SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 1997
Commission File No. 1-9874
CALENERGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2213782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 South 36th Street, Suite 400, Omaha, NE 68131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 341-4500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Former name, former address and former fiscal year, if changed
since last report. N/A
82,242,434 shares of Common Stock, $0.0675 par value were
outstanding as of October 31, 1997.
CALENERGY COMPANY, INC.
Form 10-Q
September 30, 1997
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Independent Accountants' Report 3
Consolidated Balance Sheets, September 30, 1997 and December 31,
1996 4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 3. Defaults on Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 35
Exhibit Index 36
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
CalEnergy Company, Inc.
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of
CalEnergy Company, Inc. and subsidiaries as of September 30,
1997, and the related consolidated statements of operations for
the three and nine month periods ended September 30, 1997 and
1996 and the related consolidated statements of cash flows for
the nine month periods ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of CalEnergy
Company, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented
herein), and in our report dated January 31, 1997 (February 27,
1997 as to Notes 6 and 20), we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of December 31, 1996 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 13, 1997
CALENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
________________________________
September 30 December 31
1997 1996
(unaudited)
ASSETS
Cash and cash equivalents $ 677,313 $ 424,500
Joint venture cash and investments 37,589 47,764
Restricted cash 125,533 106,968
Short-term investments 1,481 4,921
Accounts receivable 332,991 342,307
Properties, plants, contracts and
equipment, net 3,517,989 3,225,496
Excess of cost over fair value of
net assets acquired, net 979,172 790,920
Equity investments 236,539 238,856
Deferred charges and other assets 476,432 448,424
Total assets $ 6,385,039 $ 5,630,156
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 161,968 $ 218,164
Other accrued liabilities 1,166,317 668,612
Parent company debt 953,831 1,146,685
Subsidiary and project debt 2,187,907 1,678,392
Deferred income taxes 345,711 469,199
Total liabilities 4,815,734 4,181,052
Deferred income 28,044 29,067
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary trusts 553,930 103,930
Preferred securities of subsidiary 56,387 136,065
Minority interest 125,834 299,252
Common stock and options subject to
redemption (Note 9) 654,736 -
Stockholders' equity:
Preferred stock - authorized 2,000
shares, no par value - -
Common stock - par value $0.0675 per
share, authorized 180,000 shares,
issued 63,880 and 63,747 shares,
outstanding 63,136 and 63,448 at
September 30, 1997 and
December 31, 1996, respectively 4,312 4,303
Additional paid in capital 561,263 563,567
Retained earnings 266,415 297,520
Common stock and options subject to
redemption (Note 9) (654,736) -
Treasury stock - 744 and 299 common
shares at September 30, 1997 and
December 31, 1996, respectively,
at cost (26,068) (8,787)
Unearned compensation-restricted stock (475) (5,471)
Unrealized gain on investments, net 9,035 -
Cumulative effect of foreign currency
translation adjustment (9,372) 29,658
Total stockholders' equity 150,374 880,790
Total liabilities and stockholders'
equity $ 6,385,039 $ 5,630,156
The accompanying notes are an integral part of these financial statements.
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
____________(unaudited)___________
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Revenues:
Operating revenue $ 527,896 $ 165,487 $ 1,576,407 $ 346,166
Interest and other income 23,997 13,561 66,456 39,032
Total revenues 551,893 179,048 1,642,863 385,198
Costs and expenses:
Cost of sales 239,081 - 758,011 -
Operating expense 82,513 40,182 243,004 91,840
General and administration 12,068 6,518 37,560 15,814
Depreciation and amortization 69,877 36,587 207,789 80,300
Loss on equity investment in
Casecnan 1,364 1,192 5,321 3,966
Interest expense 73,840 45,017 216,106 116,521
Less interest capitalized (10,843) (7,951) (33,603) (31,459)
Total costs and expenses 467,900 121,545 1,434,188 276,982
Income before income taxes 83,993 57,503 208,675 108,216
Provision for income taxes 27,929 18,325 74,520 33,862
Income before minority interest 56,064 39,178 134,155 74,354
Minority interest 9,656 1,624 29,410 3,067
Net income before
extraordinary item 46,408 37,554 104,745 71,287
Extraordinary item, net of
minority interest
of $58,222 (135,850) - (135,850) -
Net income (loss) available for
common stockholders $ (89,442) $ 37,554 $ (31,105) $ 71,287
Net income per share before
extraordinary item $ .71 $ .67 $ 1.59 $ 1.29
Extraordinary item (2.07) - (2.06) -
Net income (loss) per share-
primary $ (1.36) $ .67 $ (.47) $ 1.29
Average number of common and common
equivalent shares outstanding 65,678 56,296 65,765 55,362
Fully diluted net income
per share $ .66 $ .59 $ 1.54 $ 1.18
before extraordinary item
Fully diluted shares outstanding 76,429 67,740 73,592 66,397
before extraordinary item
Net income (loss) per share -
fully diluted $ (1.36) $ .59 $ (.47) $ 1.18
Fully diluted shares 65,678 67,740 65,765 66,397
The accompanying notes are an integral part of these financial statements.
CALENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30
1997 1996
Cash flows from operating activities:
Net income (loss) $ (31,105) $ 71,287
Adjustments to reconcile net cash flow from
operating activities:
Depreciation and amortization 187,813 73,873
Amortization of excess of cost over fair
value of net assets acquired 19,976 6,427
Amortization of deferred financing and other costs 26,858 45,325
Provision for deferred income taxes 46,502 16,188
Loss (income) on equity investments (9,774) 968
Loss applicable to minority interest (42,767) -
Changes in other items:
Accounts receivable 8,608 (34,372)
Accounts payable and accrued liabilities 112,356 3,924
Deferred income (7,704) (788)
Net cash flows from operating activities 310,763 182,832
Cash flows from investing activities:
Purchase of Northern Electric, Falcon and
Partnership Interest, net of cash acquired (631,808) (264,621)
Distributions from equity investments 18,793 4,505
Philippine construction (21,351) (121,312)
Indonesian construction (87,742) (48,721)
Exploration and other development costs (9,757) (3,746)
Capital expenditures relating to operations (116,130) (60,816)
Salton Sea IV construction - (57,513)
Decrease in short-term investments 2,494 31,326
Decrease (increase) in restricted cash (18,565) 75,926
Decrease in other assets 67,144 4,866
Net cash flows from investing activities (796,922) (440,106)
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred securities of subsidiary trust 450,000 103,930
Proceeds from parent company debt - 259,136
Repayment of parent company debt (195,000) -
Proceeds from subsidiary and project debt 603,392 275,725
Repayments of subsidiary and project debt (74,409) (164,977)
Proceeds from sale of common and treasury
stock and exercise of options 6,495 13,950
Decrease in amounts due from joint ventures 22,705 8,666
Deferred charges relating to debt financing (21,589) (14,212)
Purchase of treasury stock (23,767) (3,221)
Net cash flows from financing activities 767,827 478,997
Effect of exchange rate changes, net (39,030) -
Net increase in cash and cash equivalents 242,638 221,723
Cash and cash equivalents at beginning of period 472,264 149,704
Cash and cash equivalents at end of period $ 714,902 $ 371,427
Supplemental disclosures:
Interest paid, net of amount capitalized $ 211,318 $ 48,477
Income taxes paid $ 27,990 $ 17,790
The accompanying notes are an integral part of these financial statements.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
1. General:
In the opinion of management of CalEnergy Company, Inc. (the
"Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
position as of September 30, 1997 and the results of operations
for the three and nine months ended September 30, 1997 and 1996,
and cash flows for the nine months ended September 30, 1997 and
1996.
The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries, and its
proportionate share of the partnerships and joint ventures in
which it has an undivided interest in the assets and is
proportionally liable for its share of liabilities. Other
investments and corporate joint ventures where the Company has
the ability to exercise significant influence are accounted for
under the equity method. Investments, where the Company's
ability to influence is limited, are accounted for under the cost
method of accounting.
The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
Certain amounts in the 1996 financial statements and supporting
footnote disclosures have been reclassified to conform to the
1997 presentation. Such reclassification did not impact
previously reported net income or retained earnings.
2. Other Footnote Information:
Reference is made to the Company's most recently issued annual
report that included information necessary or useful to the
understanding of the Company's business and financial statement
presentations.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
3. Properties, Plants, Contracts and Equipment:
Properties, plants, contracts and equipment comprise the
following:
September 30, December 31,
1997 1996
(unaudited)
Operating assets:
Distribution system $ 1,177,282 $ 928,575
Power plants 1,452,638 1,277,663
Wells and resource development 391,437 377,731
Power sales agreements 227,535 227,535
Other assets 237,784 176,483
Total operating assets 3,486,676 2,987,987
Less accumulated depreciation and
amortization (439,665) (271,216)
Net operating assets 3,047,011 2,716,771
Mineral and gas reserves, net 293,649 270,851
Construction in progress:
Malitbog - 152,411
Indonesia 169,617 81,875
Other development 7,712 3,588
Total $ 3,517,989 $ 3,225,496
4. Income Taxes:
The Company's effective tax rate in 1997 is greater than the
Federal statutory rate primarily due to foreign and state taxes
partially offset by the depletion deduction. The significant
components of the deferred tax liability are the temporary
differences between the financial reporting basis and income tax
basis of the power plants, distribution system and the well and
resource development costs, offset by the benefit of investment
and geothermal energy tax credits.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
5. Issuance of Convertible Preferred Securities:
On February 26, 1997 a subsidiary of the Company completed a
private placement (with certain shelf registration rights) of
$150,000 aggregate amount of 6 1/4% Trust Convertible Preferred
Securities ("Trust Securities"). In addition, an option to
purchase an additional 600 Trust Securities, or $30,000 aggregate
amount, was exercised by the initial purchasers to cover over-
allotments in connection with the placement. Each Trust Security
has a liquidation preference of fifty dollars and is convertible
at any time at the option of the holder into 1.1655 shares of
Company Common Stock (equivalent to a conversion price of $42.90
per common share) subject to adjustments in certain
circumstances.
On August 12, 1997, a subsidiary of the Company completed a
private placement (with certain shelf registration rights) of
$225,000 aggregate amount of 6 1/2% Trust Convertible Preferred
Securities (the "6 1/2% Trust Securities"). In addition, an
option to purchase an additional 900 of the 6 1/2% Trust
Securities, or $45,000 aggregate amount, was exercised by the
initial purchasers to cover overallotments in connection with the
placement. Each 6 1/2% Trust Security has a liquidation
preference of fifty dollars and is convertible at any time at the
option of the holder into 1.047 shares of Company Common Stock
(equivalent to a conversion price of $47.75 per common share)
subject to adjustments in certain circumstances.
6. Purchase of Northern Electric:
On December 24, 1996 CE Electric plc ("CE Electric"), which is
currently 70% owned indirectly by the Company and 30% owned
indirectly by Peter Kiewit Sons', Inc. ("PKS"), acquired majority
ownership of the outstanding ordinary share capital of Northern
Electric plc ("Northern") pursuant to a tender offer (the
"Northern Tender Offer") commenced in the United Kingdom by CE
Electric on November 5, 1996. As of March 18, 1997, CE Electric
effectively owned 100% of Northern's ordinary shares.
The Company and PKS contributed to CE Electric approximately
$410,000 and $176,000, respectively, of the approximately
$1,300,000 required to acquire all of Northern's ordinary and
preference shares in connection with the Northern 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 on October 28, 1996 (the "CalEnergy
Credit Facility"). The
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
Company has repaid the entire CalEnergy Credit Facility through
the use of proceeds of the Trust Securities offering. The
remaining funds necessary to consummate the Northern Tender Offer
are being provided from a 560,000 pounds ($903,784) Term Loan and
Revolving Facility Agreement, dated as of October 28, 1996 (the
"U.K. Credit Facility") obtained by CE Electric UK Holdings. The
Company has not guaranteed, and it is not otherwise subject to
recourse for, amounts borrowed under the U.K. Credit Facility.
As of September 30, 1997, CE Electric UK Holdings had borrowed
approximately 405,000 pounds ($653,630) under the U.K. Credit Facility
to pay for Northern ordinary and preference shares purchased to
date, including related costs.
In 1996, the Company also acquired Falcon Seaboard Resources,
Inc. and the remaining 50% ownership interest in the Edison
Mission Energy Partnerships. Unaudited pro forma combined
revenue, net income and primary earnings per share before
extraordinary item of the Company for the nine months ended
September 30, 1997, as if the acquisitions had occurred at the
beginning of the year of acquisition after giving effect to
certain pro forma adjustments related to the acquisitions were
$1,642,863, $105,352 and $1.60 compared to $1,575,511, $50,730,
and $.92 for the same period last year.
7. Commitments and Contingencies:
In November 1995, the Company closed the financing and commenced
construction of the Casecnan Project, a combined irrigation and
150 net MW hydroelectric power generation project (the "Casecnan
Project") located in the central part of the island of Luzon in
the Republic of the Philippines.
CE Casecnan Water and Energy Company, Inc., a Philippine
Corporation ("CE Casecnan") which is currently approximately 35%
indirectly owned by the Company and currently approximately 35%
indirectly owned by PKS, is developing the Casecnan Project. The
PKS interest will be purchased by the Company as part of the KDG
Acquisition. CE Casecnan financed a portion of the costs of the
Casecnan Project through the issuance of $125,000 of its 11.45%
Senior Secured Series A Notes due 2005 and $171,500 of its 11.95%
Senior Secured Series B Bonds due 2010 and $75,000 of its Secured
Floating Rate Notes due 2002, pursuant to an indenture dated as
of November 27, 1995, as amended to date.
The Casecnan Project was being constructed pursuant to a fixed-
price, date-certain, turnkey construction contract (the "Hanbo
Contract") on a joint and several basis by Hanbo Corporation
("Hanbo") and Hanbo Engineering and Construction Co., Ltd.
("HECC"), both of which are South Korean corporations. As of May
7, 1997, CE Casecnan terminated the Hanbo Contract due to
defaults by Hanbo and HECC including the insolvency of each such
company. CE Casecnan entered into a new turnkey engineering,
procurement and construction contract to complete the
construction of the Casecnan Project (the "Replacement
Contract"). The work under the Replacement Contract is being
conducted by a consortium of contractors and subcontractors
including Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and
Colenco Power Engineering Ltd. and will be headed by Cooperativa
Muratori Cementisti CMC di Ravenna and Impressa Pizzarottie & C.
Spa (collectively, the "Replacement Contractor").
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
In connection with the Hanbo Contract termination, CE Casecnan
tendered a certificate of drawing to Korea First Bank ("KFB") on
May 7, 1997 under the irrevocable standby letter of credit issued
by KFB as security under the Hanbo Contract to pay for certain
transition costs and other presently ascertainable damages under
the Hanbo Contract. As a result of KFB's wrongful dishonor of
the draw request, CE Casecnan filed an action in New York State
Court. That Court granted CE Casecnan's request for a temporary
restraining order requiring KFB to deposit $79,329, the amount of
the requested draw, in an interest bearing account with an
independent financial institution in the United States. KFB
appealed this order, but the appellate court denied KFB's appeal
and on May 19, 1997, KFB transferred funds in the amount of
$79,329 to a segregated New York bank account pursuant to the
Court order. If KFB were to fail to honor its obligations under
the Casecnan letter of credit, such action could have a material
adverse effect on the Casecnan Project and CE Casecnan.
On August 6, 1997, CE Casecnan announced that it had issued a
notice to proceed to the Replacement Contractor. The Replacement
Contractor was already on site and has fully mobilized and
commenced engineering, procurement and construction work on the
Casecnan Project. The receipt of the letter of credit funds from
KFB remains essential and CE Casecnan will continue to press KFB
to honor its clear obligations under the letter of credit and to
pursue Hanbo and KFB for any additional damages arising out of
their actions to date.
On August 27, 1997, CE Casecnan announced that it had received a
favorable summary judgment ruling in New York State Court against
KFB. The judgment, which has been appealed by the bank, requires
KFB to honor the $79,329 drawing by CE Casecnan on the $117,850
irrevocable standby letter of credit.
On September 29, 1997, CE Casecnan tendered a second certificate
of drawing for $10,828 to KFB. KFB also wrongfully dishonored
this draw, but pursuant to a stipulation agreed to deposit the
draw amount in an interest bearing account with the same
independent financial institution in the United States pending
resolution of the appeal regarding the first draw and agreed to
expedite the appeal.
On or about September 3, 1997, Hanbo and HECC filed a Request for
Arbitration before the International Chamber of Commerce ("ICC").
The Request for Arbitration asserts various claims by Hanbo and
HECC against CE Casecnan relating to the terminated Hanbo
Contract and seeking damages. On October 10, 1997, CE Casecnan
served its answer and defenses in response to the Request for
Arbitration as well as counterclaims against Hanbo and HECC for
breaches of the Hanbo Contract. The arbitration proceedings
before the ICC are ongoing and CE Casecnan intends to pursue
vigorously its claims against Hanbo, HECC and KFB in the
proceedings described above.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
On September 20, 1997, a Presidential Decree (the "Decree") was
issued in Indonesia, providing for government action to the
effect that, in order to address certain recent fluctuations in
the value of the Indonesian currency, the start-up dates for a
number of private power projects would be: (i) continued
according to their initial schedule (because construction process
was underway); (ii) postponed as to their start-up dates (because
they are not yet in progress) until economic conditions have
recovered; or (iii) reviewed with a view to being continued,
postponed or rescheduled, depending on the status of those
projects. In the Decree, Dieng Units 1, 2 and 3 are approved to
continue according to their initial schedule; Patuha Unit 1 and
Bali Units 1 and 2 are to receive further review to determine
whether or not they should be continued in accordance with their
initial schedule; and Bali Units 3 and 4, Patuha Units 2, 3 and 4
and Dieng Unit 4 are to be postponed for an unspecified period.
In this regard, the Company notes that its contracts and
government undertakings for the Dieng, Patuha and Bali projects
do not by their terms permit such delays by the government and
that the Company has obtained political risk insurance coverage
for its Indonesian projects. Moreover, since the Decree was
issued, officials in the Government of Indonesia have confirmed
to the Company that the Indonesian government intends to fully
honor its contractual obligations and does not intend to impact
the schedule of any projects for which financing has already been
arranged or on which construction related or well drilling work
has already commenced, and since Patuha Unit 2 and all of the
Company's projects in the "future review category" meet one or
both of those standards, the Company believes that the schedule
for these projects should not be delayed. The Company does not
believe that any delay in the "postponed" category of projects
will have a material adverse effect on its planned operations in
Indonesia, since all but one of these units were not scheduled to
commence construction until after 1998. The Company believes
that, given Indonesia's demonstrated need for power and its
emphasis on diversifying fuel sources and maintaining sufficient
amounts of oil for export, the Company's projects are
significantly advantaged by their indigenous geothermal fuel
source and will all proceed. However, until further information
is made available by the Indonesian government with respect to
the projects that are under review or postponed, no assurance can
be given that such will be the case.
On June 9, 1997, Edison filed a complaint alleging breach of
certain ISO4 power purchase agreements ("SO4 Agreements") between
Edison and Coso Finance Partners, Coso Power Partners and Coso
Energy Developers as a result of alleged improper venting of
certain noncondensible gases at the Coso geothermal energy
project located in California (partnerships in which CalEnergy
holds an approximate 50% ownership interest, collectively the
"Coso Partnerships"). In the complaint Edison seeks unspecified
damages, including the refund of certain amounts previously paid
under the SO4 Agreements, and termination of the SO4 Agreements.
The complaint was recently filed and the proceeding is in its
early procedural stages. The Coso Partnerships believe this
litigation has entirely no merit. The Coso Partnerships intend
to vigorously defend this action and prosecute all available
counterclaims against Edison.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
On February 14, 1995, NYSEG filed with the FERC a Petition for a
Declaratory Order, Complaint, and Request for Modification of
Rates in Power Purchase Agreements Imposed Pursuant to the Public
Utility Regulatory Policies Act of 1978 ("Petition") seeking FERC
(i) to declare that the rates NYSEG pays under the Saranac PPA,
which was approved by the New York Public Service Commission (the
"PSC") were in excess of the level permitted under PURPA and (ii)
to authorize the PSC to reform the Saranac PPA. On March 14,
1995, the Saranac Partnership intervened in opposition to the
Petition asserting, inter alia, that the Saranac PPA fully
complied with PURPA, that NYSEG's action was untimely and that
the FERC lacked authority to modify the Saranac PPA. On March
15, 1995, the Company intervened also in opposition to the
Petition and asserted similar arguments. On April 12, 1995, the
FERC by a unanimous (5-0) decision issued an order denying the
various forms of relief requested by NYSEG and finding that the
rates required under the Saranac PPA were consistent with PURPA
and the FERC's regulations. On May 11, 1995, NYSEG requested
rehearing of the order and, by order issued July 19, 1995, the
FERC unanimously (5-0) denied NYSEG's request. On June 14, 1995,
NYSEG petitioned the United States Court of Appeals for the
District of Columbia Circuit (the "Appeals Court") for review of
FERC's April 12, 1995 order. FERC moved to dismiss NYSEG's
petition for review on July 28, 1995. The Saranac Partnership
intervened in the appeal and concurred with NYSEG on the issue of
the Court's jurisdiction while disagreeing on the merits. On
July 11, 1997, the Appeals Court dismissed NYSEG's appeal holding
that it was without jurisdiction to review the FERC's order and
that any enforcement action under PURPA lies in federal district
court.
On August 7, 1997, NYSEG filed a complaint in the U.S. District
Court for the Northern District of New York against the FERC, the
PSC (and the Chairman, Deputy Chairman and the Commissioners of
the PSC as individuals in their official capacity), the Saranac
Partnership and Lockport Energy Associates, L.P. ("Lockport")
concerning the power purchase agreements that NYSEG entered into
with Saranac Partners and Lockport.
NYSEG's suit asserts that the PSC and the FERC improperly
implemented PURPA in authorizing the pricing terms that NYSEG,
the Saranac Partnership and Lockport agreed to in those
contracts. The action raises similar legal arguments to those
rejected by the FERC in its April and July 1995 orders. NYSEG in
addition asks for retroactive reformation of the contracts
as of the date of commercial operation and seeks a refund of $281
million from the Saranac Partnership. Saranac believes that
NYSEG's claims are without merit for the same reasons described
in the FERC's orders.
8. Extraordinary Item:
On July 31, 1997, the Finance Act in the United Kingdom was
passed by Parliament and included the introduction of a one time
"windfall tax" equal to 23% of the difference between the price
paid for Northern upon privatization and the Labour government's
assessed "value" of Northern as calculated by reference to a
formula set forth in the July budget. This amounted to $135,850,
net of minority interest of $58,222, which was recorded as an
extraordinary item. The tax is payable in installments in
December 1997 and December 1998.
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
9. Energy Project Joint Venture Acquisition and Stock
Repurchase:
On September 11, 1997, the Company signed a definitive agreement
with Kiewit Diversified Group ("KDG"), a wholly owned subsidiary
of PKS, for the Company to purchase KDG's ownership interest in
various project partnerships and CalEnergy common shares (the
"KDG Acquisition"). Accordingly, common stock and options
subject to redemption have been reclassified in the consolidated
balance sheet.
KDG's current ownership interest in CalEnergy comprises
approximately 20,231 shares of common stock (assuming exercise by
KDG of one million options to purchase CalEnergy shares) which,
as of September 30, 1997, represents approximately 30% of
CalEnergy's outstanding shares (26% on a fully diluted basis), as
well as the following minority project interests: Mahanagdong
(45%), Casecnan (35%), Dieng (47%), Patuha (44%), Bali (30%) and
CE Electric UK (30%). CalEnergy is the managing partner and
operator of each such project.
The agreement provides that CalEnergy will pay approximately
$1,155,000 for KDG's stock holdings in CalEnergy and KDG's
various power project interests. Final closing of the
transaction is expected to occur in January 1998. CalEnergy
intends to fund this acquisition with available cash, the net
proceeds of the equity offering completed October 17, 1997 and
the net proceeds of the debt offering completed October 28, 1997.
10. Subsequent Events:
On October 17, 1997, the Company completed the public offering of
17.1 million shares of its common stock ("Common Stock") at $37
7/8 per share (the "Public Offering"). In addition, 2 million
shares of Common Stock were purchased from CalEnergy in a direct
sale by a trust affiliated with Walter Scott, Jr., the Chairman
and Chief Executive Officer of PKS (the "Direct Sale"),
contemporaneously with the closing of the Public Offering. Net
proceeds from the Public Offering and the Direct Sale were
approximately $699,920.
On October 28, 1997, the Company completed the sale of $350,000
aggregate principal amount of its 7.63% Senior Notes due 2007
(the "Senior Note Offering").
CALENERGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)
________________________________
11. Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board
("FASB") adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings per Share." SFAS 128, which becomes
effective for financial statements of the Company issued for
years ending after December 15, 1997, replaces primary and fully
diluted earnings per share, as disclosed under current
pronouncements, with basic and diluted earnings per share. Pro
forma basic earnings per share before extraordinary item for the
three months ending September 30, 1997 and 1996 are $.73 and
$.71, respectively. For the nine months ending September 30,
1997 and 1996, pro forma basic earnings per share before
extraordinary item are $1.65 and $1.37, respectively. Pro forma
diluted earnings per share before extraordinary item for the
three months ending September 30, 1997 and 1996 are $.67 and
$.61, respectively. For the nine months ending September 30,
1997 and 1996, pro forma diluted earnings per share before
extraordinary item are $1.56 and $1.22, respectively.
In June 1997, the FASB adopted Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", and No. 131,
"Disclosures about Segments of an Enterprise and Related
Information". Both statements will be effective for the Company
beginning January 1, 1998. The Company has not yet determined
the impact of these statements on current disclosures.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations:
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included
in the accompanying statements of operations.
As a result of the acquisition of Northern, the Company's future
results will differ significantly from the Company's historical
results.
Acquisitions:
On December 24, 1996, CE Electric acquired majority ownership of
the outstanding ordinary share capital of Northern pursuant to
the tender offer ("Northern Tender Offer"). As of March 18,
1997, CE Electric effectively owned 100% of Northern's ordinary
shares.
In August 1996, the Company acquired Falcon Seaboard Resources,
Inc. ("Falcon Seaboard") for approximately $226,000, thereby
acquiring significant ownership in 520 MW of natural gas-fired
electric production facilities located in New York, Texas and
Pennsylvania and a related gas transmission pipeline.
In April 1996, the Company completed the buyout for approximately
$70,000 of its partner's interests ("Partnership Interest") in
four electric generating plants in Southern California, resulting
in sole ownership of the Imperial Valley Project.
Business of Northern:
During the three and nine months ended September 30, 1997, a
significant portion of the Company's results of operations were
attributable to Northern's operations which consist primarily of
the distribution and supply of electricity and other auxiliary
businesses. Northern's operations are seasonal in nature with a
disproportionate percentage of revenues and earnings historically
being earned in the Company's first and fourth quarters.
Northern receives electricity from the national grid transmission
system and distributes electricity to each customer's premises
using its network of transformers, switchgear and cables.
Substantially all of the customers in Northern's authorized area
are connected to Northern's network and can only be supplied
electricity through Northern's distribution system, regardless of
whether the electricity is supplied by Northern's supply business
or by other suppliers, thus providing Northern with distribution
volume that is stable from year to year. Northern charges its
customers access fees for the use of the distribution system.
The prices for distribution to most customers are controlled by a
prescribed formula that limits increases (and may require
decreases) based upon the rate of inflation in the United Kingdom
and other regulatory action.
Northern's supply business primarily involves the bulk purchase
of electricity, through a central pool, and subsequent resale to
individual customers. Until March 31, 1998, Northern is the
exclusive supplier of electricity to premises in its authorized
area, except where the maximum
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Business of Northern: (continued)
demand of a customer is greater than 100kW. The supply business
generally is a high volume business which tends to operate at
lower profitability levels than the distribution business.
Currently the income received by the supply business from
customers with demand under 100kW is controlled by a prescribed
formula, while income received from other customers is not
regulated.
Power Generation Projects:
For purposes of consistent financial presentation, plant capacity
factors for Navy I, Navy II, and BLM (collectively the "Coso
Project") are based upon a capacity amount of 80 net MW for each
plant. Plant capacity factors for Vulcan, Hoch (Del Ranch),
Elmore and Leathers (collectively the "Partnership Project") are
based on capacity amounts of 34, 38, 38, and 38 net MW
respectively, and for Salton Sea I, Salton Sea II, Salton Sea III
and Salton Sea IV plants (collectively the "Salton Sea Project")
are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW
respectively (the Partnership Project and the Salton Sea Project
are collectively referred to as the "Imperial Valley Project").
Plant capacity factors for Saranac, Power Resources, NorCon and
Yuma (collectively the "Gas Plants") are based on capacity
amounts of 240, 200, 80, and 50 net MW, respectively. Each plant
possesses an operating margin which allows for production in
excess of the amount listed above. Utilization of this operating
margin is based upon a variety of factors and can be expected to
vary between calendar quarters, under normal operating
conditions.
The Coso Project and the Partnership Project sell all electricity
generated by the respective plants pursuant to seven individual
long-term SO4 Agreements between the respective projects and
Southern California Edison Company ("Edison"). These SO4
Agreements provide for capacity payments, capacity bonus payments
and energy payments. Edison makes fixed annual capacity payments
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 and the capacity payment is
significantly higher in the months of June through September.
Energy is sold at increasing scheduled rates for the first ten
years after firm operation and thereafter at Edison's Avoided
Cost of Energy.
The scheduled energy price periods of the Coso Project SO4
Agreements extended until at least August 1997 for the Navy I
Partnership and extend until at least March 1999 and January 2000
for each of the units operated by the BLM and Navy II
Partnerships, respectively.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan
Partnership and extend until December 1998 for the Hoch (Del
Ranch) and Elmore Partnerships, and December 1999 for the
Leathers Partnership.
Excluding Vulcan, which is receiving Edison's Avoided Cost of
Energy, the Company's SO4 Agreements provide for energy rates
ranging from 13.6 cents per kWh in 1997 to 15.6 cents per kWh in 1999.
The Salton Sea I Project sells electricity to Edison pursuant to
a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy
payments. The energy payment is calculated using a Base Price
which is subject to quarterly adjustments based on a basket of
indices. The time period weighted average energy payment for
Salton Sea I was 5.3 cents per kWh during the nine months ended
September 30, 1997. As the Salton Sea I PPA is not an SO4
Agreement, the energy payments do not revert to Edison's Avoided
Cost of Energy.
The Salton Sea II and Salton Sea III Projects sell electricity to
Edison pursuant to 30-year modified SO4 Agreements that provide
for capacity payments, capacity bonus payments and energy
payments. The price for contract capacity and contract capacity
bonus payments is fixed for the life of the modified SO4
Agreements. The energy payments for the first ten year period,
which expires April 4, 2000 for Salton Sea II and February 13,
1999 for Salton Sea III, are levelized at a time period weighted
average of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and
Salton Sea III, respectively. Thereafter, the monthly energy
payments will be at 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
March 31, 2004.
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.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
For the nine months ended September 30, 1997, Edison's average
Avoided Cost of Energy was 3.2 cents per kWh which is substantially
below the contract energy prices earned for the nine months ended
September 30, 1997. Estimates of Edison's future Avoided Cost of
Energy vary substantially from year to year. The Company cannot
predict the likely level of Avoided Cost of Energy prices under
the SO4 Agreements and the modified SO4 Agreements at the
expiration of the scheduled payment periods. The revenues
generated by each of the projects operating under SO4 Agreements
could decline significantly after the expiration of the
respective scheduled payment periods.
The Upper Mahiao Project (the "Upper Mahiao Project") was "deemed
complete" in June 1996, meaning that construction of the plant
was completed on time by the Company but the required
transmission line was not completed by PNOC, and accordingly, the
Upper Mahiao Project began receiving capacity payments pursuant
to the Upper Mahiao Energy Conversion Agreement ("ECA") in July
of 1996. The Upper Mahiao Project is structured as a ten year
build-own-operate-transfer ("BOOT"), in which the Company's
subsidiary CE Cebu Geothermal Power Company, Inc. ("CE Cebu"),
the project company, is responsible for providing operations and
maintenance during the ten year BOOT period. The electricity
generated by the Upper Mahiao geothermal power plant is sold to
the PNOC - Energy Development Corporation ("PNOC-EDC"), which is
also responsible for supplying the facility with the geothermal
steam. After the ten year cooperation period, and the recovery
by the Company of its capital investment plus incremental return,
the plant will be transferred to PNOC-EDC at no cost.
PNOC-EDC is obligated to pay for electric capacity that is
nominated each year by CE Cebu, irrespective of whether PNOC-EDC
is willing or able to accept delivery of such capacity. PNOC-EDC
pays to CE Cebu a fee (the "Capacity Fee") based on the plant
capacity nominated to PNOC-EDC in any year (which, at the plant's
design capacity, is approximately 95% of total contract revenues)
and a fee (the "Energy Fee") based on the electricity actually
delivered to PNOC-EDC (approximately 5% of total contract
revenues). 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 is paid in Philippine pesos and 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.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
Unit I of the Malitbog Project (the "Malitbog Project") was
deemed complete in July 1996 and Units II and III in July 1997.
The Malitbog Project is owned and operated by Visayas Geothermal
Power Company ("VGPC"), a Philippine general partnership that is
wholly owned, indirectly, by the Company. Under its contract,
VGPC is to sell 100% of its output on substantially the same
basis as described above for the Upper Mahiao Project to PNOC-
EDC, which will in turn sell the power to the National Power
Corporation of the Philippines ("NPC"). However, VGPC receives
100% of its revenues from such sales in the form of capacity
payments. As with the Upper Mahiao Project, the Malitbog Project
is structured as a ten year BOOT, in which the Company 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 Mahanagdong Project (the "Mahanagdong Project") was deemed
complete in July 1997 and accordingly, the Mahanagdong Project
began receiving capacity payments pursuant to the Mahanagdong
Energy Conversion Agreement ("ECA") in August of 1997. The
Mahanagdong Project is owned and operated by CE Luzon Geothermal
Power Company, Inc., a Philippine corporation, that is expected
to be indirectly owned 45% by the Company, 45% by PKS and up to
10% by another industrial company. The PKS interest will be
purchased by the Company as part of the KDG Acquisition. The
electricity generated by the Mahanagdong Project will be sold to
PNOC-EDC on a "take or pay" basis, which is also responsible for
supplying the facility with the geothermal steam. The terms of
the Mahanagdong ECA are substantially similar to those of the
Upper Mahiao ECA. All of PNOC-EDC's obligations under the
Mahanagdong ECA are supported by the Government of the
Philippines through a performance undertaking. The capacity fees
are expected to be approximately 97% of total revenues at the
design capacity levels and the energy fees are expected to be
approximately 3% of such total revenues.
The Saranac Project sells electricity to New York State Electric
& Gas pursuant to a 15-year negotiated power purchase agreement
(the "Saranac PPA"), which provides for capacity and energy
payments. Capacity payments, which in 1997 total 2.2 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 6.6 cents per kWh in 1997, escalate at approximately
4.4% annually for the remaining term of the contract. The
Saranac PPA expires in June of 2009.
The Power Resources Project sells electricity to Texas Utilities
Electric Company ("TUEC") pursuant to a 15-year negotiated power
purchase agreement (the "Power Resources PPA"), which provides
for capacity and energy payments. Capacity payments and energy
payments, which in 1997 are $3,032 per month and 2.96 cents per kWh,
respectively, escalate at 3.5% annually for the remaining term of
the contract. The Power Resources PPA expires in September 2003.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Power Generation Projects: (continued)
The NorCon Project sells electricity to Niagara Mohawk Power
Corporation ("NIMO") pursuant to a 25-year negotiated power
purchase agreement (the "NorCon PPA") which provides for energy
payments calculated pursuant to an adjusting formula based on
NIMO's ongoing Tariff Avoided Cost and the contractual Long-Run
Avoided Cost. The NorCon PPA term extends through December 2017.
The NorCon Project has had a number of on-going contractual
disputes with NIMO which are unresolved and in August 1996 NIMO
proposed a buyout of the NorCon PPA as part of a generic
restructuring by NIMO of all its qualifying facility contracts in
an effort to restructure NIMO's purchased power obligations to
meet the challenge of industry deregulation and avoid what NIMO
alleges as the risk of a possible NIMO insolvency. The Company
believes that any contractual restructuring or even a NIMO
insolvency would not have a material adverse effect on its
consolidated financial results of operations.
The Yuma Project sells electricity to San Diego Gas & Electric
Company ("SDG&E") under an existing 30-year power purchase
contract. The energy is sold at SDG&E's Avoided Cost of Energy
and the capacity is sold to SDG&E at a fixed price for the life
of the power purchase contract. The contract term extends
through May 2024.
Results of Operations for Three and Nine Months Ended September
30, 1997 and 1996:
Operating revenue increased in the third quarter of 1997 to
$527,896 from $165,487 for the same period in 1996, a 219.0%
increase. The acquisition of Northern accounted for $343,923 of
this increase. The remainder of the increase is due to the
ownership of Falcon Seaboard for the full quarter as well as the
commencement of earnings of Malitbog.
For the nine month period ended September 30, 1997, operating
revenue increased to $1,576,407 from $346,166 for the same period
in 1996, a 355.4% increase. The acquisition of Northern
accounted for $1,099,997 of this increase. The remainder of the
increase is due to the acquisitions of Falcon Seaboard and the
Partnership Interest as well as the commencement of earnings of
Salton Sea IV, Upper Mahiao and Malitbog.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations for Three and Nine Months Ended September
30, 1997 and 1996 (continued):
The following operating data represents the aggregate capacity
and electricity production of the domestic geothermal projects:
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Overall capacity factor 102.6% 106.8% 101.8% 104.2%
kWh produced (in thousands) 1,149,600 1,196,300 3,382,900 3,324,800
Capacity NMW (weighted average)* 507.4 507.4 507.4 485.4
* Weighted average for the commencement of operations at the
Salton Sea IV in 1996.
The capacity factor decreased for the three and nine months ended
September 30, 1997 compared to the same periods in 1996 due to
marginally decreasing production at the Coso Project and
scheduled turbine overhauls at BLM, Vulcan and Del Ranch in April
1997.
The following operating data represents the aggregate capacity
and electricity production of the Gas Plants:
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Overall capacity factor 82.4% 87.1% 85.7% 88.7%
kWh produced (in thousands) 1,036,780 1,095,982 3,199,930 3,323,287
Installed capacity NMW 570 570 570 570
The capacity factor of the Gas Plants reflects certain
contractual curtailments. The capacity factors adjusted for
these contractual curtailments are 97.2% and 97.8% for the three
and nine months ended September 30, 1997, compared with 100.7%
and 100.1% for the same periods in 1996. Decreases from the
prior periods were primarily due to scheduled maintenance at
Saranac and a plant overhaul at Norcon in August and September
1997.
Interest and other income increased in the third quarter of 1997
to $23,997 from $13,561 for the same period in 1996, a 77.0%
increase. For the nine months ended September 30, 1997, interest
and other income increased to $66,456 from $39,032 for the same
period in 1996, a 70.3% increase. These increases are primarily
due to interest earned by Northern and equity earnings from
Saranac and Mahanagdong.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations for Three and Nine Months Ended September
30, 1997 and 1996 (Continued):
Cost of sales relates primarily to Northern's purchases of
electricity for resale.
Operating expense increased in the third quarter of 1997 to
$82,513 from $40,182 for the same period in 1996, a 105.3%
increase. For the nine months ended September 30, 1997,
operating expense increased to $243,004 from $91,840 for the same
period in 1996, a 164.6% increase. These increases are primarily
due to the acquisitions of Northern, Falcon Seaboard and the
Partnership Interest as well as the commencement of operations at
Salton Sea IV, Upper Mahiao and Malitbog.
General and administration costs increased in the third quarter
of 1997 to $12,068 from $6,518 for the same period in 1996, a
85.1% increase. For the nine months ended September 30, 1997,
general and administrative costs increased to $37,560 from
$15,814 for the same period in 1996, a 137.5% increase. These
increases are primarily due to the administration costs at
Northern.
Depreciation and amortization increased in the third quarter of
1997 to $69,877 from $36,587 for the same period in 1996, a 91.0%
increase. For the nine months ended September 30, 1997,
depreciation and amortization increased to $207,789 from $80,300
for the same period in 1996, a 158.8% increase. These increases
are primarily due to the acquisitions of Northern and Falcon
Seaboard, and the commencement of operations at the Salton Sea
IV, Upper Mahiao and Malitbog.
Loss on equity investment in Casecnan reflects the Company's
construction period share of interest expense in excess of
capitalized interest and interest income at the Casecnan Project.
Interest expense, less amounts capitalized, increased in the
third quarter of 1997 to $62,997 from $37,066 for the same period
in 1996, a 70.0% increase. For the nine months ended September
30, 1997, interest expense, less amounts capitalized, increased
to $182,503 from $85,062 for the same period in 1996, a 114.6%
increase. These increases are primarily due to the acquisition
of Northern, the greater average outstanding debt and the
decrease in capitalized interest due to the commencement of
operations at Salton Sea IV, Upper Mahiao and Malitbog.
The provision for income taxes increased in the third quarter of
1997 to $27,929 from $18,325 for the same period in 1996, a 52.4%
increase. For the nine months ended from September 30, 1997,
provision for income taxes increased to $74,520 from $33,862 for
the same period in 1996, a 120.1% increase. These increases are
due to higher income before taxes and an increase in the
effective tax rate due to the acquisition of Northern.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Results of Operations for Three and Nine Months Ended September
30, 1997 and 1996 (Continued):
Minority interest increased in the third quarter to $9,656 from
$1,624 for the same period in 1996. For the nine months ended
September 30, 1997, minority interest increased to $29,410 from
$3,067 for the same period in 1996. These increases are the
result of the increases in dividends on convertible preferred
securities and the minority interest ownership in Northern.
Net income available for common stockholders, before the
extraordinary item, increased in the third quarter of 1997 to
$46,408 or $.71 per share from $37,554 or $.67 per share for the
same period in 1996. For the nine months ended September 30,
1997, net income, before the extraordinary item, increased to
$104,745 or $1.59 per share from $71,287, or $1.29 per share for
the same period in 1996.
On July 31, 1997, the Finance Act in the United Kingdom was
passed by Parliament and included the introduction of a one time
"windfall tax" equal to 23% of the difference between the price
paid for Northern upon privatization and the Labour government's
assessed "value" of Northern as calculated by reference to a
formula set forth in the July budget. This amounted to $135,850,
net of minority interest of $58,222, which was recorded as an
extraordinary item. The tax is payable in installments in
December 1997 and December 1998.
Liquidity and Capital Resources:
The Company's cash and cash equivalents were $677,313 at
September 30, 1997 as compared to $424,500 at December 31, 1996.
In addition, the Company's share of joint venture cash and
investments retained in project control accounts at September 30,
1997 and December 31, 1996 was $37,589 and $47,764, respectively.
Distributions out of the project control accounts are made
monthly to the Company for operations and maintenance and capital
costs and semiannually to each Coso Project partner for profit
sharing under a prescribed calculation subject to mutual
agreement by the partners. The Company recorded separately
restricted cash of $125,533 and $106,968 at September 30, 1997
and December 31, 1996, respectively. The restricted cash balance
as of September 30, 1997 is comprised primarily of amounts
deposited in restricted accounts from which the Company will fund
the Coso Project royalty payment and the Power Resources Project,
the Upper Mahiao Project and the Malitbog Project cash reserves
for debt service reserve funds. Also, the Company had $1,481 and
$4,921 of short term investments as of September 30, 1997 and
December 31, 1996, respectively.
As of September 30, 1997, the Company holds 744 shares of
treasury stock at a cost of $26,068 to provide shares for
issuance under the Company's employee stock option and share
purchase plan and other outstanding convertible securities. The
repurchase plan attempts to minimize the dilutive effect of the
additional shares issued under these plans.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
On September 11, 1997, the Company signed a definitive agreement
with Kiewit Diversified Group ("KDG"), a wholly owned subsidiary
of PKS, for the Company to purchase KDG's ownership interest in
various project partnerships and CalEnergy common shares (the
"KDG Acquisition").
KDG's current ownership interest in CalEnergy comprises
approximately 20,231 shares of common stock (assuming exercise by
KDG of one million options to purchase CalEnergy shares) which,
as of September 30, 1997, represents approximately 30% of
CalEnergy's outstanding shares (26% on a fully diluted basis), as
well as the following minority project interests: Mahanagdong
(45%), Casecnan (35%), Dieng (47%), Patuha (44%), Bali (30%) and
CE Electric UK (30%). CalEnergy is the managing partner and
operator of each such project.
The agreement provides that CalEnergy will pay approximately
$1,155,000 for KDG's stock holdings in CalEnergy and KDG's
various power project interests. Final closing of the
transaction is expected to occur in January 1998. CalEnergy
intends to fund this acquisition with available cash, the
proceeds of the equity offering completed October 17, 1997 and
the proceeds of the debt offering completed October 28, 1997.
On October 17, 1997, the Company completed the public offering of
17.1 million shares of its common stock ("Common Stock") at $37
7/8 per share (the "Public Offering"). In addition, 2 million
shares of Common Stock were purchased from CalEnergy in a direct
sale by a trust affiliated with Walter Scott, Jr., the Chairman
and Chief Executive Officer of PKS (the "Direct Sale"),
contemporaneously with the closing of the Public Offering.
On October 28, 1997, the Company completed the sale of $350,000
aggregate principal amount of its 7.63% Senior Notes due 2007
(the "Senior Note Offering").
On August 12, 1997, a subsidiary of the Company completed a
private placement (with certain shelf registration rights) of
$225,000 aggregate amount of 6 1/2% Trust Convertible Preferred
Securities (the "6 1/2% Trust Securities"). In addition, an
option to purchase an additional 900 of the 6 1/2% Trust
Securities, or $45,000 aggregate amount, was exercised by the
initial purchasers to cover overallotments in connection with the
placement. Each 6 1/2% Trust Security has a liquidation
preference of fifty dollars and is convertible at any time at the
option of the holder into 1.047 shares of Company Common Stock
(equivalent to a conversion price of $47.75 per common share)
subject to adjustments in certain circumstances.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
On August 5, 1997, the Company and certain affiliated capital
funding trusts filed with the Securities and Exchange Commission
a shelf registration statement covering up to $1,500,000 of
common stock, preferred stock and debt securities which may be
sold from time to time for various purposes. The Company
completed the Public Offering and the Senior Note Offering under
the shelf registration statement.
On February 26, 1997, a subsidiary of the Company completed a
private placement (with certain shelf registration rights) of
$150,000 aggregate amount of 6 1/4% Trust Convertible Preferred
Securities ("Trust Securities"). In addition, an option to
purchase an additional 600 Trust Securities, or $30,000 aggregate
amount, was exercised by the initial purchasers to cover over-
allotments in connection with the placement. Each Trust Security
has a liquidation preference of fifty dollars and is convertible
at any time at the option of the holder into 1.1655 shares of
Company Common Stock (equivalent to a conversion price of $42.90
per common share) subject to adjustments in certain
circumstances.
In November 1995, the Company closed the financing and commenced
construction of the Casecnan Project, a combined irrigation and
150 net MW hydroelectric power generation project (the "Casecnan
Project") located in the central part of the island of Luzon in
the Republic of the Philippines.
CE Casecnan Water and Energy Company, Inc., a Philippine
Corporation ("CE Casecnan") which is currently approximately 35%
indirectly owned by the Company and currently approximately 35%
indirectly owned by PKS, is developing the Casecnan Project. CE
Casecnan financed a portion of the costs of the Casecnan Project
through the issuance of $125,000 of its 11.45% Senior Secured
Series A Notes due 2005 and $171,500 of its 11.95% Senior Secured
Series B Bonds due 2010 and $75,000 of its Secured Floating Rate
Notes due 2002, pursuant to an indenture dated as of November 27,
1995, as amended to date.
The Casecnan Project was being constructed pursuant to a fixed-
price, date-certain, turnkey construction contract (the "Hanbo
Contract") on a joint and several basis by Hanbo Corporation
("Hanbo") and Hanbo Engineering and Construction Co., Ltd.
("HECC"), both of which are South Korean corporations. As of May
7, 1997, CE Casecnan terminated the Hanbo Contract due to
defaults by Hanbo and HECC including the insolvency of each such
company. CE Casecnan entered into a new turnkey engineering,
procurement and construction contract to complete the
construction of the Casecnan Project (the "Replacement
Contract"). The work under the Replacement Contract is being
conducted by a consortium of contractors and
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
subcontractors including Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd. and will be headed by
Cooperativa Muratori Cementisti CMC di Ravenna and Impressa
Pizzarottie & C. Spa (collectively, the "Replacement
Contractor").
In connection with the Hanbo Contract termination, CE Casecnan
tendered a certificate of drawing to Korea First Bank ("KFB") on
May 7, 1997 under the irrevocable standby letter of credit issued
by KFB as security under the Hanbo Contract to pay for certain
transition costs and other presently ascertainable damages under
the Hanbo Contract. As a result of KFB's wrongful dishonor of
the draw request, CE Casecnan filed an action in New York State
Court. That Court granted CE Casecnan's request for a temporary
restraining order requiring KFB to deposit $79,329, the amount of
the requested draw, in an interest bearing account with an
independent financial institution in the United States. KFB
appealed this order, but the appellate court denied KFB's appeal
and on May 19, 1997, KFB transferred funds in the amount of
$79,329 to a segregated New York bank account pursuant to the
Court order. If KFB were to fail to honor its obligations under
the Casecnan letter of credit, such action could have a material
adverse effect on the Casecnan Project and CE Casecnan.
On August 6, 1997, CE Casecnan announced that it had issued a
notice to proceed to the Replacement Contractor. The Replacement
Contractor was already on site and has fully mobilized and
commenced engineering, procurement and construction work on the
Casecnan Project. The receipt of the letter of credit funds from
KFB remains essential and CE Casecnan will continue to press KFB
to honor its clear obligations under the letter of credit and to
pursue Hanbo and KFB for any additional damages arising out of
their actions to date.
On August 27, 1998, CE Casecnan announced that it had received a
favorable summary judgment ruling in New York State Court against
KFB. The judgment, which has been appealed by the bank, requires
KFB to honor the $79,329 drawing by CE Casecnan on a $117,850
irrevocable standby letter of credit.
On September 29, 1997, CE Casecnan tendered a second certificate
of drawing for $10,828 to KFB. KFB also wrongfully dishonored
this draw, but pursuant to a stipulation agreed to deposit the
draw amount in an interest bearing account with the same
independent financial institution in the United States pending
resolution of the appeal regarding the first draw and agreed to
expedite the appeal.
On or about September 3, 1997, Hanbo and HECC filed a Request for
Arbitration before the International Chamber of Commerce ("ICC").
The Request for Arbitration asserts various claims by Hanbo and
HECC against CE Casecnan relating to the terminated Hanbo
Contract and seeking damages. On October 10, 1997, CE Casecnan
served its answer and defenses in response to the Request for
Arbitration as well as counterclaims against Hanbo and HECC for
breaches of the Hanbo Contract. The arbitration proceedings
before the ICC are ongoing and CE Casecnan intends to pursue
vigorously its claims against Hanbo, HECC and KFB in the
proceedings described above.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
The Company's Dieng, Patuha and Bali projects in Indonesia
represent ongoing, phased-in development and construction
programs through the year 2000 of 1,200 MW under contract, to be
brought into commercial operation on a modular basis as the steam
fields are concurrently drilled and developed.
In June 1997, the Company's special-purpose subsidiary, CE
Indonesia Funding Corp., entered into a $400 million revolving
credit facility (which is nonrecourse to the Company) to finance
the development and construction of the Company's geothermal
power facilities at the Dieng, Patuha and Bali sites in
Indonesia.
On September 20, 1997, a Presidential Decree (the "Decree") was
issued in Indonesia, providing for government action to the
effect that, in order to address certain recent fluctuations in
the value of the Indonesian currency, the start-up dates for a
number of private power projects would be: (i) continued
according to their initial schedule (because construction process
was underway); (ii) postponed as to their start-up dates (because
they are not yet in progress) until economic conditions have
recovered; or (iii) reviewed with a view to being continued,
postponed or rescheduled, depending on the status of those
projects. In the Decree, Dieng Units 1, 2 and 3 are approved to
continue according to their initial schedule; Patuha Unit 1 and
Bali Units 1 and 2 are to receive further review to determine
whether or not they should be continued in accordance with their
initial schedule; and Bali Units 3 and 4, Patuha Units 2, 3 and 4
and Dieng Unit 4 are to be postponed for an unspecified period.
In this regard, the Company notes that its contracts and
government undertakings for the Dieng, Patuha and Bali projects
do not by their terms permit such delays by the government and
that the Company has obtained political risk insurance coverage
for its Indonesian projects. Moreover, since the Decree was
issued, officials in the Government of Indonesia have confirmed
to the Company that the Indonesian government intends to fully
honor its contractual obligations and does not intend to impact
the schedule of any projects for which financing has already been
arranged or on which construction related or well drilling work
has already commenced, and since Patuha Unit 2 and all of the
Company's projects in the "future review category" meet one or
both of those standards, the Company believes that the schedule
for these projects should not be delayed. The Company does not
believe that any delay in the "postponed" category of projects
will have a material adverse effect on its planned operations in
Indonesia, since all but one of these units were not scheduled to
commence construction until after 1998. The Company believes
that, given Indonesia's demonstrated need for power and its
emphasis on diversifying fuel sources and maintaining sufficient
amounts of oil for export, the Company's projects are
significantly advantaged by their indigenous geothermal fuel
source and will all proceed. However, until further information
is made available by the Indonesian government with respect to
the projects that are under review or postponed, no assurance can
be given that such will be the case.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
On December 2, 1994, a subsidiary of the Company, Himpurna
California Energy Ltd. ("HCE") executed a joint operation
contract (the "Dieng JOC") for the development of the geothermal
steam field and geothermal power facilities at the Dieng
geothermal field, located in Central Java (the "Dieng Project")
with Perusahaan Pertambangan Minyak Dan Gas Bumi Negara
("Pertamina"), the Indonesian national oil company, and executed
a "take-or-pay" energy sales contract (the "Dieng ESC") with both
Pertamina and P.T. PLN (Persero) ("PLN"), the Indonesian national
electric utility. HCE was formed pursuant to a joint development
agreement with P.T. Himpurna Enersindo Abadi ("P.T. HEA"), its
Indonesian partner, which is a subsidiary of Himpurna, an
association of Indonesian military veterans, whereby the Company
and P.T. HEA have agreed to work together on an exclusive basis
to develop the Dieng Project (the "Dieng Joint Venture"). The
Dieng Joint Venture is structured with subsidiaries of the
Company holding an approximate 47% interest (including certain
assignments of dividend rights representing an economic interest
of 2%), and subsidiaries of PKS holding an approximate 47%
interest (including certain assignments of dividend rights
representing an economic interest of 2%) and P.T. HEA holding a
6% interest in the Dieng Project. Financial closing and first
disbursement of construction loan funds occurred on October 3,
1996. The construction contractor for the Dieng Unit I project
is on schedule to complete the Unit I plant and commence
commercial operation by the end of the fourth quarter of 1997.
Pursuant to the Dieng JOC and ESC, Pertamina has granted to HCE
the geothermal field and the wells and other facilities presently
located thereon and HCE will build, own and operate power
production units with an aggregate capacity of up to 400 MW. HCE
will accept the field operation responsibility for developing and
supplying the geothermal steam and fluids required to operate the
plant. The Dieng JOC is structured as a build own transfer
agreement and will expire (subject to extension by mutual
agreement) on the date which is the later of (i) 42 years
following effectiveness of the Dieng JOC and (ii) 30 years
following the date of commencement of commercial generation of
the final unit completed. Upon the expiration of the proposed
Dieng JOC, all facilities will be transferred to Pertamina at no
cost. HCE is required to pay Pertamina a production allowance
equal to three percent of HCE's net operating income from the
Dieng Project, plus a further amount based upon the negotiated
value of existing Pertamina geothermal production facilities that
the Company expects will be made available by Pertamina.
Pursuant to the Dieng ESC, PLN agreed to purchase and pay for all
of the Dieng Project's capacity and energy output on a "take or
pay" basis regardless of PLN's ability to accept such energy made
available from the Dieng Project for a term equal to that of the
Dieng JOC. The price paid for electricity includes a base energy
price per kWh multiplied by the number of kWhs the plants deliver
or are "capable of delivering," whichever is greater. Energy
price payments are also subject to adjustment for inflation. PLN
will also pay a capacity payment based on plant capacity. All
such payments are payable in U.S. dollars.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
HCE began well testing in the fourth quarter of 1995 and issued a
notice to proceed for the construction and supply of an initial
55 net MW unit ("Dieng Unit I") in the first quarter of 1996. PT
Kiewit/Holt Indonesia, a consortium consisting of Kiewit
Construction Group, Inc., a subsidiary of PKS ("KCG") and Holt,
will construct Dieng Unit I pursuant to a fixed price, date
certain, turnkey construction contract ("Construction Contract").
Affiliates of KCG and Holt will provide the engineered supply
with respect to Dieng Unit I pursuant to a fixed price, date
certain, turnkey supply contract ("Supply Contract"). The
Construction Contract and Supply Contract are sometimes referred
to herein as the "Dieng EPC" and KCG, Holt and their affiliates
party to the Construction Contract and Supply Contract are
sometimes referred to herein, collectively, as the "Construction
Consortium." The obligations of the Construction Consortium
under the Construction and Supply Contracts are supported by a
guaranty of KCG and Holt. KCG is the lead member of the
Construction Consortium, with a 60% interest. HCE will be
responsible for operating and managing the Dieng Project.
Pursuant to the Dieng JOC and ESC, the Company presently intends
to proceed on a modular basis with construction of additional
units to follow Dieng Unit I, resulting in an aggregate first
phase net capacity at this site of 215 MW. The Company estimates
that the total project cost of these units will be approximately
$450 million. The next phase is expected to expand the total
capacity to 400 MW. The cost of the full Dieng Project is
estimated to approximate $1,000,000.
The Company is also developing a geothermal power plant in the
Patuha geothermal field in Java, Indonesia (the "Patuha
Project"). On December 2, 1994, the project company developing
the Patuha Project, Patuha Power, Ltd. ("Patuha Power") executed
both a joint operation contract and an energy sales contract,
each of which contains terms substantially similar to those
described above for the Dieng Project. Patuha Power intends to
proceed on a modular basis similar to the Dieng Project, with an
aggregate capacity of up to 400 MW. The Company estimates that
the total cost will be approximately $1,000,000. The Company
began well testing and exploration in the fourth quarter of 1995
and has commenced construction of the first unit.
On September 2, 1997, the Company announced it closed the project
financing for the Patuha Unit I geothermal project located in
Indonesia. Patuha Unit I is an 80 net MW geothermal project
which constitutes the second phase of a planned geothermal
development by CalEnergy of approximately 1,200 MW under contract
in Indonesia. With the existence of successful projection wells
at the Patuha well-field, Patuha Unit I is currently expected to
begin commercial operation in mid-year 1999.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
The Patuha Unit I construction loan of $150 million was funded by
Credit Suisse First Boston and a syndicate of international
commercial banks under the $400 million revolving credit
construction facility arranged for CE Indonesia Funding Corp.
CalEnergy owns a 44% equity interest in the Patuha Project, and
will operate and manage the project as the managing general
partner.
The Company and PT Panutan Group, an Indonesian consortium of
energy, oil, gas and mining companies, have formed a joint
venture to pursue the development of geothermal resources in Bali
(the "Bali Project"). The PT Panutan Group is entitled to
contribute up to 40% of the total equity and obtain up to 40% of
the net profit of the Bali Project. The project company
developing the Bali Project, Bali Energy Ltd. ("Bali Energy"),
has executed both a joint operation contract and an energy sales
contract with terms similar to those at Dieng and Patuha. Bali
Energy intends to proceed on a modular basis similar to the Dieng
Project, with an aggregate capacity of up to 400 MW. The Company
estimates that the total cost of the Bali Project will be
approximately $1,000,000.
Magma, a subsidiary of the Company, sought new long-term final
SO4 power purchase agreements in the Salton Sea area through the
bidding process adopted by the California Public Utilities
Commission ("CPUC") under its 1992 Biennial Resource Plan Update
("BRPU"). In its BRPU, the CPUC cited the need for an additional
9,600 MW of power production through 1999 among California's
three investor-owned utilities, Edison, SDG&E and Pacific Gas and
Electric Company. Of this amount, 275 MW was set aside for
bidding by independent power producers (such as Magma) utilizing
renewable resources. Pursuant to an order of the CPUC dated June
22, 1994 (confirmed on December 21, 1994), Magma was awarded 163
net MW for sale to Edison and SDG&E, with in-service dates in
1997 and 1998. On February 23, 1995 the Federal Energy
Regulatory Commission ("FERC") issued an order finding that the
CPUC's BRPU program violated the Public Utilities Regulatory
Policies Act ("PURPA") and FERC's implementing regulations and
recommended negotiated settlements. In response, the CPUC
issued an Assigned Commissioners Ruling encouraging settlements
between the final winning bidders and the utilities. The
utilities are expected to continue to challenge the BRPU and, in
light of the regulatory uncertainty, there can be no assurance
that power sales contracts will be executed or that any such
projects will be completed. In light of these developments, the
Company agreed to execute an agreement with Edison on March 16,
1995 providing that in certain circumstances it would withdraw
its Edison BRPU bid in consideration for the payment of certain
sums. In December 1996, the Company entered into a confidential
cash buyout agreement with SDG&E. These agreements are subject to
CPUC approval.
CALENERGY COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share and per kWh amounts)
_________________________________
Liquidity and Capital Resources: (continued)
The Company is actively seeking to develop, construct, own and
operate new energy projects, both domestically and
internationally, the completion of any of which is subject to
substantial risk. Development can require the Company to expend
significant sums for preliminary engineering, permitting, fuel
supply, resource exploration, legal and other expenses in
preparation for competitive bids which the Company may not win or
before it can be determined whether a project is feasible,
economically attractive or capable of being financed. Successful
development and construction is contingent upon, among other
things, negotiation on terms satisfactory to the Company of
engineering, construction, fuel supply and power sales contracts
with other project participants, receipt of required governmental
permits and consents and timely implementation of construction.
Further, there can be no assurance that the Company, which is
substantially leveraged, will obtain access to the substantial
debt and equity capital required to continue to develop and
construct projects or to refinance projects. The Company's
future growth is dependent, in large part, upon the demand for
significant amounts of additional electrical generating capacity
and its ability to obtain contracts to supply portions of this
capacity. There can be no assurance that development efforts on
any particular project, or the Company's efforts generally, will
be successful.
The Company believes the international independent power market
holds the majority of new opportunities for financially
attractive private power development in the next several years.
The financing, construction and development of projects outside
the United States entail significant political and financial
risks (including, without limitation, uncertainties associated
with first time privatization efforts in the countries involved,
currency exchange rate fluctuations, currency repatriation
restrictions, political instability, civil unrest and
expropriation) and other structuring issues that have the
potential to cause substantial delays or material impairment of
value to the project being developed, which the Company may not
be fully capable of insuring against. The uncertainty of the
legal environment in certain foreign countries in which the
Company may develop or acquire projects could make it more
difficult for the Company to enforce its rights under
agreements relating to such projects. In addition, the laws and
regulations of certain countries may limit the ability of the
Company to hold a majority interest in some of the projects that
it may develop or acquire. The Company's international projects
may, in certain cases, be terminated by a government. Projects
in operation, construction and development are subject to a
number of uncertainties more specifically described in the
Company's Form 8-K, dated February 25, 1997, filed with the
Securities and Exchange Commission.
CALENERGY COMPANY, INC.
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.
As of September 30, 1997, there are no material
outstanding lawsuits; however see Note 7, Commitments and
Contingencies.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Defaults on Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 - Calculation of earnings per share.
Exhibit 15 - Awareness letter of Independent Accountants.
Exhibit 27 - Financial Data Schedule.
CALENERGY COMPANY, INC.
PART II - OTHER INFORMATION
(b) Reports on Form 8-K:
During the quarter ended September 30, 1997 the Company
filed the following:
(i) Form 8-K dated July 7, 1997 announcing United
Kingdom windfall tax.
(ii) Form 8-K dated July 15, 1997 reporting the cash
tender offer for shares of New York State Electric &
Gas Corporation ("NYSEG")
(iii) Form 8-K dated July 22, 1997 reporting the
Initial Offer to purchase NYSEG shares.
(iv) Form 8-K dated August 6, 1997 regarding the Tender
Offer, Proposed Merger, Subsequent Offer, and fully
underwritten financing commitments relating to
NYSEG.
(v) Form 8-K dated August 8, 1997 reporting Amendment
(#7) and Supplement to NYSEG Offer to Purchase and
closing of private placement of $225MM of 6 1/2%
Convertible Preferred Securities for CalEnergy
Capital Trust III.
(vi) Form 8-K dated August 15, 1997 reporting expiration
of Tender Offer (NYSEG).
(vii) Form 8-K dated August 27, 1997 reporting its
indirect subsidiary CE Casecnan obtained the New
York State Court summary judgment ruling against
Korea First Bank.
(viii) Form 8-K dated September 2, 1997, announcing
the closing of Patuha Unit I financing and agreement
to purchase Kiewit's ownership interest in various
project partnerships and CalEnergy's common shares.
(ix) Form 8-K dated September 11, 1997 reporting the
definitive Acquisition Agreement signed with PKS.
(x) Form 8-K dated September 24, 1997 announcing
Indonesian projects status unchanged by Indonesian
government's announcement of proposed delays in
start-up power projects.
(xi) Form 8-K dated September 24, 1997 announcing
preliminary Prospectus Supplement commencing
registration of 14,000,000 shares.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALENERGY COMPANY, INC.
Date: November 13, 1997 /s/ Gregory E. Abel
Gregory E. Abel
President and Chief Operating Officer, CalEnergy
Europe and Chief Accounting Officer,
CalEnergy Company, Inc.
/s/ Craig M. Hammett
Craig M. Hammett
Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
No. No.
11 Calculation of Earnings Per Share 37
15 Awareness Letter of Independent Accountants 38
27 Financial Data Schedule 39
Exhibit 11
CALENERGY COMPANY, INC.
CALCULATION OF EARNINGS PER SHARE IN ACCORDANCE
WITH INTERPRETIVE RELEASE NO. 34-9083
(dollars in thousands, except per share amounts)
___________________
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Actual weighted average shares
outstanding for the period 63,379,832 52,765,706 63,473,805 51,994,097
Dilutive stock options and warrants
using average market prices 2,298,102 3,530,474 2,290,970 3,367,558
Primary shares outstanding 65,677,934 56,296,180 65,764,775 55,361,655
Additional dilutive stock options using ending market price and
assuming conversion of convertible debt, convertible subordinated
debenture and convertible
preferred securities of
subsidiary trusts(1) 10,751,063 11,444,305 7,826,991 11,035,506
Fully diluted shares
outstanding before
extraordinary item 76,428,997 67,740,485 73,591,766 66,397,161
Net income before
extraordinary item $ 46,408 $ 37,554 $ 104,745 $ 71,287
Extraordinary item (135,850) - (135,850) -
Net income (loss)
available for common
stockholders $ (89,442) $ 37,554 $ (31,105) $ 71,287
Net earnings per share before
extraordinary item $ .71 $ .67 $ 1.59 $ 1.29
Extraordinary item (2.07) - (2.06) -
Primary earnings (loss)
per share $ (1.36) $ .67 $ (.47) $ 1.29
Fully diluted net earnings
per share before
extraordinary item (2) $ .66 $ .59 $ 1.54 $ 1.18
Fully diluted earnings (loss)
per share based on SEC
interpretive release
No. 34-9083(1)(2) $ (1.36) $ .59 $ (.47) $ 1.18
(1)-The convertible preferred securities of subsidiary trusts
would be antidilutive to earnings per share after the
extraordinary item for the three and nine months ended September
30, 1997. Therefore, these items are excluded from fully diluted
shares outstanding after extraordinary item.
(2)-Net income available for common stockholders for the three
and nine months ended September 30, 1997 was increased by
dividends on convertible preferred securities of subsidiary
trusts, net of tax effect, of $4,232 and $8,648, respectively.
Net income available for common stockholders for the three and
nine months ended September 30, 1996 was increased by the
interest expense associated with the convertible debt and
convertible subordinated debentures and dividends on convertible
preferred securities of subsidiary trusts, net of tax effect, of
$2,553 and $6,825, respectively.
Exhibit 15
CalEnergy Company, Inc.
Omaha, Nebraska
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of CalEnergy Company,
Inc. for the three and nine month periods ended September 30,
1997 and 1996 as indicated in our report dated October 13, 1997;
because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included
in your Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, is incorporated by reference in Registration
Statements No. 33-41152, No. 33-52147 and No. 333-30395 on Form S-
8 and Registration Statements No. 33-51363 and No. 333-32821 on
Form S-3.
We also are aware that the aforementioned report, pursuant to
Rule 436(c) under the Securities Act, is not considered a part of
a Registration Statement prepared or certified by an accountant
or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 13, 1997