CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
Dollars and Shares in Thousands Except Per Share Amounts
ASSETS 1996 1995
Cash and cash equivalents $ 424,500 $ 72,114
Joint venture cash and investments 48,083 77,590
Restricted cash 107,143 149,227
Short-term investments 4,921 34,190
Accounts receivable 342,307 57,909
Due from joint ventures 17,556 27,273
Properties, plants, contracts and
equipment, net 3,348,583 1,781,255
Excess of cost over fair value of
net assets acquired, net 790,920 302,288
Equity investments 196,535 60,815
Deferred charges and other assets 432,359 91,377
Total assets $5,712,907 $2,654,038
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $218,182 $ 6,638
Other accrued liabilities 674,842 87,892
Parent company debt 1,146,685 842,205
Subsidiary and project debt 1,754,895 921,219
Deferred income taxes 469,199 226,520
Total liabilities 4,263,803 2,084,474
Deferred income 29,067 26,032
Commitments and contingencies (Notes 3, 17, 18, 19 and 20)
Company - obligated mandatorily redeemable
convertible preferred securities of
subsidiary trust holding solely
convertible debentures 103,930 ---
Preferred securities of subsidiary 136,065 ---
Minority interest 299,252 ---
Stockholders' equity:
Preferred stock - authorized 2,000
shares, no par value --- ---
Common stock - par value $.0675 per share,
authorized 80,000 shares, issued 63,747
and 50,680 shares, outstanding 63,448
and 50,593 shares, respectively 4,303 3,421
Additional paid in capital 563,567 343,406
Retained earnings 297,520 205,059
Cumulative effect of foreign currency
translation adjustment 29,658 ---
Treasury stock - 299 and 87 common
shares at cost (8,787) (1,348)
Unearned compensation - restricted stock (5,471) (7,006)
Total stockholders' equity 880,790 543,532
Total liabilities and stockholders'
equity $5,712,907 $2,654,038
The accompanying notes are an integral part of these financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1996
Dollars and Shares in Thousands Except Per Share Amounts
1996 1995 1994
Revenue:
Sales of electricity and steam $518,934 $335,630 $154,562
Income on equity investments 6,134 --- ---
Royalty income 6,846 19,482 ---
Interest and other income 44,281 43,611 31,292
Total revenues 576,195 398,723 185,854
Cost and expenses:
Operating expense 108,962 79,294 33,015
Cost of sales 31,840 --- ---
General and administration 21,451 23,376 13,012
Royalty expense 23,693 24,308 9,888
Depreciation and amortization 118,586 72,249 21,197
Loss on equity investment in Casecnan 5,221 362 ---
Interest expense 165,900 134,637 62,837
Less interest capitalized (39,862) (32,554) (9,931)
Dividends on convertible preferred
securities of subsidiary trust 4,691 --- ---
Total expenses 440,482 301,672 130,018
Income before provision for
income taxes 135,713 97,051 55,836
Provision for income taxes 41,821 30,631 17,002
Income before extraordinary item 93,892 66,420 38,834
Extraordinary item --- --- (2,007)
Income before minority interest
and preferred dividends 93,892 66,420 36,827
Minority interest 1,431 3,005 ---
Net income 92,461 63,415 36,827
Preferred dividends --- 1,080 5,010
Net income available to common
stockholders $92,461 $62,335 $31,817
Income per share before
extraordinary item $ 1.60 $ 1.25 $ .95
Extraordinary item --- --- (.06)
Net income per share - primary $1.60 $1.25 $ .89
Net income per share - fully diluted $1.50 $1.18 $ .88
Average number of shares
outstanding - primary 57,870 49,971 35,721
Fully diluted shares 67,164 57,742 40,166
The accompanying notes are an integral part of these financial
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
Dollars and Shares in Thousands
Outstanding Additional Foreign
Common Common Paid-In Retained Currency Treasury Unearned
Shares Stock Capital Earnings Adjust. Stock Compensation Total
Balance December 31, 1993 35,446 $2,404 $100,965 $111,031 $ --- $(2,897) $ --- $211,503
Exercise of stock options 46 3 379 --- --- --- --- 382
Purchase of treasury stock (3,765) --- --- --- --- (65,119) --- (65,119)
Exercise of stock options
from treasury stock 96 --- (1,473) --- --- 1,772 --- 299
Employee stock purchase plan
issues from treasury stock 26 --- (122) --- --- 470 --- 348
Preferred stock dividends,
Series C, including cash
distribution of $121 --- --- --- (4,921) --- --- --- (4,921)
Tax benefit from stock plan --- --- 672 --- --- --- --- 672
Net income before preferred
dividends --- --- --- 36,827 --- --- --- 36,827
Balance December 31, 1994 31,849 2,407 100,421 142,937 --- (65,774) --- 179,991
Equity offering 18,170 1,004 240,825 --- --- 56,801 --- 298,630
Exercise of stock options 102 7 303 --- --- --- --- 310
Restricted stock 500 --- 848 --- --- 8,652 (9,500) ---
Amortization of unearned
compensation --- --- --- --- --- --- 2,494 2,494
Employee stock purchase
plan issues 41 3 559 --- --- --- --- 562
Exercise of stock options
from treasury stock 33 --- (416) --- --- 563 --- 147
Purchase of treasury stock (102) --- --- --- --- (1,590) --- (1,590)
Preferred stock dividends,
Series C, including cash
distribution of $43 --- --- --- (1,293) --- --- --- (1,293)
Tax benefit from stock plan --- --- 866 --- --- --- --- 866
Net income before preferred
dividends --- --- --- 63,415 --- --- --- 63,415
Balance December 31, 1995 50,593 3,421 343,406 205,059 --- (1,348) (7,006) 543,532
Exercise of stock options and
other equity transactions 4,971 335 57,190 --- --- 1 --- 57,526
Amortization of unearned
compensation --- --- --- --- --- --- 1,535 1,535
Employee stock purchase plan
issues 60 2 547 --- --- 588 --- 1,137
Exercise of stock options
from treasury stock 232 --- (4,707) --- --- 3,980 --- (727)
Purchase of treasury stock (472) --- --- --- --- (12,008) --- (12,008)
Conversion of debt 8,064 545 164,912 --- --- --- --- 165,457
Tax benefit from stock plan --- --- 2,219 --- --- --- --- 2,219
Foreign currency translation
adjustment --- --- --- --- 29,658 --- --- 29,658
Net income --- --- --- 92,461 --- --- --- 92,461
Balance December 31, 1996 63,448 $4,303 $563,567 $297,520 $29,658 $(8,787) $(5,471) $880,790
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1996
Dollars in Thousands
1996 1995 1994
Cash flows from operating activities:
Net income $92,461 $ 63,415 $ 36,827
Adjustments to reconcile net cash flow from operating activities:
Depreciation and amortization 109,447 65,244 21,197
Amortization of excess of cost over fair
value of net assets acquired 9,139 7,005 ---
Amortization of original issue discount 50,194 45,409 31,946
Amortization of deferred financing costs 9,677 8,979 1,885
Amortization of unearned compensation 1,535 2,494 ---
Provision for deferred income taxes 12,252 13,983 8,258
Loss (income) on equity investments (910) 362 ---
Income applicable to minority interest 1,431 3,005 ---
Changes in other items:
Accounts receivable (13,936) 213 (6,614)
Accounts payable and other accrued liabilities (942) 5,922 19,364
Deferred income 3,035 6,181 (437)
Net cash flows from operating activities 273,383 222,212 112,426
Cash flows from investing activities:
Purchase of Northern, Falcon Seaboard, Partnership
Interest and Magma, net of cash acquired (474,443) (907,614) (3,043)
Distributions from equity investments 8,222 --- ---
Capital expenditures relating to operating
projects (24,821) (27,120) (38,078)
Philippine construction (167,160) (289,655) (69,997)
Indonesian and other development (81,068) (8,973) (2,445)
Salton Sea IV construction (63,772) (62,430) ---
Pacific Northwest, Nevada, and Utah
exploration costs (4,885) (10,445) (8,493)
Decrease (increase) in short-term investments 33,998 80,565 (50,000)
Decrease (increase) in restricted cash 63,175 (17,452) (83,670)
Other (2,591) 11,514 1,847
Investment in Casecnan --- (61,177) ---
Net cash flows from investing activities (713,345)(1,292,787)(253,879)
Cash flows from financing activities:
Proceeds from sale of common and treasury stock
and exercise of stock options 54,935 299,649 1,580
Proceeds from convertible preferred securities
of subsidiary trust 103,930 --- ---
Proceeds from issuance of parent company debt 324,136 200,000 400,000
Net proceeds from revolver 95,000 --- ---
Proceeds from subsidiary and project debt 428,134 654,695 31,503
Repayments of subsidiary and project debt (210,892) (176,664) (13,800)
Deferred charges relating to debt financing (36,010) (34,733) (11,905)
Decrease (increase) in amounts due from
joint ventures 10,756 (29,169) 316
Purchase of treasury stock (12,008) (1,590) (65,119)
Proceeds from merger facility --- 500,000 ---
Recapitalization of merger facility --- (500,000) ---
Defeasance of 12% senior notes --- --- (35,730)
Net cash flows from financing activities 757,981 912,188 306,845
Effect of exchange rate changes 4,860 --- ---
Net increase (decrease) in cash and investments 322,879 (158,387) 165,392
Cash and cash equivalents at beginning of period 149,704 308,091 142,699
Cash and cash equivalents at end of period $472,583 $149,704 $308,091
Supplemental Disclosures:
Interest paid (net of amounts capitalized) $ 92,829 $ 50,840 $ 12,624
Income taxes paid $ 23,211 $ 14,812 $ 4,926
See note 6 regarding conversion of debt to equity.
The accompanying notes are an integral part of these financial statements.
NOTES Consolidated Financial Statements
For the Three Years Ended December 31, 1996
Dollars 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
resources, natural gas and hydroelectric or other energy sources, such
as oil and coal. In addition, through its recently acquired
subsidiary, Northern, 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 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 is 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 pursuant to a tender
offer ("Tender Offer"). The total amount expected to be paid for all
of Northern's ordinary and preference shares is approximately $1.3
billion.
Northern is one of the twelve regional electric 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 distribute and
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 distributes and supplies
electricity outside its Authorized Area pursuant to second tier PES
licenses. Northern also is involved in non-regulated activities,
including 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 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.
Investments and Restricted Cash
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, 1996, 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.
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 resources. All such costs, which include dry 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.
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 $8,371 and $7,086 at December 31, 1996 and 1995,
respectively, and are included in other assets.
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 1-40 years.
Northern's investment in Teesside Power Limited is being amortized
over the remaining contract life of 11 years using a straight line
method.
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.
Mineral reserves are amortized on the units of production method.
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.
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 implicit interest method.
Revenue Recognition
Revenues are recorded based upon service rendered and electricity and
steam delivered to the end of the month. Royalties earned from
providing geothermal resources to power plants operated by other
geothermal power producers are recorded on an accrual basis.
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.
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.
Net Income per Common Share
Primary and fully diluted earnings per common share are based on the
weighted average number of common and dilutive common equivalent
shares outstanding during the period computed using the treasury stock
method. Fully diluted earnings per common share also assumes the
conversion at the beginning of the year of the convertible debt into
3,529 common shares at a conversion price of $18.375 per share, the
conversion at the beginning of the year of the convertible
subordinated debentures into 4,444 common shares at a conversion price
of $22.50 per share, the convertible preferred securities of
subsidiary into 3,477 common shares at a conversion price of $29.89
per share and the exercise of all dilutive stock options outstanding
at their option prices, with the option exercise proceeds used to
repurchase shares of common stock at the ending market price for fully
diluted earnings per share. For primary earnings per share, shares of
common stock are assumed to be repurchased at the average price for
the period.
Cash Equivalents
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.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 did not have a
material effect on the Company's financial statements.
Reclassification
Certain amounts in the fiscal 1995 and 1994 financial statements and
supporting footnote disclosures have been reclassified to conform to
the fiscal 1996 presentation. Such reclassification did not impact
previously reported net income or retained earnings.
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.
3. Acquisitions
Northern
On December 24, 1996, CE Electric, which is 70% owned indirectly by
the Company and 30% owned indirectly by PKS, acquired majority
ownership of the outstanding ordinary share capital of Northern
pursuant to the Tender Offer. Through January 31, 1997, CE Electric
had purchased more than 90% of Northern's ordinary shares. Under
United Kingdom statutory procedures available to compulsorily acquire
shares not purchased in the Tender Offer, CE Electric expects to
acquire the remaining Northern ordinary shares by April 30, 1997.
As of December 31, 1996, the Company and PKS had contributed to CE
Electric approximately $410,000 and $176,000 respectively, of the
approximately $1,300,000 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 remaining funds necessary to
consummate the Tender Offer will be provided from a 560,000 ($958,888)
Term Loan and Revolving Facility Agreement, dated October 28, 1996
(the "U.K. Credit Facility").
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
is recorded at historical cost. The total cost of the acquisition
through December 31, 1996 was allocated as follows:
Cash $ 200,399
Properties, plants and equipment 1,101,860
Other assets 541,554
Northern project debt (447,119)
Accounts payable (213,710)
Accrued liabilities (606,525)
Minority interest (297,821)
Preferred securities (136,065)
Excess of cost over fair value of
net assets acquired, net of
deferred taxes of $129,493 267,648
$ 410,221
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 March 31, 1998 the Company is able to recover these
costs. For the period after March 31, 1998, 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, 1996, CFDs were in place to hedge a
portion of electricity purchases of approximately 55,000 GWh through
the year 2008.
The Labour Party has asserted that if they are elected at the next
General Election, which must be held no later than May 22, 1997, they
will seek to introduce a "windfall" assessment to be levied on the
privatized utilities including Northern. The Company has established
a liability for such an assessment as part of its purchase accounting
reserves.
The preferred securities reflect the fair value of the outstanding
preferred stock of Northern.
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. The total cost of the acquisition was allocated as
follows:
Cash $ 22,923
Operating facilities 141,176
Power sales agreements 23,282
Equity investments 144,656
Other assets 27,229
Project loans (119,478)
Other liabilities (15,527)
Excess of cost over fair value of
net assets acquired, net of
deferred taxes of $93,279 5,239
$ 229,500
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. The total cost of the acquisition was allocated as
follows:
Cash $ 12,956
Restricted cash 13,226
Power sales agreements 78,036
Other assets 20,254
Project loans (48,161)
Liabilities (5,311)
$ 71,000
Magma Power Company
On January 10, 1995, the Company acquired approximately 51% of the
outstanding shares of common stock of Magma (the "Magma Common Stock")
through a cash tender offer (the "Magma Tender Offer") and completed
the Magma acquisition on February 24, 1995 by acquiring the
approximately 49% of the outstanding shares of Magma Common Stock not
owned by the Company through a merger.
The Magma 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 Magma, equal to their
fair values at the date of the acquisition. The total cost of the
acquisition was allocated as follows:
Cash $ 62,116
Operating facilities and project cash 291,365
Power sales agreements 173,730
Mineral reserves 160,768
Construction in progress 93,174
Process license and other 39,304
Excess of cost over fair value of net assets
acquired, net of deferred taxes of $168,914 137,455
$957,912
Unaudited pro forma combined revenue, net income and primary earnings
per share of the Company, Northern, Falcon Seaboard, the Partnership
Interest and Magma for the twelve months ended December 31, 1996 and
1995, as if the acquisitions had occurred at the beginning of 1995
after giving effect to certain pro forma adjustments related to the
acquisition were $2,162,381, $64,811 and $1.12, compared to
$2,006,496, $53,887 and $1.02, respectively.
4.Properties, Plants, Contracts and Equipment
Properties, plants, contracts and equipment comprise the following at
December 31:
1996 1995
Operating project costs:
Power plants and distribution system $2,361,089 $623,778
Wells and resource development 391,929 329,414
Power sales agreements 232,228 188,415
Licenses, equipment, wells and resource
development in progress 66,207 58,517
Total operating facilities 3,051,453 1,200,124
Less accumulated depreciation and amortization (271,216) (164,184)
Net operating facilities 2,780,237 1,035,940
Mineral reserves 207,424 212,929
Construction in progress:
Malitbog 152,411 146,735
Mahanagdong 123,567 76,560
Other international development 84,944 11,418
Upper Mahiao --- 188,904
Salton Sea IV --- 108,769
Total $3,348,583 $1,781,255
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,
profits and losses were allocated approximately 49% before payout of
Units 2 and 3 and approximately 46.4% thereafter to the Company. As of
December 31, 1994, payout had been reached on Units 2 and 3 of the
Navy I Joint Venture. 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
before and after payout is approximately 45% and 48%, respectively.
The BLM Joint Venture reached payout in June 1994. Under terms of the
Navy II Joint Venture, all profits, losses and capital contributions
for Navy II are divided equally by the two partners.
Imperial Valley Project Operating Facilities
The Company currently operates eight geothermal power plants in the
Imperial Valley in California. Four of these plants were developed by
Magma. 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, three of which were purchased by Magma on
March 31, 1993 from Union Oil Company of California and the fourth
which was completed by the Company in June 1996. These geothermal
power plants consist of the Salton Sea I, Salton Sea II, Salton Sea
III and the 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:
Imperial Valley Commencement Nominal
Plants Date Capacity
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
Significant Customers and Contracts
All of the Company's sales of electricity from the Coso Project and
Imperial Valley Project, which comprise approximately 77% of 1996
electricity and steam revenues, are to 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 payments to the projects
and, to the extent that capacity factors exceed certain benchmarks, is
required to make capacity bonus payments. 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
extend until at least August 1997, March 1999 and January 2000 for
each of the units operated by the Navy I, BLM and Navy II
Partnerships, respectively. The Company's share of the annual capacity
payments is approximately $5,600 to $5,900 per annum for each plant.
The Company's share of bonus payments is approximately $1,000 per
annum for each plant.
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 Vulcan, which is receiving Edison's Avoided Cost of Energy,
the Company's SO4 Agreements provide for energy rates ranging from
12.6 cents per kWh in 1996 to 15.6 cents per kWh in 1999. The weighted average
energy rate for all of the Company's SO4 Agreements was 11.7 cents per kWh
in 1996.
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 5.1 cents per kWh during 1996.
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 cents per kWh and
9.8 cents per kWh for Salton Sea II and Salton Sea III,
respectively. Thereafter, the monthly energy payments will be Edison's
Avoided Cost of Energy. For Salton Sea II only, Edison is entitled to
receive, at no cost, 5% of all energy delivered in excess of 80% of
contract capacity through September 30, 2004. 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, 1996, Edison's average Avoided Cost of
Energy was 2.5 cents per kWh which is substantially below the contract
energy prices earned for the year ended December 31, 1996. Estimates
of Edison's future Avoided Cost of Energy vary substantially from year
to year. The Company cannot predict the likely level of Avoided Cost
of Energy prices under the SO4 Agreements and the modified SO4
Agreements at the expiration of the scheduled payment periods. The
revenues generated by each of the projects operating under SO4
Agreements could decline significantly after the expiration of the
respective scheduled payment periods.
The Upper Mahiao Project 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 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
("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). The Capacity Fee
serves to recover the capital costs of the project, to recover fixed
operating costs and to cover return on investment. The Energy Fee is
designed to cover all variable operating and maintenance costs of the
power plant. 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, which
will be used to pay Philippine peso-denominated expenses. 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 was deemed complete in July 1996. The
Malitbog Project is being built, owned and operated by VGPC, a
Philippine general partnership that is wholly owned, indirectly, by
the Company. VGPC is selling 100% of its capacity 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 NPC. As with the Upper
Mahiao project, the Malitbog project is structured as a ten year BOOT,
in which the Company will be responsible for implementing construction
of the geothermal power plant and, as owner, 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 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 1996 total 2.1 cents per kWh, are received for
electricity produced during "peak hours" as defined in the Saranac PPA
and escalate at approximately 4.1% annually for the remaining term of
the contract. Energy payments, which average 6.3 cents per kWh in 1996,
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 1996 are $2,930 per month and 2.86 cents 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.
Royalty Expense
Royalty expense comprises the following for the years ended:
1996 1995 1994
Navy I, Unit 1 $ 1,620 $ 1,622 $1,641
Navy I, Units 2 and 3 3,512 3,394 3,174
BLM 2,538 3,036 2,842
Navy II 5,742 5,571 1,963
Partnership Project 6,702 6,820 ---
Salton Sea Project 3,526 3,578 ---
Desert Peak 53 287 268
Total $23,693 $24,308 $9,888
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, 1996, the balance of funds deposited approximated $5,311,
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 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 1996 was
approximately 5.2%. The royalties are paid to numerous recipients
based on varying percentages of electrical revenue or steam production
multiplied by published indices.
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.
Glass Mountain
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. Pursuant to two power
sales contracts executed in September 1994, an affiliate of the
Company agreed to sell 20 MW to BPA and 10 MW to Eugene Water and
Electric Board ("EWEB") from the Project. In addition, BPA and EWEB
together have an option to purchase up to an additional 100 MW of
production from the project under certain circumstances. These power
sales contracts provide that under certain circumstances the contracts
may be utilized at an alternative location.
Pursuant to its resource exploration program, the Company has
determined that the geothermal resource at Newberry is not sufficient
to support the contracts and accordingly has determined to utilize the
contracts at its leasehold position in Glass Mountain (the "Glass
Mountain Project") in Northern California, where it has two successful
production wells. The Company and BPA have agreed to relocate the
project to Glass Mountain. Under the relocation agreement BPA will
purchase 30 MW from the project. 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. Discussions with EWEB are continuing.
The Glass Mountain Project is currently expected to commence
commercial operation in 2000. Completion of this project is subject
to a number of significant uncertainties and cannot be assured.
5. Equity Investments
The Company has a present indirect ownership of approximately 35% in
the Casecnan Project, a combined irrigation and 150 net MW
hydroelectric power generation project located on the island of Luzon
in the Philippines.
The Company acquired an approximate 47% 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:
Casecnan Saranac NorCon
As of and for the year ended December 31, 1996:
Assets $ 492,166 $ 325,174 $ 125,956
Liabilities 380,737 213,326 121,223
Net income (loss) (11,207) 40,005 (53)
As of December 31, 1995:
Assets 501,160 N/A N/A
Liabilities 378,524 N/A N/A
6. Parent Company Debt
Parent company debt comprises the following at December 31:
1996 1995
Senior discount notes $ 527,535 $ 477,355
Senior notes 224,150 ---
Limited recourse senior secured notes* 200,000 200,000
CalEnergy credit facility 100,000 ---
Revolving credit facility 95,000 ---
Convertible subordinated debentures --- 100,000
Convertible debt --- 64,850
$ 1,146,685 $ 842,205
*The amount of recourse obligation to the parent was $0 at December 31, 1996.
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 (the difference between
$400,000 and $529,640) will be amortized from issue date through
January 15, 1997, during which time no cash interest will be paid on
the Senior Discount Notes. Commencing July 15, 1997, cash interest on
the Senior Discount Notes will be payable semiannually on January 15
and July 15 of each year. 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.
Senior Notes
On September 20, 1996 the Company completed a private sale to
institutional investors of $225,000 aggregate principal amount of 9
1/2% Senior Notes due 2006. Interest on the Senior Notes will be
payable semiannually on March 15 and September 15 of each year. The
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 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, 1996.
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 has drawn
$100,000 as of December 31,1996. Borrowings under the CalEnergy
Credit Facility are unsecured and mature on October 28, 1997, subject
to prepayment by the Company at any time. Subsequent to year end, the
Company 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. The facility is unsecured and is available to fund
general operating capital requirements and finance future business
opportunities. The Company had drawn $95,000 as of December 31, 1996.
Subsequent to year end, the Company repaid the entire balance.
Convertible Subordinated Debentures
In June of 1993, the Company issued $100,000 principal amount of 5%
convertible subordinated debentures ("debentures") due July 31, 2000.
Substantially all of the debentures were converted into 4,443 common
shares in September and October 1996 at a conversion price of $22.50
per share.
Convertible Debt
On November 19, 1991, the Company sold one thousand shares of
convertible preferred stock, Series C, at $50,000 per share to Kiewit
Energy Company Inc. ("Kiewit"), a subsidiary of PKS, in a private
placement. Each share of the Series C preferred stock was convertible
at any time at $18.375 per common share into 2,721 shares of common
stock subject to customary adjustments. The Series C preferred stock
had a dividend rate of 8.125%, commencing March 15, 1992 through
conversion date or December 15, 2003. The dividends, which were
cumulative, were payable quarterly in convertible preferred stock,
Series C, through March 15, 1995 and in cash on subsequent dividend
dates.
Pursuant to the terms of the Securities Purchase Agreement, the
Company exercised its rights to exchange the preferred stock, Series
C, on March 15, 1995 for $64,850 principal amount 9.5% convertible
subordinated debenture of the Company due 2003, with the same
conversion features of the preferred stock, Series C. On September
20, 1996, the Company converted the $64,850 convertible debt and
associated accrued interest into 3,620 common shares at a conversion
price of $18.375 per share.
The annual repayments of the parent company debt for the years
beginning January 1, 1997 are as follows:
Senior Limited
Discount Senior Recourse
Notes Notes Notes *
1997 - 2001 $ --- $ --- $ ---
Thereafter 529,640 225,000 200,000
$529,640 $225,000 $200,000
*The amount of recourse obligation to the parent was $0 at December 31, 1996.
7. Subsidiary and Project Debt:
Project loans held by subsidiaries and projects of the Company
comprise the following at December 31:
1996 1995
Salton Sea Notes and Bonds $ 538,982$ 452,088
Northern eurobonds 439,192 ---
Coso Funding Corp. project loans 148,346 203,226
U.K. Credit Facility 128,423 ---
Power Resources project debt 114,571 ---
Construction loans 377,454 211,198
Other 7,927 54,707
$ 1,754,895 $ 921,219
Pursuant to separate project financing agreements, substantially all
the assets of the Company are pledged or encumbered to support or
otherwise provide the security for the project or subsidiary debt.
Salton Sea Notes and Bonds
On June 20, 1996 and July 25, 1995, the Company through its wholly
owned subsidiary, Salton Sea Funding Corporation ("Funding
Corporation"), completed sales to institutional investors of $135,000
and $475,000, respectively, of Salton Sea Notes and Bonds (the "Notes
and Bonds"). The Salton Sea Notes and Bonds are nonrecourse to the
Company. The Funding Corporation debt securities were offered as
follows:
Senior Secured Series Due Rate Amount
July 25, 1995 A Notes May 30, 2000 6.69% $232,750
July 25, 1995 B Bonds May 30, 2005 7.37% 133,000
July 25, 1995 C Bonds May 30, 2010 7.84% 109,250
June 20, 1996 D Notes May 30, 2000 7.02% 70,000
June 20, 1996 E Bonds May 30, 2011 8.30% 65,000
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.
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. 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.
Substantially all of the assets of each subsidiary listed below
(except Vulcan/BN Geothermal Power Company and certain other
subsidiaries involved in project financing activities) have been
encumbered to secure obligations owed to the creditors of such
subsidiary:
Fish Lake Power Company
Salton Sea Brine Processing L.P.
Salton Sea Power Generation L.P.
Vulcan Power Company
CalEnergy Operating Company
Salton Sea Funding Corporation
Salton Sea Power Company
Salton Sea Royalty Company
Vulcan/BN Geothermal Power Company
Del Ranch, L.P.
Elmore, L.P.
Leathers, L.P.
Pursuant to the 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 55,000 ($94,177) debenture due in 1999,
which bears a fixed interest rate of 12.661%. The debt also includes
bearer bonds repayable in 100,000 ($171,230) amounts in 2005 and 2020,
bearing fixed interest rates of 8.625% and 8.875%, respectively.
The balance at December 31, 1996 consists of the following:
Debenture due 1999 $ 99,924
Bearer bonds due 2005 171,130
Bearer bonds due 2020 168,138
$ 439,192
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. On December 16,
1992, pursuant to separate credit agreements executed between Coso
Funding Corp. and each Coso Joint Venture, the proceeds from Coso
Funding Corp.'s note offering were loaned to the Coso Project. The
proceeds of $560,245 were used by the Coso Project to (i) purchase and
retire project finance debt comprised of the term loans and
construction loans in the amount of $424,500, (ii) fund contingency
funds in the amount of $68,400, (iii) fund debt service reserve funds
in the amount of $40,000, and (iv) finance $27,345 of capital
expenditures and transaction costs. The contingency fund and debt
service reserve fund were required by the project loan agreements.
The contingency fund represented the approximate maximum amount, if
any, which could theoretically have been payable by the Coso Project
to third parties to discharge all liens of record and other contract
claims encumbering the Coso Project's plants at the time of the
project loans. The contingency fund was established in order to
obtain investment-grade ratings to facilitate the offer and sale of
the notes by Coso Funding Corp., and such establishment did not
reflect the Coso Project's view as to the merits or likely disposition
of such litigation or other contingencies. On June 9, 1993, MPE and
the Mission Power Group, subsidiaries of Edison Corp., and the Coso
Project reached a final settlement of all of their outstanding
disputes and claims relating to the construction of the Coso Project.
As a result of the various payments and releases involved in such
settlement, the Coso Project agreed to make a net payment of $20,000
to MPE from the cash reserves of the Coso Project contingency fund and
MPE agreed to release its mechanics' liens on the Coso Project. After
making the $20,000 payment, the remaining balance of the Coso Project
contingency fund (approximately $49,300) was used to increase the Coso
Project debt reserve fund from approximately $43,000 to its maximum
fully-funded requirement of $67,900. The remaining $24,400 balance of
contingency fund was retained within the Coso Project for future
capital expenditures and for Coso Project debt service payments.
Since the Coso Project debt service reserve is fully funded in
advance, Coso Project cash flows otherwise intended to fund the Coso
Project debt service reserve fund, subject to satisfaction of certain
covenants and conditions contained in the Coso Joint Ventures'
refinancing documents, may be available for distribution to the
Company in its proportionate share.
The Coso Funding Corp. project loans are collateralized by, among
other things, the power plants, geothermal resource, debt service
reserve funds, contingency funds, pledge of contracts, and an
assignment of all such Coso Project's revenues which will be applied
against the payment of obligations of each Coso Joint Venture,
including the project loans. Each Coso Joint Venture's assets will
secure only its own project loan, and will not be cross-collateralized
with assets pledged under other Coso Joint Venture's credit
agreements. The project loans are nonrecourse to any partner in the
Coso Joint Ventures and the Coso Funding Corp. shall solely look to
such Coso Joint Venture's pledged assets for satisfaction of such
project loans. However, the loans are cross-collateralized by the
available cash flow of each Coso Joint Venture. Each Coso Joint
Venture after satisfying a series of its own obligations has agreed to
advance support loans (to the extent of available cash flow and, under
certain conditions, its debt service reserve funds) in the event
revenues from the supporting Coso Joint Ventures are insufficient to
meet scheduled principal and interest on their separate project loans.
The Coso Funding Corp. project loans carry a fixed interest rate with
weighted average interest rates of 8.46% and 8.29% at December 31,
1996 and 1995, respectively. The loans have scheduled repayments
through December 2001.
U.K. Credit Facility
On October 28, 1996 CE Holdings obtained a 560,000 ($958,888) five
year term loan and revolving credit facility (the "U.K. Credit
Facility"). The Company has not guaranteed, nor is it otherwise
subject to recourse for, amounts borrowed under the U.K. Credit
Facility. The agreement places restrictions on distributions from CE
Electric to any of its shareholders based on certain financial ratios.
As of December 31, 1996, CE Holdings had drawn 75,000 ($128,423) under
the agreement.
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%. The
loan is collateralized by all of the assets of Power Resources.
The annual repayments of the subsidiary and project debt, excluding
construction loans, for the years beginning January 1, 1997 and
thereafter are as follows:
Salton Sea Coso
Notes and Funding UK Credit Power
Bonds Northern Corp. Facility Resources Other
1997 $ 90,228 $ --- $ 41,729 $ --- $ 11,228 $ 873
1998 106,938 --- 38,912 --- 12,805 1,678
1999 57,836 99,924 31,717 --- 14,268 1,421
2000 25,072 --- 4,080 --- 16,087 1,181
2001 22,376 --- 31,908 128,423 18,119 959
Thereafter 236,532 339,268 --- --- 42,064 1,815
$538,982 $439,192 $148,346 $128,423 $114,571 $7,927
Construction Loans
The Company's share of project construction loans comprise the
following at December 31:
1996 1995
Upper Mahiao $150,628 $134,619
Malitbog 137,881 36,863
Mahanagdong 76,503 39,716
Dieng Unit I 12,442 ---
$377,454 $211,198
The construction loans are scheduled to be replaced by 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, 1996 totaled $150,628. A consortium of
international banks provided the construction financing with interest
rates at LIBOR or "Prime" with interest payments due every quarter and
at LIBOR maturity. The weighted average interest rate at December 31,
1996 and 1995 is approximately 8.01% and 8.31%, 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 early 1997. 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 for a ten year term 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, 1996 totaled $137,881. Credit Suisse and OPIC
have provided the construction and term loan facilities. The eight
year project term loan facilities will be at variable interest rates
(weighted average of 8.15% and 8.42% at December 31, 1996 and 1995,
respectively). The international bank portion of the debt will be
insured by the Overseas Private Investment Corporation ("OPIC")
against political risks and the Company's equity contribution to
Visayas Geothermal Power Company ("VGPC") is covered by political risk
insurance from the Multilateral Investment Guarantee Agency and OPIC.
Mahanagdong Construction Loan
The Company's share of draws on the construction loan for the
Mahanagdong geothermal power project at December 31, 1996 totaled
$76,503. The construction debt financing is provided by OPIC and a
consortium of international banks. The construction loan interest
rates are at LIBOR or "Prime" with interest payments due quarterly and
at LIBOR maturity. The weighted average interest rate at December 31,
1996 and 1995 is approximately 8.05% and 8.02% respectively. Political
risk insurance from Ex-Im Bank has been obtained for the commercial
lenders. Ten year project term debt financing of approximately
$120,000 will be provided by Ex-Im Bank (which will replace the bank
construction debt) and by OPIC. The majority of the term financing is
expected to be provided by the Ex-Im Bank at a fixed interest rate of
6.92%.
Dieng Construction Loan
On October 4, 1996 the Company closed the $120,000 project financing
for the Dieng Unit I 55 net MW geothermal project located in
Indonesia. The loan carries a variable interest rate (weighted
average of 7.19% at December 31, 1996) and has scheduled project term
repayments through 2002. Dieng Unit I is under construction and is
currently expected to begin commercial operation by late 1997. The
Company has drawn $12,442 as of December 31, 1996.
8. Income Taxes
Provision for income taxes is comprised of the following at December
31:
1996 1995 1994
Currently payable:
State $ 7,520 $ 5,510 $1,970
Federal 19,873 11,138 5,829
Foreign 2,176 --- ---
29,569 16,648 7,799
Deferred:
State 1,619 921 1,017
Federal 9,209 13,062 7,241
Foreign 1,424 --- ---
12,252 13,983 8,258
Total after benefit of
extraordinary item 41,821 30,631 16,057
Tax benefit attributable to
extraordinary item --- --- 945
Total before benefit of
extraordinary item $41,821 $30,631 $17,002
A reconciliation of the federal statutory tax rate to the effective
tax rate applicable to income before provision for income taxes
follows:
1996 1995 1994
Federal statutory rate 35.00% 35.00% 35.00%
Percentage depletion in excess
of cost depletion (6.12) (7.38) (6.85)
Investment and energy tax credits (8.34) (1.80) (3.04)
State taxes, net of federal
tax effect 4.38 4.09 4.48
Goodwill amortization 2.51 2.53 ---
Non-deductible expense .84 1.10 ---
Lease investment --- (2.18) ---
Tax effect of foreign income 2.54 --- ---
Other .01 .20 .86
30.82% 31.56% 30.45%
Deferred tax liabilities (assets) are comprised of the following at
December 31:
1996 1995
Depreciation and amortization, net $725,366 $349,079
Pensions 22,883 ---
Other 6,119 4,043
754,368 353,122
Deferred contract costs (128,745) ---
Deferred income (9,298) (7,709)
Loss carryforwards --- (3,050)
Energy and investment tax credits (55,931) (52,857)
Advance corporation tax (20,205) ---
Alternative minimum tax credits (50,819) (52,480)
Jr. SO4 royalty receivable (5,865) (5,865)
Accruals not currently deductible
for tax purposes (13,372) ---
Other (934) (4,641)
(285,169) (126,602)
Net deferred taxes $469,199 $226,520
The Company has unused investment and geothermal energy tax credit
carryforwards of approximately $55,931 expiring between 2002 and 2011.
The Company also has approximately $50,819 of alternative minimum tax
credit and 11,800 ($20,205) of surplus advance corporation tax
carryforwards which have no expiration date.
9. Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Subsidiary Trust Holding Solely Convertible Debentures
On April 12, 1996 CalEnergy Capital Trust, a special purpose Delaware
business trust organized by the Company (the "Trust"), pursuant to
the Amended and Restated Declaration of Trust (the "Declaration")
dated as of April 4, 1996, completed a private placement (with certain
shelf registration rights) of $100,000 of convertible preferred
securities ("TIDES"). In addition, an option to purchase an additional
78.6 TIDES, or $3,930, was exercised by the initial purchasers to
cover over-allotments.
The Trust has issued 2,078.6 of 6 1/4% TIDES with a liquidation
preference of fifty dollars each. The Company owns all of the common
securities of the Trust. The TIDES and the common securities
represent undivided beneficial ownership interests in the Trust. The
assets of the Trust consist solely of the Company's 6 1/4% Convertible
Junior Subordinated Debentures due 2016 in an outstanding aggregate
principal amount of $103,930 ("Junior Debentures") issued pursuant to
an indenture dated as of April 1, 1996. The indenture includes an
agreement by the Company to pay expenses and obligations incurred by
the Trust. Each TIDES will be convertible at the option of the holder
thereof at any time into 1.6728 shares of CalEnergy Common Stock
(equivalent to a conversion price of $29.89 per share of the Company's
Common Stock), subject to customary anti-dilution adjustments.
Until converted into the Company's Common Stock, the TIDES 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
Trust. Distributions on the TIDES (and Junior Debentures) are
cumulative, accrue from the date of initial issuance and are payable
quarterly in arrears, commencing June 15, 1996. 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 Indenture.
Pursuant to a Preferred Securities Guarantee Agreement, dated as of
April 10, 1996 (the "Guarantee"), between the Company and a preferred
guarantee trustee, the Company has agreed irrevocably to pay to the
holders of the TIDES, to the extent that the Trustee has funds
available to make such payments, quarterly distributions, redemption
payments and liquidation payments on the TIDES. Considered together,
the undertakings contained in the Declaration, Junior Debentures,
Indenture and Guarantee constitute a full and unconditional guarantee
by the Company of the Trust's obligations under the TIDES.
10.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
plan was amended in February 1991 so that the agreement with Kiewit
would not trigger the exercise of 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.
11.Stock Options and Restricted Stock
The Company has issued various stock options. As of December 31, 1996,
a total of 5,088 shares are reserved for stock options, of which 4,777
shares have been granted and remain outstanding at prices of $3.00 to
$30.38 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 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 three 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 (see Note 12).
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 is
being amortized over the vesting period of which 125 shares were
immediately vested and the remaining 375 shares vest straight line
over approximately five years. Accordingly, $1,535 and $2,494 of
unearned compensation was charged to general and administrative
expense in 1996 and 1995, respectively.
Transactions in Stock Options
Options Outstanding
Shares Available
for Grant Under Option Price Weighted Avg
1996 Option Plan Shares Per Shares Option Price Total
Balance December 31, 1993 439 8,514 $3.00 - $19.00 $12.32 $104,931
Options granted (954) 1,243 12.00 - 17.25 15.49 19,260
Options terminated 15 (15) 3.00 - 15.94 13.67 (205)
Options exercised --- (141) 3.00 - 15.94 5.03 (709)
Additional shares reserved
under 1996 Option Plan 586 --- --- --- ---
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) 1,1572 5.06 - 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 exercisable at:
December 31, 1994 7,897 $3.00 - $19.00 $11.87 $93,705
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
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1996:
Options Outstanding Options Exercisable
Weighted Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
$3.00 $11.99 1,251 $ 10.70 4 years 1,251 $ 10.70
12.00 20.99 2,369 16.72 7 years 1,786 16.50
21.00 30.38 1,157 28.16 9 years 34 29.25
4,777 $ 17.92 7 years 3,071 $ 14.25
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." SFAS 123 defines a fair
value based method of accounting for stock-based employee compensation
plans and encourages all entities to adopt that method of accounting.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting.
The Company has decided to continue to apply the intrinsic value based
method of accounting for its stock-based employee compensation plans.
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 6.00%, expected volatility of 22%, expected life of approximately
4.5 years, and no expected dividends. The weighted average fair value
of options granted during 1996 and 1995 was $8.62 per option and $5.72
per option, respectively.
12.Common Stock Sales & Related Options
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.
The Company and Kiewit signed a Stock Purchase Agreement and related
agreements, dated as of February 18, 1991. Under the terms of the
agreements, Kiewit purchased 4,000 shares of common stock at $7.25 per
share and received options to buy 3,000 shares at a price of $9 per
share exercisable over three years and an additional 3,000 shares at a
price of $12 per share exercisable over five years (subject to
customary adjustments).
In May 1994, pursuant to a special antidilution provision of the 1991
Stock Purchase Agreement between the Company and Kiewit, the Company
increased Kiewit's existing option (granted in 1991) to purchase 3,000
shares at $12 per share by an additional 289 shares as a final
adjustment under such provisions.
In connection with this initial stock purchase, the Company and Kiewit
also entered into certain other agreements pursuant to which Kiewit
and its affiliates agreed not to acquire more than 34% of the
outstanding common stock (the "Standstill Percentage") for a five-year
period ending in February 1996 and Kiewit became entitled to nominate
at least three of the Company's directors.
On June 19, 1991, the board approved a number of amendments to the
Stock Purchase Agreement and the related agreements. As part of those
amendments, the Company extended the term of the $9 and $12 options to
seven years; modified certain of the other terms of these options;
granted to Kiewit an option to acquire an additional 1,000 shares of
the common stock at $11.625 per share for a ten year term; and
increased the Standstill Percentage from 34% to 49%.
On November 19, 1991, the Board approved the issuance by the Company
to Kiewit of one thousand shares of Series C preferred stock for
$50,000. In connection with the sale of the Series C preferred stock
to Kiewit, the Standstill Agreement was amended so that the 49%
Standstill Percentage restriction would apply to voting stock rather
than just common stock.
13. Related Party Transactions
The Company charged and recognized a management fee and interest on
advances to its Coso Joint Ventures, which aggregated approximately
$5,731, $6,075 and $5,569 in the years ended December 31, 1996, 1995
and 1994, respectively. The Company has a note receivable from the
Coso Joint Ventures included in deferred charges and other assets
which bears a fixed interest rate of 12.5% and is payable on or before
March 19, 2002. The balance of the note is $11,578 and $14,254 as of
December 31, 1996 and 1995, respectively. This note is subordinated
to the senior project loan on the project.
The Mahanagdong Project is being constructed by a consortium (the "EPC
Consortium") of Kiewit Construction Group, Inc. ("KCG") and the CE
Holt Company, a wholly owned subsidiary of the Company, pursuant to
fixed-price, date-certain, turnkey supply and construction contracts
(collectively, the "Mahanagdong EPC"). The obligations of the EPC
Consortium under the Mahanagdong EPC are supported by a guaranty of
KCG at an aggregate amount equal to approximately 50% of the
Mahanagdong EPC price. The Mahanagdong EPC provides for maximum
liability for liquidated damages of up to $100,500 and total liability
of up to $201,000. KCG, a wholly owned subsidiary of PKS, is the lead
member of the EPC Consortium, with an 80% interest. KCG performs
construction services for a wide range of public and private customers
in the U.S. and internationally. CE Holt Company provides design and
engineering services for the EPC Consortium, and holds a 20% interest.
The Company has provided a guaranty of CE Holt Company's obligations
under the Mahanagdong EPC Contract.
The Company has in an international joint venture agreement with PKS,
a stockholder of the Company, which the Company believes enhances its
capabilities in foreign power markets. The joint venture agreement is
limited to international power project development activities and
provides that, if both the Company and PKS agree to participate in a
project, they will share all development costs equally. The Company
and PKS each will provide 50% of the equity required for financing a
project developed by the joint venture and the Company will receive
from the project a development fee (generally 1% of project capital)
and will operate and manage such project for a fee. The agreement
creates a joint development structure under which, on a project by
project basis, the Company will be the development manager, managing
partner and/or project operator, and equal equity participant with PKS
and a preferred participant in the construction consortium and PKS
will be an equal equity participant and the preferred turnkey
construction contractor. The joint venture agreement may be terminated
by either party on 15 days written notice, provided that such
termination cannot affect the pre-existing contractual obligations of
either party.
14. Extraordinary Item
In conjunction with the Company's Senior Discount Notes offering in
1994, the 12% Senior Notes were defeased. This resulted in an
extraordinary item in the amount of $2,007, after the income tax
effect of $945. The extraordinary item represents the amount necessary
to defease the interest payments and the unamortized portion of the
deferred financing costs on the 12% Senior Notes.
15.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 techniques. 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.
Interest rate swap agreements - The fair value of interest rate swap
agreements is estimated based on quotes from the counter party to
these instruments and represents the estimated amounts that the
Company would expect to receive or pay to terminate the agreements. It
is the Company's intention to hold the swap agreements to their
intended maturity.
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 6 and 7 except for the interest rate swaps
which are discussed in Note 16.
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Interest rate swap receivable $ 100 $ 222 $ 61 $ 561
Financial liabilities:
Senior discount notes 527,535 556,971 477,355 503,158
Senior notes 224,150 229,866 --- ---
Limited recourse senior secured
notes 200,000 212,560 200,000 210,500
CalEnergy credit facility 100,000 100,000 --- ---
Revolving line of credit 95,000 95,000 --- ---
Convertible subordinated debentures --- --- 100,000 100,500
Salton Sea notes and bonds 538,982 531,807 452,088 459,629
Northern Electric eurobonds 439,192 445,830 --- ---
Construction loans 377,454 377,454 211,198 211,198
Coso Funding Corp. project loans 148,346 153,650 203,226 214,917
Power Resources Inc. project
financing debt 114,571 114,571 --- ---
U.K. credit facility 128,423 128,423 --- ---
Other 7,927 7,927 54,707 54,707
Interest rate swap payable --- --- 226 672
16. Interest Rate Swap Agreements
In January 1993, the Coso Joint Ventures entered into five year
deposit interest rate swap agreements. The subject deposits represent
debt service reserves established in conjunction with refinancing the
Coso Joint Ventures loans through Coso Funding Corp. The deposit
interest rate swaps effectively convert interest earned on the debt
service reserve deposits from a variable rate to a fixed rate, in
order to match the nature of the interest rate on the borrowings used
to fund the debt service reserve deposits. The Company's proportion of
the deposit amount of $27,239 included in restricted cash and
investments accretes annually to a maximum amount of approximately
$29,300 in 1997. Under the agreements, which mature on January 11,
1998, the Coso Joint Ventures make semi-annual payments to the counter
party at variable rates based on LIBOR, reset and compounded every
three months, and in return receive payments based on a fixed rate of
6.34%. The effective LIBOR rate ranged from 5.5313% to 5.9375% during
1996 and was 5.5313% at December 31, 1996. The counter party to these
agreements is a large multi-national financial institution.
17. Regulatory Matters
Northern is subject to price cap regulation. The Office of
Electricity Regulation ("OFFER") controls the revenues generated by
Northern in its distribution and supply businesses by applying a price
control formula, P + RPI - X (where X is currently 3% for distribution
and 2% for supply), where P is the price level at the beginning of
each new regulatory period, RPI is the change in the Retail Price
Index and X is an adjustment factor determined by OFFER.
In the distribution business, the Distribution Price Control Formula
("DPCF") is usually set for a five-year period, subject to more
frequent adjustments as determined necessary by the Director General
of Electricity Supply (the "Regulator"). At each review, the
Regulator can require a one-time price reduction. An initial review
by the Regulator of allowable income in the distribution business led
to a reduction of the price level by 17% for Northern starting April
1, 1995, followed by efficiency factors of X=2% for each year until
March 2000. On July 6, 1995, the Regulator announced the result of a
further distribution price review which was precipitated by certain
market events in the UK electric utility industry. For Northern, such
announcement meant a further real reduction of 11% in allowable
distribution income for the twelve months from April 1, 1996, followed
by an efficiency factor X=3% for each year until March 31, 2000,
before an allowed increase for inflation.
In the supply business, which is progressively being opened to
competition, price regulation still applies to the market for
customers with demand of not more than 100kW. The calculation of the
maximum supply charge is based on a Supply Price Control Formula,
similar to the DPCF and is set for a four-year period. In 1993, OFFER
announced the supply franchise market (i.e., with demand of not more
than 100kW) income entitlement for the four-year period ending March
1998. A relatively small efficiency factor of X=2% was applied to
Northern and is being offset by an allowance for both unit and
customer growth. The nonfranchise markets (above 1 MW) were opened to
full competition during privatization in 1990; the nonfranchise
markets above 100kW were opened to full competition starting in April
1994.
18. 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 assumed an interest rate of 7.75% an
expected return on plan assets of 8.25% and annual compensation
increases of 5.75% 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.
The following table details the funded status and the amount
recognized in the balance sheet of the Company as of December 31,
1996.
Actuarial present value of benefit obligations:
Vested benefits $ 797,932
Nonvested benefits ---
Accumulated benefit obligation 797,932
Effect of future increase in compensation 58,218
Projected benefit obligation 856,150
Fair value of plan assets 919,163
Prepaid pension asset $ 63,013
19. Commitments and Contingencies
There were no material outstanding lawsuits as of December 31, 1996.
Casecnan
In November 1995, CE Casecnan Water and Energy Company, Inc., a
Philippine corporation ("CE Casecnan"), closed the financing and
commenced construction of the Casecnan Project, a combined irrigation
and 150 net MW hydroelectric power generation project (the "Casecnan
Project") located in the central part of the island of Luzon in the
Republic of the Philippines. The Casecnan Project will consist
generally of diversion structures in the Casecnan and Denip Rivers
that will divert water into a tunnel of approximately 23 kilometers.
The tunnel will transfer the water from the Casecnan and Denip Rivers
in the Pantabangan Reservoir for irrigation and hydroelectric use in
the Central Luzon area. An underground powerhouse located at the end
of the water tunnel and before the Pantabangan Reservoir will house a
power plant consisting of approximately 150 MW of newly installed
rated electrical capacity. A tailrace tunnel of approximately three
kilometers will deliver water from the water tunnel and the new
powerhouse to the Pantabangan Reservoir, providing additional water
for irrigation and increasing the potential electrical generation at
two downstream existing hydroelectric facilities of the National Power
Corporation of the Philippines ("NPC").
CE Casecnan, which is presently indirectly owned as to approximately
35% of its equity by the Company and approximately 35% by PKS, is
developing the Casecnan Project under the terms of the Project
Agreement between CE Casecnan and the National Irrigation
Administration ("NIA"). Under the Project Agreement, CE Casecnan will
develop, finance and construct the Casecnan Project over an estimated
four-year construction period, and thereafter own and operate the
Casecnan Project for 20 years (the "Cooperation Period"). During the
Cooperation Period, NIA is obligated to accept all deliveries of water
and energy, and so long as the Casecnan Project is physically capable
of operating and delivering in accordance with agreed levels set forth
in the Project Agreement, NIA will pay CE Casecnan a guaranteed fee
for the delivery of water and a guaranteed fee for the delivery of
electricity, regardless of the amount of water or electricity actually
delivered. In addition, NIA will pay a fee for all electricity
delivered in excess of a threshold amount up to a specified amount.
NIA will sell the electric energy it purchases to NPC, although NIA's
obligations to CE Casecnan under the Project Agreement are not
dependent on NPC's purchase of the electricity from NIA. All fees to
be paid by NIA to CE Casecnan are payable in U.S. dollars. The
guaranteed fees for the delivery of water and energy are expected to
provide approximately 70% of CE Casecnan's revenues.
The Project Agreement provides for additional compensation to CE
Casecnan upon the occurrence of certain events, including increases in
Philippine taxes and adverse changes in Philippine law. Upon the
occurrence and during the continuance of certain force majeure events,
including those associated with Philippines political action, NIA may
be obligated to buy the Casecnan Project from CE Casecnan at a buy out
price expected to be in excess of the aggregate principal amount of
the outstanding CE Casecnan debt securities, together with accrued but
unpaid interest. At the end of the Cooperation Period, the Casecnan
Project will be transferred to NIA and NPC for no additional
consideration on an "as is" basis.
The Republic of the Philippines has provided a Performance Undertaking
under which NIA's obligations under the Project Agreement are
guaranteed by the full faith and credit of the Republic of the
Philippines. The Project Agreement and the Performance Undertaking
provide for the resolution of disputes by binding arbitration in
Singapore under international arbitration rules.
The Casecnan Project is being constructed on a joint and several basis
by Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd.
(formerly known as You One Engineering & Construction Co., Ltd., and
herein referred to as "HECC"), both of which are South Korean
corporations, pursuant to a fixed-price, date-certain, turnkey
construction contract (the "Turnkey Construction Contract"). Hanbo
Corporation and HECC (sometimes collectively referred to as the
"Contractor") are under common ownership control. Hanbo Corporation
is an international construction company. HECC, which recently
emerged from a court-administered receivership, is a contractor with
over 25 years experience in tunnel construction, using both the drill-
and-blast and tunnel boring machine ("TBM") methods.
The Contractor's obligations under the Turnkey Construction Contract
are guaranteed by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a
large South Korean steel company. In addition, the Contractor's
obligations under the Turnkey Construction Contract are secured by an
unconditional, irrevocable standby letter of credit issued by Korea
First Bank ("KFB") in the approximate amount of $118,000. The total
cost of the Casecnan Project, including development, construction,
testing and startup, is estimated to be approximately $495,000.
In late January 1997, the Company was advised that Hanbo Corporation
and Hanbo Steel had each filed to seek court receivership protection
in Korea. At the present time, all of the construction work on the
Casecnan Project is being performed by the second contractor which is
party to the Turnkey Construction Contract, HECC. Although HECC,
Hanbo Corporation and Hanbo Steel are under common ownership control,
HECC has not filed for receivership protection and is believed to be
solvent. However, no assurances can be given that HECC will not file
for receivership due to the foregoing developments or that it will
remain solvent and able to perform fully its obligations under the
Turnkey Construction Contract.
The work on the Casecnan Project, which commenced in 1995, is
presently continuing on schedule and within the budget. CE Casecnan
is presently reviewing its rights, obligations and potential remedies
in respect of the recent developments regarding the co-Contractor and
the guarantor and is presently unable to speculate as to the ultimate
effect of such developments on CE Casecnan. However, CE Casecnan has
recently received confirmation from HECC that it intends to fully
perform its obligations under the Turnkey Construction Contract and
complete the Casecnan Project on schedule and within the budget.
Additionally, it has been reported that the South Korean government
has informed the Philippine government that the South Korean
government will take appropriate actions to support HECC's completion
of the Casecnan Project.
KFB has recently reconfirmed to CE Casecnan that it will honor its
obligations under the Casecnan Project letter of credit and also has
stated its support for the successful completion of the Casecnan
Project. However, Moody's Investors Service has recently issued a
warning for a possible ratings downgrade for KFB because of the
possible impact of the Hanbo Steel receivership on the substantial
loans KFB previously made to Hanbo Steel. In a related development,
the South Korean government has recently announced that it would
provide some funding to assist Hanbo Steel's creditor banks (including
KFB) and its subcontractors.
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
Notes due 2010 pursuant to an indenture dated November 27, 1995, as
amended to date (the "Casecnan Indenture"). Although no default has
occurred under the Casecnan Indenture as a result of the announced
receivership of Hanbo Corporation, CE Casecnan will continue to
closely monitor the Hanbo group and KFB developments and project
construction status and develop appropriate contingency plans.
If HECC were to materially fail to perform its obligations under the
Turnkey Construction Contract and if KFB were to fail to honor its
obligations under the Casecnan letter of credit, such actions could
have a material adverse effect on the Casecnan Project and CE
Casecnan. However, based on the information presently available to
it, CE Casecnan does not presently expect that either such event will
occur.
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, 1996, the Company's future minimum rental payments
with respect to non-cancellable operating leases were as follows:
1997 $ 9,137
1998 8,897
1999 5,337
2000 5,279
2001 5,098
Thereafter 61,204
$94,952
20. Subsequent Event
On February 26, 1997, CalEnergy Capital Trust II, a special purpose
Delaware business trust organized by the Company (the "Trust II"),
pursuant to the Amended and Restated Declaration of Trust (the
"Declaration") dated as of February 26, 1997, completed a private
placement (with certain shelf registration rights) of $150,000 of
trust preferred convertible securities, referred to as Company-
obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible debentures ("Trust
Securities"). In addition, an option to purchase an additional 600
Trust Securities, or $30,000, was exercised by the initial purchasers
to cover over-allotments.
The Trust has issued 3,600 of 6 1/4% Trust Securities with a
liquidation preference of fifty dollars each. The Company owns all of
the common securities of the Trust. The Trust Securities and the
common securities represent undivided beneficial ownership interests
in the Trust. The assets of the Trust consist solely of the Company's
6 1/4% Convertible Junior Subordinated Debentures due 2012 in an
outstanding aggregate principal amount of $180,000 ("Junior
Debentures") issued pursuant to an indenture dated as of February 20,
1997. The indenture includes an agreement by the Company to pay
expenses and obligations incurred by the Trust. Each Trust Security
will be convertible at the option of the holder thereof at any time
into 1.1655 shares of CalEnergy Common Stock (equivalent to a
conversion price of $42.90 per share of the Company's Common Stock),
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 Trust. Distributions on the Trust Securities (and
Junior Debentures) are cumulative, accrue from the date of initial
issuance and are payable quarterly in arrears, commencing June 1,
1997. 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 Indenture.
Pursuant to a Preferred Securities Guarantee Agreement (the
"Guarantee"), 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 Trust has funds available to make
such payments, quarterly distributions, redemption payments and
liquidation payments on the Trust Securities. Considered together,
the undertaking contained in the Declaration, Junior Debentures,
Indenture and Guarantee constitute a full and unconditional guarantee
by the Company of the Trust's obligations under the Trust Securities.
A portion of the net proceeds of the Trust Securities offering were
used to repay the CalEnergy Credit Facility.
21. Geographic Information
The Company operates in one principal industry segment: the
generation, distribution and supply of electricity to customers
located throughout the world. The Company's operations by geographic
area are as follows:
1996 1995 1994
Revenue
Americas 457,032 355,112 154,562
Asia 35,691 --- ---
Europe 39,191 --- ---
531,914 355,112 154,562
Operating income (loss)
Americas 203,305 155,885 77,450
Asia 17,914 --- ---
Europe 6,163 --- ---
227,382 155,885 77,450
1996 1995
Identifiable assets
Americas $2,613,830 $2,194,873
Asia 713,570 459,165
Europe 2,385,507 ---
$5,712,907 $2,654,038
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of
operations for the years ended December 31, 1996 and December 31,
1995.
Three Months Ended *
1996: (1) March 31 June 30 September 30 December 31
Sales of electricity $75,944 $104,735 $165,487 $172,768
and steam
Total revenue 90,356 115,794 179,048 190,997
Total costs and 69,398 87,482 123,169 160,433
expenses
Income before provision
for income 20,958 28,312 55,879 30,564
taxes and minority 6,497 9,040 18,325 7,959
interest
Provision for income
taxes
Net income before 14,461 19,272 37,554 22,605
minority interest --- --- --- 1,431
Minority interest
Net income attributable $14,461 $ 19,272 $ 37,544 $ 21,174
to common shares
Net income per share -
primary $ .27 $ .35 $ .67 $ 33
Net income per share -
fully diluted $ .26 $ .33 $ .59 $ .32
Three Months Ended *
1995: (2) March 31 June 30 September 30 December 31
Sales of electricity
and steam $72,978 $ 81,756 $102,423 $ 78,473
Total revenue 86,685 97,096 119,717 95,225
Total costs and
expenses 68,527 76,957 79,898 76,290
Income before provision
for income taxes and
minority interest 18,158 20,139 39,819 18,935
Provision for income
taxes 5,540 6,248 12,457 6,386
Net income before
minority interest 12,618 13,891 27,362 12,549
Minority interest 3,005 --- --- ---
Net income 9,613 13,891 27,362 12,549
Preferred dividends 1,080 --- --- ---
Net income attributable
to common shares $ 8,533 $13,891 $27,362 $ 12,549
Net income per share -
primary $ .21 $ .27 $ .52 $ .24
Net income per share -
fully diluted $ .21 $ .27 $ .48 $ .18
* The Company's operations are seasonal in nature with a
disproportionate percentage of income historically earned in the
second and third quarters.
(1) Reflects acquisitions of Northern, Falcon Seaboard and the
Partnership Interest.
(2) Reflects acquisition of Magma.
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, 1996
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and
1995 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Omaha, Nebraska
January 31, 1997
(February 27, 1997 as to Notes 6 and 20)
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