
market for the Debt Securities will not be subject to similar volatility.
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THE COMPANY
GENERAL
CalEnergy Company, Inc. (the "Company") is a fast-growing global power
company whose goal is to be one of the leading providers of low cost energy
services throughout the world as electricity and gas markets privatize or
deregulate. The Company manages and owns interests in over 5,000 MW of power
generation facilities in operation, construction and development worldwide and
currently operates 20 generating facilities. In addition, through its
subsidiary, Northern Electric plc ("Northern"), the Company is engaged in the
distribution and supply of electricity and gas to approximately 1.9 million
customers in the U.K. The Company employs 4,200 people worldwide. For the year
ended December 31, 1997, the Company generated revenues of over $2.2 billion
and had assets of approximately $7.5 billion.
The Company's Common Stock is traded on the New York, Pacific and London
Stock Exchanges.
----------------
The principal executive offices of the Company are located at 302 South
36th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is (402)
341-4500. The Company was incorporated in 1971 under the laws of the State of
Delaware.
RECENT DEVELOPMENTS; MIDAMERICAN MERGER
On August 11, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger with MidAmerican Energy Holdings Company
("MidAmerican"), pursuant to which the Company agreed (i) to pay $27.15 in cash
for each outstanding share of MidAmerican common stock for an aggregate
purchase price of approximately $2.65 billion, in a transaction in which
approximately $1.4 billion of debt and preferred securities of MidAmerican will
remain outstanding, in a merger pursuant to which MidAmerican will become a
wholly owned subsidiary of the Company, and (ii) to reincorporate in the State
of Iowa and be renamed MidAmerican Energy Holdings Company. Closing of the
transaction is subject to the approval of the shareholders of both companies
and the obtaining of certain regulatory approvals. The transaction is presently
expected to close by the end of the first quarter of 1999. See "Risk
Factors--Acquisition Uncertainties; MidAmerican Merger." Reference is also made
to the Company's Current Report on Form 8-K dated August 12, 1998 which
contains the Merger Agreement relating to the MidAmerican Merger, which Form
8-K is incorporated herein by reference.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges on a historical basis for each of the five years in the period ended
December 31, 1997 and for the six months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges ......... 2.8 1.7 1.5 1.6 1.4 1.7 1.4
</TABLE>
- ----------
(1) The ratio of earnings to fixed charges for the year ended December 31,
1997 was impacted by the $87 million non-recurring asset impairment
charge related to the Company's assets in Indonesia. Without this charge,
the ratio of earnings to fixed charges would have been 1.7.
For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate of
(a) the pre-tax income of the Company, including its proportionate share of the
pre-tax income of the Coso Project and excluding the equity in loss of a
non-consolidated subsidiary, and (b) fixed charges, less capitalized interest.
"Fixed charges" represent interest (whether expensed or capitalized),
amortization of deferred financing and bank fees, and the portion of rentals
considered to be representative of the interest factor (one-third of lease
payments) and preferred stock dividend requirements of majority owned
subsidiaries.
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement
accompanying this Prospectus, proceeds from the sale of the Offered Securities
ultimately will be used by the Company to make equity investments in future
domestic and international energy projects, to fund possible project or Company
acquisitions, for the repayment of debt or for other general corporate
purposes, and initially may be temporarily invested in short-term securities.
See "The Company--Recent Developments; MidAmerican Merger."
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DESCRIPTION OF CAPITAL STOCK
The following summary does not purport to be complete and is subject to,
and qualified in its entirety by, the Company's Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"), and
the Company's By-Laws, as amended (the "By-Laws"), and by the provisions of
applicable law. The authorized capital stock of the Company consists of
180,000,000 shares of Common Stock, par value $0.0675 per share, and 2,000,000
shares of Preferred Stock, no par value. This summary contains a description of
certain general terms of the Common Stock and the Preferred Stock to which any
Prospectus Supplement may relate. Certain terms of any Common Stock or any
series of Preferred Stock offered by a Prospectus Supplement will be described
in the Prospectus Supplement relating thereto, including the number of shares,
offered, any initial offering price, and market price and dividend information.
If so indicated in the Prospectus Supplement, the terms of any series may
differ from the terms set forth below.
COMMON STOCK
At June 30, 1998, there were 60,032,677 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Holders of the Common Stock vote together as a single class on all matters.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. The outstanding shares of Common Stock are fully
paid and nonassessable. The Common Stock will, when issued against payment
therefor, be fully paid and nonassessable.
On December 1, 1988, the Company distributed a dividend of one Preferred
Share Purchase Right (a "Right") for each outstanding share of Common Stock.
The Rights are not exercisable until ten days after a person or group, without
prior Board approval, acquires, or has the right to acquire, beneficial
ownership of 20% or more of the Common Stock or announces a tender or exchange
offer for 30% or more of the Common Stock. Each Right entitles the holder to
purchase one one-hundredth of a share of Series A Junior Preferred Stock, no
par value ("Series A Preferred Stock"), for $52. The Rights may be redeemed by
the Board of Directors up to ten days after an event triggering the
distribution of certificates for the Rights. The Rights are automatically
attached to, and trade with, each share of Common Stock. The Rights will
expire, unless previously redeemed or exercised, on November 30, 1998.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares
of Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without any further action by the stockholders. The
issuance of shares of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders. The issuance of shares of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. The
Company has no present plans to issue any additional shares of Preferred Stock.
See "Description of Preferred Stock."
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS AFFECTING CHANGE IN
CONTROL
The Restated Certificate of Incorporation and the By-Laws include certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and that may have the
effect of delaying, deterring or preventing a future takeover or change in
control of the Company, unless such takeover or change in control is approved
by the Board of Directors. Such provisions may also render the removal of the
directors and management more difficult. Such provisions
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<PAGE>
include a classified Board of Directors divided into three classes serving
staggered three-year terms, prohibit stockholders of the Company from taking
action by written consent, require the affirmative vote of at least 66 2/3% of
the outstanding shares of stock of the Company entitled to vote thereon to
adopt, repeal, alter, amend or rescind the By-Laws, and require that special
meetings of stockholders be called only by the Board of Directors or the Chief
Executive Officer. In addition to the foregoing, the Board of Directors has
adopted a Stockholder Rights Plan, which provided for a dividend of one Right
for each outstanding share of Common Stock. See "--Common Stock."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock is publicly traded or
held of record by more than 2,000 stockholders and an "interested stockholder"
are prohibited for a three-year period following the date that such stockholder
became an interested stockholder, unless (i) the corporation has elected in its
original certificate of incorporation not to be governed by Section 203 (the
Company did not make such an election), (ii) the transaction in which the
stockholder became an interested stockholder or the business combination was
approved by the board of directors of the corporation before the other party to
the business combination became an interested stockholder, (iii) upon
consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the commencement of the transaction (excluding
voting stock owned by directors who are also officers or held in employee
benefit plans in which the employees do not have a confidential right to tender
or vote stock held by the plan) or (iv) the business combination was approved
by the board of directors of the corporation and ratified by two-thirds of the
voting stock which the interested stockholder did not own. The term "business
combination" is defined generally to include mergers or consolidations between
a Delaware corporation and an "interested stockholder," transactions with an
"interested stockholder" involving the assets or stock of the corporation or
its majority-owned subsidiaries and transactions which increase an "interested
stockholder's" percentage ownership of stock. The term "interested stockholder"
is defined generally as a stockholder who, together with its affiliates and
associates, owns (or, within three years prior, did own) 15% or more of a
Delaware corporation's voting stock. Section 203 could prohibit or delay a
merger, takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.
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DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the shares of Preferred Stock
that may be offered by the Company sets forth certain general terms and
provisions of the Preferred Stock to which any Prospectus Supplement may
relate. Certain other terms of any series of Preferred Stock and the terms of
any related option, put or right of the Company to require the holder of any
other Security offered to also acquire shares of Preferred Stock will be
specified in the applicable Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, the terms of any series of Preferred Stock
may differ from the terms set forth below. The description of the terms of the
Preferred Stock set forth below and in any Prospectus Supplement is necessarily
a summary thereof and is qualified in its entirety by reference to the
Certificate of Designation relating to the applicable series of Preferred
Stock, which Certificate of Designation will be filed as an exhibit to or
incorporated by reference in the Registration Statement of which this
Prospectus forms a part.
GENERAL
Pursuant to the Restated Certificate of Incorporation and the Delaware
General Corporation Law, the Board of Directors of the Company has the
authority, without further stockholder action, to issue from time to time up to
a maximum of up to 2,000,000 shares of Preferred Stock, in one or more series
and for such consideration as may be fixed from time to time by the Board of
Directors of the Company and to fix before the issuance of any shares of
Preferred Stock of a particular series, the designation of such series, the
number of shares to comprise such series, the dividend rate or rates payable
with respect to the shares of such series, the redemption price or prices, if
any, and the terms and conditions of any redemption, the voting rights, any
sinking fund provisions for the redemption or purchase of the shares of such
series, the terms and conditions upon which the shares are convertible or
exchangeable, if they are convertible or exchangeable, and any other relative
rights, preferences and limitations pertaining to such series.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Stock offered thereby for specific terms, including: (i)
the designation, stated value and liquidation preference of such Preferred
Stock and the number of shares offered; (ii) the initial public offering price
at which such shares will be issued; (iii) the dividend rate or rates (or
method of calculation), the dividend periods, the date or dates on which
dividends shall be payable and whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from which dividends shall commence
to cumulate; (iv) any redemption or sinking fund provisions; (v) any conversion
or exchange provisions; (vi) the procedures for any auction and remarketing, if
any, of such Preferred Stock; (vii) whether interests in Preferred Stock will
be represented by depositary shares; and (viii) any additional dividend,
liquidation, redemption, sinking fund and other rights, preferences,
privileges, limitations and restrictions of such Preferred Stock.
The Preferred Stock will, when issued against payment therefor, be fully
paid and nonassessable. Holders of Preferred Stock will have no preemptive
rights to subscribe for any additional securities which may be issued by the
Company.
Because the Company is a holding company, its rights and the rights of
holders of its securities, including the holders of Preferred Stock, to
participate in the distribution of assets of any subsidiary of the Company upon
the latter's liquidation or recapitalization will be subject to the prior
claims of such subsidiary's creditors and preferred stockholders, except to the
extent the Company may itself be a creditor with recognized claims against such
subsidiary or a holder of preferred stock of such subsidiary.
DIVIDENDS
The holders of the Preferred Stock will be entitled to receive, when and
as declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends at such rates and on such dates as will be
specified in the applicable Prospectus Supplement. Such rates may be fixed or
variable or both. If variable, the formula used for determining the dividend
rate for each dividend period will be specified in the applicable Prospectus
Supplement. Dividends will be payable to the holders of record as they appear
on the stock books of the Company on such record dates as will be fixed by the
Board of
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Directors of the Company. Dividends may be paid in the form of cash, Preferred
Stock (of the same or a different series) or Common Stock of the Company, in
each case as specified in the applicable Prospectus Supplement.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as specified in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company
fails to declare a dividend payable on a dividend payment date on any Preferred
Stock for which dividends are noncumulative ("Noncumulative Preferred Stock"),
then the holders of such Preferred Stock will have no right to receive a
dividend in respect of the dividend period relating to such dividend payment
date, and the Company will have no obligation to pay the dividend accrued for
such period, whether or not dividends on such Preferred Stock are declared or
paid on any future dividend payment dates.
The Company shall not declare, pay or set apart for payment any dividends
on any series of its Preferred Stock ranking, as to dividends, on a parity with
or junior to the outstanding Preferred Stock of any series unless (i) if such
series of Preferred Stock has a cumulative dividend ("Cumulative Preferred
Stock"), full cumulative dividends have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
such payment on such Preferred Stock for all past dividend periods and the then
current dividend period, or (ii) if such series of Preferred Stock is
Noncumulative Preferred Stock, full dividends for the then current dividend
period on such Preferred Stock have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
such payment. When dividends are not paid in full upon Preferred Stock of any
series and any other shares of Preferred Stock of the Company ranking on a
parity as to dividends with such Preferred Stock, all dividends declared upon
such Preferred Stock and any other Preferred Stock of the Company ranking on a
parity as to dividends with such Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share on such Preferred Stock and
such other shares of Preferred Stock shall in all cases bear to each other the
same ratio that the accrued dividends per share on such Preferred Stock (which
shall not, if such Preferred Stock is Noncumulative Preferred Stock, include
any accumulation in respect of unpaid dividends for prior dividend periods) and
such other shares of Preferred Stock bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on Preferred Stock of such series which may be in arrears.
Except as set forth in the preceding sentence, unless (i) full dividends
on the outstanding Cumulative Preferred Stock of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and the
then current dividend period or (ii) full dividends for the then current
dividend period on the outstanding Noncumulative Preferred Stock of any series
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment, no dividends
(other than in Common Stock of the Company or other shares of the Company
ranking junior to such Preferred Stock as to dividends and upon liquidation)
shall be declared or paid or set aside for payment, nor shall any other
distribution be made, on the Common Stock of the Company or on any other shares
of the Company ranking junior to or on a parity with such Preferred Stock as to
dividends or upon liquidation.
Unless (i) full dividends on the Cumulative Preferred Stock of any series
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period or (ii) full dividends for the
then current dividend period on the Noncumulative Preferred Stock of any series
have been declared and paid or declared and a sum sufficient for the payment
thereof set apart for such payment, no Common Stock or any other shares of the
Company ranking junior to or on a parity with such Preferred Stock as to
dividends or upon liquidation shall be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid or made available for a
sinking fund for the redemption of any such shares) by the Company or any
subsidiary of the Company except by conversion into or exchange for shares of
the Company ranking junior to such Preferred Stock as to dividends and upon
liquidation. Any dividend payment made on shares of Cumulative Preferred Stock
of any series shall first be credited against the earliest accrued but unpaid
dividend due with respect to shares of such series which remains unpaid.
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REDEMPTION
Preferred Stock may be redeemable, in whole or in part, at the option of
the Company, out of funds legally available therefor, and may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, in each case upon
terms, at the times and at the redemption prices specified, in the applicable
Prospectus Supplement. Preferred Stock redeemed by the Company will be restored
to the status of authorized but unissued shares of Preferred Stock.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock is Noncumulative Preferred Stock,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable
capital stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) full dividends on the Cumulative
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period or
(ii) full dividends for the then current dividend period on the Noncumulative
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment, no shares of Preferred Stock of such series shall be redeemed unless
all outstanding shares of Preferred Stock of such series are simultaneously
redeemed, and the Company shall not purchase or otherwise acquire any shares of
Preferred Stock of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of Preferred Stock of such series pursuant
to a purchase or exchange offer provided such offer is made on the same terms
to all holders of the Preferred Stock of such series.
Notice of redemption shall be given by mailing the same to each record
holder of the Preferred Stock to be redeemed, not less than 30 nor more than 60
days prior to the date fixed for redemption thereof, at the address of such
holder as the same shall appear on the stock books of the Company. Each notice
shall state: (i) the redemption date; (ii) the number of shares and series of
the Preferred Stock to be redeemed; (iii) the redemption price; (iv) the place
or places where certificates for such Preferred Stock are to be surrendered for
payment of the redemption price; (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date; and (vi) the date upon
which the holder's conversion or exchange rights, if any, as to such shares
shall terminate. If fewer than all the shares of Preferred Stock of any series
are to be redeemed, the notice mailed to each such holder thereof shall also
specify the number of shares of Preferred Stock to be redeemed from each such
holder.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Board of Directors of the Company and such shares may be redeemed pro rata
from the holders of record of such shares in proportion to the number of such
shares held by such holders (with adjustments to avoid redemption of fractional
shares) or by lot in a manner determined by the Board of Directors of the
Company.
If notice of redemption of any shares of Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by the
Company, separate and apart from its other funds, in trust for the pro rata
benefit of holders of any shares of Preferred Stock so called for redemption,
then from and after the redemption date for such shares, dividends on such
shares shall cease to accrue and such shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Company (except the right to receive the redemption price) shall cease. Upon
surrender, in
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accordance with such notice, of the certificates representing any such shares
(properly endorsed or assigned for transfer, if the Board of Directors of the
Company shall so require and the notice shall so state), the redemption price
set forth above shall be paid out of the funds provided by the Company. If
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without cost
to the holder thereof.
CONVERSION OR EXCHANGE RIGHTS
The Prospectus Supplement relating to a series of Preferred Stock that is
convertible or exchangeable will state the terms on which shares of such series
are convertible or exchangeable into Common Stock, another series of Preferred
Stock or Debt Securities.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock shall
be entitled to receive out of the assets of the Company legally available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or any other class or series of capital stock ranking
junior to such Preferred Stock upon liquidation, liquidating distributions in
the amount of the liquidation preference of such Preferred Stock plus all
accrued and unpaid dividends thereon (which shall not, in the case of
Noncumulative Preferred Stock, include any accumulation in respect of unpaid
dividends for prior dividend periods). If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to Preferred Stock of any series and any other shares of Preferred
Stock of the Company ranking as to any such distribution on a parity with such
Preferred Stock are not paid in full, the holders of such Preferred Stock and
of such other shares of Preferred Stock will share ratably in any such
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Preferred Stock of any series Will not be entitled to any further
participation in any distribution of assets by the Company.
VOTING RIGHTS
Except as indicated below or in the applicable Prospectus Supplement, or
except as expressly required by applicable law, the holders of Preferred Stock
will not be entitled to vote.
If the Company fails to pay dividends on any shares of Preferred Stock for
six consecutive quarterly periods, the holders of such shares of Preferred
Stock (voting separately as a class with all other series of Preferred Stock
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of two additional directors of the Company at
a special meeting called by the holders of record of at least 10% of such
Preferred Stock or the next annual meeting of stockholders and at each
subsequent meeting until (i) all dividends accumulated on shares of Cumulative
Preferred Stock for the past dividend periods and the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment or (ii) four consecutive quarterly
dividends on shares of Noncumulative Preferred Stock shall have been fully paid
or declared and a sum sufficient for the payment thereof set aside for payment.
In such case, the entire Board of Directors of the Company will be increased by
two directors.
So long as any shares of Preferred Stock remain outstanding, the Company
shall not, without the affirmative vote of the holders of at least two-thirds
of each series of Preferred Stock outstanding at the time, given in person or
by proxy, at a meeting (voting separately as a class): (i) authorize, create or
issue, or increase the authorized or issued amount of, any class or series of
capital stock ranking prior to such series of Preferred Stock with respect to
payment of dividends or distribution of assets upon liquidation, dissolution or
winding up, or reclassify any capital stock into any such shares, or authorize,
create or issue any obligation or security convertible into, exchangeable for
or evidencing the right to purchase any such shares or (ii) amend, alter or
repeal the provisions of the Restated Certificate of Incorporation, including
the Certificate of Designation relating to such series of Preferred Stock,
whether by merger, consolidation,
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or otherwise, so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof; provided, however, that any increase in the amount of the authorized
Preferred Stock or any outstanding series of Preferred Stock or any other
capital stock of the Company, or the creation and issuance of any other series
of Preferred Stock or of any other capital stock of the Company, in each case
ranking on a parity with or junior to the Preferred Stock of such series with
respect to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
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DESCRIPTION OF DEBT SECURITIES
The Debt Securities may consist of Senior Debt Securities or Subordinated
Debt Securities. The Senior Debt Securities will be issued under an indenture
(the "Senior Debt Indenture") between the Company, as issuer, and one or more
trustees (each a "Trustee") meeting the requirements of a trustee under the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Subordinated Debt Securities will be issued under an indenture (the
"Subordinated Debt Indenture") between the Company, as issuer, and a Trustee.
Forms of the Indentures have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. The Indentures are subject to and
governed by the Trust Indenture Act. The following summaries of certain
provisions of the Indentures do not purport to be complete, and where reference
is made to particular provisions of the Indentures, such provisions, including
definitions of certain terms, are incorporated by reference as a part of such
summaries or terms, which are qualified in their entirety by such reference.
The Indentures are substantially identical except for provisions relating to
subordination.
The Debt Securities may be issued in one or more series. The particular
terms of each series of Debt Securities, as well as any modifications of or
additions to the general terms of the Debt Securities as described herein that
may be applicable in the case of a particular series of Debt Securities, will
be described in the Prospectus Supplement relating to such series of Debt
Securities. Accordingly, for a description of the terms of a particular series
of Debt Securities, reference must be made to both the Prospectus Supplement
relating thereto and the description of Debt Securities set forth in this
Prospectus.
GENERAL
Neither of the Indentures limits the amount of Debt Securities that may be
issued thereunder. Each Indenture provides that Debt Securities issuable
thereunder may be issued up to the aggregate principal amount which may be
authorized from time to time by the Company. Reference is made to the
Prospectus Supplement for the following terms of the Debt Securities (to the
extent such terms are applicable to such Debt Securities) in respect of which
this Prospectus is being delivered (the "Offered Debt Securities"):
(i) the title of the Offered Debt Securities and whether the Offered Debt
Securities are Senior Debt Securities or Subordinated Debt Securities;
(ii) the aggregate principal amount of the Offered Debt Securities and
any limit on such aggregate principal amount;
(iii) the date or dates, or the method for determining such date or
dates, on which the principal of the Offered Debt Securities will be
payable;
(iv) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which the Offered Debt
Securities will bear interest, if any;
(v) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the interest payment dates on which
any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which any such date shall be
determined, the person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(vi) the place or places where the principal of (and premium, if any) and
interest, if any, on such Offered Debt Securities will be payable, such
Offered Debt Securities may be surrendered for conversion or registration
of transfer or exchange and notices or demands to or upon the Company in
respect of such Offered Debt Securities and the applicable Indenture may be
served;
(vii) the period or periods within which, the price or prices at which
and the terms and conditions upon which the Offered Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;
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(viii) the denominations of the Offered Debt Securities if other than
$1,000 and any integral multiple thereof;
(ix) if other than the principal amount thereof, the portion of the
principal amount of the Offered Debt Securities payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of the Offered Debt Securities which is convertible into
Common Stock or Preferred Stock, or the method by which any such portion
shall be determined;
(x) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on the Offered Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on one or more currencies, currency
units, composite currencies, commodities, equity indicies or other
indicies) and the manner in which such amounts shall be determined;
(xi) any additions to, modifications of or deletions from the terms of
the Offered Debt Securities with respect to the Events of Default or
covenants set forth in the applicable Indenture;
(xii) provisions, if any, granting special rights to the Holders of the
Offered Debt Securities upon the occurrence of such events as may be
specified;
(xiii) whether any of the Offered Debt Securities are to be issuable
initially in temporary global form and whether any of the Offered Debt
Securities are to be issuable in permanent global form and, if so, whether
beneficial owners of interests in any such permanent global Security may
exchange such interests for Debt Securities of such series and of like
tenor of any authorized form and denomination and the circumstances under
which any such exchanges may occur, if other than in the manner provided in
the applicable Prospectus Supplement, and, if the Offered Debt Securities
are to be issuable as a global Security, the identity of the depositary for
the Offered Debt Securities;
(xiv) the date as of which any temporary global Security representing
outstanding Offered Debt Securities shall be dated if other than the date
of original issuance of the first Offered Debt Security to be issued;
(xv) the Person to whom any interest on any Offered Debt Security shall
be payable, if other than the Person in whose name that Offered Debt
Security is registered, and the extent to which, or the manner in which,
any interest payable on a temporary global Security on an Interest Payment
Date will be paid if other than in the manner provided in the applicable
Prospectus Supplement;
(xvi) the applicability, if any, of defeasance and covenant defeasance
provisions of the applicable Indenture and any provisions in modification
of, in addition to or in lieu of any such defeasance or covenant defeasance
provisions;
(xvii) if the Offered Debt Securities are to be issuable in definitive
form (whether upon original issue or upon exchange of a temporary Offered
Debt Security) only upon receipt of certain certificates or other documents
or satisfaction of other conditions, then the form and/or terms of such
certificates, documents or conditions;
(xviii) if the Offered Debt Securities are to be issued upon the exercise
of warrants, the time, manner and place for such Offered Debt Securities to
be authenticated and delivered;
(xix) the terms, if any, upon which the Offered Debt Securities may be
convertible into Common Stock or Preferred Stock of the Company and the
terms and conditions upon which such conversion will be effected,
including, without limitation, the initial conversion price or rate and the
conversion period as well as any applicable limitations on the ownership or
transferability of the Common Stock or Preferred Stock into which the
Offered Debt Securities are convertible; and
(xx) any other terms of the Offered Debt Securities not inconsistent with
the provisions of the applicable Indenture.
As described in each Prospectus Supplement relating to any particular
series of Debt Securities offered thereby, the Indenture under which such Debt
Securities are issued may contain covenants
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limiting: (i) the incurrence of debt by the Company; (ii) the incurrence of
debt by subsidiaries of the Company; (iii) the making of certain payments by
the Company and its subsidiaries; (iv) business activities of the Company and
its subsidiaries; (v) the issuance of preferred stock of subsidiaries; (vi)
asset dispositions; (vii) transactions with affiliates; (viii) liens; and (ix)
mergers and consolidations involving the Company.
SENIOR DEBT SECURITIES
The payment of principal of, premium, if any, and interest on the Senior
Debt Securities will, to the extent and in the manner set forth in the Senior
Debt Indenture, rank pari passu in right of payment with all other existing and
future unsecured and unsubordinated obligations of the Company.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
The Subordinated Debt Indenture provides that the Subordinated Debt
Securities are subordinate and junior in right of payment to all Senior
Indebtedness of the Company as provided in the Subordinated Debt Indenture. No
payment of principal of (including redemption payments), or interest on, the
Subordinated Debt Securities may be made (i) if any Senior Indebtedness is not
paid when due, any applicable grace period with respect to a default thereunder
has ended and such default has not been cured or waived, or (ii) if the
maturity of any Senior Indebtedness has been accelerated because of a default.
Upon any distribution of assets of the Company to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings,
all principal of, and premium, if any, and interest due or to become due on,
all Senior Indebtedness must be paid in full before the holders of the
Subordinated Debt Securities are entitled to receive or retain any payment. In
the event that, notwithstanding the foregoing, any payment or distribution of
cash, property or securities shall be received or collected by a holder of the
Subordinated Debt Securities in contravention of the foregoing provisions, such
payment or distribution shall be held for the benefit of and shall be paid over
to the holders of Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture under which
any instrument evidencing Senior Indebtedness may have been issued, as their
respective interests may appear, to the extent necessary to pay in full all
Senior Indebtedness then due, after giving effect to any concurrent payment to
the holders of Senior Indebtedness. Subject to the payment in full of all
Senior Indebtedness, the rights of the holders of the Subordinated Debt
Securities will be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions applicable to Senior
Indebtedness until all amounts owing on the Subordinated Debt Securities are
paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company (i)
the principal, premium, if any, and interest in respect of (A) indebtedness of
such obligor for money borrowed and (B) indebtedness evidenced by securities,
bonds or other similar instruments issued by such obligor, (ii) all capital
lease obligations of such obligor, (iii) all obligations of such obligor issued
or assumed as the deferred purchase price of property, all conditional sale
obligations of such obligor and all obligations of such obligor under any title
retention agreement (but excluding trade accounts payable and other similar
obligations arising in the ordinary course of business), (iv) all obligations
of such obligor for the reimbursement of any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction, (v) all
obligations of the type referred to in clauses (i) through (iv) above of other
persons for the payment of which such obligor is responsible or liable as
obligor, guarantor or otherwise, and (vi) all obligations of the type referred
to in clauses (i) through (v) above of other persons secured by any lien on any
property or asset of such obligor (whether or not such obligation is assumed by
such obligor), except for (1) any such indebtedness issued after the date of
original issuance of the Subordinated Debt Securities that is by its terms
subordinated to or pari passu with the Subordinated Debt Securities and (2) any
indebtedness (including all other debt securities and guarantees in respect of
those debt securities) initially issued to any other trust, or a trustee of
such trust, partnership or other entity affiliated with the Company that is,
directly or indirectly, a financing vehicle of the Company (a "Financing
Entity") in
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connection with the issuance by such Financing Entity of Convertible Preferred
Securities or other similar securities. Such Senior Indebtedness shall continue
to be Senior Indebtedness and entitled to the benefits of the subordination
provisions irrespective of any amendment, modification or waiver of any term of
such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
the Company may issue.
CERTAIN COVENANTS
Unless otherwise provided in a Prospectus Supplements with respect to a
particular series of Offered Debt Securities, each of the Indentures will
contain certain covenants, including the ones summarized below, which covenants
will be applicable (unless they are waived or amended or unless the Debt
Securities are defeased, see "Defeasance" below) so long as any of the Debt
Securities are outstanding.
Limitation on Debt
The Company will not Incur any Debt, including Acquisition Debt, unless,
after giving effect to the incurrence of such Debt and the receipt and
application of the proceeds therefrom, the Fixed Charge Ratio (as defined in
the Indenture) of the Company would be equal to or greater than 2.0 to 1.
Notwithstanding the foregoing, the Company may Incur each and all of the
following: (i) Company Refinancing Debt, (ii) Debt of the Company to any of its
Restricted Subsidiaries or any Eligible Joint Venture that is expressly
subordinated in right of payment to the Senior Debt Securities of all series,
in the case of the Senior Debt Indenture or the Subordinated Debt Securities of
all series in the case of the Subordinated Debt Indenture, provided that any
transfer of such Debt by a Restricted Subsidiary or an Eligible Joint Venture
(other than to another Restricted Subsidiary or another Eligible Joint
Venture), or any transfer of the Company's ownership interest, or a portion
thereof, in such Restricted Subsidiary or such Eligible Joint Venture or the
interest, or a portion thereof, of Kiewit in a Permitted Joint Venture or an
Eligible Joint Venture (which transfer has the effect of causing such
Restricted Subsidiary or such Eligible Joint Venture to cease to be a
Restricted Subsidiary or an Eligible Joint Venture, as the case may be), will
be deemed to be an Incurrence of Debt that is subject to the provisions of this
covenant other than this clause (ii), (iii) Debt in an aggregate principal
amount not to exceed $100 million outstanding at any one time may be issued
under or in respect of Permitted Working Capital Facilities, (iv) Non-Recourse
Debt Incurred in respect of one or more Permitted Facilities in which the
Company has a direct or indirect interest, (v) Debt in respect of Currency
Protection Agreements or Interest Rate Protection Agreements, (vi) Purchase
Money Debt, provided that the amount of such Debt (net of any original issue
discount) does not exceed 90% of the fair market value of the Property
acquired, (vii) the Debt Securities and other Debt outstanding as of the date
of original issuance of any series of the Debt Securities (other than Debt to
the extent that it is extinguished, retired, defeased or repaid in connection
with the original issuance of any series of the Debt Securities), including
Debt that is Incurred in respect of interest or discount on such Debt (or
Redeemable Stock issued as dividends in respect of Redeemable Stock) pursuant
to the terms of the agreement or instrument that governs such Debt (or such
Redeemable Stock) as in effect on the date of original issuance of any series
of the Debt Securities and (viii) Debt in an aggregate principal amount not to
exceed $75 million outstanding at any one time.
Limitation on Subsidiary Debt
The Company will not permit any of its Restricted Subsidiaries or any
Eligible Joint Venture, to Incur any Debt.
Notwithstanding the foregoing, each and all of the following Debt may be
Incurred by a Restricted Subsidiary or an Eligible Joint Venture: (i) Debt
outstanding as of the date of original issuance of any series of the Debt
Securities, (ii) Debt owed by a Restricted Subsidiary or an Eligible Joint
Venture to the Company or another Restricted Subsidiary of the Company or
another Eligible Joint Venture that either directly or indirectly owns all or a
portion of the Company's interest in, or directly or indirectly is owned by,
such Restricted Subsidiary, or such Eligible Joint Venture, as the case may be,
(iii) Non-Recourse Debt Incurred in respect of one or more Permitted
Facilities, provided that such Restricted Subsidiary or such Eligible Joint
Venture has a direct or an indirect interest (which may include Construction
Financing
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provided by the Company to the extent permitted under the covenant described
under "Limitation on Restricted Payments" below as a "Permitted Investment") in
one or more of such Permitted Facilities in respect of which one or more
Restricted Subsidiaries or Eligible Joint Ventures shall have a direct or
indirect interest, (iv) Subsidiary Refinancing Debt, (v) Acquired Debt, (vi)
Debt in respect of Currency Protection Agreements or Interest Rate Protection
Agreements, (vii) Permitted Funding Company Loans and (viii) Permitted
Facilities Debt, provided that at the time of Incurrence thereof and after
giving effect to the application of the proceeds thereof, the aggregate
principal amount of Permitted Facilities Debt shall not exceed 15% of total
consolidated Debt of the Company computed in accordance with GAAP.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, directly or indirectly, make any
Restricted Payment unless at the time of such Restricted Payment and after
giving effect thereto (a) no Event of Default and no event that, after the
giving of notice or lapse of time or both, would become an Event of Default,
has occurred and is continuing, (b) the Company could Incur at least $1 of Debt
under the provision described in the first paragraph of "Limitation on Debt"
above and (c) the aggregate amount of all Restricted Payments made by the
Company, its Restricted Subsidiaries and the Eligible Joint Ventures (the
amount so made, if other than in cash, to be determined in good faith by the
Chief Financial Officer, as evidenced by an Officers' Certificate, or, if more
than $30 million, by the Board of Directors, as evidenced by a Board
resolution) after March 24, 1994, is less than the sum (without duplication) of
(i) 50% of the Adjusted Consolidated Net Income of the Company for the period
(taken as one accounting period) beginning on the first day of the first fiscal
quarter that begins after March 24, 1994 and ending on the last day of the
fiscal quarter immediately prior to the date of such calculation, provided that
if throughout any fiscal quarter within such period the Ratings Categories
applicable to the Debt Securities are rated Investment Grade by Standard &
Poor's Corporation and Moody's Investors Service, Inc. (or if both do not make
a rating of the Debt Securities publicly available, an equivalent Rating
Category is made publicly available by another Rating Agency), then 100%
(instead of 50%) of the Adjusted Consolidated Net Income (if more than zero)
with respect to such fiscal quarter will be included pursuant to this clause
(i), and provided further that if Adjusted Consolidated Net Income for such
period is less than zero, then minus 100% of the amount of such net loss, plus
(ii) 100% of the aggregate net cash proceeds received by the Company from and
after [March 24, 1994] from (A) the issuance and sale (other than to a
Restricted Subsidiary or an Eligible Joint Venture) of its Capital Stock
(excluding Redeemable Stock, but including Capital Stock other than Redeemable
Stock issued upon conversion of, or in exchange for Redeemable Stock or
securities other than its Capital Stock), (B) the issuance and sale or the
exercise of warrants, options and rights to purchase its Capital Stock (other
than Redeemable Stock) and (C) the issuance and sale of convertible Debt upon
the conversion of such convertible Debt into Capital Stock (other than
Redeemable Stock), but excluding the net proceeds from the issuance, sale,
exchange, conversion or other disposition of its Capital Stock (I) that is
convertible (whether at the option of the Company or the holder thereof or upon
the happening of any event) into (x) any security other than its Capital Stock
or (y) its Redeemable Stock or (II) that is Capital Stock referred to in
clauses (ii) and (iii) of the definition of "Permitted Payment", plus (iii) the
net reduction in Investments of the types specified in clauses (iv) and (v) of
the definition of "Restricted Payment" that result from payments of interest on
Debt, dividends, or repayment of loans or advances, the proceeds of the sale or
disposition of the Investment or other return of the amount of the original
Investment to the Company, the Restricted Subsidiary or the Eligible Joint
Venture that made the original Investment from the Person in which such
Investment was made, provided that (x) the aggregate amount of such payments
will not exceed the amount of the original Investment by the Company or such
Restricted Subsidiary that reduced the amount available pursuant to this clause
(c) for making Restricted Payments and (y) such payments may be added pursuant
to this clause (iii) only to the extent such payments are not included in the
calculation of Adjusted Consolidated Net Income, provided further that if
Investments of the types specified in clauses (iv) and (v) of the Definition of
"Restricted Payment" have been made in any Person and such Person thereafter
becomes a Restricted Subsidiary or an Eligible Joint Venture, then the
aggregate amount of such Investment (to the extent that it has reduced the
amount available pursuant to this clause (c) for making Restricted Payments),
net of the amounts previously added pursuant to this clause (iii), may be added
to the amount available for
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making Restricted Payments, plus (iv) an amount equal to the principal amount
of Debt of the Company extinguished in connection with the conversion into
Common Stock of the Company of the Company's 5% Convertible Subordinated
Debentures due 2000 and its 9.5% Convertible Subordinated Debenture due 2003.
The foregoing clause (c) will not prevent the payment of any dividend within 60
days after the date of its declaration if such dividend could have been made on
the date of its declaration without violation of the provisions of this
covenant.
None of the Company, any of its Restricted Subsidiaries or any Eligible
Joint Venture will be deemed to have made an Investment at the time that a
Person that is a Restricted Subsidiary of the Company or an Eligible Joint
Venture ceases to be a Restricted Subsidiary or an Eligible Joint Venture
(other than as a result of being designated as an Unrestricted Subsidiary),
although any subsequent Investment made by the Company, its Restricted
Subsidiaries and Eligible Joint Ventures in such Person will be Investments
that will be subject to the foregoing paragraph unless and until such time as
such Person becomes a Restricted Subsidiary or an Eligible Joint Venture.
Notwithstanding the foregoing, (i) the designation of a Restricted Subsidiary
as an Unrestricted Subsidiary, in the manner provided in the definition of
"Unrestricted Subsidiary," will be an Investment that will be subject to the
foregoing paragraph and (ii) the transfer of the Company's interest (or any
portion thereof) in an entity that has been deemed to be an Eligible Joint
Venture, directly or indirectly, to an Unrestricted Subsidiary will be an
Investment (to the extent of the interest transferred) that will be subject to
the foregoing paragraph.
Restricted Payments are defined in the Indentures to exclude Permitted
Payments, which include Permitted Investments. See "Certain Definitions" below.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, create or cause to become, or as
a result of the acquisition of any Person or Property, or upon any Person
becoming a Restricted Subsidiary or an Eligible Joint Venture, remain subject
to, any consensual encumbrance or consensual restriction of any kind on the
ability of any Restricted Subsidiary or any Eligible Joint Venture to (a) pay
dividends or make any other distributions permitted by applicable law on any
Capital Stock of such Restricted Subsidiary or such Eligible Joint Venture
owned by the Company, any other Restricted Subsidiary or any other Eligible
Joint Venture, (b) make payments in respect of any Debt owed to the Company,
any other Restricted Subsidiary of the Company or any Eligible Joint Venture,
(c) make loans or advances to the Company or to any other Restricted Subsidiary
of the Company or any other Eligible Joint Venture that is directly or
indirectly owned by such Restricted Subsidiary or such Eligible Joint Venture
or (d) transfer any of its Property to the Company or to any other Restricted
Subsidiary or any other Eligible Joint Venture that directly or indirectly owns
or is owned by such Restricted Subsidiary or such Eligible Joint Venture, other
than those encumbrances and restrictions created or existing (i) on the date of
the original issuance of any series of Debt Securities, (ii) pursuant to the
Indenture, (iii) in connection with the Incurrence of any Debt permitted under
the provisions described in clause (iii) of the second paragraph of "Limitation
on Subsidiary Debt" above, provided that, in the case of Debt owed to Persons
other than the Company, its Restricted Subsidiaries and any Eligible Joint
Venture, the Chief Executive Officer or the Chief Financial Officer of the
Company determines in good faith, as evidenced by an Officers' Certificate,
that such encumbrances or restrictions are required to effect such financing
and are not materially more restrictive, taken as a whole, on the ability of
the applicable Restricted Subsidiary or the applicable Eligible Joint Venture
to make the payments, distributions, loans, advances or transfers referred to
in clauses (a) through (d) above than encumbrances and restrictions, taken as a
whole, customarily accepted (or, in the absence of any industry custom,
reasonably acceptable) in comparable financings or comparable transactions in
the applicable jurisdiction, (iv) in connection with the execution and delivery
of an electric power or thermal energy purchase contract, or other contract
related to the output or product of, or services rendered by one or more
Permitted Facilities to which such Restricted Subsidiary or such Eligible Joint
Venture is a supplying party or other contracts with customers, suppliers and
contractors to which such Restricted Subsidiary or such Eligible Joint Venture
is a party and where such Restricted Subsidiary or such Eligible Joint Venture
is engaged, directly or indirectly, in the development, design, engineering,
procurement, construction, acquisition, ownership, management or operation of
one or more of such Permitted Facilities, provided
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that the Chief Executive Officer or the Chief Financial Officer of the Company
determines in good faith, as evidenced by an Officers' Certificate, that such
encumbrances or restrictions are required to effect such contracts and are not
materially more restrictive, taken as a whole, on the ability of the applicable
Restricted Subsidiary or the applicable Eligible Joint Venture to make the
payments, distributions, loans, advances or transfers referred to in clauses
(a) through (d) above than encumbrances and restrictions, taken as a whole,
customarily accepted (or, in the absence of any industry custom, reasonably
acceptable) in comparable financings or comparable transactions in the
applicable jurisdiction, (v) in connection with any Acquired Debt, provided
that such encumbrance or restriction was not incurred in contemplation of such
Person becoming a Restricted Subsidiary or an Eligible Joint Venture and
provided further that such encumbrance or restriction does not extend to any
other Property of such Person at the time it became a Restricted Subsidiary or
an Eligible Joint Venture, (vi) in connection with the Incurrence of any Debt
permitted under clause (iv) of the provision described in the second paragraph
of "Limitation on Subsidiary Debt" above, provided that, in the case of Debt
owed to Persons other than the Company and its Restricted Subsidiaries, the
Chief Executive Officer or the Chief Financial Officer of the Company
determines in good faith, as evidenced by an Officers' Certificate, that such
encumbrances or restrictions taken as a whole are not materially more
restrictive than the encumbrances and restrictions applicable to the Debt
and/or equity being exchanged or refinanced, (vii) customary non-assignment
provisions in leases or other contracts entered into in the ordinary course of
business of the Company, any Restricted Subsidiary or any Eligible Joint
Venture, (viii) any restrictions imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all of the Capital Stock or
Property of any Restricted Subsidiary or Joint Venture that apply pending the
closing of such sale or disposition, (ix) in connection with Liens on the
Property of such Restricted Subsidiary or such Eligible Joint Venture that are
permitted by the covenant described under "Limitation on Liens" below but only
with respect to transfers referred to in clause (d) above, (x) in connection
with the Incurrence of any Debt permitted under clause (ii) of the provisions
described in the second paragraph of "Limitation on Subsidiary Debt" above or
(xi) in connection with the Incurrence of any Permitted Facilities Debt
permitted under clause (viii) of the provisions described in the second
paragraph of "Limitation on Subsidiary Debt" above, provided that any such
encumbrance or restriction relates only to those Restricted Subsidiaries or
Eligible Joint Ventures having a direct or indirect interest in the Permitted
Facilities in respect of which such Permitted Facilities Debt was Incurred.
Limitation on Dispositions
Subject to the covenant described under "Mergers, Consolidations and Sales
of Assets" below, the Company will not make, and will not permit any of its
Restricted Subsidiaries or any Eligible Joint Venture to make, any Asset
Disposition unless (i) the Company, the Restricted Subsidiary or the Eligible
Joint Venture, as the case may be, receives consideration at the time of each
such Asset Disposition at least equal to the fair market value of the Property
or securities sold or otherwise disposed of (to be determined in good faith by
the Chief Financial Officer, as evidenced by an Officers' Certificate, or, if
more than $30 million, by the Board of Directors, as evidenced by a Board
resolution), (ii) at least 85% of such consideration is received in cash or
Cash Equivalents or if less than 85%, the remainder of such consideration
consists of Property related to the business of the Company as described in the
first sentence of the covenant described under "Limitation on Business" below,
and (ii) unless otherwise required under the terms of Senior Debt, at the
Company's election, the Net Cash Proceeds are either (A) invested in the
business of the Company, any of its Restricted Subsidiaries or any Eligible
Joint Venture or (B) applied to the payment of any Debt of the Company or any
of its Restricted Subsidiaries or any Eligible Joint Venture (or as otherwise
required under the terms of such Debt), provided that, no such payment of Debt
(x) under Permitted Working Capital Facilities or any other revolving credit
agreement will count for this purpose unless the related loan commitment,
standby facility or the like will be permanently reduced by an amount equal to
the principal amount so repaid or (y) owed to the Company, a Restricted
Subsidiary thereof or an Eligible Joint Venture will count for this purpose,
provided further that such investment or such payment, as the case may be, must
be made within 365 days from the later of the date of such Asset Disposition or
the receipt by the Company, such Restricted Subsidiary or such Eligible Joint
Venture of the Net Cash Proceeds related thereto. Any Net Cash Proceeds from
Asset
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Dispositions that are not applied as provided in clause (A) or (B) of the
preceding sentence will constitute "Excess Proceeds." Excess Proceeds will be
applied, as described below, to make an offer (an "Offer") to purchase any
series of Debt Securities at a purchase price equal to 100% of the principal
thereof, plus accrued interest, if any, to the date of purchase.
Notwithstanding anything in the foregoing to the contrary, the Company,
its Restricted Subsidiaries and the Eligible Joint Ventures may exchange with
other Persons (i) Property that constitutes a Restricted Subsidiary or an
Eligible Joint Venture for Property that constitutes a Restricted Subsidiary or
an Eligible Joint Venture, (ii) Property that constitutes a Restricted
Subsidiary or an Eligible Joint Venture for Property that does not constitute a
Restricted Subsidiary or an Eligible Joint Venture, (iii) Property that does
not constitute a Restricted Subsidiary or an Eligible Joint Venture for
Property that does not constitute a Restricted Subsidiary or an Eligible Joint
Venture and (iv) Property that does not constitute a Restricted Subsidiary or
an Eligible Joint Venture for Property that constitutes a Restricted Subsidiary
or an Eligible Joint Venture, provided that in each case the fair market value
of the Property received is at least equal to the fair market value of the
Property exchanged as determined in good faith by the Chief Financial Officer,
as evidenced by an Officers' Certificate, or, if more than $25 million, by the
Board of Directors, as evidenced by a Board resolution, provided that the
Investment in the Property received in the exchanges described in clauses (ii)
and (iii) of the prior sentence will be subject to the covenant described under
"Limitation on Restricted Payments" above. Notwithstanding anything in the
foregoing to the contrary, the Company may not, and will not permit any of its
Restricted Subsidiaries or any Eligible Joint Venture to, make an Asset
Disposition of any of their interest in, or Property of, any of the Coso
Project other than for consideration consisting solely of cash.
To the extent that any or all of the Net Cash Proceeds of any Foreign
Asset Disposition are prohibited from (or delayed in) being repatriated to the
United States by applicable local law, the portion of such Net Cash Proceeds so
affected will not be required to be applied at the time provided above but may
be retained by any Restricted Subsidiary or any Eligible Joint Venture so long,
but only so long, as the applicable local law does not permit (or delays)
repatriation to the United States. If such Net Cash Proceeds are transferred by
the Restricted Subsidiary or Eligible Joint Venture that conducted the Foreign
Asset Disposition to another Restricted Subsidiary or Eligible Joint Venture,
the Restricted Subsidiary or Eligible Joint Venture receiving such Net Cash
Proceeds must not be directly or indirectly obligated on any Debt owed to any
Person other than the Company. The Company will take or cause such Restricted
Subsidiary or such Eligible Joint Venture to take all actions required by the
applicable local law to permit such repatriation promptly. Once repatriation of
any of such Net Cash Proceeds is permitted under the applicable local law,
repatriation will be effected immediately and the repatriated Net Cash Proceeds
will be applied in the manner set forth in this covenant as if such Asset
Disposition had occurred on the date of such repatriation. In addition, if the
Chief Financial Officer determines, in good faith, as evidenced by an Officers'
Certificate, that repatriation of any or all of the Net Cash Proceeds of any
Foreign Asset Disposition would have a material adverse tax consequence to the
Company, the Net Cash Proceeds so affected may be retained outside of the
United States by the applicable Restricted Subsidiary or the applicable
Eligible Joint Venture for so long as such material adverse tax consequence
would continue. Notwithstanding the foregoing provisions of this paragraph to
the contrary, if applicable local law prohibits (or delays) the repatriation of
Net Cash Proceeds of a Foreign Asset Disposition but such local law does not
prohibit the application of such Net Cash Proceeds pursuant to the first
sentence of the first paragraph of this covenant, the Company may apply such
Net Cash Proceeds pursuant to such provision.
If the series of Debt Securities tendered pursuant to an Offer have an
aggregate purchase price that is less than the Excess Proceeds available for
the purchase of such Debt Securities, the Company may use the remaining Excess
Proceeds for general corporate purposes without regard to the provisions of
this covenant. The Company will not be required to make an Offer pursuant to
this covenant if the Excess Proceeds available therefor are less than $10
million, provided that the lesser amounts of such Excess Proceeds will be
carried forward and cumulated for each 36 consecutive month period for purposes
of determining whether an Offer is required with respect to any Excess Proceeds
of any subsequent Asset
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Dispositions. Any such lesser amounts so carried forward and cumulated need not
be segregated or reserved and may be used for general corporate purposes,
provided that such use will not reduce the amount of cumulated Excess Proceeds
or relieve the Company of its obligation hereunder to make an Offer with
respect thereto.
The Company will make an Offer by mailing to each Holder, with a copy to
the Trustee, within 30 days after the receipt of Excess Proceeds that cause the
cumulated Excess Proceeds to exceed $10 million, a written notice that will
specify the purchase date, which will not be less than 30 days nor more than 60
days after the date of such notice (the "Purchase Date"), that will contain
certain information concerning the business of the Company that the Company
believes in good faith will enable the Holders to make an informed decision and
that will contain information concerning the procedures applicable to the Offer
(including, without limitation, the right of withdrawal) and the effect of such
Offer on the Debt Securities tendered. Holders that elect to have their Debt
Securities purchased will be required to surrender such Debt Securities at
least one Business Day prior to the Purchase Date. If at the expiration of the
Offer period the aggregate purchase price of the series of Debt Securities
properly tendered by Holders pursuant to the Offer exceeds the amount of such
Excess Proceeds, such series of Debt Securities or portions of Debt Securities
to be accepted for purchase will be selected by the Trustee in such manner as
the Trustee deems to be fair and appropriate in the circumstances.
If the Company is prohibited by applicable law from making the Offer or
purchasing Debt Securities of any series thereunder, the Company need not make
an Offer pursuant to this covenant for so long as such prohibition is in
effect.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with an
Offer.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, directly or indirectly, conduct
any business or enter into or permit to exist any transaction or series of
related transactions (including, but not limited to, the purchase, sale or
exchange of Property, the making of any Investment, the giving of any Guarantee
or the rendering of any service) with any Affiliate of the Company, such
Restricted Subsidiary or such Eligible Joint Venture, as the case may be,
unless (i) such business, transaction or series of related transactions is in
the best interest of the Company, such Restricted Subsidiary or such Eligible
Joint Venture, (ii) such business, transaction or series of related
transactions is on terms no less favorable to the Company, such Restricted
Subsidiary or such Eligible Joint Venture than those that could be obtained in
a comparable arm's length transaction with a Person that is not such an
Affiliate and (iii) with respect to such business, transaction or series of
related transactions that has a fair market value or involves aggregate
payments equal to, or in excess of, $10 million, such business, transaction or
series of transactions is approved by a majority of the Board of Directors
(including a majority of the disinterested directors), which approval is set
forth in a Board resolution delivered to the Trustee certifying that, in good
faith, the Board of Directors believes that such business, transaction or
series of transactions complies with clauses (i) and (ii) above.
Limitation on Liens
The Company may not Incur any Debt that is secured, directly or
indirectly, with, and the Company will not, and will not permit any of its
Restricted Subsidiaries or an Eligible Joint Venture to, grant a Lien on the
Property of the Company, its Restricted Subsidiaries or any Eligible Joint
Venture now owned or hereafter acquired unless contemporaneous therewith or
prior thereto the Debt Securities are equally and ratably secured except for
(i) any such Debt secured by Liens existing on the Property of any entity at
the time such Property is acquired by the Company, any of its Restricted
Subsidiaries or any Eligible Joint Venture, whether by merger, consolidation,
purchase of such Property or otherwise, provided that such Liens (x) are not
created, incurred or assumed in contemplation of such Property being acquired
by the Company, any of its Restricted Subsidiaries or any Eligible Joint
Venture and (y) do not extend to any other Property of the Company, any of its
Restricted Subsidiaries or any Eligible Joint Venture, (ii) any other Debt that
is required by the terms thereof to be equally and ratably secured as a result
of the
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Incurrence of Debt that is permitted to be secured pursuant to another clause
of this covenant, (iii) Liens that are granted in good faith to secure Debt (A)
contemplated by clause (iv) of the covenant described under "Limitation on
Debt" above or (B) contemplated by clauses (ii), (iii), (vi) and (viii) of the
covenant described under "Limitation on Subsidiary Debt" above, provided that,
in the case of Debt owed to a Person other than the Company or a Restricted
Subsidiary, the Chief Executive Officer or Chief Financial Officer of the
Company determines in good faith, as evidenced by an Officers' Certificate,
that such Liens are required in order to effect such financing and are not
materially more restrictive, taken as a whole, than Liens, taken as a whole,
customarily accepted (or in the absence of industry custom, reasonably
acceptable) in comparable financings or comparable transactions in the
applicable jurisdiction, (iv) Liens existing on the date of the original
issuance of any series of the Debt Securities, (v) Liens incurred to secure
Debt incurred by the Company as permitted by clause (vi) of the covenant
described under "Limitation on Debt" above, provided that such Liens may not
cover any Property other than that being purchased and improvements and
additions thereto, (vi) Liens on any Property of the Company securing Permitted
Working Capital Facilities, Guarantees thereof and any Interest Rate Protection
Agreements or Currency Protection Agreements, provided that such Liens may not
extend to the Capital Stock owned by the Company in any Restricted Subsidiary
of the Company or any Eligible Joint Venture, (vii) Liens in respect of
extensions, renewals, refundings or refinancings of any Debt secured by the
Liens referred to in the foregoing clauses, provided that the Liens in
connection with such renewal, extension, refunding or refinancing will be
limited to all or part of the specific property that was subject to the
original Lien, (viii) Liens incurred to secure obligations in respect of
letters of credit, bankers' acceptances, surety, bid, operating and performance
bonds, performance guarantees or other similar instruments or obligations (or
reimbursement obligations with respect thereto) (in each case, to the extent
incurred in the ordinary course of business), (ix) any Lien arising by reason
of (A) any judgment, decree or order of any court, so long as such Lien is
being contested in good faith and is appropriately bonded, and any appropriate
legal proceedings that may have been duly initiated for the review of such
judgment, decree or order have not been finally terminated or the period within
which such proceedings may be initiated has not expired, (B) taxes, duties,
assessments, imposts or other governmental charges that are not yet delinquent
or are being contested in good faith, (C) security for payment of worker's
compensation or other insurance, (D) security for the performance of tenders,
contracts (other than contracts for the payment of money) or leases, (E)
deposits to secure public or statutory obligations, or to secure permitted
contracts for the purchase or sale of any currency entered into in the ordinary
course of business, (F) the operation of law in favor of carriers,
warehousemen, landlords, mechanics, materialmen, laborers, employees or
suppliers, incurred in the ordinary course of business for sums that are not
yet delinquent or are being contested in good faith by negotiations or by
appropriate proceedings that suspend the collection thereof, (G) easements,
rights-of-way, zoning and similar covenants and restrictions and other similar
encumbrances or title defects that do not in the aggregate materially interfere
with the ordinary conduct of the business of the Company, any of its Restricted
Subsidiaries or any Eligible Joint Venture or (H) leases and subleases of real
property that do not interfere with the ordinary conduct of the business of the
Company, any of its Restricted Subsidiaries or any Eligible Joint Venture and
that are made on customary and usual terms applicable to similar properties, or
(x) Liens, in addition to the foregoing, that secure obligations not in excess
of $5 million in the aggregate.
Purchase of Debt Securities Upon a Change of Control
Upon the occurrence of a Change of Control, each Holder of the Debt
Securities of each series will have the right to require that the Company
repurchase such Holder's Debt Securities of such series at a purchase price in
cash equal to 101% of the principal thereof on the date of purchase plus
accrued interest, if any, to the date of purchase.
The Change of Control provisions may not be waived by the Trustee or by
the Board of Directors, and any modification thereof must be approved by each
Holder. Nevertheless, the Change of Control provisions will not necessarily
afford protection to Holders, including protection against an adverse effect on
the value of the Debt Securities of any series, in the event that the Company
or its Subsidiaries Incur additional Debt, whether through recapitalizations or
otherwise.
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Within 30 days following a Change of Control, the Company will mail a
notice to each Holder of the Debt Securities of each series, with a copy to the
Trustee, stating (1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's Debt Securities
at the purchase price described above (the "Change of Control Offer"), (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control), (3) the purchase
date (which will be not earlier than 30 days nor later than 60 days from the
date such notice is mailed) (the "Purchase Date"), (4) and thereafter interest
on and such Debt Security will continue to accrue, (5) any Debt Security
properly tendered pursuant to the Change of Control Offer will cease to accrue
interest after the Purchase Date (assuming sufficient moneys for the purchase
thereof are deposited with the Trustee), (6) that Holders electing to have a
Debt Security of any series purchased pursuant to a Change of Control Offer
will be required to surrender the Debt Security of such series, with the form
entitled "Option of Holder To Elect Purchase" on the reverse of the Debt
Security completed, to the paying agent at the address specified in the notice
prior to the close of business on the fifth Business Day prior to the Purchase
Date, (7) that a Holder will be entitled to withdraw such Holder's election if
the paying agent receives, not later than the close of business on the third
Business Day (or such shorter periods as may be required by applicable law)
preceding the Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of Debt
Securities of such series the Holder delivered for purchase, and a statement
that such Holder is withdrawing his election to have such Debt Securities of
such series purchased and (8) that Holders that elect to have their Debt
Securities of any series purchased only in part will be issued new Debt
Securities having a principal amount equal to the portion of the Debt
Securities of the series that were surrendered but not tendered and purchased.
On the Purchase Date, the Company will (i) accept for payment all Debt
Securities of any series or portions thereof tendered pursuant to the Change of
Control Offer, (ii) deposit with the Trustee money sufficient to pay the
purchase price of all Debt Securities of such series or portions thereof so
tendered for purchase and (iii) deliver or cause to be delivered to the Trustee
the Debt Securities of such series properly tendered together with an Officers'
Certificate identifying the Debt Securities of such series or portions thereof
tendered to the Company for purchase. The Trustee will promptly mail, to the
Holders of the Debt Securities of such series properly tendered and purchased,
payment in an amount equal to the purchase price, and promptly authenticate and
mail to each Holder a new Debt Security of the same series having a principal
amount equal to any portion of such Holder's Debt Securities of such series
that were surrendered but not tendered and purchased, the Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Purchase Date.
If the Company is prohibited by applicable law from making the Change of
Control Offer or purchasing Debt Securities of any series thereunder, the
Company need not make a Change of Control Offer pursuant to this covenant for
so long as such prohibition is in effect.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with a
Change of Control Offer.
Limitation on Business
The Company will, and will cause its Restricted Subsidiaries and the
Eligible Joint Ventures to, engage only in (i) the ownership, design,
engineering, procurement, construction, development, acquisition, operation,
servicing, management or disposition of Permitted Facilities, (ii) the
ownership, creation, development, acquisition, servicing, management or
disposition of Restricted Subsidiaries and Joint Ventures that own, construct,
develop, design, engineer, procure, acquire, operate, service, manage or
dispose of Permitted Facilities, (iii) obtaining, arranging or providing
financing incident to any of the foregoing and (iv) other related activities
incident to any of the foregoing. The Company will not, and will not permit any
of its Restricted Subsidiaries or any Eligible Joint Venture to, make any
Investment or otherwise acquire any Property that is not directly related to
the business of the Company as described in the preceding sentence
(collectively, the "Ineligible Investments") other than as a part of an
Investment or an acquisition of Property that is predominantly and directly
related to the business of the Company
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as described above, and if the aggregate fair market value of such Ineligible
Investments in the aggregate exceeds 20% (the "Percentage Limit") of the total
assets of the Company and its consolidated Restricted Subsidiaries (as
determined in accordance with GAAP) as determined in good faith by the Chief
Financial Officer, as evidenced by an Officers' Certificate, the Company, its
Restricted Subsidiaries and the Eligible Joint Ventures must cease acquiring
any additional Ineligible Investments and, within 18 months of the acquisition
that caused the Ineligible Assets to exceed the Percentage Limit, must return
to compliance with the Percentage Limit by disposing of Ineligible Assets or
otherwise, provided that such 18-month period may be extended up to an
additional six months if, despite the Company's active efforts during such
18-month period to dispose of such Ineligible Investments or to otherwise come
into compliance with such Percentage Limit, the Company is unable to do so
because of regulatory restrictions or delays or adverse market conditions.
Limitation on Certain Sale-Leasebacks
The Company will not, and will not permit any of its Restricted
Subsidiaries or any Eligible Joint Venture to, Incur or otherwise become
obligated with respect to any sale-leaseback (other than a sale-leaseback with
respect to a Permitted Facility that is Non-Recourse) unless, (i) (a) if
effected by the Company, the Company would be permitted to Incur such
obligation under the covenant described under "Limitation on Debt" above or,
(b) if effected by a Restricted Subsidiary or an Eligible Joint Venture, such
Restricted Subsidiary or such Eligible Joint Venture would be permitted to
Incur such obligation under the covenant described under "Limitation on
Subsidiary Debt" above, assuming for the purpose of this covenant and the
covenants described under "Limitation on Debt" and "Limitation on Subsidiary
Debt" that (x) the obligation created by such sale-leaseback is a Capitalized
Lease and (y) the Capitalized Lease Obligation with respect thereto is the
Attributable Value thereof, (ii) the Company, such Restricted Subsidiary or
such Eligible Joint Venture is permitted to grant a Lien with respect to the
property that is the subject of such sale-leaseback under the covenant
described under "Limitation on Liens" above, (iii) the proceeds of such
sale-leaseback are at least equal to the fair market value of the property sold
(determined in good faith as evidenced by an Officers' Certificate delivered to
the Trustee in respect of a transaction involving less than $25 million, or, if
equal to or in excess of $25 million, by the Board of Directors, as evidenced
by a Board resolution) and (iv) the Net Cash Proceeds of the sale-leaseback are
applied pursuant to the covenants described under "Limitation on Dispositions"
above.
Limitation on Sale of Subsidiary Preferred Stock
The Company will not permit any of its Restricted Subsidiaries or any
Eligible Joint Venture to create, assume or otherwise cause or suffer to exist
any Preferred Stock except: (i) Preferred Stock outstanding on the date of the
Indentures, including Preferred Stock issued as dividends in respect of such
Preferred Stock pursuant to the terms of the agreement or instrument that
governs such Preferred Stock as in effect on the date of original issuance of
the Debt Securities, (ii) Preferred Stock held by the Company, a Restricted
Subsidiary of the Company or an Eligible Joint Venture, (iii) Preferred Stock
issued by a Person prior to the time (a) such Person becomes a Restricted
Subsidiary or an Eligible Joint Venture, (b) such Person merges with or into
another Restricted Subsidiary or another Eligible Joint Venture or (c) a
Restricted Subsidiary, or an Eligible Joint Venture merges with or into such
Person (in a transaction in which such Person becomes a Restricted Subsidiary
or an Eligible Joint Venture), provided that such Preferred Stock was not
issued in anticipation of such Person becoming a Restricted Subsidiary or an
Eligible Joint Venture or of such merger, (iv) Preferred Stock issued or agreed
to be issued by a Restricted Subsidiary or an Eligible Joint Venture in
connection with the financing of the construction, design, engineering,
procurement, equipping, developing, operation, ownership, management, servicing
or acquisition of one or more Permitted Facilities in which the Company or one
or more Restricted Subsidiaries or Eligible Joint Ventures has a direct or
indirect interest or the retirement of Debt or Preferred Stock secured by any
such Permitted Facility or in order to enhance the repatriation of equity,
advances or income or the increase of after-tax funds available for
distribution to the owners of any such Permitted Facility, (v) Preferred Stock
issued or agreed to be issued by a Restricted Subsidiary or an Eligible Joint
Venture in satisfaction of legal requirements applicable to a Permitted
Facility or to maintain the ordinary course of conduct of such Restricted
Subsidiary's or such Eligible Joint Venture's business in the applicable
jurisdiction and (vi) Preferred Stock that is exchanged for, or the proceeds of
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which are used to refinance, any Preferred Stock permitted to be outstanding
pursuant to clauses (i) through (v) hereof (or any extension, renewal or
refinancing thereof), having a liquidation preference not to exceed the
liquidation preference of the Preferred Stock so exchanged or refinanced and
having a redemption period no shorter than the redemption period of the
Preferred Stock so exchanged or refinanced.
EVENTS OF DEFAULT
An Event of Default, as defined in each of the Indentures and applicable
to any particular series of Debt Securities issued under such Indenture is
defined as being: (i) default as to the payment of principal, or premium, if
any, on any Debt Security of that series or as to any payment required in
connection with a Change of Control or an Asset Disposition, (ii) default as to
the payment of interest on any Debt Security of that series for 30 days after
payment is due, (iii) failure to make an offer required under either of the
covenants described under "Limitation on Dispositions" or "Purchase of Debt
Securities Upon a Change of Control" above or a failure to purchase Debt
Securities of that series tendered in respect of such offer, (iv) default in
the performance, or breach, of any covenant, agreement or warranty contained in
the Indentures and the Debt Securities of that series and such failure
continues for 30 days after written notice is given to the Company by the
Trustee or the Holders of at least 25% in principal amount outstanding of the
Debt Securities of that series issued under such Indenture, as provided in such
Indenture, (v) default on any other Debt of the Company or any Significant
Subsidiary (other than Non-Recourse Debt of Significant Subsidiaries) if either
(x) such default results from failure to pay principal of such Debt in excess
of $25 million when due after any applicable grace period or (y) as a result of
such default, the maturity of such Debt has been accelerated prior to its
scheduled maturity and such default has not been cured within the applicable
grace period, and such acceleration has not been rescinded, and the principal
amount of such Debt, together with the principal amount of any other Debt of
the Company and its Significant Subsidiaries (not including Non-Recourse Debt
of the Significant Subsidiaries) that is in default as to principal, or the
maturity of which has been accelerated, aggregates $25 million or more, (vi)
the entry by a court of one or more judgments or orders against the Company or
any Significant Subsidiary for the payment of money that in the aggregate
exceeds $25 million (excluding the amount thereof covered by insurance or by a
bond written by a Person other than an Affiliate of the Company), which
judgments or orders have not been vacated, discharged or satisfied or stayed
pending appeal within 60 days from the entry thereof, provided that such a
judgment or order will not be an Event of Default if such judgment or order
does not require any payment by the Company or any Significant Subsidiary,
except to the extent that such judgment is only against Property that secures
Non-Recourse Debt that was permitted under the Indentures, and the Company
could, at the expiration of the applicable 60 day period, after giving effect
to such judgment or order and the consequences thereof, Incur at least $1 of
Debt under the provisions described in the first paragraph of "Limited on Debt"
above, and (vii) certain events involving bankruptcy, insolvency or
reorganization of the Company or any of its Significant Subsidiaries.
The Indentures provide that the Trustee may withhold notice to the Holders
of any default (except in payment of principal of, premium, if any, or interest
on any series of Debt Securities and any payment required in connection with a
Change of Control or an Asset Disposition) if the Trustee considers it in the
interest of Holders to do so.
The Indentures provide that if an Event of Default with respect to Debt
Securities of any series at the time outstanding (other than an event of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary) has occurred and is continuing, either the Trustee or the Holders
of not less than 25% in principal amount of the Debt Securities of that series
issued under such Indenture then outstanding may declare the Default Amount of
all Debt Securities of that series to be due and payable immediately, but upon
certain conditions such declaration may be annulled and past defaults (except,
unless theretofore cured, a default in payment of principal of, premium, if
any, or interest on the Debt Securities of that series or any payment required
in connection with a Change of Control or an Asset Disposition, as the case may
be) may be waived by the Holders of a majority in principal amount of the
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Debt Securities of that series then outstanding. If an Event of Default due to
the bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary occurs, the Indenture provides that the Default Amount of all Debt
Securities of that series will become immediately due and payable.
The Holders of a majority in principal amount of the Debt Securities of
any series issued under such Indenture then outstanding will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee under the Indenture with respect to the Debt
Securities of such series, subject to certain limitations specified in the
Indenture, provided that the Holders of Debt Securities of such series must
have offered to the Trustee reasonable indemnity against expenses and
liabilities. Each Indenture requires the annual filing by the Company with the
Trustee of a written statement as to compliance with the principal covenants
contained in the Indentures.
MODIFICATION
Each of the Indentures contains provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Debt Securities at the time outstanding, to modify such
Indenture or any supplemental indenture or the rights of the Holders of the
series of Debt Securities issued under such Indenture, except that no such
modification may (i) extend the final maturity of any of the Debt Securities,
reduce the principal amount thereof, reduce any amount payable on redemption or
purchase thereof or impair the right of any Holder to institute suit for the
payment thereof or make any change in the covenants regarding a Change of
Control or an Asset Disposition or the related definitions without the consent
of the Holder of each of the series of Debt Securities so affected or (ii)
reduce the percentage of any series of Debt Securities, the consent of the
Holders of which is required for any such modification, without the consent of
the Holders of all series of Debt Securities issued under such Indenture then
outstanding.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
The Company may not consolidate with, merge with or into, or transfer all
or substantially all its Property (as an entirety or substantially an entirety
in one transaction or a series of related transactions), to any Person unless:
(i) the Company will be the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or to
which the Property of the Company is transferred will be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia and will expressly assume in writing all the
obligations of the Company, under the Indenture and the Debt Securities, (ii)
immediately after giving effect to such transaction, no Event of Default and no
event or condition that through the giving of notice or lapse of time or both
would become an Event of Default will have occurred and be continuing, (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company or the surviving entity would be able to Incur at least $1 of Debt
under the provision described in the first paragraph of "Limitation on Debt"
above and (iv) the Net Worth of the Company or the surviving entity, as the
case may be, on a pro forma basis after giving effect to such transaction
(without giving effect to the fees and expenses incurred in respect of such
transaction), is not less than the Net Worth of the Company immediately prior
to such transaction.
None of the Company, any of its Restricted Subsidiaries or any Eligible
Joint Ventures may merge with or into, or be consolidated with, an Unrestricted
Subsidiary of the Company, except to the extent that such Unrestricted
Subsidiary has been designated a Restricted Subsidiary as provided in the
Indenture in advance of or in connection with such merger.
DEFEASANCE AND DISCHARGE
Legal Defeasance
Each of the Indentures provides that the Company will be deemed to have
paid and will be discharged from any and all obligations in respect of the Debt
Securities of or within any series, on the 123rd day after the deposit referred
to below has been made (or immediately if an Opinion of Counsel is delivered to
the effect described in clause (B)(iii)(y) below), and the provisions of such
Indenture will
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cease to be applicable with respect to such Debt Securities of such series
(except for, among other matters, certain obligations to register the transfer
or exchange of such Debt Securities of such series, to replace stolen, lost or
mutilated Debt Securities of such series, to maintain paying agencies and to
hold monies for payment in trust) if, among other things, (A) the Company has
deposited with the Trustee, in trust, money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the applicable Debt
Securities, on the respective Stated Maturities of the Debt Securities or, if
the Company makes arrangements satisfactory to the Trustee for the redemption
of the Debt Securities prior to their Stated Maturity, on any earlier
redemption date in accordance with the terms of such Indenture and the
applicable Debt Securities, (B) the Company has delivered to the Trustee (i)
either (x) an Opinion of Counsel to the effect that Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred and the
Company had paid or redeemed such Debt Securities on the applicable dates,
which Opinion of Counsel must be based upon a ruling of the Internal Revenue
Service to the same effect or a change in applicable federal income tax law or
related Treasury regulations after the date of the Indentures or (y) a ruling
directed to the Trustee or the Company received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel, (ii) an
Opinion of Counsel to the effect that the creation of the defeasance trust does
not violate the Investment Company Act of 1940 and (iii) an Opinion of Counsel
to the effect that either (x) after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 or 548
of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law or (y) based upon existing precedents, if the matter were properly briefed,
a court should hold that the deposit of moneys and/or U.S. Government
Obligations as provided in clause (A) would not constitute a preference
voidable under Section 547 or 548 of the U.S. Bankruptcy Code or Section 15 of
the New York Debtor and Creditor Law, (C) immediately after giving effect to
such deposit on a pro forma basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
will have occurred and be continuing on the date of such deposit or (unless an
Opinion of Counsel is delivered to the effect described in clause (B)(iii)(y)
above) during the period ending on the 123rd day after the date of such deposit
and the deposit will not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company is a
party or by which the Company is bound and (D) if at such time the Debt
Securities are listed on a national securities exchange, the Company has
delivered to the Trustee an Opinion of Counsel to the effect that the Debt
Securities will not be delisted as a result of such deposit, defeasance and
discharge.
Covenant Defeasance
The Indentures further provide that the provisions of clause (iii) under
"Mergers, Consolidations and Sales of Assets" and all the covenants described
herein under "Certain Covenants," clause (iv) under "Events of Default" with
respect to such covenants and with respect to clause (iii) under "Mergers,
Consolidations and Sales of Assets," clauses (i) and (iii) with respect to
certain offers for any series of Debt Securities required by certain covenants
and clauses (v) and (vi) under "Events of Default" will cease to be applicable
to the Company, its Restricted Subsidiaries and its Eligible Joint Ventures
upon the satisfaction of the provisions described in clauses (A), (B)(ii) and
(iii), (C) and (D) of the preceding paragraph and the delivery by the Company
to the Trustee of an Opinion of Counsel to the effect that, among other things,
the Holders of such Debt Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and the defeasance of
certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred and the
Company had paid or redeemed such Debt Securities on the applicable dates.
Defeasance and Certain Other Events of Default
If the Company exercises its option to omit compliance with certain
covenants and provisions of the Indentures with respect to the Debt Securities
of any series as described in the immediately preceding paragraph and any
series of Debt Securities are declared due and payable because of the
occurrence of
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an Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on such Debt Securities at the time of their Stated Maturity or
scheduled redemption, but may not be sufficient to pay amounts due on such Debt
Securities at the time of acceleration resulting from such Event of Default.
The Company will remain liable for such payments.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by, and construed
in accordance with, the law of the State of New York, including Section 5-1401
of the New York General Obligations Law, but otherwise without regard to
conflict of laws rules.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of each of the Indentures. Reference is made to
the Indentures for the full definitions of all such terms as well as any other
capitalized terms used herein for which no definition is provided.
"Acquired Debt" is defined to mean Debt Incurred by a Person prior to the
time (i) such Person becomes a Restricted Subsidiary of the Company or an
Eligible Joint Venture, (ii) such Person merges with or into a Restricted
Subsidiary of the Company or an Eligible Joint Venture, or (iii) a Restricted
Subsidiary of the Company or an Eligible Joint Venture merges with or into such
Person (in a transaction in which such Person becomes a Restricted Subsidiary
of the Company or an Eligible Joint Venture), provided that, after giving
effect to such transaction, any Non-Recourse Debt of such Person could have
been Incurred pursuant to clause (iii) of the provision described under
"Limitation on Subsidiary Debt", any Permitted Facilities Debt of such Person
could have been Incurred pursuant to clause (viii) of the provision described
under "Limitation on Subsidiary Debt" and would not otherwise violate any other
provision of the applicable Indenture, and all the other Debt of such Person
could have been Incurred by the Company at the time of such merger or
acquisition pursuant to the provision described in the first paragraph of
"Limitation on Debt" above, and provided further that such Debt was not
Incurred in connection with, or in contemplation of, such merger or such Person
becoming a Restricted Subsidiary of the Company or an Eligible Joint Venture.
"Acquisition Debt" is defined to mean Debt of any Person existing at the
time such Person is merged into the Company or assumed in connection with the
acquisition of Property from any such Person (other than Property acquired in
the ordinary course of business), including Debt Incurred in connection with,
or in contemplation of, such Person being merged into the Company (but
excluding Debt of such Person that is extinguished, retired or repaid in
connection with such merger or acquisition).
"Adjusted Consolidated Net Income" is defined to mean for any period, for
any Person (the "Referenced Person") the aggregate Net Income (or loss) of the
Referenced Person and its consolidated Subsidiaries for such period determined
in conformity with GAAP, provided that the following items will be excluded in
computing Adjusted Consolidated Net Income (without duplication): (i) the Net
Income (or loss) of any other Person (other than a Subsidiary of the Referenced
Person) in which any third Person has an interest, except to the extent of the
amount of dividends or other distributions actually paid in cash to the
Referenced Person during such period, or after such period and on or before the
date of determination, by such Person in which the interest is held, which
dividends and distributions will be included in such computation, (ii) solely
for the purposes of calculating the amount of Restricted Payments that may be
made pursuant to the provision described in clause (c) of the first paragraph
of "Limitation on Restricted Payments" above (and in such case, except to the
extent includable pursuant to clause (i) above), the Net Income (if positive)
of any other Person accrued prior to the date it becomes a Subsidiary of the
Referenced Person or is merged into or consolidated with the Referenced Person
or any of its Subsidiaries or all or substantially all the Property of such
other Person is acquired by the Referenced Person or any of its Subsidiaries,
(iii) the Net Income (if positive) of any Subsidiary of the Referenced Person
to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary to such Person or to any other Subsidiary of
such Net Income is not at the time permitted
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by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary, (iv) any gains or losses (on an after-tax basis) attributable
to Asset Sales (except, solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to the provision described in
clause (c) of the first paragraph of "Limitation on Restricted Payments" above,
any gains or losses of the Company and any of its Restricted Subsidiaries from
Asset Sales of Capital Stock of Unrestricted Subsidiaries), (v) the cumulative
effect of a change in accounting principles and (vi) any amounts paid or
accrued as dividends on Preferred Stock of any Subsidiary of the Referenced
Person that is not held by the Referenced Person or another Subsidiary thereof.
When the "Referenced Person" is the Company, the foregoing references to
"Subsidiaries" will be deemed to refer to "Restricted Subsidiaries."
"Affiliate" of any Person is defined to mean any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with") when used with respect to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. For the purpose of
the covenant described under "Limitation on Transactions with Affiliates"
above, the term "Affiliate" will be deemed to include only Kiewit, any entity
owning beneficially 10% or more of the Voting Stock of the Company and their
respective Affiliates other than the Restricted Subsidiaries and the Eligible
Joint Ventures and the other equity investors in the Restricted Subsidiaries
and the Eligible Joint Ventures (solely on account of their investments in the
Restricted Subsidiaries and the Eligible Joint Ventures), and for such purpose
such term also will be deemed to include the Unrestricted Subsidiaries.
"Asset Acquisition" is defined to mean (i) an investment by the Company,
any of its Subsidiaries or any Joint Venture in any other Person pursuant to
which such Person will become a direct or indirect Subsidiary of the Company or
a Joint Venture or will be merged into or consolidated with the Company, any of
its Subsidiaries or any Joint Venture or (ii) an acquisition by the Company,
any of its Subsidiaries or any Joint Venture of the Property of any Person
other than the Company, any of its Subsidiaries or any Joint Venture that
constitutes substantially all of an operating unit or business of such Person.
"Asset Disposition" is defined to mean any sale, transfer, conveyance,
lease or other disposition (including by way of merger, consolidation or
sale-leaseback) by the Company, any of its Restricted Subsidiaries or any
Eligible Joint Venture to any Person (other than to the Company, a Restricted
Subsidiary of the Company or an Eligible Joint Venture and other than in the
ordinary course of business) of any Property of the Company, any of its
Restricted Subsidiaries or any Eligible Joint Venture other than any shares of
Capital Stock of the Unrestricted Subsidiaries. Notwithstanding the foregoing
to the contrary, the term "Asset Disposition" will include the sale, transfer,
conveyance or other disposition of any shares of Capital Stock of any
Unrestricted Subsidiary to the extent that the Company or any of its Restricted
Subsidiaries or Eligible Joint Ventures made an Investment in such Unrestricted
Subsidiary pursuant to clause (vii) of the definition of "Permitted Payment,"
and the Company will, and will cause each of its Restricted Subsidiaries and
Eligible Joint Ventures to, apply pursuant to the covenant described under
"Limitation on Dispositions" that portion of the Net Cash Proceeds from the
sale, transfer, conveyance or other disposition of such Unrestricted Subsidiary
that is equal to the portion of the total Investment in such Unrestricted
Subsidiary that is represented by the Investment that was made pursuant to
clause (vii) of the definition of "Permitted Payment." For purposes of this
definition, any disposition in connection with directors' qualifying shares or
investments by foreign nationals mandated by applicable law will not constitute
an Asset Disposition. In addition, the term "Asset Disposition" will not
include (i) any sale, transfer, conveyance, lease or other disposition of the
Capital Stock or Property of Restricted Subsidiaries or Eligible Joint Ventures
pursuant to the terms of any power sales agreements or steam sales agreements
to which such Restricted Subsidiaries or such Eligible Joint Ventures are
parties on the date of the original issuance of any series of the Debt
Securities or pursuant to the terms of any power sales agreements or steam
sales agreements, or other agreements or contracts that are related to the
output or product of, or services rendered by, a Permitted Facility as to which
such Restricted Subsidiary or such Eligible Joint Venture is the supplying
party, to which such Restricted
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Subsidiaries or such Eligible Joint Ventures become a party after such date if
the Chief Executive Officer or Chief Financial Officer of the Company
determines in good faith (evidenced by an Officers' Certificate) that such
provisions are customary (or, in the absence of any industry custom, reasonably
necessary) in order to effect such agreements and are reasonable in light of
comparable transactions in the applicable jurisdiction, (ii) any sale,
transfer, conveyance, lease or other disposition of Property governed by the
covenant described under "Mergers, Consolidations and Sales of Assets" above,
(iii) any sale, transfer, conveyance, lease or other disposition of any Cash
Equivalents, (iv) any transaction or series of related transactions consisting
of the sale, transfer, conveyance, lease or other disposition of Capital Stock
or Property with a fair market value aggregating less than $5 million and (v)
any Permitted Payment or any Restricted Payment that is permitted to be made
pursuant to the covenant described under "Limitation on Restricted Payments"
above. The term "Asset Disposition" also will not include (i) the grant of or
realization upon a Lien permitted under the covenant described under
"Limitation on Liens" above or the exercise of remedies thereunder, (ii) a
sale-leaseback transaction involving substantially all the Property
constituting a Permitted Facility pursuant to which a Restricted Subsidiary of
the Company or an Eligible Joint Venture sells the Permitted Facility to a
Person in exchange for the assumption by that Person of the Debt financing the
Permitted Facility and the Restricted Subsidiary or the Eligible Joint Venture
leases the Permitted Facility from such Person, (iii) dispositions of Capital
Stock, contract rights, development rights and resource data made in connection
with the initial development of Permitted Facilities, or the formation or
capitalization of Restricted Subsidiaries or Eligible Joint Ventures in respect
of the initial development of Permitted Facilities, in respect of which only an
insubstantial portion of the prospective Construction Financing that would be
required to commence commercial operation has been funded or (iv) transactions
determined in good faith by the Chief Financial Officer, as evidenced by an
Officers' Certificate, made in order to enhance the repatriation of Net Cash
Proceeds for a Foreign Asset Disposition or in order to increase the after-tax
proceeds thereof available for immediate distribution to the Company. Any Asset
Disposition that results from the bona fide exercise by any governmental
authority of its claimed or actual power of eminent domain need not comply with
the provisions of clauses (i) and (ii) of the covenant described under
"Limitation on Dispositions" above. Any Asset Disposition that results from a
casualty loss need not comply with the provisions of clause (i) of the covenant
described under "Limitation on Dispositions" above.
"Asset Sale" is defined to mean the sale or other disposition by the
Company, any of its Subsidiaries or any Joint Venture (other than to the
Company, another Subsidiary of the Company or another Joint Venture) of (i) all
or substantially all of the Capital Stock of any Subsidiary of the Company or
any Joint Venture or (ii) all or substantially all of the Property that
constitutes an operating unit or business of the Company, any of its
Subsidiaries or any Joint Venture.
"Attributable Value" means, as to a Capitalized Lease Obligation under
which any Person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear
on the face of a balance sheet of such Person in accordance with GAAP.
"Average Life" is defined to mean, at any date of determination with
respect to any Debt security or Preferred Stock, the quotient obtained by
dividing (i) the sum of the product of (A) the number of years from such date
of determination to the dates of each successive scheduled principal or
involuntary liquidation value payment of such Debt security or Preferred Stock,
respectively, multiplied by (B) the amount of such principal or involuntary
liquidation value payment by (ii) the sum of all such principal or involuntary
liquidation value payments.
"Board of Directors" is defined to mean either the Board of Directors of
the Company or any duly authorized committee of such Board.
"Business Day" is defined to mean a day that, in the city (or in any of
the cities, if more than one) where amounts are payable in respect of the Debt
Securities, is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close.
"Capital Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in, or interests (however designated) in, the
equity of such Person that is outstanding or issued on or after the date of
Indenture, including, without limitation, all Common Stock and Preferred Stock
and partnership and joint venture interests in such Person.
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"Capitalized Lease" is defined to mean, as applied to any Person, any
lease of any Property of which the discounted present value of the rental
obligations of such Person as lessee, in conformity with GAAP, is required to
be capitalized on the balance sheet of such Person, and "Capitalized Lease
Obligation" means the rental obligations, as aforesaid, under such lease.
"Cash Equivalent" is defined to mean any of the following: (i) securities
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof (provided that the full faith
and credit of the United States of America is pledged in support thereof), (ii)
time deposits and certificates of deposit of any commercial bank organized in
the United States having capital and surplus in excess of $500,000,000 or any
commercial bank organized under the laws of any other country having total
assets in excess of $500,000,000 with a maturity date not more than two years
from the date of acquisition, (iii) repurchase obligations with a term of not
more than 30 days for underlying securities of the types described in clauses
(i) or (v) that was entered into with any bank meeting the qualifications set
forth in clause (ii) or another financial institution of national reputation,
(iv) direct obligations issued by any state or other jurisdiction of the United
States of America or any other country or any political subdivision or public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof, within 90 days after the date of acquisition thereof and, at
the time of acquisition, having a rating of A from Standard & Poor's
Corporation ("S&P") or A-2 from Moody's Investors Service, Inc. ("Moody's")
(or, if at any time neither S&P nor Moody's may be rating such obligations,
then from another nationally recognized rating service acceptable to the
Trustee), (v) commercial paper issued by (a) the parent corporation of any
commercial bank organized in the United States having capital and surplus in
excess of $500,000,000 or any commercial bank organized under the laws of any
other country having total assets in excess of $500,000,000, and (b) others
having one of the two highest ratings obtainable from either S&P or Moody's
(or, if at any time neither S&P nor Moody's may be rating such obligations,
then from another nationally recognized rating service acceptable to the
Trustee) and in each case maturing within one year after the date of
acquisition, (vi) overnight bank deposits and bankers' acceptances at any
commercial bank organized in the United States having capital and surplus in
excess of $500,000,000 or any commercial bank organized under the laws of any
other country having total assets in excess of $500,000,000, (vii) deposits
available for withdrawal on demand with any commercial bank organized in the
United States having capital and surplus in excess of $500,000,000 or any
commercial bank organized under the laws of any other country having total
assets in excess of $500,000,000, (viii) investments in money market funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (vi) and (ix), and (ix) auction rate securities or money
market preferred stock having one of the two highest ratings obtainable from
either S&P or Moody's (or, if at any time neither S&P nor Moody's may be rating
such obligations, then from another nationally recognized rating service
acceptable to the Trustee).
"Change of Control" is defined to mean the occurrence of one or more of
the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than Kiewit, is or becomes the beneficial owner (as
the term "beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act), directly or
indirectly, of more than 35% of the total voting power of the Voting Stock
of the Company (for the purposes of this clause (i), any person will be
deemed to beneficially own any Voting Stock of any corporation (the
"specified corporation") held by any other corporation (the "parent
corporation"), if such person "beneficially owns" (as so defined), directly
or indirectly, more than 35% of the voting power of the Voting Stock of
such parent corporation) and Kiewit "beneficially owns" (as so defined),
directly or indirectly, in the aggregate a lesser percentage of the voting
power of the Voting Stock of the Company and does not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of the Company;
(ii) during any one-year period, individuals who at the beginning of such
period constituted the Board of Directors of the Company (together with any
new directors elected by such Board of Directors or nominated for election
by the shareholders of the Company by a vote of at least a majority of the
directors of the Company then still in office who were either directors at
the beginning
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of such period or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of the Board of
Directors then in office, unless a majority of such new directors were
elected or appointed by Kiewit; or
(iii) the Company or its Restricted Subsidiaries sell, convey, assign,
transfer, lease or otherwise dispose of all or substantially all the
Property of the Company and the Restricted Subsidiaries taken as a whole;
provided that with respect to the foregoing subparagraphs (i), (ii) and
(iii), a Change of Control will not be deemed to have occurred unless and until
a Rating Decline has occurred as well.
"Common Stock" is defined to mean with respect to any Person, Capital
Stock of such Person that does not rank prior, as to the payment of dividends
or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Company Refinancing Debt" is defined to mean Debt issued in exchange for,
or the proceeds of which are used to refinance (including to purchase),
outstanding Debt Securities or other Debt of the Company Incurred pursuant to
clauses (i), (iv), and (vii) of "Limitation on Debt" and Debt Incurred pursuant
to the first paragraph under "Limitation on Debt" in an amount (or, if such new
Debt provides for an amount less than the principal amount thereof to be due
and payable upon a declaration of acceleration thereof, with an original issue
price) not to exceed the amount so exchanged or refinanced (plus accrued
interest and all fees, premiums (in excess of the accreted value) and expenses
related to such exchange or refinancing), for which purpose the amount so
exchanged or refinanced will be deemed to equal the lesser of (x) the principal
amount of the Debt so exchanged or refinanced and (y) if the Debt being
exchanged or refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such exchange or refinancing, provided that (A) such Debt will be subordinated
in right of payment to the Senior Debt Securities in the case of the Senior
Debt Indenture and the Subordinated Debt Securities in the case of the
Subordinated Debt Indenture at least to the same extent, if any, as the Debt so
exchanged or refinanced is subordinated to the Senior Debt Securities in the
case of the Senior Debt Indenture and the Subordinated Debt Securities in the
case of the Subordinated Debt Indenture, (B) such Debt win be Non-Recourse if
the Debt so exchanged or refinanced is Non-Recourse, (C) the Average Life of
the new Debt will be equal to or greater than the Average Life of the Debt to
be exchanged or refinanced and (D) the final Stated Maturity of the new Debt
will not be sooner than the earlier of the final Stated Maturity of the Debt to
be exchanged or refinanced or six months after the final Stated Maturity of the
Debt Securities, provided that if such new Debt refinances any series of the
Debt Securities in part only, the final Stated Maturity of such new Debt must
be at least six months after the final Stated Maturity of such series of Debt
Securities.
"Consolidated EBITDA" of any Person for any period is defined to mean the
Adjusted Consolidated Net Income of such Person, plus, only to the extent
deducted in computing Adjusted Consolidated Net Income and without duplication,
(i) income taxes, excluding income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or Asset Sales,
all determined on a consolidated basis for such Person and its consolidated
Subsidiaries in accordance with GAAP, (ii) Consolidated Fixed Charges, (iii)
depreciation and amortization expense, all determined on a consolidated basis
for such Person and its consolidated Subsidiaries in accordance with GAAP and
(iv) all other non-cash items reducing Adjusted Consolidated Net Income for
such period, all determined on a consolidated basis for such Person and its
consolidated Subsidiaries in accordance with GAAP, and less all non-cash items
increasing Adjusted Consolidated Net Income during such period, provided that
depreciation and amortization expense of any Subsidiary of such Person and any
other non-cash item of any Subsidiary of such Person that reduces Adjusted
Consolidated Net Income will be excluded (without duplication) in computing
Consolidated EBITDA, except to the extent that the positive cash flow
associated with such depreciation and amortization expense and other non-cash
items is actually distributed in cash to such Person during such period,
provided further that as applied to the Company, cash in respect of
depreciation and amortization and other non-cash items of Restricted
Subsidiaries and Eligible Joint Ventures may be deemed to have been distributed
or paid to the Company to the extent that
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such cash (I) is or was under the exclusive dominion and control of such
Restricted Subsidiary or such Eligible Joint Venture and is or was free and
clear of the Lien of any other Person, (II) is or was immediately available for
distribution and (III) could be or could have been repatriated to the United
States by means that are both lawful and commercially reasonable, provided that
the amount of the cash deemed by this sentence to have been distributed or paid
will be reduced by the amount of tax that would have been payable with respect
to the repatriation thereof, provided further that any cash that enables the
recognition of depreciation and amortization and other non-cash items pursuant
to this sentence may not be used to enable the recognition of depreciation and
amortization and other non-cash items with respect to any prior or subsequent
period, regardless of whether such cash is distributed to the Company, and
provided further that the recognition of any depreciation and amortization and
other non-cash items as a result of this sentence will be determined in good
faith by the Chief Financial Officer, as evidenced by an Officers' Certificate
that will set forth in reasonable detail the relevant facts and assumptions
supporting such recognition. When the "Person" referred to above is the
Company, the foregoing references to "Subsidiaries" will be deemed to refer to
"Restricted Subsidiaries."
"Consolidated Fixed Charges" of any Person is defined to mean, for any
period, the aggregate of (i) Consolidated Interest Expense, (ii) the interest
component of Capitalized Leases, determined on a consolidated basis for such
Person and its consolidated Subsidiaries in accordance with GAAP, excluding any
interest component of Capitalized Leases in respect of that portion of a
Capitalized Lease Obligation of a Subsidiary that is Non-Recourse to such
Person, and (iii) cash and non-cash dividends due (whether or not declared) on
the Preferred Stock of any Subsidiary of such Person held by any Person other
than such Person and any Redeemable Stock of such Person or any Subsidiary of
such Person. When the "Person" referred to above is the Company, the foregoing
references to "Subsidiaries" will be deemed to refer to "Restricted
Subsidiaries."
"Consolidated Interest Expense" of any Person is defined to mean, for any
period, the aggregate interest expense in respect of Debt (including
amortization of original issue discount and non-cash interest payments or
accruals) of such Person and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, including all commissions,
discounts, other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs associated with Interest Rate
Protection Agreements and Currency Protection Agreements and any amounts paid
during such period in respect of such interest expense, commissions, discounts,
other fees and charges that have been capitalized, provided that Consolidated
Interest Expense of the Company will not include any interest expense
(including all commissions, discounts, other fees and charges owed with respect
to letters of credit and bankers' acceptance financing and net costs associated
with Interest Rate Protection Agreements or Currency Protection Agreements) in
respect of that portion of any Debt that is Non-Recourse, and provided further
that Consolidated Interest Expense of the Company in respect of a Guarantee by
the Company of Debt of another Person will be equal to the commissions,
discounts, other fees and charges that would be due with respect to a
hypothetical letter of credit issued under a bank credit agreement that can be
drawn by the beneficiary thereof in the amount of the Debt so guaranteed if (i)
the Company is not actually making directly or indirectly interest payments on
such Debt and (ii) GAAP does not require the Company on an unconsolidated basis
to record such Debt as a liability of the Company. When the "Person" referred
to above is the Company, the foregoing references to "Subsidiaries" will be
deemed to refer to "Restricted Subsidiaries."
"Construction Financing" is defined to mean the debt and/or equity
financing provided (over and above the owners' equity investment) to permit the
acquisition, development, design, engineering, procurement, construction and
equipping of a Permitted Facility and to enable it to commence commercial
operations, provided that Construction Financing may remain outstanding after
the commencement of commercial operations of a Permitted Facility, without any
increase in the amount of such financing, and such Construction Financing will
not cease to be Construction Financing.
"Currency Protection Agreement" is defined to mean, with respect to any
Person, any foreign exchange contract, currency swap agreement or other similar
agreement or arrangement intended to protect such Person against fluctuations
in currency values to or under which such Person is a party or a beneficiary on
the date of the Indenture or becomes a party or a beneficiary thereafter.
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"Debt" is defined to mean, with respect to any Person, at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit, bankers' acceptances, surety, bid,
operating and performance bonds, performance guarantees or other similar
instruments or obligations (or reimbursement obligations with respect thereto)
(except, in each case, to the extent incurred in the ordinary course of
business), (iv) all obligations of such Person to pay the deferred purchase
price of property or services, except Trade Payables, (v) the Attributable
Value of all obligations of such Person as lessee under Capitalized Leases,
(vi) all Debt of others secured by a Lien on any Property of such Person,
whether or not such Debt is assumed by such Person, provided that, for purposes
of determining the amount of any Debt of the type described in this clause, if
recourse with respect to such Debt is limited to such Property, the amount of
such Debt will be limited to the lesser of the fair market value of such
Property or the amount of such Debt, (vii) all Debt of others Guaranteed by
such Person to the extent such Debt is Guaranteed by such Person, (viii) all
Redeemable Stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends and (ix) to the extent
not otherwise included in this definition, all net obligations of such Person
under Currency Protection Agreements and Interest Rate Protection Agreements.
For purposes of determining any particular amount of Debt that is or would
be outstanding, Guarantees of, or obligations with respect to letters of credit
or similar instruments supporting (to the extent the foregoing constitutes
Debt), Debt otherwise included in the determination of such particular amount
will not be included. For purposes of determining compliance with the
Indenture, in the event that an item of Debt meets the criteria of more than
one of the types of Debt described in the above clauses, the Company, in its
sole discretion, will classify such item of Debt and only be required to
include the amount and type of such Debt in one of such clauses.
"Default Amount" is defined to mean the principal amount plus accrued
interest.
"Eligible Joint Venture" is defined to mean a Joint Venture (other than a
Subsidiary) (i) that is or will be formed with respect to the construction,
development, acquisition, servicing, ownership, operation or management of one
or more Permitted Facilities and (ii) in which the Company and Kiewit together,
directly or indirectly, own at least 50% of the Capital Stock therein (of which
the Company must own at least half (in any event not less than 25% of the total
outstanding Capital Stock)) and (iii) in respect of which the Company alone or
in combination with Kiewit, directly or indirectly, (a) controls, by voting
power, board or management committee membership, or through the provisions of
any applicable partnership, shareholder or other similar agreement or under an
operating, maintenance or management agreement or otherwise, the management and
operation of the Joint Venture or any Permitted Facilities of the Joint Venture
or (b) otherwise has significant influence over the management or operation of
the Joint Venture or any Permitted Facility of the Joint Venture in all
material respects (significant influence includes, without limitation, the
right to control or veto any material act or decision) in connection with such
management or operation. Any Joint Venture that is an Eligible Joint Venture
pursuant to this definition because of the ownership of Capital Stock therein
by Kiewit will cease to be an Eligible Joint Venture if (x) Kiewit disposes of
any securities issued by the Company and, as a result of such disposition,
Kiewit becomes the beneficial owner (as such term is defined under Rule 13d-3
or any successor rule or regulation promulgated under the Exchange Act) of less
than 25% of the outstanding shares of Voting Stock of the Company or (y) (I) as
a result of any action other than a disposition of securities by Kiewit, Kiewit
becomes the beneficial owner of less than 25% of the outstanding shares of
Voting Stock of the Company and (II) thereafter Kiewit disposes of any
securities issued by the Company as a result of which the beneficial ownership
by Kiewit of the outstanding Voting Stock of the Company is further reduced,
provided that thereafter such Joint Venture may become an Eligible Joint
Venture if Kiewit becomes the beneficial owner of at least 25% of the
outstanding shares of Voting Stock of the Company and the other conditions set
forth in this definition are fulfilled.
"Fixed Charge Ratio" is defined to mean the ratio, on a pro forma basis,
of (i) the aggregate amount of Consolidated EBITDA of any Person for the
Reference Period immediately prior to the date of the transaction giving rise
to the need to calculate the Fixed Charge Ratio (the "Transaction Date") to
(ii) the
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aggregate Consolidated Fixed Charges of such Person during such Reference
Period, provided that for purposes of such computation, in calculating
Consolidated EBITDA and Consolidated Fixed Charges, (1) the Incurrence of the
Debt giving rise to the need to calculate the Fixed Charge Ratio and the
application of the proceeds therefrom (including the retirement or defeasance
of Debt) will be assumed to have occurred on the first day of the Reference
Period, (2) Asset Sales and Asset Acquisitions that occur during the Reference
Period or subsequent to the Reference Period and prior to the Transaction Date
(but including any Asset Acquisition to be made with the Debt Incurred pursuant
to (1) above) and related retirement of Debt pursuant to an Offer (in the
amount of the Excess Proceeds with respect to which such Offer has been made or
would be made on the Transaction Date if the purchase of Debt Securities
pursuant to such Offer has not occurred on or before the Transaction Date) will
be assumed to have occurred on the first day of the Reference Period, (3) the
Incurrence of any Debt during the Reference Period or subsequent to the
Reference Period and prior to the Transaction Date and the application of the
proceeds therefrom (including the retirement or defeasance of other Debt) will
be assumed to have occurred on the first day of such Reference Period, (4)
Consolidated Interest Expense attributable to any Debt (whether existing or
being Incurred) computed on a pro forma basis and bearing a floating interest
rate will be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period unless the obligor on such Debt
is a party to an Interest Rate Protection Agreement (that will remain in effect
for the twelve month period after the Transaction Date) that has the effect of
fixing the interest rate on the date of computation, in which case such rate
(whether higher or lower) will be used and (5) there will be excluded from
Consolidated Fixed Charges any Consolidated Fixed Charges related to any amount
of Debt that was outstanding during or subsequent to the Reference Period but
is not outstanding on the Transaction Date, except for Consolidated Fixed
Charges actually incurred with respect to Debt borrowed (as adjusted pursuant
to clause (4)) (x) under a revolving credit or similar arrangement to the
extent the commitment thereunder remains in effect on the Transaction Date or
(y) pursuant to the provision described in clause (iii) in the second paragraph
of "Limitation on Debt" above. For the purpose of making this computation,
Asset Sales and Asset Acquisitions that have been made by any Person that has
become a Restricted Subsidiary of the Company or an Eligible Joint Venture or
been merged with or into the Company or any Restricted Subsidiary of the
Company or an Eligible Joint Venture during the Reference Period, or subsequent
to the Reference Period and prior to the Transaction Date, will be calculated
on a pro forma basis, as will be all the transactions contemplated by the
calculations referred to in clauses (1) through (5) above with respect to the
Persons or businesses that were the subject of such Asset Sales and Asset
Dispositions, assuming such Asset Sales or Asset Acquisitions occurred on the
first day of the Reference Period.
"Foreign Asset Disposition" means an Asset Disposition in respect of the
Capital Stock or Property of a Restricted Subsidiary of the Company or an
Eligible Joint Venture to the extent that the proceeds of such Asset
Disposition are received by a Person subject in respect of such proceeds to the
tax laws of a jurisdiction other than the United States of America or any State
thereof or the District of Columbia.
"GAAP" is defined to mean generally accepted accounting principles in the
U.S. as in effect as of the date of the Indenture, applied on a basis
consistent with the principles, methods, procedures and practices employed in
the preparation of the Company's audited financial statements, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Debt of any other Person
and, without limiting the generality of the foregoing, any Debt obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt of
such other Person (whether arising by virtue of partnership arrangements (other
than solely by reason of being a general partner of a partnership), or by
agreement to keep-well, to purchase assets, goods, securities or services or to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Debt of the payment thereof or to protect such obligee
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against loss in respect thereof (in whole or in part), provided that the term
"Guarantee" will not include endorsements for collection or deposit in the
ordinary course of business or the grant of a Lien in connection with any
Non-Recourse Debt. The term "Guarantee" used as a verb has a corresponding
meaning.
"Holder", "holder of Debt Securities" and other similar terms are defined
to mean the registered holder of any Debt Security.
"Incur" is defined to mean with respect to any Debt, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such Debt,
provided that neither the accrual of interest (whether such interest is payable
in cash or kind) nor the accretion of original issue discount will be
considered an Incurrence of Debt. The term "Incurrence" has a corresponding
meaning.
"Interest Rate Protection Agreement" is defined to mean, with respect to
any Person, any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate
hedge agreement or other similar agreement or arrangement intended to protect
such Person against fluctuations in interest rates to or under which such
Person or any of its Subsidiaries is a party or a beneficiary on the date of
the Indenture or becomes a party or a beneficiary thereafter.
"Investment" in a Person is defined to mean any investment in, loan or
advance to, Guarantee on behalf of, directly or indirectly, or other transfer
of assets to such Person (other than sales of products and services in the
ordinary course of business).
"Investment Grade" is defined to mean with respect to the Debt Securities,
(i) in the case of S&P, a rating of at least BBB-, (ii) in the case of Moody's,
a rating of at least Baa3, and (iii) in the case of a Rating Agency other than
S&P or Moody's, the equivalent rating, or in each case, any successor,
replacement or equivalent definition as promulgated by S&P, Moody's or other
Rating Agency as the case may be.
"Joint Venture" is defined to mean a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal form.
"Kiewit" is defined to mean and include Kiewit Energy Company and any
other Subsidiary of Peter Kiewit Sons', Inc., Kiewit Construction Group Inc. or
Kiewit Diversified Group, Inc.
"Lien" is defined to mean, with respect to any Property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect
of such Property, but will not include any partnership, joint venture,
shareholder, voting trust or other similar governance agreement with respect to
Capital Stock in a Subsidiary or Joint Venture. For purposes of the Indentures,
the Company will be deemed to own subject to a Lien any Property that it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such Property.
"Net Cash Proceeds" from an Asset Disposition is defined to mean cash
payments received (including any cash payments received by way of a payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received (including any cash received upon sale or disposition of
any such note or receivable), excluding any other consideration received in the
form of assumption by the acquiring Person of Debt or other obligations
relating to the Property disposed of in such Asset Disposition or received in
any form other than cash) therefrom, in each case, net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses of any kind
(including consent and waiver fees and any applicable premiums, earn-out or
working interest payments or payments in lieu or in termination thereof)
incurred, (ii) all federal, state, provincial, foreign and local taxes and
other governmental charges required to be accrued as a liability under GAAP (a)
as a consequence of such Asset Disposition, (b) as a result of the repayment of
any Debt in any jurisdiction other than the jurisdiction where the Property
disposed of was located or (c) as a result of any repatriation of any proceeds
of such Asset Disposition, (iii) a reasonable reserve for the after-tax cost of
any indemnification
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payments (fixed and contingent) attributable to seller's indemnities to the
purchaser undertaken by the Company, any of its Restricted Subsidiaries or any
Eligible Joint Venture in connection with such Asset Disposition (but excluding
any payments that by the terms of the indemnities will not, under any
circumstances, be made during the term of the Debt Securities), (iv) all
payments made on any Debt that is secured by such Property, in accordance with
the terms of any Lien upon or with respect to such Property, or that must by
its terms or by applicable law or in order to obtain a required consent or
waiver be repaid out of the proceeds from or in connection with such Asset
Disposition, and (v) all distributions and other payments made to holders of
Capital Stock of Restricted Subsidiaries or Eligible Joint Ventures (other than
the Company or its Restricted Subsidiaries) as a result of such Asset
Disposition.
"Net Income" of any Person for any period is defined to mean the net
income (loss) of such Person for such period, determined in accordance with
GAAP, except that extraordinary and non-recurring gains and losses as
determined in accordance with GAAP will be excluded.
"Net Worth" of any Person is defined to mean, as of any date, the
aggregate of capital, surplus and retained earnings (including any cumulative
currency translation adjustment) of such Person and its consolidated
Subsidiaries as would be shown on a consolidated balance sheet of such Person
and its consolidated Subsidiaries prepared as of such date in accordance with
GAAP When the "Person" referred to above is the Company, the foregoing
references to "Subsidiaries" will be deemed to refer to "Restricted
Subsidiaries."
"Non-Recourse", as applied to any Debt or any sale-leaseback, is defined
to mean any project financing that is or was Incurred with respect to the
development, acquisition, design, engineering, procurement, construction,
operation, ownership, servicing or management of one or more Permitted
Facilities in respect of which the Company or one or more Restricted
Subsidiaries or Eligible Joint Ventures has a direct or indirect interest,
provided that such financing is without recourse to the Company, any Restricted
Subsidiary or any Eligible Joint Venture other than any Restricted Subsidiary
or any Eligible Joint Venture that does not own any Property other than one or
more of such Permitted Facilities or a direct or indirect interest therein,
provided further that such financing may be secured by a Lien on only (i) the
Property that constitutes such Permitted Facilities, (ii) the income from and
proceeds of such Permitted Facilities, (iii) the Capital Stock of, and other
Investments in, any Restricted Subsidiary or Eligible Joint Venture that owns
the Property that constitutes any such Permitted Facility, and (iv) the Capital
Stock of, and other Investments in, any Restricted Subsidiary or Eligible Joint
Venture obligated with respect to such financing and of any Subsidiary or Joint
Venture (that is a Restricted Subsidiary or an Eligible Joint Venture) of such
Person that owns a direct or indirect interest in any such Permitted Facility,
and provided further that an increase in the amount of Debt with respect to one
or more Permitted Facilities pursuant to the financing provided pursuant to the
terms of this definition (except for the first refinancing of Construction
Financing) may not be Incurred to fund or enable the funding of any dividend or
other distribution in respect of Capital Stock. The fact that a portion of
financing with respect to a Permitted Facility is not Non-Recourse will not
prevent other portions of the financing with respect to such Permitted Facility
from constituting Non-Recourse Debt if the foregoing requirements of this
definition are fulfilled with respect to such other portions.
"Officers' Certificate" is defined to mean a certificate signed by the
Chairman of the Board of Directors, the Chief Executive Officer or any Vice
President and by the Chief Financial Officer, the Treasurer, an Assistant
Treasurer, the Controller, the Assistant Controller, the Secretary or any
Assistant Secretary of the Company and delivered to the Trustee. Each such
certificate will comply with Section 314 of the Trust Indenture Act and include
the statements provided for in the Indenture if and to the extent required
thereby.
"Opinion of Counsel" is defined to mean an opinion in writing signed by
legal counsel who may be an employee of or counsel to the Company or who may be
other counsel satisfactory to the Trustee. Each such opinion will comply with
Section 314 of the Trust Indenture Act and include the statements provided for
in the Indenture, if and to the extent required thereby.
"Permitted Facility" is defined to mean (i) an electric power or thermal
energy generation or cogeneration facility or related facilities (including
residual waste management and facilities that use
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thermal energy from a cogeneration facility), and its or their related electric
power transmission, fuel supply and fuel transportation facilities, together
with its or their related power supply, thermal energy and fuel contracts and
other facilities, services or goods that are ancillary, incidental, necessary
or reasonably related to the marketing, development, construction, management,
servicing, ownership or operation of the foregoing, owned by a utility or
otherwise, as well as other contractual arrangements with customers, suppliers
and contractors or (ii) any infrastructure facilities related to (A) the
treatment of water for municipal and other uses, (B) the treatment and/or
management of waste water, (C) the treatment, management and/or remediation of
waste, pollution and/or potential pollutants and (D) any other process or
environmental purpose.
"Permitted Facilities Debt" is defined to mean any Debt that is or was
Incurred with respect to the direct or indirect development, acquisition,
design, engineering, procurement, construction, operation, ownership, servicing
or management of one or more Permitted Facilities (x) currently in development
by the Company (directly or indirectly) or which are hereafter acquired or
developed by the Company (directly or indirectly) and (y) in which the Company
or one or more Restricted Subsidiaries or Eligible Joint Ventures has a direct
or indirect interest.
"Permitted Funding Company Loans" is defined to mean (a) Debt of a
Restricted Subsidiary, all the Capital Stock of which is owned, directly or
indirectly, by the Company and that (x) does not own any direct or indirect
interest in a Permitted Facility and (y) is not directly or indirectly
obligated on any Debt owed to any Person other than the Company, a Restricted
Subsidiary or an Eligible Joint Venture (a "Funding Company"), owed to a
Restricted Subsidiary or an Eligible Joint Venture that is not directly or
indirectly obligated on any Debt owed to any Person other than the Company, a
Restricted Subsidiary or an Eligible Joint Venture (except to the extent that
it has pledged the Capital Stock of its Subsidiaries and Joint Ventures to
secure Non-Recourse Debt) (a "Holding Company"), provided that such Debt (i)
does not require that interest be paid in cash at any time sooner than six
months after the final Stated Maturity of any series of Debt Securities, (ii)
does not require any payment of principal at any time sooner than six months
after the final Stated Maturity of any series of Debt Securities, (iii) is
subordinated in right of payment to all other Debt of such Restricted
Subsidiary other than Debt Incurred pursuant to clause (vii) of the covenant
described under "Limitation on Subsidiary Debt," all of which will be pari
passu and (iv) is evidenced by a subordinated note in the form attached to the
Indenture, and (b) Debt of a Holding Company to a Funding Company.
"Permitted Investment" is defined to mean any Investment that is made
directly or indirectly by the Company and its Restricted Subsidiaries in (i) a
Restricted Subsidiary or Eligible Joint Venture (excluding for the purpose of
this clause (i) any Construction Financing) that, directly or indirectly, is or
will be engaged in the construction, development, acquisition, operation,
servicing, ownership or management of a Permitted Facility or in any other
Person as a result of which such other Person becomes such a Restricted
Subsidiary or an Eligible Joint Venture, provided that at the time that any of
the foregoing Investments is proposed to be made, no Event of Default or event
that, after giving notice or lapse of time or both, would become an Event of
Default, will have occurred and be continuing, (ii) Construction Financing
provided by the Company (A) to any of its Restricted Subsidiaries (other than
an Eligible Joint Venture) up to 100% of the Construction Financing required by
such Restricted Subsidiary and (B) to any Eligible Joint Venture a portion of
the Construction Financing required by such Eligible Joint Venture that does
not exceed the ratio of the Capital Stock in such Eligible Joint Venture that
is owned directly or indirectly by the Company to the total amount of the
Capital Stock in such Eligible Joint Venture that is owned directly and
indirectly by the Company and Kiewit together (provided that the Company may
provide such Construction Financing to such Eligible Joint Venture only if
Kiewit provides the balance of such Construction Financing or otherwise causes
it to be provided), if, in either case, (x) the aggregate proceeds of all the
Construction Financing provided is not more than 85% of the sum of the
aggregate proceeds of all the Construction Financing and the aggregate owners'
equity investment in such Restricted Subsidiary or such Eligible Joint Venture,
as the case may be, (y) the Company receives a pledge or assignment of all the
Capital Stock of such Restricted Subsidiary or such Eligible Joint Venture, as
the case may be, that is owned by a non-governmental Person (other than the
Company, its Subsidiaries or the Eligible Joint Ventures) that is permitted to
be pledged for such purpose
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under applicable law and (z) neither the Company nor Kiewit reduces its
beneficial ownership in such Restricted Subsidiary or such Eligible Joint
Venture, as the case may be, prior to the repayment in full of the Company's
portion of the Construction Financing, (iii) any Cash Equivalents, (iv) prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits in the ordinary
course of business consistent with past practice, (v) loans and advances to
employees made in the ordinary course of business and consistent with past
practice, (vi) Debt incurred pursuant to Currency Protection Agreements and
Interest Rate Protection Agreements as otherwise permitted by the Indenture,
(vii) bonds, notes, debentures or other debt securities and instruments
received as a result of Asset Dispositions to the extent permitted by the
covenants described under "Limitation on Dispositions" above and "Limitation on
Business" above, (viii) any Lien permitted under the provisions described under
"Limitation on Liens" above, (ix) bank deposits and other Investments (to the
extent they do not constitute Cash Equivalents) required by lenders in
connection with any Non-Recourse Debt, provided that the Chief Executive
Officer or the Chief Financial Officer of the Company determines in good faith,
as evidenced by an Officers' Certificate, that such bank deposits or
Investments are required to effect such financings and are not materially more
restrictive, taken as a whole, than comparable requirements, if any, in
comparable financings in the applicable jurisdiction or (x) any Person to the
extent made with Capital Stock (other than Redeemable Stock) of the Company
(whether by way of purchase, merger, consolidation or otherwise) to the extent
permitted by the covenants described under "Limitation on Business" above.
"Permitted Joint Venture" is defined to mean a Joint Venture (i) that is
or will be formed with respect to the construction, development, acquisition,
servicing, ownership, operation or management of one or more Permitted
Facilities and (ii) in which (A) the Company or (B) the Company and Kiewit
together, directly or indirectly, own at least 70% of the Capital Stock therein
(of which the Company must own at least half (in any event not less than 35% of
the total outstanding Capital Stock)), provided that if applicable non-U.S. law
restricts the amount of Capital Stock that the Company may own, the Company
must own at least 70% of the amount of Capital Stock that it may own pursuant
to such law, which in any event must be not less than 35% of the total
outstanding Capital Stock therein and (iii) in respect of which the Company
alone or in combination with Kiewit, directly or indirectly, (a) controls, by
voting power, board or management committee membership, or through the
provisions of any applicable partnership, shareholder or other similar
agreement or under an operating, maintenance or management agreement or
otherwise, the management and operation of the Joint Venture or any Permitted
Facilities of the Joint Venture or (b) otherwise has significant influence over
the management or operation of the Joint Venture or any Permitted Facility of
the Joint Venture in all material respects (significant influence includes,
without limitations, the right to control or veto any material act or decision)
in connection with such management or operation. Any Joint Venture that is a
Permitted Joint Venture pursuant to this definition because of the ownership of
Capital Stock therein by Kiewit will cease to be a Permitted Joint Venture if
(x) Kiewit disposes of any securities issued by the Company and, as a result of
such disposition, Kiewit becomes the beneficial owner (as such term is defined
under Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of less than 25% of the outstanding shares of Voting Stock of the
Company or (y) (I) as a result of any action other than a disposition of
securities by Kiewit, Kiewit becomes the beneficial owner of less than 25% of
the outstanding shares of Voting Stock of the Company and (II) thereafter
Kiewit disposes of any securities issued by the Company as a result of which
the beneficial ownership by Kiewit of the outstanding Voting Stock of the
Company is further reduced, provided that thereafter such Joint Venture may
become a Permitted Joint Venture if Kiewit becomes the beneficial owner of at
least 25% of the outstanding shares of Voting Stock of the Company and the
other conditions set forth in this definition are fulfilled.
"Permitted Payments" is defined to mean, with respect to the Company, any
of its Restricted Subsidiaries or any Eligible Joint Venture, (i) any dividend
on shares of Capital Stock of the Company payable (or to the extent paid)
solely in Capital Stock (other than Redeemable Stock) or in options, warrants
or other rights to purchase Capital Stock (other than Redeemable Stock) of the
Company and any distribution of Capital Stock (other than Redeemable Capital
Stock) of the Company in respect of the exercise of any right to convert or
exchange any instrument (whether Debt or equity and including Redeemable
Capital Stock) into Capital Stock (other than Redeemable Capital Stock) of the
Company,
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(ii) the purchase or other acquisition or retirement for value of any shares of
the Company's Capital Stock, or any option, warrant or other right to purchase
shares of the Company's Capital Stock with additional shares of, or out of the
proceeds of a substantially contemporaneous issuance of, Capital Stock other
than Redeemable Stock, (iii) any defeasance, redemption, purchase or other
acquisition for value of any Debt that by its terms ranks subordinate in right
of payment to the Debt Securities with the proceeds from the issuance of (x)
Debt that is subordinate to the Debt Securities at least to the extent and in
the manner as the Debt to be defeased, redeemed, purchased or otherwise
acquired is subordinate in right of payment to the Debt Securities, provided
that such subordinated Debt provides for no mandatory payments of principal by
way of sinking fund, mandatory redemption or otherwise (including defeasance)
by the Company (including, without limitation at the option of the holder
thereof other than an option given to a holder pursuant to a "change of
control" or an "asset disposition" covenant that is no more favorable to the
holders of such Debt than comparable covenants for the Debt being defeased,
redeemed, purchased or acquired or, if none, the covenants described under
"Limitation on Dispositions" and "Purchase of Debt Securities Upon a Change of
Control" above and such Debt is not in an amount (net of any original issue
discount) greater than, any Stated Maturity of the Debt being replaced and the
proceeds of such subordinated Debt are utilized for such purpose within 45 days
of issuance or (y) Capital Stock (other than Redeemable Stock), (iv) Restricted
Payments in an amount not to exceed $75 million in the aggregate provided that
no payment may be made pursuant to this clause (iv) if an Event of Default, or
an event that, after giving notice or lapse of time or both, would become an
Event of Default, has occurred and is continuing, (v) any payment or Investment
required by applicable law in order to conduct business operations in the
ordinary course, (vi) a Permitted Investment and (vii) Investments in
Unrestricted Subsidiaries and other Persons that are not Restricted
Subsidiaries or Eligible Joint Ventures in an amount not to exceed $100 million
in the aggregate, provided that no payment or Investment may be made pursuant
to this clause (vii) if an Event of Default, or an event that, after giving
notice or lapse of time or both, would become an Event of Default, has occurred
and is continuing. Notwithstanding the foregoing, the amount of Investments
that may be made pursuant to clauses (iv) or (vii), as the case may be, may be
increased by the net reduction in Investments of the type made previously
pursuant to clauses (iv) or (vii), as the case may be, that result from
payments of interest on Debt, dividends, or repayment of loans or advances, the
proceeds of the sale or disposition of the Investment or other return of the
amount of the original Investment to the Company, the Restricted Subsidiary or
the Eligible Joint Venture that made the original Investment from the Person in
which such Investment was made or any distribution or payment of such
Investment to the extent that such distribution or payment constituted either a
Restricted Payment or a Permitted Payment, provided that (x) the aggregate
amount of such payments will not exceed the amount of the original Investment
by the Company, such Restricted Subsidiary or Eligible Joint Venture that
reduced the amount available pursuant to clause (iv) or clause (vii), as the
case may be, for making Restricted Payments and (y) such payments may be added
pursuant to this proviso only to the extent such payments are not included in
the calculation of Adjusted Consolidated Net Income.
"Permitted Working Capital Facilities" is defined to mean one or more loan
or credit agreements providing for the extension of credit to the Company for
the Company's working capital purposes, which credit agreements will be ranked
pari passu with or subordinate to the Debt Securities in right of payment and
may be secured or unsecured.
"Person" is defined to mean an individual, a corporation, a partnership,
an association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) or preferred or preference stock of such Person
that is outstanding or issued on or after the date of original issuance of any
series of Debt Securities.
"Property" of any Person is defined to mean all types of real, personal,
tangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person under GAAP.
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"Purchase Money Debt" means Debt representing, or Incurred to finance, the
cost of acquiring any Property, provided that (i) any Lien securing such Debt
does not extend to or cover any other Property other than the Property being
acquired and (ii) such Debt is Incurred, and any Lien with respect thereto is
granted, within 18 months of the acquisition of such Property.
"Rating Agencies" is defined to mean (i) S&P and (ii) Moody's or (iii) if
S&P or Moody's or both do not make a rating of the Debt Securities publicly
available, a nationally recognized securities rating agency or agencies, as the
case may be, selected by the Company, which will be substituted for S&P,
Moody's or both, as the case may be.
"Rating Category" is defined to mean (i) with respect to S&P, any of the
following categories: BB, B, CCC, CC, C and D (or equivalent successor
categories), (ii) with respect to Moody's, any of the following categories: Ba,
B, Caa, Ca, C and D (or equivalent successor categories) and (iii) the
equivalent of any such category of S&P or Moody's used by another Rating
Agency. In determining whether the rating of the Debt Securities has decreased
by one or more gradations, gradations within Rating Categories (+ and - for
S&P, 1, 2 and 3 for Moody's or the equivalent gradations for another Rating
Agency) will be taken into account (e.g., with respect to S&P, a decline in a
rating from BB+ to BB, as well as from BB- to B+, will constitute a decrease of
one gradation).
"Rating Decline" is defined to mean the occurrence of the following on, or
within 90 days after, the earlier of (i) the occurrence of a Change of Control
and (ii) the date of public notice of the occurrence of a Change of Control or
of the public notice of the intention of the Company to effect a Change of
Control (the "Rating Date") which period will be extended so long as the rating
of the Debt Securities is under publicly announced consideration for possible
downgrading by any of the Rating Agencies: (a) in the event that any series of
the Debt Securities are rated by either Rating Agency on the Rating Date as
Investment Grade, the rating of such Debt Securities by both such Rating
Agencies will be reduced below Investment Grade, or (b) in the event the Debt
Securities are rated below Investment Grade by both such Rating Agencies on the
Rating Date, the rating of such Debt Securities by either Rating Agency will be
decreased by one or more gradations (including gradations within Rating
Categories as well as between Rating Categories).
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of any series of the Debt Securities, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time prior to the Stated Maturity of any series of Debt Securities or
(iii) convertible into or exchangeable for Capital Stock referred to in clause
(i) or (ii) above or Debt having a scheduled maturity prior to the Stated
Maturity of any series of Debt Securities, provided that any Capital Stock that
would not constitute Redeemable Stock but for provisions thereof giving holders
thereof the right to require the Company to purchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or a "change of control" occurring
prior to the Stated Maturity of any series of Debt Securities will not
constitute Redeemable Stock if the "asset sale" or "change of control"
provision applicable to such Capital Stock is no more favorable to the holders
of such Capital Stock than the provisions contained in the covenants described
under "Limitation on Dispositions" and "Purchase of Debt Securities Upon a
Change of Control" above and such Capital Stock specifically provides that the
Company will not purchase or redeem any such Capital Stock pursuant to such
covenants prior to the Company's purchase of Debt Securities required to be
purchased by the Company under the covenants described under "Limitation on
Dispositions" and "Purchase of Debt Securities Upon a Change of Control" above.
"Reference Period" is defined to mean the four most recently completed
fiscal quarters for which financial information is available preceding the date
of a transaction giving rise to the need to make a financial calculation.
"Restricted Payment" is defined to mean (i) any dividend or other
distribution on any shares of the Company's Capital Stock, provided that a
dividend or other distribution consisting of the Capital Stock of an
Unrestricted Subsidiary will not constitute a Restricted Payment except to the
extent of the portion thereof that is equal to the portion of the total
Investment in such Unrestricted Subsidiary that is represented by the
Investment that was made pursuant to clause (vii) of the definition of
"Permitted
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Payment," (ii) any payment on account of the purchase, redemption, retirement
or acquisition for value of the Company's Capital Stock, (iii) any defeasance,
redemption, purchase or other acquisition or retirement for value prior to the
scheduled maturity of any Debt ranked subordinate in right of payment to the
Senior Debt Securities in the case of the Senior Debt Indenture and the
Subordinated Debt Securities other than repayment of Debt of the Company to a
Restricted Subsidiary or an Eligible Joint Venture, (iv) any Investment made in
a Person (other than the Company or any Restricted Subsidiary or any Eligible
Joint Venture) and (v) designating a Restricted Subsidiary as an Unrestricted
Subsidiary (the Restricted Payment made upon such a designation to be
determined as the fair market value of the Capital Stock of such Restricted
Subsidiary owned directly or indirectly by the Company at the time of the
designation). Notwithstanding the foregoing, "Restricted Payment" will not
include any Permitted Payment, except that any payment made pursuant to clauses
(iv) and (v) of the definition of "Permitted Payment" will be counted in the
calculation set forth in clause (c) of the covenant described under "Limitation
on Restricted Payments."
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Senior Debt" is defined to mean the principal of and interest on all Debt
of the Company whether created, Incurred or assumed before, on or after the
date of original issuance of any series of Debt Securities (other than the Debt
Securities), provided that Senior Debt will not include (i) Debt that, when
Incurred and without respect to any election under Section 1111(b) of Title 11,
United States Code, was without recourse to the Company, (ii) Debt of the
Company to any Affiliate and (iii) any Debt of the Company that, by the terms
of the instrument creating or evidencing the same, is specifically designated
as being junior in right of payment to the Debt Securities or any other Debt of
the Company.
"Significant Subsidiary" is defined to mean a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X
under the Securities Act and the Exchange Act.
"Stated Maturity" is defined to mean, with respect to any debt security or
any installment of interest thereon, the date specified in such debt security
as the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.
"Subsidiary" is defined to mean, with respect to any Person including,
without limitation, the Company and its Subsidiaries, (i) any corporation or
other entity of which such Person owns, directly or indirectly, a majority of
the Capital Stock or other ownership interests and has ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions, and (ii) with respect to the Company and, as appropriate, its
Subsidiaries, any Permitted Joint Venture, including, without limitation, Coso
Land Company Joint Venture, Coso Finance Partners, Coso Energy Developers and
Coso Power Developers, provided that in respect of any Subsidiary that is not a
Permitted Joint Venture, the Company must exercise control over such Subsidiary
and its Property to the same extent as a Permitted Joint Venture.
"Subsidiary Refinancing Debt" is defined to mean Debt issued in exchange
for, or the proceeds of which are used to refinance (including to purchase),
outstanding Debt of a Restricted Subsidiary or an Eligible Joint Venture,
including, without limitation, Construction Financing, in amount (or, if such
new Debt provides for an amount less than the principal amount thereof to be
due and payable upon a declaration of acceleration thereof, with an original
issue price) not to exceed the amount so exchanged or refinanced (plus accrued
interest or dividends and all fees, premiums (in excess of accreted value) and
expenses related to such exchange or refinancing), for which purpose the amount
so exchanged or refinanced will not exceed, in the case of Debt, the lesser of
(x) the principal amount of the Debt so exchanged or refinanced and (y) if the
Debt being exchanged or refinanced was issued with an original issue discount,
the accreted value thereof (as determined in accordance with GAAP) at the time
of such exchange or refinancing, and, in the case of an equity investment made
in lieu of or as part of Construction Financing, Debt, in an amount not to
exceed the capital and surplus shown on the balance sheet of such Restricted
Subsidiary or Eligible Joint Venture, provided that (A) such Debt will be
Non-Recourse if the Debt so exchanged or refinanced is Non-Recourse and (B) the
Average Life of the new Debt will be equal to or greater than the Average Life
of the Debt to be exchanged or refinanced, provided further that upon
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the first refinancing of any Construction Financing of a Restricted Subsidiary
or an Eligible Joint Venture, (i) the amount of the Subsidiary Refinancing Debt
issued in exchange for or to refinance such Construction Financing will not be
limited by this provision and (ii) the Subsidiary Refinancing Debt issued in
exchange for or to refinance such Construction Financing will not be subject to
the provisions of the foregoing clause (B) of this provision.
"Trade Payables" is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors Incurred, created, assumed or Guaranteed by such Person or any of its
Subsidiaries or Joint Ventures arising in the ordinary course of business.
"Unrestricted Subsidiary" is defined to mean any Subsidiary of the Company
that becomes an Unrestricted Subsidiary in accordance with the requirements set
forth in the next sentence. The Company may designate any Restricted Subsidiary
as an Unrestricted Subsidiary if (a) such designation is in compliance with the
first paragraph of the covenant described under "Limitation on Restricted
Payments" above and (b) after giving effect to such designation, such
Subsidiary does not own, directly or indirectly, a majority of the Capital
Stock or the Voting Stock of any other Restricted Subsidiary unless such other
Restricted Subsidiary is designated as an Unrestricted Subsidiary at the same
time. Any such designation will be effected by filing with the Trustee an
Officers' Certificate certifying that such designation complies with the
requirements of the immediately preceding sentence. No Debt or other obligation
of an Unrestricted Subsidiary may be with recourse to the Company, any of its
Restricted Subsidiaries, any Eligible Joint Venture or any of their respective
Property except to the extent otherwise permitted by the provisions of the
Indenture. An Unrestricted Subsidiary may be designated as a Restricted
Subsidiary if (i) all the Debt of such Unrestricted Subsidiary could be
Incurred under the provision described under "Limitation on Subsidiary Debt"
above or (ii) any portion of such Debt could not be Incurred under such
provision, if the Company could borrow all such remaining Debt under the
provision described in the first paragraph under "Limitation on Debt" above.
"U.S. Government Obligations" is defined to mean securities that are (i)
direct obligations of the U.S. for the payment of which its full faith and
credit is pledged or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the U.S., the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the U.S.,
that, in either case are not callable or redeemable at the option of the issuer
thereof, and will also include a depository receipt issued by a bank or trust
company as custodian with respect to any such U.S. Government Obligations or a
specific payment of interest on or principal of any such U.S. Government
Obligation held by such custodian for the account of the holder of a depository
receipt, provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
U.S. Government Obligation or the specific payment of interest on or principal
of the U.S. Government Obligation evidenced by such depository receipt.
"Voting Stock" is defined to mean, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors (or persons fulfilling similar responsibilities) of such Person.
As more fully described in the Prospectus Supplement, each of the
Indentures also provides for defeasance of certain covenants.
CERTIFICATED SECURITIES
Except as may be set forth in a Prospectus Supplement, Debt Securities
will not be issued in certificated form. If, however, Debt Securities of any
series are to be issued in certificated form, no service charge will be made
for any transfer or exchange of any such Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
BOOK-ENTRY SYSTEM
If so specified in any accompanying Prospectus Supplement relating to Debt
Securities of any series, Debt Securities of or within such series may be
issued under a book-entry system in the form of one or
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more global securities (each, a "Global Security"). Each Global Security will
be deposited with, or on behalf of, a depositary, which, unless otherwise
specified in the accompanying Prospectus Supplement, will be The Depository
Trust Company, New York, New York (the "Depositary"). The Global Securities
will be registered in the name of the Depositary or its nominee.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and pledges,
in deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. The Depositary is owned by a number of its Direct Participants
and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and
the National Association of Securities Dealers, Inc. Access to the Depositary
system is also available to others such as securities brokers and dealers,
banks, and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depositary and its
Participants are on file with the SEC.
Purchases of the Offered Securities under the Depositary system must be
made by or through Direct Participants, which will receive a credit for the
Securities on the Depositary's records. The ownership interest of each actual
purchaser of each Security ("Beneficial Owner") is in turn to be recorded on
the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the
Securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in Securities, except in
the event that use of the book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by
Participants with the Depositary are registered in the name of the Depositary's
partnership nominee, Cede & Co. The deposit of Securities with the Depositary
and their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners of
the Securities; the Depositary's records reflect only the identity of the
Direct Participants to whose accounts such Securities are credited, which may
or may not be the Beneficial Owners. The Participants will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Securities. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the Company as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Securities will be made to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the payable date in accordance with their respective holdings shown
on the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on the payable date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of
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customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of the Depositary, agent, or the
Company, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to the Depositary
is the responsibility of the Depositary, and disbursement of such payments to
the Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
The Depositary may discontinue providing its services as securities
depository with respect to the Securities at any time by giving reasonable
notice to the Company. Under such circumstances, in the event that a successor
securities depository is not obtained, Security certificates are required to be
printed and delivered. The Company may decide to discontinue use of the system
of book-entry transfers through the Depositary (or a success securities
depository). In that event, Security certificates will be printed and
delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
A Global Security of any series may not be transferred except as a whole
by the Depositary to a nominee or successor of the Depositary or by a nominee
of the Depositary to another nominee of the Depositary. A Global Security
representing all but not part of an offering of Offered Debt Securities hereby
is exchangeable for Debt Securities in definitive form of like tenor and terms
if (i) the Depositary notified the Company that it is unwilling or unable to
continue as depositary for such Global Security or if at any time the
Depositary is no longer eligible to be or in good standing as a clearing agency
registered under the Exchange Act, and in either case, a successor depositary
is not appointed by the Company within 90 days of receipt by the Company of
such notice or of the Company becoming aware of such ineligibility, or (ii) the
Company in its sole discretion at any time determines not to have all of the
Debt Securities represented in an offering of Offered Debt Securities by a
Global Security and notifies the Trustee thereof. A Global Security
exchangeable pursuant to the preceding sentence shall be exchangeable for Debt
Securities registered in such names and in such authorized denominations as the
Depositary of such Global Security shall direct.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities in any of the following ways
(or in any combination thereof): (i) through underwriters or dealers; (ii)
directly to a limited number of purchasers or to a single purchaser; or (iii)
through agents. The Prospectus Supplement with respect to any Offered
Securities will set forth the terms of the offering of such Offered Securities,
including the name or names of any underwriters, dealers or agents and the
respective amounts of such Offered Securities underwritten or purchased by each
of them, the initial public offering price of such Offered Securities and the
proceeds to the Company from such sale, any discounts, commissions or other
items constituting compensation from the Company and any discounts, commissions
or concessions allowed or reallowed or paid to dealers and any securities
exchanges on which such Offered Securities may be listed.
If underwriters are used in the sale of any Offered Securities, such
Offered Securities will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. Such Offered Securities may be either offered
to the public through underwriting syndicates represented by managing
underwriters, or directly by underwriters.
Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis
for the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain purchasers to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement.
Agents, dealers and underwriters may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the agents or underwriters may be required to
make in respect thereof.
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LEGAL MATTERS
Certain legal matters (including the validity of the Securities) will be
passed upon for the Company by Steven A. McArthur, Senior Vice President and
General Counsel of the Company and by Willkie Farr & Gallagher. As of August
31, 1998, Mr. McArthur beneficially owned approximately 200,000 shares of
Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries incorporated by reference in this Registration
Statement by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports which are incorporated herein
by reference, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
With respect to the Company's unaudited interim financial information for
the periods ended March 31, 1998 and 1997 and June 30, 1998 and 1997,
incorporated herein by reference, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their reports included in the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and June
30, 1998, and incorporated by reference herein, they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of the Registration Statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Securities Act.
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