ML20151Y601

Calenergy Co,Inc 1997 Annual Rept

ML20151Y601
Person / Time
Site:	Quad Cities
Issue date:	12/31/1997
From:	Sokol D External (Affiliation Not Assigned)
To:
Shared Package
ML20151Y560	List: ML20151Y555 ML20151Y566 ML20151Y583 ML20151Y593 ML20151Y601 ML20151Y606 ML20151Y616
References
NUDOCS 9809180289
Download: ML20151Y601 (97)

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2 R 1 'F y F I () f 1 A. Our Strategy g \\ R s + N o ( I i \\ e4 l l x, b e I

Our well-phuuini strategy fier growlh is the haris li>r our success aint has cruihinl our Coinpany to exlxual anci pn>3per. [1] (hir connnilinent to our constituents is unwavering. As ourCompany luis grown, we liave continuni our ilnlication to environinental stewaniship niul to provialing inen asni oplxu1nnities aini un enhanenl quality of lilit to our custonins. shan hoklers. nnployees. ainI tho,e of Ihe conununities we serve-people wliose surnws pamllelourown. [1 ) OurconunionenI to excellence in core business operations has furtlier inivanen! our success by optiniizing our CalEnergy's Strategy for Growth use of teclinology. ensuring the <levelopnient of innovative custonier services. aini niaintaining our lheus on operational excellence aini rafety in every an a of our Coinpany. [ 1 ] Thningh ilisciplinni acquisitions aini new project ilevelopinents we have increanni our skill base inul hnnulenni our position as a lemling global energy services company. (1] Aiul finally, ihnnigh priulent financial aml risk nianagenient. our Coinpany lills itcIlieval iilijH'essive groWill iliul ecoiiolllic lH flIH1tilliH'e. _1 g -

c FinmacialHighlights (Amounn in mdhom ofU.S dollm anptper Jurr amouna.) 1995 1996 1997 Revenue 399 S 576 $ 2,271 Net Income' S 62 S 92 S 139 Net income Ihr Basic Share' S 1.32 S 1.69 $ 2.06 EBITDA3 271 S 385 811 f l ) I i, ' ( k f.s f f ha 93 94 95 96 97 ha 93 94 95 96 97 ha 93 94 95 96 97 ha 93 94 95 96 97 l 149 38 1 08 102 186 l 34 1 021 130i i 399 62i 1.32: 2 71 l 576-92 1.69 385! 2.271 139 2 06-811 RFVENUE N r T I N C O M E' N tr INCOM E' E BIT D A' Mdhum Mdlwns l' V n B A s i C Mdham Sit A n t ' ikfm extraordssiry item, armalatne t$a ofa dunge se aaounnng prim spk. and nunnamng item. ' Lornaugs befn ruterest. saw, depmutwn, amurtnatwn. andmn-m umng irm GilEnergy Company Inc. stak is pubhcly traded ort the New Yak Stock Exchange, the Paci5c Stock Exchange. and the Iondon Stxk Exchange under the trading symbol "CE ~

_i Table of Contents i Cou r ANY OVE RYlEW: WilO WE.A R E 4 Cil AIRM AN'S hlE55 AGE: COMutTTED TO OuR STR ATEGY 6 A CilANGING INDUSTRY CREATES OrrORTuNITIES 8 OuR COMMITMENT: ~ THE POWER TO hI AKE A DIF FERENCE l2 Customers I3 Shareixdders I4 Employees Is

• Communities IS j

Entiremnent l8 CA EENE RGY's G LO B A L PORTFO EIO 22 PROJ ECT OVERVIEW: A 1. A N D M A R K YE A R 24 l > UnitedStates 24 l

• UnitedKingdom 26 Q-
• lbland

_28 Philippines 29 Indonesia 30

• Australia 3l hil L E 5 T O N E S AND SicNIFIC ANT EVENTS OF 1997 34 CALENERGY: A FORCE FOR Tile FUTURE 40 1997 FIN ANCI AL RF.rORT 41 CALENERGY'S SFNIOR hl AN AGEMENT TEAM lnside Back Cover

c __ M;,7;;T::Q,, 3 CompanyOverview 11% frMre Our l'erliernuuice in 1W7 CalEnergy has successfully expanded its role m from that of an independent power producer ) i e ,s ~~m,, to a global energy company that now supplies " ~ " and distributes electricity and gas to nearly 1.8 million retail customers in the United Kingdom, g and manages and owns interest in over 5.000 net l megawatts ("MW") of power generation facilities in operation, construction and development worldwide. ] .~ Financial results and customer growth at Northem Electric plc, our electricity distnbution and electricity ) and gas supply company in the U.K., have signifi-cantly exceeded our expectations throughout the past year. Through constant improvement of productivity and cost reductions, our geothermal and natural gas generation facilities in the U.S have continued to show t CalEnergy,s Malitbog geothermai power project supplies muchmded electacity to the islandof Leyte. Republic excellent operating performance and have remained of thePhilippines. a predictable and Sign # cant source of cash flavv for the Company. Also in 1997, we completed construction an%an sengrewnue on twogeoW CalEnergy Company, Inc ("CalEnergy" or "the p wergener tionprojectsinthePhilippines. Compa6y") was founded in 1971 as a consultant CalEnergy achieved outstanding financial to geothermal power production facilities in North growth during 1997: America. Since that time, many events have occurred AssMsinceasedo neadyWMon in the United States and elsewhere that have from $5.6 billion in 1996-provided important opportunities for our Company. 8 percendocrease As you read through our 1997 Annual Report, wnuenurg@ ne y$2 Mon we hope that it will become apparent that CalEnergy U* U" " 0 0-is well prepared to benefit from the energy industry a 2%ercendnuease deregulation and privatization occurring worfdwide. N et income' increased to $139 million We have long been committed to our mission to fr m$ 2 m%onin1996-become a leading globalprovider of a full range P"""""' of energy services, a goal we have continued to Net income per basic share' increased pursue in 1997. e to $2.06 from $1.69 in 1996-g f' j T a 22percentincrease h 93 94 95969 EBITDA' increased to S811 million from $385million- "6 j 2.6 a 111percentincrease 7.488' Bel,n nirasw.hnary arm wmidarne eftht o,fa.l.any in amounting priroaph. and non -murring tr.m. Ii i s T O R l C A L.

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,m. n. w.::n w, e,.s.,;., 1 i Our Vision: A Fone for the Future We understand that our success is tied directly CaiEnergy has experienced remarkable growth to our performance and flexibility-past, present, since 1991 when. in response to the evolving world and future-and to our ability o identify and take energy markets, we developed e strategy to: prompt, decisive action to seize opportunities in the employadditionalenergysources to fuel face of industry change We are excited about the j ourgenerationassets potential to broaden our supply business in the U.K. broaden ourbase o/energyservices and elsewhere, and believe that new and expanding byincluding distribution andsupply opportunities exist to introduce Northern Electric's expand our target markets to encompass proven and proprietary information technology selectopportunities worldwide and customer billing services to the U.S. and other By focusing on our core competencies deregulating utility markets. Additionally, gas and of resource based development and strategic geothermal exploration and development activities acquisitions, we have achieved enviable growth will provide the Company with many more exciting i and financial performance and have established cpportunities worldwide. l l the experience base, asset base and financial base In this regard, we are convinced that we have i I for future growth. Our strategy is based upon: properly structured our organization in preparation Commitmentto OurConstituents for both the challenges and the opportunities that 1 Excellence in Core Business Operations will arise as we approach the new millennium Disciplined Acquisitions and New Project and continue our journey as a force for the future. h-Developments l Prudent Financialand Risk Management Today, more than any other time in its history, i-the global energy industry is preparing for change. Deregulation and pnvatization are occurring rapidly around the world Economic uncertainties, as ] q evidenced by Asia, underscore the importance / of foresight and prudent restraint. CalEnergy has

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F9EPf'94pTJursm...- na aaaa"..mitTE t aein aao a io to P 4 4 1. I re ( 1 ,_] Chainnan's Message v Committedto OurStrategy For the majority of our business,1997 was a The full integration of Northem Electric into year of great accomplishments. It was clearly also CalEnergy, the completion of the Mahanagdong and a year of frustration in our Indonesian activities. Melitbog geothermal power generation facilities in Revenues exceeded $2.25 billion. Net income, the Philippines, the award and initiation of gas-based excluding non-recurring and extraordinary charges power developments in Poland and Austraka, and exceeded $138 million. Earnings before interest, the continued strength of the operations of our U.S. taxes, depreciation, amortization, and non-recurring generating facihties marked an eventful year. charges ("EBITDA") exceeded $800 million. Of Additionally, the purchase of Peter Kiewit Sons',Inc. particular note, since 1990, revenue, net income 30 percent holdings in A-rated Northem Electric, and EBITDA have had cumulative annual growth their investments in our Asian projects, and their rates of 57 percent,42 percent, and 45 percent, 20.2 million CalEnergy shares was an important step respectively, excluding non-recurring and extraordi-both toward broadening our position as a leading nary charges. By any reasonable measure, these global energy services company and providing a are very respectable results for a growth company source of annual earnings growth for the future. in ourindustry. In addition, as a result of concrete achievements, we further refined our strategy to significantly expand our presence in the deregulated energy and gas $((% markets of the United Kingdom and the United States. By year end 1997, through the utilization j ? F4 e of Northern Efectric's proprietary information ~ p.h hi technology and innovative marketing initiatives. 3 g > M 'h Northem added nearly 300.000 new gas customers YY ~ " o. to their 1996 base of 145 million electricity cus-g;iQN* D h tomers This equates tc a 20 percent increase of hh h Northem's customer base in less than six months, h h,. an accomphshment that is virtually unheard of h.1 y Y In the utility business absent an acquisition. lt is y Eh[h b, [, $ S l y important to note that all of these new customers CI [ hh are buying energy at lower but profit-producing [{f Y " '" prices. Also,tothecreditof theNorthemElectric ' (lpf,, 9..i 5 staff, all of Northern's customer satisfaction mea-l sures increased from last year notwithstanding the organizational challenges that typically accompany such rapid business growth We look forward to continuing our customer expansion in the United Kingdom and exporting our capabilities to the United States utility market as it enters deregulation. Clearly, the Asian economic and cun ancy prob-lems caused enormous dislocation throughout the Pacific Rim and in particular have created significant uncertainty and confusion in Indonesia. Our projects in Indonesia-Dieng Patuha and Bali-have been &aM%e M % unMa&aud l y,,g( g,go, Chavrnan of the Board and Chief fecurw 0ff;cer us t0 take a prudent ss7 miikon. non-recumng

,an laulustry charige was inttnitient in the U.S For decades. utilities had met increasing ) power demands with decreasing prices but important events began to take place to change that trend. tre Northeast Blackout of 1965 raised concems about reliability the passage of the Clean Air Act of 1970 and its amendments in 1977 required utilities to reduce air emissions; the Arab Oil Embargo of 1973-74 resulted in increased fossil-fuel prices; the accident at Three Mile Island in 1979 led to higher costs and uncertainty in the rnlear industry and inflation caused interest rates to more than tnple. 'Ihe mornenturn grew with the passage of PUltl%,the Public Utility Regulatory Policies Act, passed by U S. Congress to reduce the country's dependence on foreign oil and promote conservation by encouraging the efficient use of fossil fuels and the development of renewable and altemative energy sources. PURPA created a new category of non-utihty Denerators-small independent power producers-from which j utilities were required to buy power. ,,.nrwer**TY =lN j%hT w "w w.uaq-j %, %;4 I I \\ Calfilergy was fant Hled asa consultant and developer of geothermalpowerproduction facilitiesin NorthAmerica. CalEsiergy arcognimi the opj wniairiities presented i by PURPA -the first step towardindsay deregulation in the U.S. The Company began the transition from a service provider to an independentpowerproducer. I ( l Chronologyof Expandii o

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l APERTURE 1 l CARD 1 Also Ava!irble on Aperture Card i e 'T .,y % j e y ~ __l ' ; j_Il N,,__. -[L...u. _n..L t.u.! i-4 4 A b e+, f Call'.iicap estendreI it-oj keration-and entered into an agreement to deveIop geothermal resources at the Coso project, near china lake, Caldornia. l l 9 80915o 289-O L 0PPonmities or C,a Fnerg37

&? - i m,. a CalEnergy is committed to its well-defined stmtegy and ultimately, to providing superior value to the constituents we serve as we continue on our successful path to become a lemlingglobal provider of a full muge of energy services. ) 1 charge in the fourth quarter of 1997 in order due to the members of our extraordinary team to fully provide for the effect on CalEnergy's in Asia, who have discharged their duties with investments in Indonesia. However, it is irnportant diligence and enthusiasm. Our employoe team to note that our U.S. dollar-denominated contracts around the world continues to be one of our in Indonesia have sovereign guarantees from the greatest assets. Govemment of Indonesia and that we have insured By many companies' standards, Ca! Energy's our investment on the Dieng and Patuha projects performance in 1997 was very good, although through the Overseas Private Investment Corporation, by our own standards we are disappointed. an agency of the U. S. Govemment. We have consis-However, we are excited about the potential for tently developed our projects with all of the structural CalEnergy's future growth and look forward to safety features we could obtain. The reality remains, a year of strong financial performance in 1998. k however, that significant risk still exists in today's I would like to close by thanking our shareholders I global economy. As such, we will continue to work for their continued confidence, our Board of Directors to protect shareholder value by employing all the for their guidance and leadership, our employees protections available. for their exceptional performance, and finally to our Our strategy for growth remains focused on the customers for their trust in us. We remain focused opportunities that continue to unfold in our industry. on satisfying their needs and providing reliable and j We plan to utilize our ever-expanding skill base low-cost energy services. CalEnergy is committed to to take advantage of these opportunities, while its well-defined strategy and ultimately, to providing remaining constantly mindful of the necessity to superior value to the constituents we serve as we provide downside protection. I hope the information continue on our successful path to become a leading shwd with you in this annual report will provide global provider of a full range af energy services. further insight into our goals and aspirations, as well as a better appreciation of the breadth of our skill base. Clearly, no one at Calf nergy is satisfied with our stock performance these ! ast months. Although the DavidL Sokol currency problems in Indc iesia have taken a toll on ChairmanoftheBoardand our stock, the decision to twest in Indonesia was Chief &ecutive Officer made by me in 1993 when it was widely considered l one of the Asian ' tiger economies' and these emerging l countries were experiencing significant economic l growth. In fact, until 'he third quarter of 1997, L. Indonesia maintained a strong investment-grade credit rating. As such, I believe comphments are W r"$ l .o L

i r: ...m.._ g l Calismrgy is conuniated to its well-defined strategy aint ultiniately. to providing superior value to the constituents we serve as we continue on our successful l l path to l>ecorue a lemling glolial provider of a full nuige j of energ senices. charge in the fourth quarter of 1997 in order due to the members of our extraordinary team to fully provide for the effect on CalEnergy's in Asia, who have discharged their duties with investments in Indonesia. However, it is important diligence and enthusiasm Our employee team to note that our U S. dollar-denominated contracts around the world continues to be one of our I in Indonesia have sovereign guarantees from the greatest assets. Govemment of Indonesia and that we have insured Bymanycompanies' standards CalEnergy's our investment on the Dieng and Patuha projects performance in 1997 was very good, although l through the Overseas Private Investment Corporation, by our own standards we are disappointed. l anagencyof theU.S Govemment.Wehaveconsis-However, we are excited about the potential for tently developed our projects with all of the structural CalEnergy's future growth and look forward to safety features we could obtain The reakty remains, a year of strong financial performance in 1998. however, that significant risk still exists in today's I would like to close by thanking our shareholders l global economy As such, we will continue to work for their continued confidence, our Board of Directors to protect shareholder value by employing all the for their guidance and leadership, our employees protections available. for their exceptional performance, and finally to our Our strategy for growth remains focused on the customers for their trust in us. We remain focused opportunities that continue to wfold in our industry on satisfying their needs and providing reliable and l We plan to utilize our ever-expanding skill base low-cost energy services. CalEnergy is cornmitted to l to take advantage of these opportunities, while its well-defined strategy and altimately, to providing i remaining constandy mindful of the necessity to superior value to the constituents we serve as we provide downside protection. I hope the information continue on our successful path to become a leading ) shared with you in this annual report will provide global provider of a full range of energy services. further insight into our goals and aspirations, as well as a better appreciation of the breadth of ~ our skill base. / Clearly, no one at CalEnergy is satisfied with our l stcck performance these past months Although the DavidL Sokol { currency problems in Indonesia have taken a toll on ChairmanoftheBoardand our stock, the decision to invest in Indonesia was Chie/hecutive 0//icer made by me in 1993 when it was widely considered j l one of the Asian ' tiger economies' and these emerging l countries were experiencing significant economic l growth. In fact, until the third quarter of 1997, l Indonesia maintained a strong investment-grade i credit rating As such, I believe compliments are d'p.- -( l

L, f' h,f g 4P '. ,gr__h ' 'p peyf.h +..o.'."aA _ "p.l3'd M, r 3 O g A Changing hidusuy Creates Opport unities Around the world, energy is a necessity. We need it for heating, cooking, lighting, refrigeration, transporta-tion, and numerous other basic and luxury items. And as economies around the world continue to expand, so does the importance of energy With economic growth comes an increased demand for energy. In industrialized nations, the growth of energy demand may be tempered by the development of energy efficient technologies, waste reduction, conservation, and better demand-side management plans. Developing nations, however, are witnessing massive growth in energy demands as their newly liberated economies expand. Since 1991 CalEnergy has studied the impact of increasing globalindustrialization and population growth on the energy industry The emerging global marketplace presents many opportunities for agile and astute power providers and energy suppliers. Based on these opportunities, CalEnergy has made strategic decisions and implemented a well-forniulated plan to allow us to grow from a developer of geothermal power production facilities in North America to one of the world's leading independent providers of power and energy-related services. A liriefIli-tory of timl:negy Indu try in the United States... The early structure of the electricity industry required that the generation, transmission, and distribution of electricity be managed by a primary provider. In some countries, this role fell to the govemment. In others, primarily industrialized nations like the U.S., exclusive franchises and associated monopolistic power were placed in the hands of utility companies. Because of this monopolistic power, regulation of utilities was a necessity. Although not necessarily assunng quality service and low prices, regulation generally provided reliability to consumers and a guaranteed rate of retum to the utilities. i Around the World... Other nations have similarfy experienced the effects of industry changes brought about by shifting social. political and economic factors in 1989, the U.K. introduced legislation to privatize and deregulate its national electric industry and thereby promote competition. Statistics indicate that since that time, services have improved while the real price of electricity has fallen. Customers in the U.K. are currently paying 33 percent less than consumers in Continental European countries that have not yet undergone privatization. With the end of the Cold War and the consequent opening of economic markets worldwide, countries in Europe, Asia, and South America began efforts to privatize and deregulate their national electric systems. l Today, many states in the U S. have enacted legislation to ensure full-scale retail electric competition by the year 2000. Countries around the world are looking to privatization and deregulation to help meet the increased energy demands presented by population and economic growth. The industry continues to evolve as full-scale deregulation and privatization occurs around the world. Opportunities for power providers and energy suppliers will continue to expand, especially for companies like CalEnergy that possess the experience and skill base to respond efficiently to the needs of consumers in cornpetitive environments. .Y N

'___ 1 I CalEnergy is Poised to Reap the Benefits i in developed nations, the deregulation of other industries-notably the telecommunications and airline industries-has paved the way for the deregulation of the energy industry. Shopping for electricity, much in the same way consumers do for long distance telephone services and air transportation in the U.S., is already a consumer reality in the U.K. (where CalEnergy's Northern Electric subsidiary is thrising), and will almost certainly become the norm throughout the U.S. We believe deregulation will bring an end to the monopolies, protected markets, and fixed pricing structures that currently rule the U.S electricity industry. Lower prices for consumers will be an inevitable result. Specifically, deregulation alters the complexion of the electricity industry by "unbundling" the trio of functions traditionally performed by utilities Generation, transmission, and local distribution of power become separate business activities. In a f ully deregulated environment, utilities, independent power producers and power marketers can offer electricity to consumers anywhere as a result of open access to the transmission grid. In the deregulated arena, price is not the customer's only basis for choosing a power suppher. Diverse product offerings, improved customer service, conservation programs, energy-efficient product innovations, and non-fossil fired, renewable ' green' power generation (such as geothermal) are among the options offered by energy providers that seek to gain a competitive edge. i I Wtli milhe to tlie l'utun-l Historically, CalEnergy has conducted extensive research and made numerous capital commitments to improve the efficiency of its power projects-investments that will allow us to compete successfully in a I deregulated environment. Efforts are now underway in the U.S and elsewhere to ensure that a deregulated electricity industry will provide for and encourage renewable and environmentally responsible energy sources. l CalEnergy's long-time commitment to environmental responsibility and our leading position as a geothermal l power producer provide additional opportunities in this area. I To sharpen our competitive edge, the Company continues to invest in and implement sophisticated l technology to increase operating efficiency, reduce overall costs and protect the environment. Operational excellence and the experience of a top-line employee team contributes to our success. Because of the Company's presence in progressively privatized and deregulated marketplaces-such as the U.S, U.K., the Philippines, Indonesia Poland, and Australia-we have gained considerable experience in both the wholesale and retail environments. All of this equates to a strong foundation from which Ca! Energy is well positioned to excel in the deregulated and privatized global energy markets of the future. I a i

, % iih tim [ntuare of tlm (.a- \\ct. l'uture ol>lH>rtunitie-are nearly limit!c+ fuk Nedged competton ' resents gas manet c 1 't a b o nn.! P e > or& pen tm W 'm Se, Upp Qo ' hr :nw in !M enew pmdm ts cpply a a,

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l CJ W es ruveu c h mmpound dt an L!uu'dng rate. l The U S. rnarket one e cum &d t & S200 billion and

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<r .,r, l worldwide opportornties muhh nemy$800 billion. l I. Cm re'n m -ope &h U e scenenw sind skill base 3 yn. m* true the Nm et hew s markets will UNoun has sqn.t. tant ap: ' OWth. I s . 2 4: L [ NW, c ? MN As , 96 i ax/ ri% PQ Ys, hiSJ) ( 99? gj o q f I ke. (lall'Herm continne<lIo increa c j (:all'netry i-l>reliarM hp take i it--killlia-c bybecomingthelargest mlsantacc of the ol>[poritmities andour l l independentgeothermalpowerproducer vast and solid experience forms the foundation I in the world with the acquisition of Magma from which we wdlmove forward Weintendto l PowerCompany Theacquisitiondoubled i continue to seek out and act on opportunities that i CalEnergy's generating capacity and ' makefmancialsenseforourshareholders-those

sigmficantlyincreaseditsassetbase.

that willallow our Company to grow andprosper Construction began on Salton FeaIV 1 I at the Imperial Valley. anda Minerals l Extraction pilotproject was established. 1 The Campany continued to strengthen its \\ g n l in I W. CalEnergy completedconstruction on two geothermalproject, manaar:. ent team and access to capital in the Philippines and acquired gas assets in diverse locations such as Poland markets, and further explored strategic and Australia. In the U K., CalEnergy has pursued opportumties presented by l acquisitions that would enable growth-deregulation of the gas industry and has attracted nearly 30Q000 new gas cus-tomers. The Company also agreed to acquire the interests of Kiewit Diversified Group in various internationalprojects. a 30 percent interest in A -rated Northern Electric, and 30 percent ownership interests in CalEnergy's common stock l ( The transaction will be immediately accretive to earmngs in I998 I i i (!all'ncre esjianded furtherasit ( lall 'nerg dis cr-illed it-fuel -onree-through the acquisition of the assets o/ Falcon Seaboard l commencedconstructionongeothermal Resources, including three naturalgas cogeneration plants and a related natural gas pipeline The Salton 1 ' projects in the Phihppines, signedan Sea IVgeothermalproject began commercial operation, construction was completed on Malitbog Unit I historicalagreement to constructa and Upper Mahiao geothermalprojects in the Philippines and construction began on Dieng Unit I combmed hydroelectric and irrigation geothermalproject in Indonesia. Additionally, the Company acquired the remaining 50 percent project at the Casecnan Riverin the ownership of four geothermalprojects in the Imperial Valley Phihypmes andreachedagreements to des viop geothermal helds in Indonesia. I he ('omltany (urned il-liwn-to I U rol >c and acquired majority ownership of Northern in the U S. the ruma tacihry became opera-Electric in the U K. The acquisition expanded CalEnergy' skill base to include distribution and supply s toanaland negotiar ons began to acquire of electricity and gas, gas exploration andproduction, sophisticated information technology and related the assets of Magma Poa er Company a energy activities. These skills, obtainedin a competitive environment, willbe appliedin the U S and U S based geothermalpos er producer other mark ets embracing deregulation andprivatization.

Open comnierce flourimlied worldw ide with the end of 'lhe pace ofindustry the Cold War and the fall of the Berlin Wall. In the U K.. the Electricity Act citiutp uorldwide was introduced to prwatue Botain's national electncity industry and promote s[uickened when the U.S. competition. As the U S and the former U.S S R. began to decrease financial Energy Policy Act was passed, support to developing nations. those countnes reahzed the need to overhaul confirming that the U S.was their energy industnes. Most adopted pnvatization measures to help satisfy entering the early stages increasing energy demands of deregulation 'Ihe I'lillippine pnenunent encouragal private investruent by enacting Build-Own-Operate Transfer laws after suffenng billions of dollars of costs associated with ' brownouts'. ... =. =- i CalEnceyy prepared to enter flie global s n aa rket plare and formulated its strategic plan to include additional energy sources and explore opportunities in Asia. The Company also acquired assets of U.S. geothermal facilities-Desett Peak and Roosevelt Hot Springs; formeda strategic alliance with Kiewit Energy; relocated corporate headquarters to Omaha, Nebraska; installed a new management team and reduced administrative overhead expenses by morethan50 percent. l l l l (iall flerg hemin roitirnercial operation-withits first ( iall tierp itlos cil irilo intertiatialtal inar ket-geothermalpower project. NavyI with the signmg of two energy contracts m the Phthppines and obtaining the development nghts for two Indonesian geothermalfields fueldiversthcation elforts began with the construction of a naturalgas cogeneration facihty m Yuma. Arizona and the management team began to k cep a watchful eye on the deregulation of the energy mdustry m the U K

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1 Otir conlillitillent io otir coll 31illients i3 llle catalyst li)r otir sitreess. [)) Ollr conHitillnent to otir ellstolliers is to (leliver flicin relialile energy froni (liversifie(1 fuel source 3 sticli as geol llernlal. Ily(lroelerf rie alHI Itilitintl gas. in iHl(lition to offering conipetitive prices an<l a full niilge of iltilovittive tu t(l viiltull)le ellergy selTires. [))

lI is lieratIse ofIllis (lctlicatioll to ofir etI toIIIc:S lltal we itn' al>le to create villlie for otir slittrellolifers.Our fiel illroille avnilulile to conunon sliarellohlelS lins inen'asyl 3 at a coniponiH1 annual nite of appnixinintely 60 pen ent over llic past llirce years. [1) IQ nally iinportant i is llial our einployees als > 3lian' in mir surec3s. l f 'ommitment to Our Constituents Otirellip!Oyees an 01tr111031 villilet l ass't itil(! we IPwanl llleir WITire willt roitij)elitive con 1l)ellNilion 1t11 l l pellefil l)arkages. tuHl Hulinlain a sali' tuMI llealllty work ellvin n tilleilt. [ ] ) \\\\i'itlM)l)clieve it is our ol)ligtilialI 10 s11l>l1011 llle coillilitillities ill wllicil olir enljiloyees live all(l wlleIU we (lo liti iiH%, \\\\i' expn% Our aj)pn'ciillioil l)y lliling [nHit llte l(x al Work finn e tuHI(lonaling to Ille lu18. t 1 H ilillt Illit y ellarities iu u l ot Ilicarl1 j )n pgn tills. lu u l Illinugli Ille 3l H H130!Sllil) of tylurational. Nili'ly. alH I envin H H nental pn ngntills. [)) I?iltillly. 3illre ille lintittlitig of olir ( i 1111) N u ly we llave Illain tail H 4 l It a H llillililleill lo l)Iuln 1ir lg ille ellvirollillellt Illn Higll Il te pn x lurlioll of energy fn >llt envinannenf allv n 3lxiiisilite 3oiirres. Wi iviiiairi lix iisal Qf on our continue (l envinnn nental riewan isliip. [ m ,J ' Ikfn nir.wJanan item and ums-ra arring tr<m. ht +n

r """"~"""""""""""i7mm Our Commitment i The Ibwer to Make a Difference CalEnergy is committed to doing its inu t to ining al>out increased op;xx1 unities and an enluinced quality oflife to all of ourconstituents amnnd the world-our customers, slmreholders. employees. and the people of the connnunities we serve.We believe that as our Cominuiy gmws, it is linportant to provide identifiable benefits to these gmups, whose successes panillel our own. 1 'Ql the next 30 to 40 years, with coal-buming plants, llg impact of Electricity _ Although electricity only provides 13 percent hydropower and other altemative energy processes of today' send-useenergyworldwide(17 percent expected to become primary generation sources.' in industrialized countries)', to most of us energy At CalEnergy, we understand that the various l is electricity It contributes to our quality of life countries and communities we serve have different and directly impacts our ability to make a living. economies and lifestyles and, therefore, different in developed nations, electricity is readily avail-energy needs. We are gratified to provide a product able. It is generated in many ways-from renewable that has a positive impact on nearly every aspect sources such as geothermal, solar and wind energy of life. Access to viable energy supplies v/ill surely to massive plants powered by nuclear fission, or help bring about enhanced living standards in less the combustion of fossil fuels like oil, gas, or coal. developed parts of the world through increased From there, it is delivered to end users through an employment opportunities and economic develop-extensive system of transmission lines, transform-ment, higher levels of education, and better public ers, and distribution wires running into factories and health. In both emerging and industrialized nations, homes. With the flip of a switch, electricity powers advanced technology employed by responsible everything from small appliances to large factories. ~ r,enerators will help reduce air emissions In many parts of the world, however, electricity ano lessen the impact of a Orowing population is not a fact of life. A vast majority of the population on the environment. of developing countries have little or no direct access to commercial energy of any form. Basic energy is often derived from heat generated by the burning of coal, wood,orotheritems Althoughdeveloping countries currently comprise 77 percent of the world's population, they use only a quarter of the world's energy This disparity, of course,is rapidly winx.ws-aang u,A Dremo in A l%i"x changing. It is anticipated that electricity will fuel nu,t w asim w resu,=nuamuu. a a.,, much of the developing world's energy demand for gnnasww.js w ' lbd

I i....., ] 'lhelieuelits toourCu tomen More than anything. Our customers create our future opportunities. Their needs affirm the efforts we make on their behalf. in the United States, we are proactive in our efforts to help bring about full deregulation, thus j l enabling our current and potential customers to choose their energy suppliers The challenge ahead g fph@l.1 j for power producers in the U.S. and other industrial-h % 91 92 93 94 95 M 97 ized nations is to navigate through deregulation and ,,1 lll1 297JXXF. lj l more competitive pricing structures while satisfying 297.000 : j l l customer demands for increased services and envi-297.000' fi! ronmental stewardship. We believe that customers 3 C I f a l will look to suppliers who are not ody reliable but 1.326.000' 3.415.000 l who also offer competitive prices and a full range of services. Because of our successful experience HISTO RIC AL GROWTH IN as a supplier of both electricity and gas in the U.K., NUMBER OF CUSTOMERS Ca! Energy already has the processes in place to (Laudee CalEnery 's net megauatts,(pnp ts in gwramm serve customers optimally in a competitive market. andalulaialumg Jarrratt mdmtry stamlerJohit estimate ome nuyuait una 11menJ+wrshurumen l IW7figrim rejint the a.Lhnan < Metier Llairr6 Jeariary andrvandeJgas,astumer baw. w~.,.. . ;.4 - -v. ,..t c :. ".. ' (.g.q.}, 1.. / - 'J E ,7.- ~

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? WI f lfff CARPET I ..e + AnYii ' }; d ~w 4Y. c. H n.1 A carpet manufacturer utilizes a portion of the steam from Yuma's naturalgas togeneration facility dunny itsprocessing of nyfon into carpet fibers w

2a_db22: (( <ai* .o a= l In the United Kingdom, our customers are. K']%$* {Y for the most part, end users of the electricity and + gas we provide. Whether these customers are ~p. industrial or residential users, we are committed to j j: i providing them with premium products and service .'/i, @ /3 'I ~ Y options, low prices, and responsive customer service. Northem Electric has formed creative alliances and dE "? 'E 'r partnerships, and has developed its proven and pro-prietary inf armation technology and customer billing services network to better meet its customers' needs and to serve them promptly and accurately. As a result Northem Electric enjoys a reputation for reliability and integrity.

• \\ ' NORTHERN s

Near the Casecnan hykoelecinc and ungation project Ca! Energy Dim Stallme Thf I stops to visit wth local children interested in the medical /xil,ty ben,g construs anddonatedby CalEnergy staff ~~ ' e 9p we also work to help implement processes and technology that will further assist area inhabitants. At our Caseenan facility in the Philippines, for l , j' 5] example, excess water diverted from the Casecnan and Denip Rivers will be used to irrigate rice fields j ( lt is projected that the annual impact will be approxi-l a, ? mately one billion pounds of additional paddy rice per \\;, l year, a production increase that will help the country achieve its goal of self sufficiency in rice production. l t A 5 " d * :.ii,O 'ihe llenefits to Our Simrehoklers Sat)SfiedCUStamerS outSide one We are committed to maximizing the rate of retum o/Northem Electnc sretadshops. l for our shareholders We do that by demanding excel-lence in every aspect of our core business the supply in other parts of the world, we continue and distribution of electricity and gas; the provision j to be committed to completing construction of our of top <luality related services; and the development. l l projects on time and within budget Our facilities in construction, ownership. and operation of power gen-l the Philippines have already added 500 net MW of eration facilities. We continuously strive to serve our j generating capacity for the country, and will add an current customers better and attract new customers l additional 150 net MW of much-needed electricity in the wholesale and retail environment, to increase l and water for irngation in the future. 0ur presence our power generating performance and lower operat-j in developing markets provides benefits beyond ing costs at our generating f acilities, and in general, those realized by our primary customers Not on!y do to develop new, innovative processes and services l we become a sustaining force in the local economy, that will allow our Company to expand successfully i

{-(. ie a.a. i n.--= ..,oe.=. i=. l We apply this same level of diligence to every We believe in promoting from within whenever endeavor that supports our core business activities. possible and providing our employees with additionai CalEnergy is known for its ability to assemble training and educational experience to equip them innovative, well-structured financing packages for promotional opportunities. We provide tuition that enable us to reduce risk. We have obtained reimbursement assistance and reimbursement more than $7 billion in financing since 1991, and for obtaining professional certifications. have completed project financings for major The safety of our employees is also of top priority. international projects utilizing a variety of sources Safety, wellness and productivity workshops are including capital markets, commercial banks, and consistently conducted at each of our facilities multilateral and export credit agencies such as the worldwide. We believe itis our duty to send our Overseas Private Investment Corporation and the employens home in the same mannerin which Export-Impost Bank ot the U S. theycome to work-safe andhealthy. As we strive to be one of the lowest cost independent power providers, CalEnergy generates 'lhe ik nclit.,Io Our Commimilitw attractive rates of retum on our invested capital. The success of the communities near our facili-We have also achieved much better than average ties is important to us for many reasons, but primarily j growth in Northem Electric's gas supply business. because they are the homes of our customers and Our experience with Northern is testament to our employees. We are proud of the volunteer efforts ability to act on strategic acquisition opportunities of our employees, who tirelessly donate their time ~ and once completed, realize operating enhance-to many charitable organizations around the world. I ( ments and cost-saving measures to allow our As an organization, we strongly believet is the Company to grow and our shareholders to prosper. obligation of our Company to give something back to the people of the communities that sustain us 'lhe lienefit, to Our Employ eis in that regard, we hire from the local workforce, The working environment at CalEnergy is one support the arts and community charities, and actively of professionalism and commitment to integrity in participate in educational organizations, community everything we do. The hours are long and the work safety programs, and environmental activities. is challenging and complex, yet an atmosphere of camaraderie and teamwork exists that moves us i ~ Q> git EZfy ~# $~..:j W h,% j ( iM @Kf7GW2 forward. Without the competence, kaowledge, /.o:. and fortitude of our employees and the willingness .~ i 7 . ;,.4. f f.,Q fZ. of many to travel and immerse themselves in new 1 -l; I[Y M - SbWi [Db .hhh O" gy cultures, our Company would have been unprepared

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for the rapid growth and expansion we have experi-f p, y,{ l SUd['( ykMMI g enced over the last five years. CalEnergy employees ". ? ?,,' d $ f ' }. B truly are the driving force behind the success of our -.j t V,.- Company and we applaud their dedication, diligence M,.,9 3 4, il~~f and hard work. We provide competitive compensa-tion packages, medical and dental programs, hfe insurance programs, accidental death and disability a insurance plans, and many opportunities for incentive compensation. '~ ~ The ieattm pnerprojectproduces electroty solety from naturally occurnng geothermalsteam twar the Salton Sea Known Geothormal Resource Area in Southe n Cairfortna 's knpenal Valley i

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?iYis 't ! 't 4%d 8010 ') l In the commun:t,es in emerg!ng nations where organizatons Neady an of our facat:es have many of our projects are located there is a need programs in place to partner vath area schools. to f or non-trad.tional assistance We help by pmsiding support school actvi;es. ath'et c and scholarsh p support in the f arm of med ca!. nutntional. educa-programs. pro',1de finarcal and appment donat:ans. tional and other types of a!d We have a5ststed in and volunteer tme to he:p educa'e students about the buMng of roads. schools. and medica! facat:es. career opportun;t<es and enwonmental ssues i and by provid:ng f ood potable v ater. agncu!!aral and As one example of how Ca Energy employees transponation equ pment and other basic supples f rom d:tterent areas mieract and support one in the United States, Ca Energy supports another. Ca'Energ/ corporate staff members sked chantable and civic organtzaDons. the arts. and ctaseN v m Ca Energy's leste Operat:ons in the edur.at,ona: and enwonmental act.v: ties across Ph : pru e.n 1997 on a p:og am to provme text the nat:on Many of the Company's fauht:es are the bacis to schoois and Lbrar,es on the is!and of Leyte largest supponers in the:r communmes of organiza m the Phipp;nes The Calnergi siff in the U S t;ons Me the United Way Company employees pned wah the Omaha Pmbhc Schools. Team A'r donate their tee and resourtes to or gan:zat:ons Express and me M p:no-Amencan Youth 0:;prtzat:an to co ect and Ap more than 13 600 edacat onal indu1.ng the CnDc f: bros:s foundatron. the n Muscu:ar Dystrophy Associat:an. area Chamtiers of text books and sc ence kits to the schonls un ley'e Commerce. the Bov and G.H Scouts o Amenta. 4H lt 6 antopated that th s suaessful and g'atfwng f loci bland banks. homelen she!!ers, sa e havens prog'am wJ: ( ont:nce f or years to come for abused v/OrPen and thM en. and fl rug preWI hon

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r i I In 1997, our Imperial Valley employee;... Additionally, Northern Electric employees donate recognized by the U.S Fish and Wildhfe Service to approximately 40 local organizations and charities for helping to construct and provide electrical wiring in northeast England each year through its Charitable for a medical and surgical hospital unit, used for the Payroll Giving Program, which collects funds through treatment of ill and injured pelicans, cranes, and payroll deductions elected by employees and retired other birds. staff These funds are then distributed to worthy In other environmental efforts, CalEnergy was organizations. In October, the Charity Association a major sponsor of " Earth & Us," a public television presented a check to the Northumberland Cancer outreach alliance project. The community educational Support Group, whicn offers support e.?d envice to project, initiated in 1997, spans 12 18 months and cancer sufferers and their families throughout the focuses on water quakty in the watersheds of Lake area In November, the staff donated state-of the-Champlain and the upper St. Lawrence River Valley, art exercise equipment to the Cardiac Rehabiktation l I near our Saranac facihty where we maintain a Unit of South Shields District General Hospital in significantwetlandsacreage Elementsof theproject South Tyneside, which will help cardiac patients i include workshops for educators, the distribution with their rehabilitation after illnesses or i of information about how residents can work to surgical procedures. l affect and improve water quahty, and a series of l community events. i j in the United Kingdom, CalEnergy's subsidiary, k I Northem Electric, is one of northeast England's largest chantable contributors, sponsoring and supporting a k wide range of agencies, charities, voluntary groups. ~. causes, and community programs. Nonhern Electric j has put a special emphasis on education and training. 4,,. .g new enterprise, and opportunities for people with special needs. Northern Electric helps bring the Royal {# .f athletic development through its sponsorship of g',',, g4 h; yyg ( Shakespeare Company to northeast England every d j year, and also supports home-grown artistic and y p b the annual Northem Electnc Arts Awards and ] y,., the Northern Electric Foundation for Sport. '. ~ 1 i hy In partnership with the conservation chanty y h[f"2 par [ ' ;, ' I Tusk Force, a group known for its protection of endangered species, the Northem Electric

• ~

Conservation Awards program was launched in October 1997. The program is open to young people ~ .,3 between the ages of five and 16, and is intended to increase conservation awareness. Participants In an eflod to increase consesahon awareness. Northem l Dectnc launched <!s fwst annual Conservanon Awards i must complete five conservation challenges by May 709 tam for young mWe between the ages c/ hw and M of 1998. More than 2,000 schools in the region have been invited to participate in the program. l l t

- - -.. ~. _. - - - - m.....=,io,...,.- _ _., ~ r i I i I In the Philippines, we have been involved in Indonesia, on the island of Bali CalEnergy in many cultural, educational, and environmental initiated a recycling program in 1997 in the villages activities. Near our Caseenan project, we have been of Desa Candikuning and Desa Pancasari in the actively involved in improving the standard of living Bedugul area The pmgram will help the villages of the Bugkalots, indigenous people who live in begin recycling and managing solid waste, and f the surrounding area We have established a Civic educate and involve local students in the recycling l Action Plan to provide for a shuttle bus and the effort. In addition to building a recycling center. l building of a road to enable them to travel from their CalEnergy provided trash bins for the communities l homes and through the mountains to a nearby village. and the schools, donated a pickup truck to haul We have also provided agricultural training and edu-the recycling matenal and trash, and is making cational programs and have established a scholarship donations to support recycling education and a j program to help further educational opportunities. trash clean-up program involving the village schools. i Also in the Philippines, CalEnergy helped to We also provided trash containers for the Kebun fund the " Presidential Derby '98," an event orga-Raya tourist area to help control htter. nized by the Harvard KSG Foundation to promote the democratic process and educate voters about 'lhe ik nclit* to Our 1:mironnient candidates in the presidential election to be held Past industry-wide power generation practices in March of 1998 Eight hundred people including have accounted for nearly one-third of global emis-pohticians. business leaders, and media representa-sions of carbon dioxide, which is believed to be the l I tives attended the forum to hear five of the top eight principal ' greenhouse gas.' These past practices presidential candidates respond to questions on have also been blamed for producing nearly two-pertinent issues The event was widely reported thirds of the sulfur dioxide that is a rnajor culprit in l in the newspapers of the Philippines and through-air pollution. Additionally, the power industry has out Southeast Asia, and was the subject of a been implicated in other environmental problems l national telecast. ranging from heat emissions into air and water supplies to the emission of toxic wastes. Therefore, it is critical that participants in the energy indusiry f - impose safeguards to prevent and reduce become better stewards of the environment and .. /\\ k ~ ' ' L . I- / harmfulemissions Ca! Energy has continued to focus on providing ~ Y [ 4.. clean, renewable energy since its founding in 1971. 34 P .;e ^ g During the past 26 years, we have employed the q most up-to-date technology at our facihties to \\ - 8) ~..;f. ensure a minimal impact on the environment. g- -,,/ Q, j The primary fuel sources utihzed by CalEnergy-Q .g p 4 geothermal, natural gas, and hydroelectric - 1 :

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I A rmchngprogram developedtv Carnergy Geothermal energy is clean, reliable, renewable on the islaMotBah <n Indones,a focuses " and indigenous. Natural gas is one of the cleanest educanng schoolcreen on the <mportance of rmchngawmaneng waste fossil fuel sources in the world - plentif ul, economical l and highly efficient. Hydroelectric power, produced l I from the energy of flowing water, is also from a I renewable, dependable, clean source when properlyimplemented

.__.auemmmaa _ _! _ <..i...<i...,,.i.. l I t _.__.________._.l_____ l t M I 1 e I { i i l i b l r f f f p ( l j h h 7 l ,. i Cahfomia Canforma' l Cahfornia ' Cahforma; i i Cahfomia l 235 31' ! t 0 54 0 83 l 0 04' 750.005-i + PG&El ! l PG&E, 0 41 .. i PG&E i PG&E' l PG&E- '1 i j j l 159 16 l 0 40 0 02 65.586 . } i } scE SCEl i sCE' sCE sCE 281 55 0 63' t 03 0 05' 996.395 i LADWP' LADWP' i LADWP LADWP LAoWP t 353 08 0 80 1 72 ' 0 08 2.052.048 i 1 sDG&E sDG&E-sDG&E sDG&E SuG&E i 248 92 0 38 i 0 39 0 03 297.179 l CaiEnergy CalEnergy? CalEnergv CalEnergy' calEnergy 82 10 0 14 0 02 0 001 13.69I I CARBON AIR SuiEUR Oxiot NIT ROG E N Oxtut P A R T i c u t. A T E A I R TO T A i. EMis% ION 4 AIR EMi%sIONs AIR E M 14 % I O N % E Ml4SION S ENV IRON M E NT A L Di-CAfu r-br H>-5fWAlu v hr th-NOr'Alue br th-PA1 Alut-br COST lNOLx l C A L1i OR NI A E L E C T R I C A L S U l' P L 1 E R %* GL N E R ATlON 5ysTi u%: ,,,, gf,, j,,,,,,,,,,,,g 4, y, TO1 A L A 1 R E Mi% %1ON S* A N D EN VIRON M E NTA L CO%T%' odi ansair on,umn.per,,,uau auf edu.d u.+,-...n..-;.e,. Cahy,ruia: Marl) at cr.nelud ma m ths hsau 4 Gdd,nna WOrlduide Clinmie Clmnge... the effects of pollution and global warming PG or lk g. ca,6 n a,a In 1997, CalEnergy became involved with Ca! Energy remains committed to: \\ scE: s*dna, Gap,rnia t>~n reducing and, whereverpassible, IM P: !" ^ 'wic^ra"~<"' the intergovemmental Panel on Climate Change y u;ua 6 twr flPCC"). which includes 2.500 climatc experts eliminating environmentalimpacts 5DG&L: 5.m Duy Gas 6 f haric re-using andrecycling materials. from around the world. The mission of the IPCC is Call nern. LaJ,.,wrn Gwpan> I,u to promote climate change policies that wiIl provide whereverpossible l aw imprn.J udla lun nas ' " ' ~ " ' ' ' promoting energy conselvation and efficiency l incentives to reduce greenhouse emissions and other improvingpublic awarenessof threats to our globa! climate. CalEnergy continues u"n. GJJard. l'h D to be an active proponent of emission reductions. environmentalissues susc n c.uas At a ensuring full compliance with legislation

c. usa 6 a uadI uxmanne As indicated by the chart above, major find.ngs illustrate that there are bignificant ditferences andregulation refining ourenvironmental in the major Califomia electricalsuppliers.

.tuair o.nni.,ns an J<juuJapnJ. CalEnergy compares very favorably with other managementsystem c.m,, psi,a.,,aq,,,,,,,,,4 broadening our etforts to meetincreasing d'" r^'" M *"rd""d suppliers because of ourlowimpacts of air emis. sions andlow totalenvironmentalcostindex. energy demands by utilizing clean, reliable, ' """." ann"w'r"o',sm'eP!""' d

Gon, reen As world population continues to increase at andeconomicalfuelsources g,aoaaag.sga,.tms employing environmentally responsible f'"'j"" ',"','i',',',"'""

a rapid pace, it becomes even more important to preserve our natural resources and reduce technology I

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ExcellenceinCore Business Operations We an cornniitte<l to excellence in core liusiness operati<nis. [1] \\\\it <levelop, construct, own, anni operate environnientally responsible power genenition facilities. [1] \\\\i engagein i1ie supply, distril>ution, transmission, ami marketing of electricity mui gas. [1] We explore :nul <levelop gas anil geolliennal fields. [1) hi pnni<le ourcastomers with a full nmge ofenergy senices. [1] We utilizennnpetitiveinibnnation teclinology and < levelop ii n iovative customer.4 rvices to maintain a focus on operational excellence in everyan a ofourOnnpany.

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+ 7 D; p? fi.9-: r s ^ } {;; r ..C.;.. L alEnergy'st GlobalPortfolio l Fuel Net MW Net MW Owned UnitedStates: A OPER ATION S: Arizona: Yuma Gas 50 50 California: ~ ,a Coso Geothermal 264 127 Navy 1, Navy 11. BLM imperial Valley Geothermal 268 268 Salton Sea I, ll, Ill, IV, Vulcan Hoch.Elmore. Leathers Nevada: Desert Peak Geothermal 10 10 Fuel NetMW Net MW New York: Owned Saranac Gas 240 180 UnitedKingdont Pennsylvania: A Ort n ATIONs: NorCon Gas 80 64 Teesside Gas 1,875 289 Texas: A CON S1 RUC11O N: Viking Gas 50 25 Power Resources Gas 200 200 Utah: A DEVL L0PM LNT: Exeter Power Gas 50 25 Roosevelt Hot Spongs Geothermal 23 17 T tal 1,975 339 A D E V E I.O P M E N T: California: Telephone Flat Geothermal 30 30 Minerals Extraction Geothermal 49 49 Total 1,214 995 h.av <taias! Anr ma> uan Jp,sJ:ng a pranng arJruru<,ir <<>ndai>rs, andplant Jony

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(anampipse AMund i ensligeggs b % %%3gh, ' \\d % % 3.2millgCg ? h ...be@ 1 J,[ 1.5nilhon h / f 17,179kmof oug$ssflines - hk-26,118km of undWp6und cables / f i< ~ &'9 24,575transformes'f ~mw c Y >, yr - 16,820MVAtransforming capacity [W, [ D', 'yy -i3 , $pikuttauWiumdemand 2.877 MW hutslectricity distributed 15.714 GWh d.

thesof electricitysupplied 14,389 GWh

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/ Fuel Net MW Net MW Share of Current Percentage 1 Owned Remaining Reserves Bcf Working Interest l Philippines-A PRODUClNG GA5 F! ELD $: I Windermere 15 0 20 % A OPER ATIONS: Victor 12.1 5% Upper Mahiao Geothermal 119 119 Schooner 11.1 2% Malitbog Geothermal 216 216 Mahanagdong Geothermal 165 149 S re Km' Current Percentage A CONSTRUCT 1ON: Working interest Caseenan Hydro 150 105 A G, A s F I E L D S IN DEVELOPMENT: A D E V E I.O P M E N T: Gengin Concession 2,960 9% Alto Peak Geothermal 70 70 Fila Concession 13.000 100 % ladonesia: A CONSTRUCTION: Dieng UnitI Geothermal 55 52 ,l3OlHl b,ei i\\lE D.109 Dieng Unit il Geothermal 80 75 q,UIUl iqI,I *g7 0WIII9 I o (M1 Pataha unit t Geothermal 80 70 A DEVE t OPM E NT: Dieng Phasell Geothermal 265 249 A COR POR ATE IIL A DQ U A R1 L R 5 Patuha Phase 11 Geothermal 320 282 A OPLR ATIONS Bali Geothermal 400 240 A CONSTRUCT lON Total 1,920 1,627 A Dtvr LOPuENT A GA% EX PLOR ATION i Ste: Tin Compann quata allpner.amnprvas <>tivr dan kaA 't l A,taal AlW m.n taryApahnx un qvrating andrum wr svuhtnm l andplant J ugn. IW wem==mmarmwww-mi -an-meme mmeep

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y 4 ..,t .Jg }, - g. g / Cd [ntVjb 5 N M IIge0l4mspr0;el!jV0udeS %) i e51;.' *be U $ DeDd'?'ne?'l Cf lW N3A,1%l S lXJ ed on tw U,f Li Lhuivos S: ton m the %we Deseta Ceaiune C##y w - @) Since 1991 our global reach has grown .\\ l nok at Our 1%jeeb trernendous!y In 1997, Ca' Energy expanded in In the United States.. several fundamental respects -geographl cal!y. in Overah performance at our U S facil't.es n 1997 j net megawatts of capacity in experience and skiH was outstanding Ca: Energy operates 17 geothermat base We reached agreements to develop projects and natura! gas-faed cogeneration facilities in the in Poland and Austraha. respectively We increased U S The Company continues to upg'ade these pro-our operating capacity as we completed construc-jects and aH of its facihties worldwide to matntain tron on projects of appro imately 300 MW of new our pos: tion as a low cost. rehable power provider x geotherma! generating capacity in the Phihppines in the competitive marketp! ace lo the U S. two projects continued in their deve!op-ment phase and our existing operating faciht>es maintained production at record levels These events come on the heels of an actr,e 1996 during which we began power plant operations outside the U S Today, through our experience w:th 4 Northern Electric in the U K. we have eamed a leading position among companies in compet.tive power markets in au reg:ons of the world U L,, .\\)?'?Q h'GNUcf. ' lt'b $ ( I hY ' $4 A:'l.U15 Y?!f.$ '0 ; $Y ? + p"* y n "r 's) y ? ! ? [v 9.n LJ? 0 e ~f r y q u, e:r 4 r

E_.alH1 ] j ElMilk V. Ih., h M Natural Gas / Cogeneration Projects: l-N j' Natural gas is one of the world's most economical, ' ~ plentiful, thermally efficient and clean fossil fuel J-sources. CalEnergy's cogeneration facilities use natural gas to fuel the turbines that produce energy [', in both electric and thermal (steam) form. In simple cycle facikties, waste heat from the turbines is g, geothermalbnne for commercra/ sale ar Calfnergy's Mnerals dissipated into the atmosphere. At CalEnergy's htractionproject in the lmverial valley cogeneration facihties, however, this exhaust is recycled in a heat recovery process in which high-GeothermalProjects:

1. '.sure steam is produced to drive the steam ne gensan Won 0% steam den Geothermal steam is an environmentally preferred extracted and delivered to a thermal host-a nearby energy source because it is reliable, renewable, industrial company that uses the steam for processing clean, and economical Geothermal production wells "3

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beneath the earth's surface to release tremendous nIg gs e gens n aches pressure caused by the hot water flashing to steam. include: Saranac, a 240 net MW project located.in At the surface, the steam is separated from the fluids Plattsburgh, New York: Power Resources, a 200 net W and used to drive turbines that generate electricity. l MW project near Big Spring Texas; NorCon, an 80 j Our U.S. geothermal facilities all performed well net MW project in North East, Pennsylvania; and in 1997. They include: Coso, a 264 net MW project Yuma, a 50 net MW project in Yuma, Arizona. ( locatednearRidgecrest Califom.ia; Imperial Valley, j a 268 net MW project near Calipatria, California, Desert Peak, a 10 net MW project near Reno, l Nevada; and Roosevelt Hot Springs, a 23 net MW project in Utah. At our Imperial Valley location, CalEnergy is continuing to develop its Minerals Extraction project. l This technology involves the use of ion exchange, solvent extraction, and electrowinning to extract and plate minerals from geothermal brine that is brought to the surface during the geothermal power production process. We anticipate that this will be a successful addition to our current operations at this site ? mm At our Telephone Flat project in northem mw a Y ~ q., y California, our environmental permitting process 7 "fyg = b ] continues. The 30 net MW geothermal project / D,, # ** f3 S is located in Siskiyou County, Cahfornia. 7h.j,N I 1 l The Saranac gas 4 red cogeneration project located in Plattsburgh. New York sells electacity to a utdity and also naturalgas through l the Cominny's North Country Gas Pipehne

__am . mar a.aom - m ___ _., e e= ( u ues=$ i = c ( _a l l l y i y 3 I ,g in the United Kingdom... N ~ :) l Our acquisition of Northem Electric,on o, / j December 24,1996, is perhaps the most significant f[ 4' j move by our Company to date. We are extremely [ h i pleased by the performance of Northem Electric, as ] an electricity supply and distribution company serving

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nearly 1.8 million customers in all 14 public electricity f d supply areas of England, Scotland and Wales. p } ~~ l Northem is also emerging as a leading gas supplier V .i, c in the competitive gas market. Effective in 1998, our ,y purchaseof theadditional30percentstakein A-rated d 4 F Northem Electric from KDG adds to our portfolio. y,, t ]}lg The acquisition of Northern Electric is consistent "g )) l with our growth strategy and is important for several l reasons First, we acquired Northern at an extremely ( attractiveprice-oneof thelowestpricespaidfor l a U.K. Regional Electricity Company This f act, along I with Northem Electric's exceptional performance communicanons network on norrheast England ,Lg l W l in 1997, has positively impacted our financial results. I { Finally, the acquisition has positioned us for growth by providing an experience base from which to com-Known for dependability and competitive pricing. l pete in other deregulated electric and gas markets. Northern offers its customers a diverse menu of com-plementary energy services through its subsidiaries: i Distribution and Supply-Northern Electric Distribution is responsible l In 1989, efforts began to hberalize the U.K. for managing the distribution (w. ires) network. i electricity industry and in 1998 full competition is Nortbem Electnc Supply supplies customers t expected to commence in both electricity and gas with electricity and gas. supply It is significant that Northem Electric oper-Nerthern Electric Generation has ownership inter-ates in a deregulated environment, and this fact was ests in and operates power generating facilities. i fundamental to our decision to move forward with Northem Utility Services is an engineering d..ivi-i the acquisition. In addition to building a profitable sion responsible for maintaining the distribution business in the U.K., we are building a foundation i network and providing related services to third of expertise that will prove invaluable in the U.S. f and other markets worldwide as deregulation P Northem Metenng Services supplies and main-i occurs Northem has considerable experience and l tains meters and provides data collection services. a solid reputation as a dependable energy supph.er Northem Electric Retail currently owns and with excellent distnbution abihties. l j operates 41 shops and superstores selling general I kitchen-related appliances, home-entertainment I products, computers, electric heating and other l j small appliances, and extended warranties l Additional service companies provide intemal I and some extemal customers with real estate, transportation, training, telecommunications, j and information services. l

j E.t a nur - i.si J 4 i > - i 1 i i ( i Over the last six months of 1997, Northem Natural Gas / Cogeneration Projects: l expanded its supply customer base by 20 percent by During 1997, construction began at the 50 net attracting nearly 300,000 new gas customers. A suc-MW natural gas fired Viking Power Station at Seal { cessful Dual Fuel marketing program has been intro-Sands on Teesside, which is owned 50 percent by j duced to offer customers cost savings for combined Northem Electric and 50 percent by Rolls-Royce electricity and gas services. In addition, annual cost Power Ventures The facihty is to be connected ) savings of approximately E17 million(U.S. $27.2 directly into the Northem Electric distribution system million) have been realized with the successful and has a long-term gas supply / electricity offtake i integration of Northem Electric into our operation. contract with Northern Electric. Dunng 1998, deregulation is expected to be com-Additionally, Northern Electric has a 15.4 pleted and competition extended to the remainder of percent ownership interest in Teesside Power the energy market in the U K. Approximately 26 million limited, which operates a 1,875 net MW combined electricity consumers and 20 million gas users will be cycle gas-fired power station at Wilton. Northern j free to choose their suppliers? This should result in Electric purchases 400 MW of electricity from the { lower pibs and higher service standards. in addition plant under a 15-year contract. l toaggressivecost<uttingmeasures NorthemElectric Northem Electric also operates a 5 net MW j has implemented key strategies to satisfy customer diesel power generating plant in Northallerton, expectations, retain existing customers, and attract North Yorkshire. new customers in this competitive environment. I These include unique information technology systems that will alicw Northern to handle a large number of customers and provide premium service in bill assess-ment and collection, power outage procedures, and changes in customers. 1

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i.....,<o...... j L Gas Field Development In order to increase our business opportunities further, CalEnergy seeks to produce not only electricity py)O but also gas for itS Customers.To achieve this, the 111 % T O R I C A g. Company's subsidiary CalEnergy Gas (U K.)l.td G R O W T 11 iN bKlLLs i-has developed a diversified portfolio of exploration, g development, and production assets in the U.K. Geothermal Exploration & portion of the Southern Gas Basin in the North Sea. C'""" Current production comes from the Company's interests in the Victor, Schooner, and Windermere py;7 Geothermal i Gas gas fields, with remaining reserves of approximately Generanon %,[*,[& 38 billion cubic feet ("bcf")of gas. In Poland.. Poland's electric power sector is in the process Hydro Electric of restructuring into three subsystems generation, transmission, and distribution. Most power plants thereburncoal,and morethanhalf arecombined i f heat and power plants. Currently, Poland's needs relate primarily to improving energy efficiency and Pjo alon competitiveness, and addressing environmental sup$ ~ Pr h. l l concerns. Natural gas is the preferred substitute for coal, and by 2010 Poland plans to generate at least 10 percent of its electricity with natural gas, as com-pared with approximately three percent currently.' Electric Electric . A.. Distnbuton Sennces Gas Field Development l CalEnergy Gas has reached an agreement with t y the Polish Ministry of Natural Resources for exclu-l sive gas exploration and development rights to a l 13,000 square kilometer area in the Central Polish Trough of northwestern Poland. The area, known .o..- .n27 .....e-e... as the Pila concession, is situated within the geological province of the northwest European Permian Basin. The agreement represents an excellent opportunity for the Company in view of Pila's potential undeveloped gas reserves. ( ' US Ikjurtent gi: wry I

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~~ .? ) i_ .y. " .V ) 77 t l s l I I l The hist CalEnergy Philippinepower protect to receive reverwe was the lhoer Mahiaogeothermalproject bcatedon the island oflepte. 1 l In the Philippines.. The Philippines possesses significant geothermal b Although Asia, as a whole, is experiencing capacity, and the hydroelectric power potential in economic uncertainties. CalEnergy's projects the country is also vast. CalEnergy's current projects in the Philippines remain unaffected. in the Philippines consist of three geothermal power Since 1990, when the Phi lippine govemment facilities ar,a one combined irrigation and hydroelec-began enacting Build-Own-Operate-Transfer tric power generation project. The country's major (" BOOT") laws to encourage increased private invest-long-term goal is to diversify its power generation ment in the country's power sector, opportunities for mix by encouraging the development of new and independent power producers in that country have renewable energy sources, such as those employed been very attractive. Each of CalEnergy's projects in by CalEnergy. l the Philippines is structured as a BOOT project, with After the National Power Corporation ("Napocor") ownership transferring to the Philippine government completed its transmission line interconnections to after an agreed upon period of time. Cebu, Repubhc of the Philippines President Fidel V l Cun ently. about 65 percent of the Philippines Ramos and members of his cabinet conducted a site is electrified and energy demand is increasing tour of Ca! Energy's Upper Mahiao geothermal plant. l Between 1993 and 1999, approximately 6.000 MW His inspiring message during this tour under-l of additional power generating capacity will be scoredtheimportanceof thecompletionof the ( added in the Philippines through BOOT contracts. BOOT projects and his commitment to increasing j The current Power Development Program foresees the electrical infrastructure of the Philippines using tota.' capacity additions of 13.000 MW from 1996 its own environmentally friendly natural resources. l to 20(5,32.660 MW from 2006 to 2015. and 46.500 President Ramos cited the fact that operation of MW though 2025. Currently, about two-thirds of the l.eyte geothermal plants displaced the need l Philippin 3 electric generation capacity is oil or coal, to import 9.4 million barrels of oil per year, resulting with the emainder based on geothermal and in a savings to the Republic of the Philippines of hydroebctric sources.* approximately $142 milhon per year. 'lind i

4% r_....___... u,. The President also noted that the development The project wil1 provide up to 150 net MW of new, and operation of the plants was an excellent example installed hydroelectric capacity to the important of the type of private sector and government coopera-Luzon electrical grid as well as much-needed tion that the BOOT progtam was intended to foster. water for agricultural use in the Luzon Valley. GeothermalProjects: In Indonesia., The construction of CalEnergy's Malitbog Units 11 The situation in Indonesia has coated some and Ill and Mahanagdong geothermal projects were significant challenges for the Company, requiring deemed complete in July 1997. The Malitbog project us to record an $87 million non-recurring charge .is a three unit. 216 net MW f acility on the Tongonan in the fourth quarter of 1997. We are proceeding Geothermal Reservation on the island of Leyte. Our cautiously and are actively pursuing the resolution Mahanagdong project is a 165 net MW geothermal e ss s n nesan @ sb facihty also located on Leyte. Both facihties sell 100 order to protect our shareholders' economic interests. percent of their capacity to the Philippine National Oil Company-EDC FPNOC-EDC") During its first year of operation our Upper Mahiao project, a 119 net MW geothermal power project, parformed exceedingly well. The project .J was deemed complete in June.1996. I Combined Irrigation / Hydroelectric Project 'ir;ns necessary to ensure our contracts N<% are hon-u oy the Govemment of Indunesia N Additionahy, realizing that one component of construction >s proceedmg on rhe ludrxe taed ty at the l Casecnan cornbined hydroelectnc and irrigation project CalEnergy,s 9verall strategy is the Jevelopment of lxared tr> Normer:> 6 or),r> rie Fnde,res projects in emerging countnes, it should be under-stood that these economies typically experience l periods of success and periods of setback, With In Australia... that in mind, and because R is impossible to pradict in Australia, the national govemment's deregula-l long-term economic cycles, CalEnergy's projects tion of the natural gas sector has spurred privatization in emerging regions have been and will continue andconstructionof naturalgaspipelines These to be structured to minimize risk to our Company efforts are helping to create an interstate gas grid { To this effect, we have consistently obtained that will further competition in the gas sector. I poliiical risk insurance for our investments and Gas Field Development sovereign guarantees for our projects in Indonesia. Western Austraha, in particular, is a reginn that in addition, our payments in accordanu with our contracts, are in U S doliars and therefore are ~ gas in the west is supplied from the northwestem i i not directly affected by local currency fluctuations shelf and transported by pipeline nearly 1,500 km f It is also important to note that our global expan-to Perth in the southwest There is considerable t sion is not reliant on one economy for growth as we heavy industry in the southwest based on the area's j have diversified our overseas investment portfolio. 1 numerous iron ore mines, gold m;nes, aluminum i As.in the Phik.ppines, rapid economic growth in refineries, nickel smelters, and bauxite mines. recent years has increased the demand for electricity Inanticipationof theopeningof thecompetitive i Indones.ia currently has the fourth largest population gas market in Austraha, CalEnergy has signed an base in the world, with more than 200 milhon people. agreement with Empire Oil & Gas of Austraha to To satisfy the increased demand and help stabilize l eam-in to a concession in the Onshore Perth Basin energy costs, it is important that electricity in of Westem Australia Theconcessioncontainsthe i Indones. be developed from sources that are rek.- old Gingin gas field, discovered in 1965, which pro-ia able, renewable, clean, indigenous, and economical. duced gas on a limited test basis in the early 1970s. Indonesia has a wealth of geothermally active The field is estimated to contain from 200 ocf to i areas and has.dentified a geothermal power-gener. i 470 bcf of gas, which at a minimum could supply i ating potential of 16,000 MW. As in the Philippines, a 250 MW plant for 20 years Additionally. because i our projects in Indonesia are structured as BOOT the site is closer to the southwest than the north-l l projects whereby, after an agreed upon period of western shelf, the potential exists to provide gas l l time, ownersh.ip will transfer from CalEnergy and to the area at competitive prices due to reduced l its partners to the Indonesian government. i transportation costs l CalEnergyis pleased with the progress ofits i projects in development and construction, and l with the exceptionalperformance ofits operat-ing projects during the past year. Because of the hard work and diligence of our employees, our Company experienced record results in 1997. l

} ~,,9. i e, e ~ s t STRICT i EV A L U AT10 N CRIhERI A .. s* M O He5p! IBM EMERGING AND DIV E RSIFIC ATION v M q m.. h o n M ATURE M ARKET st OF REVENUE BASE DeveIOEment O r r o'RT U N IT I E S ,AND FUEL SOURCES ${g.g{g i 9;- 9 DEREGULATED ~ AND PRIVATIZED ~ 'M A R K ET SE LECTIO N ~ ~ a 5 '~ iA /

-4 1 b k DisciplinedAcquisitions andNewProjectDeveloprnents Tliningli disciplined acquisitions and new project developnients, we liave finalened our l xisition as a leading glolial energv services conipany. [ 1 ) Fuinlaniental to ilias nile is ouraliility to seek out. evaluate.and act on opj xii1 unities tlia' not only increase our asset I)ase inal sources of revenue, lint also pnivide fuel source diversifiention and oilier ii ni n1 ant l >usinr33 syncigies. [1 ) llygaining valualile e3peni+ in coniplen ientary segn ients ofilie market-as well as in markets of various stages ofinaturity-we liave pn pared our Conipany for continued sucec3s.

c---- a Milestones and Significant Events of 1997 11'e Continued to Implement Our Strategic Plan /i , CalEnergy's strategic plan is to effect growth increased competition to benefit customers through through focused acquisitions and resource-based lower rates and better service. In the U.K., where development. It is a strategy that has served us deregulation is well underway, we are working to well and will be increasingly important to our future. improve service and give customers more choices. The events of 1997 have proven the importance of And in the developing world, our mission is to provide our global reach and the necessity of our constant electricity to people who have never experienced the attention to detail and risk awareness. As we reflect full benefits that electricity provides. on 1997 we can see that adherence to our plan has Our efforts to effect change and to satisfy the enabled CalEnergy to emerge as a leading provider needs of our customers in both mature and emerging of energy supply, distribution, generation, and markets are increasingly important now as world related services. power markets embrace privatization and full-scale Our commitment to our strategy does not mean, competition.Thederegulationof theU.S energy however, that we are inflexible or unable to adapt industry is becoming a reality and with CalEnergy's to industry change. On the contrary, CalEnergy has long-term business strategies, we plan to gain our always been an advocate for changes that benefit share of the new, competitive market. In those our customers. In the U.S., we want to bring about countries where we have competed for and won a share of rapidly expanding energy markets, we are demonstrating the positive effects of industry privatization. Being on the ' ground floor' in these l countries provides us with a wealth of experience i,j and expanded capabilities in generation, supply, and distnbution. Our presence in these emerging economies, where electricity is in great demand, I provides us with tremendous opportunities for growth. I .\\ lilt 5 toms of 1997 l Our focused efforts have enabled us to reach I several mileshnes this year To mention just a few of CalEnergy's successes in 1997, we first note that we attracted nearly 300,000 new gas custamers j p ( through Northem Electric's Dual Fuel offering, a j j j { marketing program that offers customers a reduced rate on their combined electricity and gas bills. We 97 90 9l 92 93 94 9? also acquired projects in diverse locations such as h l l Poland and Australia, completed construction on 240 3n: I { two geothermal projects in the Philippines, and maintained our commitment to excellence at gg 2343 each of our cperational facilities. og 5.109' H I $ T O R I C A 1. G R OW Tli IN NaT ,\\ll G A W A T T S i n+aue Ojwratwn. Gm,truawn andikipwns

R _, __ E in < o mm_ a l $p;fp ,lhe K.icuit Ihuwien.on m'g~ In January 1998, CalEnergy acquired Kiewit Diversified Group's ("KDG") 30 percent interest in A rated Northem Electric, their interest in power y ~ projects in the Philippines and Indonesia, as well i as the approximate 30 percent of CaiEnergy stock g owned by KDG. ? The transaction w:th KDG was the next logical Mk~ step to broaden our position as a leading global energy k-A' %,:6;2 & &.,e + g g An engineer wsits a stone-built electncay sub station in Company's abi!ity to make oppottune and disciplined Northumberland. Englarxf where Northem Bectnc supplies i stratBU c acquisitions The transaction is beneficial reliable eixtncity to its ruralcustomers to CalEnergy in many ways. During 1998 it will: immediatelyincrease revenue and eamings

• lhe integnition of Nortliern i'leenic significantly broaden our shareholder base The most significant accomplishment of 1997, meet out threshold after-tax rates of return however, and the one with the most far-reaching provide greater flexibility for strategic a

benefits to our Company, was our assimilation partneringas the expansion of the of Northern Electric. Since 1990, the electricity markets aroundthe worldcontinues I industry in the U.K. has been privatized and restructured. Emerging victoriously from those Ibitioned for alie l'utinv j developments is Northem Electric, which enjoys A key element to our success in the global a strong performance record and reputation as marketplace, and one that positions us for the future, a dependable energy supplier with excellent is our ability to adapt to market trends and satisfy distribution assets and abilities. Through its the needs of customers It is important to note as l subsidiary companies, Northern Electric delivers increased competition forces the industry to become customers electricity and gas and offers a diverse more efficient, profit margins will decrease. It is l menu of comp,ementary energy services. therefore critically important that we have all the l By the end of 1997, Northern Electric had pieces in place to ensure that we provide the best l attracted nearly 300,000 new gas customers and energy options and services at the lowest possible expanded its customer base by 20 percent through prices while maintaining a superior level of invest-its Dual Fuel marketing strategy, a program that ment returns. CalEnergy's experience with Northern offers customers a reduced rate on their combined Electric during the last year has prepared us well i electricity and gas bills. Northem Electric's success to compete in the privatized and deregulated global f l in this regard is a testament to the recognition it rnarkets of the future. Our hands-on experience with enjoys as a supplier of quality products and diverse fuel sources-such as geothermal, natural superiorcustomer service. gas, and hyd:oclectric-and our knowledge of distribution and supply gained from our facilities in both mature and emerging markets worldwide, l provides Ca! Energy with an unequaled skill base. I i l l

F i.i _e.. > <o.._t i. 1 T Sipiilicant l'.wnt, of 1997 During 1997 CalEnergy realized many accomplishments. In just one year, our revenues have increased nearly 300 percent. We have assembled the finest team of employees in the industry and our management team remains focused on creating shareholder value. CalEnergy is well prepared for a leadership position as we continue to put our skills to use in the U.S., the U K., and throughout the world. The additional successes of our Company in 1997 will help posit:on us for the future. They include: Constructionwasdeemedcomplete 1*C ]l'\\ lILI) Wereceiveocreditrating on the secondand thirdunits ofourMahtbog ~ upgrades on our seniordebt andconvenible project, a three-unit 216 net MWfacilityat preferredsecurities from Standard & the Tongonan Geotherma' fleservation on PoorsCorporation-theislandofLeyteinthePhilippines The l \\ 1 facility sells 100 percent ofits capacity to Lv'1 nill'Cl1 CalEnergyssubsidiam n ggpygg_ggg CE Electric, completed the acquisition CalEnetgys subsidiaiy CalEnergy Gas of Northem Electrics ordinary shares. (UK)Ltd reachedan agreement with the l ,fli11C Ca!Energys. CEIndonesiaFunding Fblish Ministry of NaturalResources for "'"' O 0 "' "" Corp closeda$400millionrevolvingcredit "O "'" ~# facility (which is nonrecourse to CalEnergy) to "U finance the dewlopment andconstruction of Pbland. The area is situated within the the Companys geothemetponer facilities at 0 the Dieng. Patuha, andBalisites in Indonesia. Nonhem Electric receivedinvestment graderatings fromStandard& Poor's yg 7 ,g Cotparation. Moody' Investors Service. s CalEnergyGas(UK)ltd signedanagreement andDuff& PhelpsCreditRating Co. with Empire Oil & Gas ofAustralia to eam-in ,\\ \\ l Iy, Construction was deemedcomplete I to a concession in ne Onshore Perth Basin of WestemAustralia Theconcessioncontains onourMahanagdongproject a 165netMW "0 " 0 geothermal facihty on the island of Leyte in thePhihppines Thefacilitysells100 percent ofits capacityto thePNOC-EDC

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h m 'llin ingli pn u lent lii n nicial a nil ri.-k n u u u genient we liave positionn i our G impany li >r financial sum ss. [11 \\\\i are known for our aliility to us.senil>le innovative financing packages aliat enalile ns to re< luce risk.1iir example. in 1992. CalEnergy coinplete<l alie first ever capital niarkets financing secun <llivainxilofopenitingassets. ( 1 ] Tlin> ugh Co30 Fuiuling Corporation, tlie Conipany raiscil over +360 niillion. [1) Again. in 1993. tlie Coinpany niiscil'473 niillion ihningli Ilie Salton Sea Fun < ling Col 1xinition. =m.e-e.-uA-e#a.+-- PrudentFinancia and RisiManaoement D In our Conipany each project or series of relatc<l pn> ject 3 in one of our linsiness units is structure <l anni finanecil separately with stanal-alone. Iloll-recollrse j)Toject lillillleillg. [1) Tliis ring-fence <l'struetnn ensun,ihat anyliylxillictinil llegillive perforillillice I)y olle l)foject is lililikely to 3ignilinuilly affi et the Coinpany a, a whole. [1) \\\\i constantly acial to inal <liversify our pniject l H lilli niio IllH liigli licW itM lIlisiliolin at H j (levelop!!icills. lli(I togelllet'. tlic3e litilittlives lillve illloWe(I olir i ($ollillillly lo incliieve illlpressive proWill illHI fillilliciill perfilllllillice.

.-__j .l M.2._I5U.S. n 41I1111Cl*O.0V A Forcefirthe Future CalEnergy has learned its lessons well and is of economic setbacks that our discipline and atten-poised (otakeadvantageof theopportunitiesof the tion to detail offers rewards. We have specifically f future. We have assenbled a proven management structured our Company with a diversified project j team and a dedicated, knowledgeable group of portfolio to avoid undue dependence on the econ-employees. We have honed our core business omyof onecountryorregion Ca!Energyistrulya expertise and are able to recognize and seize global organization-our Company as a whole is opportunities, often before others know they exist. much greater than the sum of our individual parts. 1 These are the attributes of success in any industry. We will continue to keep a watchful eye on develop-In our industry, in particular, they are most definitely ments in Asia and will work clo ;ely with our partners ] the mark of companies that will prevail in the future. during these trying times. J The accomplishments described within this In conclusion, the future of our industry report represent steps taken in a diligent pursuit holds more opportunity than at any time in history. of our strategic plan and mission-to be a lead;ng Deregulation and privatization of the electricity f global provider of a full range of energy services. sector worldwide is constantly increasing the size l Our strategy has served us well and will be of our marketplace.With CalEnergy's diverse fuel increasingly important to our future. Events of operating expertise, natural gas and geothermal 1997 have proven the importance of our global resource development capabilities, and electricity reach and the necessity of our constant attention and gas distribution and supply expertise-combined -O to detaii and risk awareness. with our unparatieled information technology 1 lhe recent unprecedented Asian currency resources-we have the tools in place to capitalize i problems have put great strain on many of the on these many opportunities and truly become Asian economies and confusion in the world's a force for the future. capital markets. It is during these inevitable times l l x y' CalEnergy's mission: to l >ecome a lemlmg \\ 'glolsal [>rovi(lerof a full nuige of energy se:Tices, ~ p x n l I l l l I

w..----- CalEnergyCompany,Inc. 1997 EnancialReport i 41-Faw ANc AL SuMM ARY 42 SELEC TED FIN ANCI AL DATA 44 M AN AGEMENT'S DISCUSSION AND AN ALYSIS OF flNANCI AL CONDITION AND RESULTS OF OPER ATIONS 45 CONSOLIDATED BALANCE SilFETS 58 . CONSOLIDATED STATEMENTS OF OPERATIONS 59 CONSOLIDATED STATEMENTS OF STOCKif 0LDERS' Equ Ty 60 CONSOLIDATED STATEMENTS OF CASil FtOwS 61 NOTES TO CONSOLIDATED FINANCI AL STATEMENTS 62 INDEPENDENT AUDITORS' REPORT 93 CORPORATE INFORM ATION 94

i.< i [- <o... i f 4 Financial Sumnwry Over the last three years ended December 31, KDG's ownership interest in CalEnergy 1997, CalEnergy Company, Inc. ("CalEnergy" comprised 20,231,065 shares of common or the " Company") has experienced significant stock (assuming exercise by KDG of one growth. Revenues have risen at a compound million options to purchase CalEnergy shares), annual rate of 130% from approximately the 30% interest in Northern Electric plc $186 millionin 1994 to appmximately (" Northern"), as well as the following $2,271 million in 1997 and net income minority project interests: Mahanagdong available to common stockholders excluding (45%), Caseenan (35%), Dieng (47%), non-recurring and extraordinary items has Patuha(44%)and Bali (30%)and other risen at acompound annualrate of 60% interests in international development from approximately $33.8 million in 1994 stage projects. to approximately $ 138.8 million in 1997. CalEnergy paid approximately $ 1,159 million This significant growth has been achieved for the KDG Acquisition and final closmg through: (i) acquisitions that complement " l*""*'Y # and diversify the Company's existing business, "*'87 "" ' "'9" broaden the geographic locations ofits assets available cash and the net proceeds of the and enhance its competitive capabilities;(ii) equity and senior note offerings completed enhancement of the financial and technical in October 1997. performance of existing and acquired pro.jects; 42 and (iii) development and construction of On December 24,1996, CE Electric plc new plants. ("CE Electric"), which in 1997 was 70% owned indirectly by the Company and 30% On September 11,1997, the Company signed owned indirectly by PKS, acquired majority a defmitive agreement with K,iewit Diversified .E

1. "" #" "S " ##I '"*'"

Group ("KDG"), a wholly owned subsidiary capital of Northern pursuant to a tender offer of Peter k,n.ewit Sons,,Inc. ("PKS"), for the (the " Northern Tender Offer") corr.menced in Company to purchase KDG.s ownership the United Kingdom on November 5,1996. interest in various project partnerships and CalEnergycommonshares(the KDG owned 100% of Northern's ordinary shares. Acqu...isition ). Accordingly, common stock and options subject to redemption have been redassified in the consolidated balance sheet.

I i -N3 In the last three years, the Company has The Company has substantially completed consummated three other significant constructing the Dieng Unit I,55 net MW acquisitions, in addition to the acquisition geothermal project in Indonesia, which is ofNonhern. InJanuary 1995, the Company the first nit of400 MW under contract at acquired Magma Pbwer Company (" Magma"), Dieng. In 1997, the Company financed and a publicly-traded United States independent commenced construction of two other projects; l power producer with 228 megawatts ("MW") the Dieng Unit 1180 MW project as well of aggregate net operating capacity and 154 as the Patuha Unit I 80 MW project, w hich MW of aggregate net ownership capacity, for is the fust unit of 400 MW under contract approximately $958 million. In April 1996, at Patuha. Additionally, the Company has the Company completed the buy-out for conducted infrastructure construction and approximately $70 million ofits panner's drilling activities for the 400 MW Bali project, interests ("Pannership Interest") in four Although the Company intends to enforce electric generating plants in Southem its contractual rights with the Indo'nesian California, resulting in sole ownership of the government, the ultimate outcome of the Imperial Valley Project. In August 1996, the current uncenain situation in Indonesia with Company acquired Falcon Seaboard Resources, re<pect to the possible abrogation by the Inc. (" Falcon Seaboard") for approximately Indonesian government of the Dieng, Patuha $226 million, thereby acquiring significant and Bali contracts adds significant risk to the ownership in 520 MW of natural gas-fired completion of those projects and resuhed in electric production facilities located in New the Company recording an asset impairment York, Texas and Pbnnsylvania and a related charge in the fourth quarter of 1997.This gas transmission pipeline. 087 million charge includes all reasonably estimated asset valuation impairments asociated with the Company's assets in Ind anesia and gives effect to the political risk insurance on such investment. l

.r..; i.. c Selected FinancialData iku.tn en Tbmamb, Eurpt IWSlurr Amants htr En4J Dwemk r 3I, 1997 1996' 1995' _!994 1993 Income Staternent Data: Operating revenue $ 2,166,338 $ 518,934 $ 335,630 $ 154,562 $ 132,059 Total revenue 2,270,911 576,195 398,723 185,854 149,253 2,074,051 435,791 301,672 130,018 87,995 Expenses Income lrfore provision for mcome taxes 196,860' 140,404 97,051 55,836 61,258 himoney interest 45,993 6,122 3,005 Income before change in accounting principic and extraordinary item 51,823' 92,461 63,415 38.834 43,074 Cumulative etTect of change in accounting principle 4,100 Extraordinary item (135,850) (2,007) Net income (kss) t84,027)' 92,461 63,415 36,827 17,174 Preferred dividends 1,080 5,010 90 Net income (loss) available co common stockholders (84,027)' 92,461 62,335 31,817 .2,544 Income per share before change in accounting principle and extraordinary item 0.77' 1 69 1.32 1,02 1.08 Cumulanve effect of change in accounung pnnciple per share 0.12 Extraordinary item per share (2.02) (0.06) - 44) Net mcome (km) per share (l.25)' 1 69 1.32 0.96 1.20 Balance Sheet Data: Total assets 7,487,626 5.630,156 2,654,038 1,131,145 715,984 Total habiln;e: 5,282,162 4,181,052 2,081,474 867,703 425,393 Companyobhgated mandaronly redeemable convertible preferred secunties of subsidiary trusts 553,930 103,930 Preferred secunties of subsidiary 56,181 1 % 065 hhnonty nterest 134,454 299,252 ReArmable preferred stak 63/0) 58,800 Stakholders' equity 765,326 880,790 543,532 179,991 211,503 i Rdiat> ik a,quintwm of %rthw I'al,a Seakeniandik Partnenby iniemt onom/braptwn afik par kr Nat a to ikpsawulstatewnts. 2 Reflats the.agmatun a(%cma s nalfaaytta ofde war ) Imlahs ik $r.WL $ L29 per sharr, no-mumng att impatnneut chaqr

i m,,m Management's Discussion and Aiia1ysis of.Fiiiancial tono,ition .n and Resuhs of Operations u,, na nm aawa. tme rm as The following is - ~~,ent's discussion Wiley Project. In Augtot 1996, the Company and analysis ofcertain significant factors acquired Falcon Seaboard Resources, Inc. which have affected the Company's fmancial (" Falcon Seaboard") for approximately condition and results ofoperations during $226,000, thereby acquiring significant the periods included in the accompanying ownership in 520 MW of natural gas-fired statements of operations. The Company's electric production facilities located in New actual results in the future could differ Erk, Texas and Pennsylvania and a related significantly from the Company's gas transmission pipeline. historical results. Pouer Generation Projects Aaptisitions For purposes ofconsistency in fmancial On December 24,1996, CE Electric plc presentation, plant capacity factors for ("CE Electric"), which in 1997 was 70% Navy 1, Navy II, and BLh! plants (collectively owned indirectly by the Company and 30% the "Coso Project"), are based upon a nominal owned indirectly by Peter Kiewit Sons', Inc. capacity amount of 80 net MW for each ("PKS"), acquired majority ownership of the plant. Plant capacity factors for Vulcan, outstanding ordinary share capital of Northern Hoch (Del Ranch), Elmore, Leathers plants Electric plc (" Northern") pursuant to a (collectively the " Partnership Project"), are tender offer (the " Northern Tender Offer") based on nominal capacity amounts of 34, commencedin the United Kingdom on 38, 38, and 38 ni t MW respectively, and for November 5,1996. As ofMarch 18,1997, Salton Sea I, Salton Sea II, Salton Sea Ill and CE Electric effectively owned 100% of Salton Sea IV plants (couectively the "Salton Norrhern's ordinary shares. Sea Project"), are based on nominal capacity amounts of 10,20,49.8 and 39.6 net MW In the last three years, the C,ompany has consummated three other sigmficant respectively(the Partnership Project and the gg p gg 4 acquisitions,in addinon to the acquisition g,, ,g,g p,g ,, Phwig of Northern. InJanuary 1995, the Companv factors for Saranac, Ibwer Resources, acquired Magma Power Company (" Magma"), g g, g g a publicly-traded United States independent power producer with 228 megawatts ("MW") .. Gas Plants ) are based on capacity amounts of aggregate net operating capacity and 154 of 240,200,80 and 50 net MW respectively. MW of aggregate net ownership capacity, Each plant possesses an operating margin g; 7 g for approximately $958.000. In April 1996, the amount listed above. Utilization of this the C,ompany completed the buy-out for approximately $70,000 ofits partner's operating margin is based upon a variety of interests ( Partnership interest )in four electnc factors and can be expected to vary throughout generating plants in Southern California, the year under normal operating conditions. resulting in sole ownership of the Imperial ",n*a e' *ar*m'a*d""""*" d'""*" N'"i 5 up z, air m

r-j Residts of0perations Three Wars The following operating data represents the EndedDecember 31,1997, aggregate capacity and electricity production of the domestic geothermal projects: 1996and1993 Operating revenues increased to $ 2,166,338 1997 1996 1995 in the year ended December 31,1997, from o,craic,py,n xtor 10l n in4* in8* r $518,934 in the year ended December 31, kWh prcduced 1996, a 317.5% increase. This growth was (m thousana) 4,507,500 4,502,200 4.296.010 Capxity NivtW(average) 507.4 4910* 467.8 primarily due to the acquisitions of Northern, Falcon Seaboard, and the Partnership Interest %,sts,,,,p *,-. & t u,,6 5s,en so n m as well as the commencement of earnings at Salton Sea IV, Upper Mahiao and Malitbog. The capacity factor was 100.4% in the fourth quarter of 1997 compared to 102.6%,99.6% The increase in operating revenues in and 103.1% for the third, second and first 1996 to $518,934 from $335,630 in 1995 qu rters of 1997, respectively. The capacity was primarily due to the acquisitions of the factor decreased in 1997 from 1996 due to Partnership Interest, Falcon Seaboard and marginally decreasing production at the Coso Nmthern, the deemed completion and Project and a scheduled turbine overhaul at commencement of receipt of revenues from BI.M in April 1997. i Upper Mah;ao and Unit I of the Malitbog I Project in the Philippines, the completion The following operating data represents the and commencement of commercial operation aggregate capacity and electricity production of Salton Sea IV and an increase in the Coso of the Gas Plants: Project's electricity revenues. 1997 1996 1995 The following data represents the supply overalcapuin fxtor n3* n2w 88.8n and distribution operations at Northern: LWh prcduced (in thousands) 4.211,030 4,216,800 4,433,900 I99 Installed capairy NMW 570 570 570 Supply (GWh) 14389 14,185 14,253 Distnbunon (GWh) 15,714 15,656 15,260 The capacity factor of the Gas Plants reflects the Gas Therms Supply effect of certain contractual curtailments. The On ihmsana) 74 5 50.0 35 3 capacity factors adjusted for these contractual curtailments are 95.7%,93.2% and 96.8% The increase in units supplied and distributed in 1997 from 1996 primarily reflects increased f r 1997,1996 and 1995, respectively, activity in the local economy. The increase in therms supplied in 1997 from 1996 reflects the increased volume as the gas business in the U.K. begins to open up to competition as a result ofregulatory changes.

c..."""""""""" i i I I Electric sale price per kWh for the Coso Overall, the Company's expenses increased Project, Partnership Project and Salton Sea in 1997 due to the full year ofoperations Project varies seasonally in accordance with of Northern, Falcon Seaboard, Partnership the rate schedule referenced in the SO4 Interest, Salton Sea IV Project, Upper Mahiao agreements and power purchase agreements. Project and Unit I of the Malitbog Project and l The Coso Project's, Partnership Project's and the deemed completion of Units 11 and 111 of Salton Sea Project's average electricity prices the Malitbog Project inJuly 1997. per kWh received in 1997,1996 and 1995 Cost of sales increased to $1,055,195 m. were comprised of(m. cents): 1997 from $31,840 in 1996. This increase Coso Project Energy Capacity Total is a result of reflecting a full year of Northern's operations. Cost ofsales represents Northern's Average 6xa! 1997 12.56 1.91 14.47 costs ofelectricity and appliances during the Average 6 scal 1996 12.61 1.82 14.43 period of the Company's controlling interest Aversge 6 scal 1995 11.81 1.82 13.63 since December 24,1996. Pbrcnership Project Energy Capacity Total & Ikinus Operating expense increased to $345,833 Averege 6 scal 1997 10.96 2.18 13 14 in 1997 from $132,655 in 1996, an increase Average Escal 1996 10.02 2.12 12.14 of 160.7%. This increase is a result of the i Average 6xal 1995 11.14 2.10 13.24 acquisitions of Northern, Falcon Seaboard ( sation sea Project Energy Capacity Total and the Partnership Interest as well as the I ^S" commencement of receipt of revenue at Average 6 scal 1997 8.66 1.97 10.63 Salton Sea IV, Upper Mahiao and Malitbog. Average 6xal 1996 8 84 2.29 11.13 Operating expense increased to $ 132,655 in Averege 6 scal 1995 9.50 2.33 11.83 Interest and other income increased in 28.0%. The increase is a result of the Falcon 1997 to $104,573 from $57,261 in 1996, Seaboard and the Partnership Interest an 82 6% increase. This increase was due acquisitions, and the commencement of primarily to interest camed by Northern, operations of the Salton Sea IV Project. equity earnings from Saranac and General and administration costs increased Mahanagdong, and m. creased interest income on the proceeds of the equity and to $52,705 in 1997 from $21,451 in 1996, an I""*"" ""'"UE ^Y senior note offerings in October 1997. a result ofthe addm.on ofNorthem. General Interest and other income decreased.m an minstran nc st t $21,G 1996 to $57,261 from $63,093 in 1995. in 1996 from $23,376 in 1995, a decrease of 8.2%. This decrease is a result of the Company's continued efforts to reduce costs and reflects the elimination of redundant functions subsequent to the acquisition ofMagma.

3 s c~~. r' Depreciation and amortization increased to political risk insurance on such investments. $276,041 in 1997 from $ 118,586 in 1996, an The estimate assumes there will be no tax increase of 132.8%. This increase is a result of benefits associated with the asset valuation the acquisitions of Northern, Falcon Seaboard impairment. and the Partnership Interest as well as the The provision for income taxes increased commencement ofthe receipt of revenue at 9 g g Salton Sea IV, Upper Mahiao and Malitbog. and $30,631 in 1995. After adjusting for Depreciation and amortization increased m. "8 ' '8" 1996 to $118,586 from $72,249 in 1995, impairment and the dividends on convertible a 64.1% increase. This increase is primarily preferred securities, the effective tax rate was due to the Magma, Partnership Interest 38.0%,30.8%, and 31.6% in 1997,1996, and Falcon Seaboard acquisitions, and the and 1995, respectively. The increase from commencement of the receipt of revenue at ue pdmaMy tparger energy Salton Sea IV Upper Mahiao and Malitbog. tax credits and depletion deductions m 1996. loss on equity investment in the Casecnan Minority interest increased to $45,993 Project reflects the Company,s share of m 1997 from $6,122 in 1996, an increase interest expense in excess ofcapitalized of 651.3%. Minority interest consists of - S. interest and interest income at the Casecnan dividends on convertible preferred securities O l Project, which is currently in construction. of subsidiary trusts and the Company.s partial Interest expense, less amounts capitalized, ownership in Northern. This increase is a increased in 1997 to $251,305 from result ofissuance of the $ 180,000 of Trust 11 $126,038 in 1996, a 99.4% increase, Securities in February 1997 and $270,000 of and increased to $ 126,038 in 1996 from Trust Ill Securities in August 1997 and a full $ 102,083 in 1995, a 23.5% increase. Higher year of operations from Northern. Minority interest expense is primarily due to a larger interest in 1995 reflects the Company's partial portfolio of facilities and their associated debt owner; hip in Magma for the period frorn partially offset by the increase in capitalized January 10,1995 to February 24,1995. interest on the Company's international and Income before extraord; nary item was domestic projects. $51,823 or $0.77 per common share in l The non-recurring charge of $87,000 !997 compared to $92,461 or $1.69 per l represents an asset valuation impairment common share in 1996 and $62,335 or l under Financial Accounting Standard No. $1.32 per common share in 1995. Excluding 121, " Accounting for the Impairment of the $87,000, $1.29 per share, non-recurring Long-1.ived Assets", relating to CalEnergy's charge, income before extraordinary item assets in Indonesia. The charge includes would have been $138,823 in 1997. all reasonably estimated asset valuation impairments associated with the Company's l assets in Indonesia and gives effect to the l l

""""""""l"""" j i OnJuly 31,1997, the Finance Act in the The Company repurchased 1,622 common [ United Kingdom was passed by Parliament shares during 1997 for the aggregate amount and included the introduction of a one time of $55,505. The Company repurchased j so-calkxl " windfall tax" equal to 23% of 472 shares ofcommon stockin 1996 at the difference between the price paid for an aggregate amount of $ 12,008. As of Northern upon privatization and the Labour December 31,1997 the Company held government's assessed "value" of Northern 1,658 shares of treasury stock at a cost of l as calculated by reference to a formula set $56,525 to provide shares for issuance under I forth in theJuly budget. This amounted to the Company's employee stock option and $ 135,850, net of minority interest, which was share purchase plan and other outstanding recorded as an extraordinary item. The first convertible securities. The repurchase plan installment was paid on December 1,1997 minimizes the dilutive effect of the additional and the second installment is payable on shares issued under these plans. December 1,1998. On September 11,1997, the Company signed IlquidityandCapitalResources a definitive agreement with Kiewit Diversi6ed Cash and short-term investments were Group ("KDG"), a wholly owned subsidiary $1,446,620 at December 31,1997 as of PKS, for the Company to purchase KDG's compared to $429,421 at December 31, ownership interest in various project partner-4, 1996. In addition, the Company's share of ships and CalEnergy common shares (the joint venture cash and investments retained "KDG Acquisition"). in project control accounts was $6,072 and KDG's ownership interest in CalEnergy $47,764 at December 31,1997 and 1996, comprised approximately 20,231 shares of respectively. Distributions out of the project common stock (assuming exercise by KDG control accounts are made monthly to the ofone million options to purchase CalEnergy Company for operation and maintenance shares), the 30% interest in Northern Electric, and capital costs and semiannually to each a well as the following minority project Coso Project panner for profit sharing under interests: Mahanagdong (45 %), Casecnan a prescribed cak ubject to mutual (35%), Dieng (47%), Patuha (44%) and Bali agreement by the trm rs. In addition, the (30%) and other interests in international Lompany recorded sepaiately restricted cash development projects. of $223,636 and $106,968 at December 31, 1997 and 1996, respectively. The restricted cash balances are comprised primarily of amounts deposited in restricted accounts from which the Company will fund construction of Dieng Unit 11 and Patuha Unit 1; the Pbwer Resources Project, the Upper Mahiao Project and the Malitbog Project cash reserves for the debt service reserve funds; and the Coso Project royalty payment.

t """"""""""""".im i CalEnergy paid $1,159,215 for the KDG On August 12,1997, a subsidiary of the Acquisition and fmal closing of the transaction Company completed a private placement occurred in January 1998. CalEnergy funded (with certain shelf registration rights) of this acquisition with available cash and the $225,000 aggregate amount of 61/2% proceeds of the equity and senior note offerings Trust Convertible Preferred Securities (the completed in October 1997. "61/2% Trust Securities"). In addition, an E "

• E" On December 15,1997, CE Electric UK 61/2% Trust Secunnes, or $45,000 aggregate Funding Company, an indirect subsidiary am unt, was exercised by the ininal purchasers of the Company (the " Funding Company"),

issued $125,000 of 6.853% senior notes the placement. Each 6 t/2% Trust Secun.ty due 20(14, and $237,000 of 6.9')5% senior "E"**" Y ^" notes due 2007 (collectively, the "CE Electric and is convertible at any time at the option UK Funding Company Senior Notes"), and f th holder into 1.(147 shares of Company f200,000 of 7.25% Sterling Bonds due 2022. Common Stock (equivalent to a conversion On November 26,1997, the Company price of $47.75 per common share) subject amended and increased its $100,000 to adjustments in certain circumstances. revolving credit facility to $400,000. The On August 5,1997, the Company and Aso V facih.ty is unsecured and is avad. ble to fund a certain affih.ated capitalfunding trusts filed l working capital requirements and finance with the Securities and Exchange Commission future business expansion opportunities. a shelf registration statement covering up On October 17,1997, the Company to $1,500,000 of common stock, preferred completed the public offering of 17.1 million stock and debt securities which may le sold shares ofits common stock (" Common Stock") from time to time for various purposes. The at $37 7/8 per share (the "Public Offering"). Company completed the Public Offering in addition,2 million shares of Common Smck and the Senior Note Offering under the were purchased from CalEnergy in a direct sale shelf registration statement. by a trust affdiated with Walter Scott,Jr., the On February 26,1997, a subsidiary of the Chairman and Chief Executive OfTicer of PKS Company completed a private placement (the. Direct Sale ), contemporaneously with (with certain shelf registration rights) of the closing of the Public Offering. $150,000 aggregate amount of 61/4% On October 28,1997, the Company Trust Convertible Preferred Securities (" Trust completed the sale of $350,000 aggregate Securities"). In addition, an option to purchase principal amount ofits 7.63% Senior Notes an additional 600 Trust Securities, or $30,000 due 2007 (the " Senior Note Offering"). 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.

j i m,...., <o...., l l l l In November 1995,the Company closed being conducted by a consortium consisting l the fmancing and commenced cmstruction of Cooperativa Muratori Cementisti CMC i of the Casecnan Project, a combined irrigation di Ravenna and Impressa Pizzarottie & C. Spa, and 150 net MW hydroelectric power working together with Siemens A.G., Sulzer l generation project (the "Casecnan Project") Hydro Ltd., Black & Veatch and Colenco ( le:ated in the central part of the island of Power Engineering Ltd. (collectively, the l Luzon in the Republic of the Philippines. " Replacement Contractor"). l G Casecnan Water and Energy Company, In connection with the Hanbo Contract l Inc., a Philippine Corporation ("G Casecnan") termination, CE Casecnan tendered a which is approximately 70% indirectly owned certificate ofdrawing to Korea First l by the Company (after the KDG Acquisition), Bank ("KFB")on May 7,1997, under the is developing the Casecnan Project. G irrevocable standby letter of credit issued l Casecnan fmanced a portion of the costs of by KFB as security under the Hanbo Contract the Casecnan Project through the issuance to pay for certain transition costs and other of $ 125,000 ofits 11.45% Senior Secured presently ascertainable damages under the Series A Notes due 2005 and $171,500 of Hanbo Contract. As a result of KFB's its 11.95% Senior Secured Series B Bonds wrongful dishonor of the draw request, CE l due 2010 and $75,000 ofits Secured Casecnan filed an action in New York State l Floating Rate Notes due 2002, pursuant Court. That Court granted G Casecnan's j to an indenture dated as of November 27, request for a temporary restraining order l 1995,as amended to date. requiring KFB to deposit $79,329, the amount of the requested draw, in an interest The Casecnan Project was being constructed bearing account with an m. dependent fmancial pursuant to a fixed-pr. ice, date<ertain, mstitution in the Um. d States. KFB appealed te tumkey construction contract (the "Hanbo this order, but the appellate court denied Contract,') on a ;omt and several basis by KFB's appeal and on May 19,1997, KFB Henbo Corporanon ("Hanbo") and Hanbo transferred funds m.the amount of $79,329 Engineering and Construcnon Co., Ltd. to a segregated New York bank account ("HECC"), both of which are South Korean pursuant to the Court order. corporations. As ofMay 7,1997, Casecnan terminated the Hanbo Contract On August 6,1997, G Casecnan announced due to defaults by Hanbo and HECC that it had issued a notice to proceed to the including the insolvency of each such Replacement Contractor.The Replacement company. On May 7,1997, G Casecnan Contractor thereafter fully mobilized and entered into a new turnkey engineering, commenced engineering, procurement and precurement and construction contract to construction work on the Casecnan Project. complete the construction of the Casecnan Project (the " Replacement Contract"). The work under the Replacement Contract is

7""""""""""""% i. -] On August 27,1997, CE Casecnan announced and CE Casecnan intends to pursue vigorously that it had received a favorable summary its claims against Hanbo, HECC and KFB in judgment ruling in New York State Court the proceedings described above. against KFB. The judgment, which has been InJune 1997, the Company,s indirect special-appealed by the bank, requires KFB to honor purpose subsidiary, CE Indones. Funding ia the $79,329 drawing by CE Casecnan on a Corp., entered into a $400,000 revolving $ 117,850 irrevocable standby letter of credit. credit facility (which is nonrecourse to the On September 29,1997, CE Casecnan Company) to fmance the development and tendered a second certificate of drawing construction of the Company's geothermal for $10,828 to KFB and on December 30, power facilities in Indonesia. 1997 CE Casecnan tendered a third certificate On September 20,1997, a Presidential ofdrawing for $2,920 to KFB. KFB also Decree (the.. Decree ) was issued in Indones.ia, wrongfully dishonored these draws, but providing for government action to the pursuant to a stipulation agreed to deposit effect that, in order to address certain recent the draw amounts in an interest bearing fluctuations in the value of the Indones. tan account with the same m. dependent financial currency, the start-up dates for a number of mstitution in the Um. d States pending te private power projects would be: (i) continued 32) resolution of the appeal regarding the first according to their initial schedule (because draw and agreed to expedite the appeal. construction was underway);(ii) postponed The receipt of the letter of credit funds from as to their start-up dates (because they are not KFB remains essential and CE Casecnan yet in construction) until economic conditions will continue to press KFB to honor its clear have recovered; or (iii) resiewed with a view obligations under the letter of credit and to to being continued, postponed or rescheduled, pursue Hanho and KFB for any additional depending on the status of those projects. damages arising out of their actions to date. In the Decree, Dieng Units 1,2 and 3 are if KFB were to fail to honor its obligations approved to continue according to their initial under the Casecnan letter of credit, such schedule; Patuha Unit I and Bali Units 1 and I action could have a material adverse effect 2 are to receive further review to determine on the Casecnan Project and CE Casecnan. whether or not they should be continued in accordance with their initial schedule; On September 2,1997, Hanbo and iIECC and Bali Um.ts 3 and 4, Patuha Units 2,3 filed a Request for Arbitration before the and 4 and Dieng Unit 4 are to be postponed International Chamber of Commerce ("lCC"). for an unspecified period. In this regard, The Request for Arbitration asserts various the Company notes that its contracts and daims by Hanbo and HECC against CE government undertakings for the Dieng, Casecnan relating to the terminated Hanbo Patuha and Bali projects do not by their Contract and seeking damages. On October '"""P"**"" '" 'E ' "I' 10,1997, CE Casecnan served its answer by the government and that the Company and defenses in response to the Request has obtained political risk insurance coverage for Arbitration as well as counterclaims '"E * '"

• P*N'* *'

against Hanho and HECC for breaches

• P"Y'"""'"""""'*'

of the Hanho Contract. The arbitration " ' * " '* P' ' 4" " I # E *"" * '"' l proceedings before the ICC are ongoing l 1 i

L i ofIndonesia to honor its contractual structured with subsidiaries of the Company obligations; however, subsequent actions by hJding an approximate 94% interest the Government ofIndonesia and continued (including certain assignments ofdividend economic pmblems in Indonesia have rights representing an economic interest of created further uncertainty as to whether the 4%), and RT. HEA holding a 6% interest in contracts for such projects wiu be abrogated the Dieng Project. Financial closing and first by theIndonesian government and disbursement of construction loan funds accordingly have created significant risks occurred on October 3,1996. Construction to the completion of these projects. As a of Dieng Unit I is expected to be completed result, the Company recorded a SFAS 121 in March 1998. asset valuation impairment charge of $87,000 Pursuant to the DiengJOC and ESC, m the fourth quarter of 1997. This charge Pertanuna has granted to HCE the mcludes all reasonably estimated asset geothermal 6 eld and the wells and other valuation impairments associated with facilities presently located thereon and HCE the Company's assets in Indonesia and may build, own and operate power production gives effect to the political risk insurance units with an aggregate capacity of up to on such investments. 400 MW HCE will accept the Eeld operation l On December 2,1994, a subsidiary of the responsibility for developing and supplying Company, Himpurna California Energy Ltd. the geothermal steam and fluids required l ("HCE") executed a joint operation contract to operate the plant.The DiengJOCis (the "DiengJOC") for the development of structured as a build own operate transfer the geothermal steam field and geothermal agreement and will expire (subject to extension power facilities at the Dieng geothermal field, by mutual agreement) on the date which is the located in CentralJava (the "Dieng Project") later of(i) 42 years fbliowing efTectiveness of the with Perusahaan Pertambangan Minyak Dieng JOC and (ii) 30 years fouowing the date Dan Gas Bumi Negara("Pertamina"), of commencement of commercial generation the Indonesian national oil company, and of the final unit. Upon the expiration of the executed a "take-or-pay" energy sales contract proposed Dieng JOC, au facilities will be (the "Dieng ESC") with both Pertamina and transferred to Pertamina at no cost. RT. PLN (Persero)("PLN"), the Indonesian national electric utility. HCE was formed pursuant to a joint development agreement with RT. Himpuma Enersindo Abadi ("ET. HEA"), its Indonesian partner, which is a subsidiary of Himpurna, whereby the Company tnd RT. HEA have agreed to work together on an exclusive basis to develop the Dieng Project (the "Dieng Joint Venture"). Subsequent to theJanuary 1998 KDG acquisition, the DiengJoint Venture is _a

i i i HCE began well testing in the fourth quarter Patuha Power, Ltd. ("Patuha Power") is of 1995 and issued a notice to proceed for developing a geothermal power plant in the the construction and supply of an initial 55 Patuha geothermal field in Java, Indonesia net MW unit ("Dieng Unit I") in the first (the "Patuha Project"). On December 2, quarter of 1996. PT Kiewit/ Holt Indonesia, 1994, Patuha Power executed both a joint a consonium including Kiewit Construction operation contract and an energy sales Group, Inc., a subsidiary of PKS ("KCG"), contract, each of which contains terms is constructing Dieng Unit I pursuant to a substantially similar to those described fixed price, date certain, tumkey construction above for the Dieng Project. Patuha Power contract ("ConstructionContract"). Affiliates began well testing and exploration in the of KCG are providing the engineered supply fourth quarter of 1995 and in the third with respect to Dieng Unit I pursuant to a quaner of 1997, issued a notice to proceed fixed price, date certain, turnkey supply for the construction and supply of the Patuha contract (" Supply Contract"). The Construction Unit I 80 net MW project.The same Contract and Supply Contract are sometimes construction consortium as described referr-d to herein as the"Dieng EPC" above for Dieng Unit I has contracted to and KCG and their afEliates party to the construct Patuha Unit I under similar terms. Construction Contract and Supply Contract The Company has contributed the necessary are sometimes referred to herein, collectively, equity for the completion of Patuha Unit I as the " Construction Consortium." Yhe and the construction loan of $ 150,000 was obligations of the Construction Consortium arranged under theJune 1997 CE Indonesia under the Construction and Supply Contracts Funding Corp. facility. However, pending are supported by a guaranty of KCG. KCG resolution of the current uncertainties is the lead member of the Construction associated with Indonesia, construction Consonium, with a 60% interest. HCE will activities on this project have been be responsible for operating and managing significantly reduced. the Dieng Project. The Company and PT Panutan Group, in the fourth quarter of 1997, HCE issued an Indonesian consortium of energy, oil, a notice to proceed for the construction and gas and mining companies, have formed supply of the Dieng UnitII 80 net MW a joint venture to pursue the development project. The same construction consortium ofgeothermal resources in Bali (the " Bali as described above for Dieng Unit I has Project"). The PT Panutan Group is entitled contracted to construct Dieng Unit 11 under to contribute up to 40% of the total equity similar terms. The Company has contributed and obtain up to 40% of the net profit of the the necessary equity for the completion of Bali Project. The project company developing Dieng Unit 11 and the construction loan the Bali Project, Bali Energy Ltd. (" Bali of $ 109,000 was arranged under theJune Energy"), has executed both a joint operation 1997 CE Indonesia Funding Corp. facility. contract and an energy sales contract with However, pending resolution of the current terms similar to those at Dieng and Patuha. uncenainties associated with Indonesia, However, pending resolution of the current construction activities on this project have uncertainties associated with Indonesia, been significantly reduced. infrastructure construction and drilling activities on this project have been significantly reduced.

i t.it... u....... i.c i I 1 l-The Company developed and owns the ("SDG&E") and Pacific Gas and Electric t rights to a proprietary process for the Company.Of this amount,275 MW was extraction of minerals from elements in set aside for bidding by independent power solution in the geothermal brine and fluids producers (such as Magma) utilizing renewable l utilized at its Imperial Valley plants (the resources. Pursuant to an order of the CPUC l "Salton Sea Extraction Project") as well as dated June 22,1994 (confirmed on December the production of power to be used in the 21,1994), Magma was awarded 163 net MW extraction process. The initial phase of the for sale to Edison and SDG&E, with in-service project would require delivery of 49 net MW dates in 1997 and 1998. On February 23,1995 of pwer. A pilot plant has successfully the Federal Energy Regulatory Commission prcduced commercial quality zine at the. ("FERC") issued an order fmding that the Company's Imperial Valley Project. Zinc is CPUCs BRPU program violated the Public . primarily used in galvanizing steel for use ' Utilities Regulatory Pblicies Act ("PURPA") I ^ in the automobile industry. The Company and FERCs implementing regulations-intends to sequentially develop manganese,. and recommended negotiated settlements.. silver, gold, lead, boron, lithium and other In response, the CPUC issued an Assigned products as it funher develops the extraction Commissioners Ruling encouraging settle-technology. The Company is also investigating ments between the fmal winning bidders producing silica from the solids precipitated ' . and the utilities. The utilities are expected to i out of the geothermal power process. Silica continue to challenge the BRPU and, in light l is used as a fdler for such products as paint, of the regulatory uncertainty, there can be plastics and high temperature cement. no assurance that power sales contracts will If successfully developed, the mineral be executed or that any such projects will be i extraction process willprovide an completed. In light of these developments, environmentally responsible and low the Company agreed to execute an agreement cost minerals recovery methodology. with Edison on March 16,1995, providing that in certain circumstances it would withdraw 1 Subsidiaries of Magma, a subsidiary of the sts Edison BRPU bid in consideration for the Company, sought new long-term fmal SO4 1 payment ofcertain sums. In December 1996, pwer purchase agreements m the Salton Sea g ,g ; g

g area through the bidding process adopted by buyout agreement with SDG&E.These the California Public Utih.. Comm..ission ties agreements are subj.ect to CPUC approval.

("CPUC") under its 1992 Bienmal Resource - Plan Update ("BRPU"). In its BRPU, the CPUC cited the need for an additional 9,600 MW ofpower production through 1999 . among Califomia's three investor owned utilities, Southern Califomia Edison Company (" Edison"), San Diego Gas and Electric j

i <.o ...,<-.....i.< r Within the United Kingdom there was The Company has various projects under continued investment to extend and construction outside the United States, a improve the electricity distribution network. number of projects under award outside the Expenditures in the year were approximately United States and a number of operating i $ 102,000 although customers directly projects doing business outside the United contributed approximately $33,000 to the States. The operation, financing, construction I additional costs incurred in expanding the and development of projects outside the system to meet their specific requirements. United States entail significant political and financial risks (including, without limitation, The Company is actively seekm.g to develop, uncertainties associated with first time construct, own and operate new energy privatization efforts m the countries involved, projects, both domestically and intemationally, currency exchange rate fluctuations, currency the completion of any of which is subject to repatriation restrictions, changes m. law or i substantial risk. Development can require regulation, changes in government policy, l the Company to expend s.igtuficant sums poh.. linstability,civ.d unrest, contract tica. for preliminary engineering, permitting, fuel abrogation and expropriation) and other supply, resource exploration, legal and other nsk/ structuring issues that have the potential expenses in preparation for competitive bids i I to cause substantial delays or material 1 ss v hich the Company may not win or betote impairment of the value of the project being l it can be determined whether a project is developed, which the Company may not feasible, economically attractive or capable be fully capable ofinsuring against. The of being fmanced. Successful development uncertainty of the legal environment in certain and construction is contingent upon, among foreign countries in which the Company.is other things, negotiation on terms satisfactory e p ng and may develop or acquire projects to the Company of engineering, construction, could make it more difficult for the Company fuel supply and power sales contracts with to enforce its nghts under agreements relating other project participants, receipt of required such projects. In addition, the laws and t governmental permits and consents and li '*8"l**i "' f '*i" ' ""i **Y timely implementation ofconstruction. the ability of the Company to hold a majority There can be no assurance that development interest in s me f the projects that it efforts on any particular project, or the

• P "I'

"'*Y P '"'9" Company's development efforts generally, i"" 'I " I ' I'

• Y' I" '"I" '****'

P willbe successful. be delayed, suspended or terminated by the applicable government or may be subject to risks of contract abrogation or other uncertainties relating to changes in government policy or personnel or changes

i c...t..... i.o J in general economic conditions affecting the country. Projects in operation, construction and development are subject to a number ofuncertainties, more specifically described in the Company's Form 8-K dated March 6, 1998, filed with the Securities and Exchange Commission andincorporated herein by reference. Inflation has not had a substantialimpact on the Company's operating revenues and costs; energy payments for electricity for the Coso Project, Partnership Project, Salton Sea 11 Project and Salton Sea Ill Project will continue to be based upon scheduled rates and are not adjusted for inflation through the initial ten year period after the dates of firm operation under each power purchase agreement. l l The Company has commenced,for allof ~ i its information systems, a year 2000 date conversion project to address all necessary ccde changes, testing and implementation. The " Year 2000 Computer Problem" creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions worldwide. Such failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business, and especially to _ precess and account for the transfer of funds electronically. Management believes that the year 2000 implementation costs and related potential effect should not have a material financialimpact on the Company. )

l, i Consolidated Ba ance Sheets l A4 Dante 31, I997 edIfX> l Duli,m ad Shea m Thawsh. Empt IW her A aus 1997 1996 Assets $ 1,445,338 424,500 i Carh and cash equivalents (Note 3) 6,072 47,764 joint venture cash and investments 223,636 106,968 Restricted cash 1,282 4,921 Short-term investments 376,745 342,307 Accounts receivable 3,528,910 3,225,496 Properties, plants, contracts and equipment, net 1,312,788 790,920 Excess of cost over fait value of net assets acquired, net 238,025 238,856 j Equiry investments 354,830 448,424 j Deferred charges and other assets $ 7,487,626 $ 5,630,156 l Total assets l Uabilities and Stockholders' Equity l 173,610 218,164 f I.iabilities: Accounts payable 1,106,641 668,612 l Other accruedliabihties 1,303,845 1,146,685 ) Parent company debt 2,189,007 1,678,392 Subsidiary and project debt 509,059 469,199 Deferred income taxes - 58 5,282,162 4,181,052 Totalliabilities 40,837 29,067 Deferred income Commitments and contingencies (Nctes 3,18,19 and 20) Company-obligated mandatorily redeemable 553,930 103,930 convertible preferred securities of subsidiary trusts 56,181 136,065 Preferred securities ofsubsidiary 134,454 299,252 Minority interest 654,736 Common stock and options subject to redemption Stockholders

• equity:

Preferred stock-authorized 2,000 shares, no par value Common stock-par value $ 0675 per share, authorized 180,000 shares, issued 82,980 and 63,747 shares, outstanding 81,322 and 5,602 4,303 63,448 shares, respectively 1,261,081 563,567 Additionalpaid in capital 213,493 297,520 Retained eamings (3,589) 29,658 Cumulative etTect of foreign currency translanon adjustment (654,736) Common stock and options subject to redemption (56,525) (8,787) Treasury stock-1,658 and 299 common shares at cost (5,471) Unearned compensation - restricted stock 765,326 880,790 Total stockholders' equiry $ 7,487,626 $ 5,630,156 Total liabilities and stockhoklers' equity nwepnmg wa a r.m wegdpar.jhafu da,an.ws. t

i ) Consolidated Statements of Operations fetk % %en En&dTMm6v 3I. I997 La ordhm se Theaans. Engt Per %*r Amounts \\ 1997 1996 1993 Revenue: Operating revenue $ 2,166,338 $ 518,934 $ 335,630 Interest and otherincome IM,573 57,261 63,093 Total revenues 2,270,911 576,195 398,723 Costs and expenses: Cost of sales 1,055,195 31,M0 Operating expense 345,833 132,655 103,602 General and administration $2,705 21,451 23,376 Depredation and amortization 276,011 118,586 72,249 Loss on equity investment in Casecnan 5,972 5,221 362 Inmat exonse 296,3M 165,900 134,637 Irss interest capitalized (45,059) (39,862) (32,554) Non-recurrin,; charge-asset vduation impairment 87,000 j Totalcosts and expenses 2,074,051 435,791 301,672 i Income before provision for income taxe 196,860 140,4M 97,051 Provision for income taxes 99,044 41,821 30,631 Income before minonty interest 97,816 98,583 66,420 g Minority interest 45,993 6,122 3,005 i income before extraordinary item $1,823 92,461 63,415 Extraordinery item, net of minority interest of $ $8,222 (135,850) Net mcome(loss) (84,027) - 92,461 63,415 - Preferred dividends 1,080 Ner income (kss) available ro common stockhoIJers (84,027) $ 92,461 $ 62,335 Income per share before extraordinary item 0.77 1.69 1.32 Extraordinary item (2.02) Net income (kas) per share (1.25) 1.69 1.32 Income per share before extraordinary item -diluted 0.75 1.54 1.22 Extraordinary item -diluted (1.97) Net income (loss)per share-diluted (1.22) 1.54 1.22 wa=,+,m nt ma a,,a miedpr gekwp.,umutast,wais. i s

........ ~........ Consolidated Statements of Stockholders' Equity Forsk Th %n Emidikenber 31,1997 LMan and%m a Tkwns Common Stock Outstanding Additional Foreign & Options Common Common Paid-in Retained Currency Subject to Treasury Unearned Shares Stock Capital Earnings Adiust. Redemption Stock Compensation Total Balance December 31,1994 31,849 $ 2,407 $ 100,421 $ 142,937 $ - $ (65,774) $ - $ 179,991 Equity offering 18,170 1,004 240,825 56,801 298,630 Restricted stock 500 848 8,652 (9,500) Exercise ofstak options and other equity rransactions 176 10 446 563 2,494 3,513 Purchase of treasury stock (102) (1,590) (1,590) Preferred stock dividends, Series C, including cash distribution of $43 (1,293) (1,293) Tax benefit from stock plan 866 866 Net income before preferred dividends 63,415 63,415 Balance December 31,1995 50,593 3,421 343,406 205,059 (1,348) (7,006) 543,532 Exercise of stock options and other equity transactions 5,263 337 53,030 4,569 1,535 59,471 ] l Purchase of treasury stock (472) (12,008) (12,008) - 60 Conv:rsion of debt 8,0M 545 164,912 165,457 Tax benefit from stock plan 2,219 2,219 fo eign currency translation adjustment 29,658 29,658 l Net income 92,461 92,461 l Balance December 31,1996 63,448 4,303 563,567 297,520 29,658 (8,787) (5,471) 880,790 Equity offering 19,100 1,289 697,315 698,604 i Exertise of stock options and orher equity transactions 396 10 (2,757) 7,767 5,471 10,491 Purchase of treasury stock (1,622) ($5,505) (55,505) Common stock and options subject to redemption - (654,736) - (654,736) Tax benefit from stock plan 2,956 2,956 l Foreign currency translation j adjustment (33,217) (33,247) Net has (84,027) (84,027) j l Balance December 31,1997 81,322 $ 5,602 $1,261,081 $ 213,493 $ (3,589)$ (654,736) $ (56,525)$ - $ 765,326 l l 1k m a m u a..aa,a p.s.t n p u w a ua.an. 4 l

l s...., i Consolidated Statements of Cash Flows liothe lbm %m EmlalDnmlur 31.1997 Dall.m a 1kash 1997 1996 1995 Cash flows from operating activities: Net income (loss) (84,027) 92,461 63,415 Adjustments to reconcile net cash flow from operating activities: Non-recurring charge-asset valuation impairment 87,0(X) Depreciation and amortkation 239,234 109,447 65,244 Amortization of euess of cost over fair value of nr.t assets acquired 36,807 9,139 7,005 Amortization oforiginal issue discount 2,160 50,194 45,409 Amonization of deferred fmancing costs 26,161 9,677 8.979 Amortization of unearned compensation 5,471 1,535 2,494 Provision for deferred income taxes 55,584 12,252 13 S83 Loss (income)on equity investments (16,068) (910) 362 Income (loss) applicable co minority interest (35,387) 1,431 3,005 Changes in other items: Accounts receivable (34,146) (13,936) 213 Accounts payable, accrued liabilities and deferred income 29,799 2,093 12,103 Net cash flows from openting activities 312,588 273,383 222,212 Cash flows from investing activities: Purchase of Northern, Falain Seaboard, Partnership Interest and Magma, net ofcash acquired (632,014) (474,443) (907,614) Distributions from equity investments 23,960 8,222 Capital expenditures telating to operating projects (194,224) (24,821) (27,120) Phdippine construction (27,334) (167,160) (289,655) Indonesian and other development (155,963) 181,068) (8,973) Salton Sea IV construction (63,772) (62,430) PaciSc Nonhwest, Nevada, and Utah exploration costs (3,128) (4,885) < 10,445) Decrease in short-terminvestments 2,880 33,998 80,565 Decrease (increase) in restricted cash (116,668) 63,175 (17,452) Other 60,390 (2,910) 11,514 Investment in Casecnan (61,177) Net cash flows from investing activities (1,042,101) (713,664) (1,292,787) Cash flows from financing activities: Prerceds from sale of aanmon and treasury stock and exercise of stock options 703,624 54,935 299,619 Procceth from convertible preferred securities of subsidiary trusts 450,000 103,930 Proceeds from issuance of parent company debt 350,000 324,136 200,000 Repayment ofparent company debt (100,000) Net protceds fmm revolver (95,000) 95,000 Proceeds from subsidiary and project debt 795,653 428,134 654,695 Repayments ofsubsidiary and project debt (271,618) (210,892) (176,661) Deferred charges relating to debt (mancing (48,395) (36,010) (34,733) Purchase of treasury scot k (55,505) (12,008) (1,590) Other 13,142 10,756 (29,169) Net cash flows from f nancing activities 1,741,906 757,981 912.188 Effect ofexchange race changes (33,247) 4,860 Net increase (darease) in cash anJ investments 979,146 322,560 (158,387) Cash and cash equivalents at beginning of year 472,264 149,704 308,091 Cash and cash equivalents at end of year $ 1,451,410 472,264 149,701 Supplemental Disckisures: Interest paid (net of amounts capitalized) 316,060 92,829 50,840 Income taxes paid 44,483 23.211 14,812 1k amp. mag ou are a mirgralper qihru)simulaairmit

[ """"""l""'"""",,, m i Notes to Consolidated Financial Statements Fethr Thra %n EnlalDurnber 31,1997 Udlan. Mah ad %ms on %wah. Ex qt Per %re Ansm L Business in 1995,the Company acquired Magma CalEnergy Company, Inc. (the " Company") Pbwer Company (" Magma"). Magma's is a United States-based global power company operating assets included four projects referred which generates, distributes and supplies to as the Partnership Project in which Magma electricity to utilities, govemment entities, had a 50% interest, and three projects referred retail customers and other customers located to as the Salton Sea Project of which Magma throughout the world. The Company was owned 100%. A founh project included in founded in 1971 and through its subsidiaries the Salton Sea Project was constructed after is primarily engaged in tl' development, the acquisition of Magma and commenced ownership and operation of environmentauy operations inJune 1996. In additioa,in April responsible independent power production 1996, the Company acquired the remaining facilities worldwide utilizing geothermal, 50% interest in the Pannership Project. In natural gas, hydroelectric and other energy August 1996, the Company acquired Falcon sources. In addition, the Company is engaged Seaboard Resources, Inc. (" Falcon Seaboard") in the distribution and supply of electricity to which includes significant interests in three approximately 1.5 million customers primarily operating gas-fired cogeneration facilities and in northeast England as well as the generation a related natural gas pipeline. On December and supply of electricity (together with 24,1996, CE Electric UK plc ("CE Electric"), other related business activities) throughout which in 1997 was 70% owned indirectly by England and Wales. The Company is also the Company and 30% owned indirectly by l active in supplying gas and has applications Peter Kiewit Sons", Inc. ("PKS"), acquired for over 400,000 customers in those areas majority ownership of the outstanding of England, Wales and Scotland where retail ordinary share capital of Northern Electric gas competition has been introduced. plc (" Northern") pursuant to a tender offer (" Tender offer"). As of March I8,1997' The Company has organized several CE Electnc effect vely owned 100% of partnerships and j..omt ventures (herem. ""#7 referred to as the "Cosojoint Ventures") in order to develop geothermal energy at Northern is one of the twelve regional the China Lake Naval Air Weapons Station, electricity companies (" RECS") which came Coso Hot Springs, China Lake, California. into existence as a result of the restructuring Couectively, the projects undertaken by and subsequent privatization of the electricity these CosoJoint Ventures are referred to industry in the United Kingdom in 1990. as the Coso Project. In 1992, the Company Northern is primarily engaged in the distrib-entered into the natural gas-fired electrical ution and supply of electricity. Nonhern was generation market through the purchase of granted a Public Electricity Supply (" PES") a development opportunity in Yuma, Arizona license under the Electricity Act to supply which commenced commercial operation in electricity in Northem's Authorized Area May 1994. In 1993, the Company started (" Authorized Area"). Northern's Authorized developing a number ofinternational power project opportunities where private power generating programs have been initiated, including the Philippines and Indonesia.

i_ c., ..... <....... m i Area covers approximately 14,400 square Investments other than restricted cash are kilometers with a population of approximately primarily commercial paper and money market 3.2 million people and includes the counties securities. The restricted cash balance includes of Northumberland, Tyne and Wear, Durham, such securities and mortgage backed securities, Cleveland and Nonh Yorkshire. Northern and is mainly composed of amounts deposited supplies electricity outside its Authorized in restricted accounts from which the Company Area pursuant to second tier licenses. will source its equity contributions and debt Northern also is involved in non-regulated service reserve requirements relating to the activities, including the supply of gas within projects. These funds are restricted by their England, Wales and Scotland, the generation respective project debt agreements to be of electricity, electrical appliance retailing usedonly for the related project. and gas exploration and production. At December 31,1997, all of the Company's

2. SurnmaryofSignigcant investments are classified as held-to-maturity AccountingPblicies and are accounted for at their amortized cost The consolidated fmancial statements include basis. The carrying amount of the investments the accounts of the Company, its wholly-owned approximates the fair value based on quoted subsidiuies, and its pmportionate share of the market prices as provided by the financial partnerships and joint ventures in which it institution which holds the investments.

o-has an undivided interest it..he assets and is Pnperties, Plants, Contracts, j proportionally liable for its share ofliabihties. EquipmentandDepreciation Other investments and corporate joint ventures The cost ofmajor additions and betterments where the Company has the ability to exercise are capitalized, while replacements, mainte-sigmficant influence are accounted for under nance, and repairs that do not improve the equity method of accounting. Investments, or extend the lives of the respective assets where the Company's ability to influence are expensed. is limited, are accounted for under the cost method of accounting. All significant inter. Depreciation of the operating power plant enterprise transactions and accounts have costs, net of salvage value, is computed on the been eliminated. The results of operations straight line method over the estimated useful of the Company include the Company's lives, between 10 and 30 years. Depreciation proportionate share of results ofoperations of fumiture, fixtures and equipment which are ofentities acquired as of the date ofeach recorded at cost, is computed on the straight acquisition. line method over the estimated useful lives of the related assets, which range frma three Cash Equa,ralents,Intestments to ten years. andRestrictedCash The Company considers all investment instruments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash is not considered a cash equivalent.

r <......,<........i.. 1 The Northern, Falcon Seaboard, Partnership frfil. Resource Derelopment Interest and Magma acquisitions by the andExploration Costs Company have been accounted for as purchase The Company follows the full cost method businesscombinations. Allidentifiableassets of accounting for costs incurred in connection acquired and liabilities assumed were assigned with the exploration and development of a portion of the cost of acquiring the respective geothermal and natural gas resources. All I companies equal to their fair values at the date such costs, which include dry hole costs and of the acquisition and include the following: the cost of drilling and equipping production wells and directly attributable administrative Property and equipment of Northern is and interest costs, are capitalized and amortized depreciated using a systematic method, over their estimated useful h.ves when produc-which approximates the straight h.ne tion commences. The estimated useful lives method over the estimated useful h.ves E' """'"5"'"'. * *'"' Y I' of the related assets which range from depending on the charactenstics of the 3-40 years. underlying resource; exploration costs Power sales agreements are amortized and development costs, other than produc-separately over (1) the remaining portion tion wells, are generally amortized over of the scheduled price periods of the the weighted average remaining term power sales agreements and (2) for of the Company's power and steam I the Partnership Interest and Magma purchase contracts. acquisitions the 20 year avoided cost ExcessofCostOrvrEw.. Iidue r periods of rhe power sales agreements Total acquisition costs in excess of the fair using the straight line method. values assigned to the net assets acquired Capitalind costs for gas reserves, other than are amortized over a 40 year period for the costs of unevaluated exploration projects and Northern and Magma acquisitions and a 25 projects awaiting development consent, are year period for the Falcon Seaboard acquisition, depleted using the unit of pnxluction method. both using the straight line method Depletion is calculated based on hydrocarbon ImpairmentofLong-in. dAssets e reserves of properties in the evaluated pool The Company reviews long-lived assets and estimated to be commercially recoverable certain identifiable intangibles for impairment and include anticipated future development whenever events or changes in circumstances costs in respect of those reserves. l indicate that the carrying amount of an asset Expenditures on major information may not be recoverable. An impairment loss technology systems are capitalized and would be recognized whenever evidence exists depreciated on a straight line basis over that the carrying value is not recoverable. the useful life of the developed systems which range from 3-10 years. [ l l t } l l

7 i .....u....... l i I l DeferrediYHiandReuvrk Costs Fair hlues ofFinancialInstruments Well rework costs are deferred and amortized The following methods and assumptions were over the estimated period between reworks. used by the Company in estimating fair values These deferred costs, net of accumulated of fmancial instruments as discussed herein. amortization, are $5,421 and $8,371 at Fair values have been estimated based on December 31,1997 and 1996, respectively, quoted market prices for debt issues listed and are included in other assets. on exchanges. Fair values of fmancial instru-ments that are not actively traded are based Revenue Recognition on market prices ofsu.nd.ar instruments j Revenues are recorded based upon service and/or valuation techniques using market rendered and electnary and steam deh.vered, assumptions. i distributed or supplied to the end of the month. Where there is an overrecovery of The Company assumes that the carrying q supply or distribution business revenues against amount of short-term financialinstruments j the maximum regulated amount, revenues approximates their fair value. For these are deferred equivalent to the overnrovered purposes, short-term is defmed as any item amount. The deferred amount is deducted from that matures, reprices, or represents a cash revenue and included in other liabilities. Where transaction between willing parties within there is an underrecovery, no anticipation of six months or less of the measurement date. any potential future recovery is made. l Ikusw.ns l Capitalization ofluterest Northern contributes to the Electricity i andDeferredFinancing Costs Supply Pension Scheme and contributions Prior to the commencement of operations, to the scheme are charged to the income j interest is capitalized on the costs of the plants statement. The capital cost ofex gratia and and geothermal resource development to the supplementary pensions are normally charged extent incurred. Capitalized interest and other to the income statement in the period in which deferred charges are amortized over the lives they are granted. Variations in pension cost, of the related assets. which are identified as a result of actuarial valuations / reviews, are amortized over the Deferred fmancing costs are amortized over J average expected remaining working lives 1 the term of the related fmancing using the j of employees in proportion to their expated efTective interest method i payroll costs. Differences between the amounts j DeferredIncome Lves funded and the amounts charged to the profit I The Company recognizes deferred tax assets and loss account are treated as either provisions and liabilities based on the difference between or prepayments in the balance sheet. the fmancial statement and tax bases of assets Net incomeper Common %are i and liabilities using estimated tax rates m l In February 1997, the h..nanaal Accounting effect for the year in which the differences l St andards Board ("FASB") adopted Statement are expected to reverse. The Company intends ofEm.ancud Accounting Standards ("SFAS") to repatriate earnings of foreign subsidianes No.128," Earnings per Share. SFAS 128 m the foreseeable future. As a result, deferred nylaced primary and ftdly diluted earnings income taxes are provided for retained per share with basic and diluted earnings earnings ofinternational subsidianes and per share, respectively. corporate joint ventures which are m. tended to be remitted.

""""""""""""4.< j i 1 Basic and diluted earnings per common share dilutive, and the exercise of all dilutive stock are based on the weighted average number options outstanding at their option prices, of common shares outstanding during the with the option exercise proceeds and tax period. Diluted eamings per common share benefits used to repurchase shares ofcommon also assumes the conversion of the convertible stock at the average market price using the preferred securities of subsidiary trusts, when treasury stock method. A reconciliation of basic earnings per share before extraordinary item to diluted earnings per share before extraordinaryitem follows: 1997 1996 1995 Ivr-Shue IYr-Shue Per-Shue Income Shres Amount Income Shues Amounc Income Shues Amount Basic cammgs per share before extraordinuy itere $ 51,823 67.268 $ 0.77 $ 92,461 54,739 $ 1.69 $ 62,335 47,249 $ 1.32 EtTect of dilutive secunties Stock opuons 1,418 1,881 1,688 Convertible preferred securites of subshary trusts'" 2,840 2,517 Convertible debt 4,968 5,935 6,038 7,258 Dduced earnings per shue before ertraordinuy item $ 51,823 68,686 $ 0.75 $100,269 65,072 $ 1,54 $ 68,373 56,195 $ 1.22 (Il Tlx amenskperprmt muntw sjubuJwy unusnm,mtuhlains a !997. Reclassi$ cation NewAccounting Pronouncements Certain amounts in the fiscal 1996 and 1995 InJune 1997, the FASB adopted SFAS No. fmancial statements and supporting footnote 130, " Reporting Comprehensive Income", disclosures have been reclassi6ed to conform and No.131," Disclosures about Segments to the fiscal 1997 presentation. Such reclas-of an Enterprise and Related Information", sification did not impact previously reported SFAS 130 establishes standards for reporting net income or retained earnings. and display of comprehensive income and its components in a full set ofgeneral purpose Use ofEstimates financial statements. SFAS 131 redefines The preparation of fmancial statements m how operating segments are determined and conformity with generally accepted accounting requires disclosure of certain fmancial and pnnciples requires management to make desen.ptive mformation about a company's estimates and assumptions that affect the 4 operating segments. Both statements wd. l reported amounts of assets and liabih.. ties and be effective for the Company beginning disclosure of contingent assets and liabih.. ties January 1,1998. The Company has not yet at the date of the fmancial statements and the determined the impact of these statements reported amounts of revenues and expenses on current disclosures. during the reporting period. Actual results could difTer from those estimates.

""""""!""5 i 3.KDG Acquisition

4. Acquisitions On September 11,1997, the Company signed Northern a defmitive agreement with Kiewit Diversified On December 24,1996,G Electric UK Group ("KDG"), a wholly owned subsidiary plc ("CE Electric"), which in 1997 was 70%

of PKS, for the Company to purchase KDG's owned indirectly by the Company and 30% - ownership interest in various project partner-owned indirectly by PKS, acquired majority ships and CalEnergy common shares (the ownership of the outstanding ordinary share "KDG Acquisition"). Accordingly, common capital of Nonhern Electric plc ("Nonhern") sterk and options subject to redemption pursuant to a tender offer (the " Northern . have been reclassified in the consolidated Tender Offer") commenced in the United balance sheet. Kingdom on November 5,1996. As of March 18,1997, G Electric effectively acquired the KDG's ownership interest in CalEnergy remaining ordinary shares and owned 100% comprised approximately 20,231 shares of " #" ' ' "*'Y common stock (assuming exercise by KDG of one million options to purchase CalEnergy The Company and PKS contributed to shares), the 30% interest in Northern Electric, G Electric approximately $410,000 and as well as the following minority project $ 176,000 respectively, of the approximately inteersts: Mahanagdong (45 %), Casecnan $1,200,000 required to acquire all of a (35 %), Dieng (47%), Patuha (44%) and Bali Northern's ordinary and preference shares (30%) and other interests in international in connection with the Tender Offer. The development stage projects. Company obtained such funds from cash on

• " " ' ' * " " "
• 8 ""

" Y"8' CalEnergy paid $1,159,215 for the KDG of approximately $ 100,000 under a Credit Acquisition and final closing of the transaction Agreement entered into with Credit Suisse etcurred inJanuary 1998. CalEnergy funded on October 28,1996 (the "CalEnergy Credit th.is acquisition with available cash and the net ac y The Company has repa.d the entire i preteeds of the equity offering and the debt 8Y ' *' 'Y ' "8

• " I offering completed in October 1997.

proceeds of the Trust Secunties offeririg. The remaining funds necessary to consummate the Tender Offer were provided from a f 560,000 Term Ioan'and Revolving Facility Agreement, dated October 28,1996 (the "U.K. Credit Facility"). G Electric has repaid the entire U.K. Credit Facility through the use ofproceeds of the senior note and sterling bond offerings of G Electric UK Funding Company.

E..............., i.. _] The Northern acquisition has been accounted Fakon Sca/x;ard for as a purchase business combination. All On August 7,1996 the Company completed identifiable assets acquired and liabilities the acquisition of Falcon Seaboard for a cash assumed were assigned a portion of the cost price of $229,500 including acquisition costs. of acquiring Northern, equal to their fair Through the acquisition, the Company values at the date of the acquisition. Minority indirectly acquited significant ownership interest was recorded at historical cost. interests in three operating gas-fired togeneration facilities and a related natural. In 1993, Northern entered into a contract gas pipeline. The plants are located in Texas, relating to the purchase of400 MW of Pennsylvan.ia and New York and total $20 capacity from a 15.4% owned related party, MW, in capacity. Teesside Power Limital("Teesside"), for a period of 15 years beginning April 1,1993. The Falcon Seaboard acquisition has been The contract sets escalating purchase prices at accounted for as a purchase business combin-predetermined levels. Currendy the escalating ation. Allidentifable assets acquired and contract prices exceed those paid by the liabilities assumed were assigned a portion Company to the electricity pool (the " Pool") of the cost of acquiring Falcon Seaboard, equal which is operated by the National Grid to their fair values at the date of the acquisition. tb Group. However, under current price cap Edison Mission EnergVs Partnership Interest regulation expected to expire in 1998 the On April 17,1996 the Company completed Company is able to recover these costs. For the acquisition of. Edison Mission Energy,s the period after the price cap regulation ends, Partnership Interests in four geothermal the G.)mpany has established a liability for operating facih.. ties m Californ. for a cash ia the estimated loss as a result of this contract. purchase price of $71,000 including Northem utilizes contracts for differences acquisition costs. The four projects, Vulcan, ("CFDs") to mitigate its exposure to volatility Hoch (Del Ranch), Leathers and Elmore, in the prices of electricity purchased through are located in the Imperial Valley of California. the Pool Such contracts allow the Company Prior to this transaction, the Company was to etTettively convert the majority ofits a 50% owner of these facilities. anticipated Pml purchases from market to The Partnership Interest acquisition has been fixed prices. As of December 31,1997, CFDs accounted for as a purchase business comb.in-were in place to hedge a portion ofelectricity ation. Allidentifiable assets acquired and purchases of approximately 55,000 GWh liabib.. ties assumed were assigned a portion through the year 2008. of the cost of acquiring the Partnership Interest, equal to their fair values at the date of the acquisition. l

j i m t...e, <,....... m r Unaudited pro forma combined revenue, Coso Pmfect Operating Facilities income and basic earnings per share before The Coso Project o;~ rating facilities comprise extraordinary item of the Company, Northern, the Corr.pany's proportionate share of the Falcon Seaboard, and the Partnership Interest assers of three ofits CosoJoint Ventures: for the twelve months ended December 31, Coso Finance Partners (" Navy 1 Joint 1997 and 1996, as if the acquisitions had Venture"), Coso Energy Developers ("B131 cccurred at the beginning of 1996 after giving Joint Venture"), and Coso Power Developers effect to certain pro forma adjustments related (" Navy 11 Joint Venture"). The Navy I power to the acquisitions were $2,270,911, $52,430, plant is located on land owned by and leased and $0.78 compared to $2,162,381, $(>4,811 from the U.S. Navy to December 2009, with and $ 1.18, respectively. Excluding the a 10 year extension at the option of the Navy. $87,000, $ 1.29 per share, non-recurring Under terms of the Navy 1 Joint Venture, charge, pro forma income before extraordinary current pmfits and h>sses are allocated 46.4% item would have been $ 139,430 in 1997. to the Company. The B131 power plant is situated on lands leased from the U.S. Bureau

5. Properties, Plants, Contracts of Land Management under a geothenaal andEqmpment lease agreement that extends until October Properties, plants, contracts and equipment 31,2035.The lease may be extended to comprise the following at December 31:

2075 at the option of the BLAI. Under the 1997 1996 terms of the B131 Joint Venture agreement, Oprating project costs: the Company's share of profits and losses is Dutribution system $ 1,237,743 s 928,575 48%, Under terms of the Navy IIJoint Iwer planu i 464,885 i,277,663 Venture, all profits, k>sses and capital Wells and remurce devekenent 395,314 377,731 contributions for Navy 11 are divided ther sales agreements 227,535 227,535 Other assets 254,973 176,483 C9

1. "O E**#

nxaircraring meu 5,5x0,450 2,987.987 The amount of royalties paid by Navy I to Ins anumulated thrrecianon the U.S. Navy to develop gcuhermal energy and amonizasm (197,sm (271.216) for Navy I, Unit 1 on the lands owned by the Net operanny assen 3.082.618 2,7 i6,77 i Navy comprises (i) a fee payable during the Mineral anel gas reservtt ner 297,N8 270,M51 term of the Contract based on the difference C"""'""k '" i" P"'8" terween the amounts paid by the Navy to U I 9 " 7 I a 140,172 8 and the price as determined under the Other development 9,072 3,588 c mract (which currently approximates j sxal s 3,528,910 s 3.225,496 73% of that paid by the Navy to Edison), and (ii) $25,000 payable in December 2009, of which the Company's share is $11,600. The $25,000 payment is secured by funds placed on deposit monthly, which funds, plus accrued interest, will aggregate $25,000. The monthly deposit is currently $50. As of December 31,1997, the balance { of funds deposited approximated $6,337, ) which amount is included in restricted cash. I

F ( 4. e....,

t. --,... i.<

l Units 2 and 3 of NavyI and the Navy 11 The Partnership Project pays rcyalties based power plants are on Navy lands, for which the on both energy revenues and total electricity Navy receives a royalty based on electric sales revenues. Hoch (Del Ranch) and Irathers revenue at the initial rate of 4% escalating to pay royalties of approximately 5% of energy 22% by the end of the contract in December revenues and 1% of total electricity revenue. 2019. The BIAf is paid a royalty of 10% of the Elmore pays royahies of approximately 5% value ofsteam produced by the geochermal ofenergy revenues. Vulcan pays royalties resource supplying the13131 Plant. of 4.167% of energy revenues. The CosoJoint Ventures had royalty expense The Salton Sea Project's weighted average included in operating expenses of $ 13,458, royalty expense in 1997 was approximately $13,412 and $13,623 in the years ended 6.1%. The royalties are paid to numerous December 31,1997,1996 and 1995, recipients based on varying percentages respectively. of electrical revenue or steam production ultiplied by publishedindices. Imperialialley Pmject Operating Facilities The Company currently operates eight The Imperial Wiley Projects had royalty geothermal power plants in the Imperial expense included in operating expenses of Valley in California. The Partnership Project $ 14,343, $ 10,228 and $ 10,398 in the years consists of the Vulcan, Hoch (Del Ranch), ended December 31,1997,1996 and 1995, Elmore, and Leathers Partnerships. The respectively. l remaining four plants which comprise g. l the Salton Sea Project are indirect wholly All of the Company,s sales ofelectncity from owned subsidianes of the Company. These the Coso Project and Imperial Wiley Project, geothermal power plants consist of Salton which comprise approximately 20% of 1997 l-Sea l, Salton Sea 11, Salton Sea 111 and Salton E*'** "3 "*""#' "

• Sea IV The Partnership Project and the Salton E& son Company Mon,,) an. m under Sea Project are collectively referred to as the "8 *"" E **' E"
• 8* ' * '* '

l Imperial %11ey Project. The Imperial Valley l Project commencement dates and nominal The Coso Project and the Partnership Project capacities are as follows: sell all electricity generated by the respective plants pursuant to seven long-term SO4 Imperialw!1ey . omnencernent sminal Agreements between the projects and Edison. Plants Date Capaaty These SO4 Agreements provide for capacity Wkan February 10,1986 34 htW bh(Del Raruh) January 2,1989 38 hly payments, capacity bonus payments and Elnue January 1.1989 38 MW energy payments. Edison makes fixed annual teachers January 1,1990 38 MW capacity and capacity bonus payments to the l Sal = Sea l Jul l 987 10 MW Y projects to the extent that capacity factors

• • • • f '*"*d capacity bonus paym

1. E

• ti e

1989 49 capacity an salton sea IV May 24,1996 39.6 MW for the life of the SO4 Agreements. Energy is sold at increasing scheduled rates for the first ten years after firm operation and thereafter at Edison's Avoided Cost of Energy. l !l.

i <.,....,m,.... 7 The scheduled energy price periods of the Salton Sea 11 and Salton Sea 111 sell electricity Coso Project SO4 Agreements extended to Edison pursuant to 30-year modified until at least August 1997 for each of the 504 Agreements that provide for capacity units operated by the Navy I Pannership and payments, capacity bonus payments and extend until at leasr Wrch 1999 andJanuary energy payments. The price for contract 2000 for each of the c aperated by the capacity and contract capacity bonus pay-Bl.M and Navy 11 Partnerships, respectively. ments is fixed for the life of the modified SO4 The Company's share of aggregate annual Agreements. The energy payments for the first capacity payments is approximately $ 17,000 ten year period, which period expires in April and its share of aggregate bonus payments 2000 and February 1999 are levelized at a time is approximately $3,000. period weighted average of 10.6c per kWh and 9.8t per kWh for Salton Sea 11 and Salton The scheduled energy price periods of the Partnership Proj.ect SOi Agreements extended Sea Ill, respectively. Thereafter, the monthly '"*'8Y E*Y**" 'A until February 1996 for the Vulcan Pannership and extend until December 1998, December Cost of Energy. For Salton Sea 11 only, Edison is "" *"*'8Y 1998, and December 1999 for each of the He:h (Del Ranch), Elmore and leathers delivered in excess f 80% ofcontract capxity through September 30,2004. The annual . Partnersh.ips, respectively. The annual capacity i bo m m s b M e 11 payments are approximately $24,500 and the g; 00 bonus payments are approximately $4,400 and $9,700, respectively. in aggregate for the four plants. Excluding Navy I and Vulcan, which are The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4 receiving Edison s Avcided Cost of Energy, agreement which provides for contract the Company s SO4 Agreements provide for energy rates ranging from 12.8( per capacity payments on 34 MW ofcapacity kWhin 1997 to 15.6e per kWh in 1999. o di h e M a p i n contract capacities deemed attributable to The weighted average energy rate for all the original Salton Sea PPA option (20 MW) of the Company s SO4 Agreements was and to the original Fish 1.ake PPA (14 MW). 12.0c perkWhin 1997. The capacity payment price for the 20 MW Salton Sea i sells electricity to Edison portion adjusts quarterly based upon specified pursuant to a 30-year negotiated power indices and the capacity payment price for the purchase agreement, as amended (the "Salton 14 MW ponion is a fixed levelized rate. The '= Sea I PPA"), which provides for capacity and energy payment (for deliveries up to a rate of energy payments. The energy payment is 39.6 MW)is at a fixed price for 55.6% of the calculated using a Base Price which is subject total energy delivered by Salton Sea IV and to quanerly adjustments based on a basket is based on an energy payment schedule for ofindices. The time period weighted average. 44.4% of the total energy delivered by Salton energy payment for Salton Sea I was 5.3< Sea IV. The contract has a 30-year term but per kWh during 1997. As the Salton Sea 1 Edison is not required to purchase the 20 MW PPA is not an SGI Agreeraent, the energy ofcapacity and energy originally attributable payments do not revert to Edison's Avoided to the Salton Sea I PPA option after September Cost of Energy. The capacity payment is 30,2017, the original termination date of the approximately $1,100 per annum. Salton Sea 1 PPA.

. m.... <o.m., i.m j r 1 For the year ended December 31,1997, PNOC-EDC is obligated to pay for electric and 1996 Edison's average Avoided Cost capacity that is nominated each year by CE of Energy was 3.3t and 2.5c, respectively, Cebu, irrespective of whether PNOC-EDC per kWh which is substantially below the is willing or able to accept delivery of such contract energy prices earned for the year capacity. PNOC-EDC pays to CE Cebu a ended December 31,1997. Estimates of fee (the " Capacity Fee") based on the plant Edison's future Avoided Cost of Energy vary capacity nominated to PNOC-EDC in any substantially from year to year. The Company year (which, at the plant's design capacity, cannot predict the likely level of Avoided Cost is approximately 95% of total contract of Energy prices under the S01 Agreements revenues) and a fee (the " Energy Fee") and the modified SO 4 Agreements at the based on the electricity actually delivered expiration of the scheduled payment periods. to PNOC-EDC(approximately 5% of total The revenucs generated by each of the contract revenues). Payments under the projects operating under SO4 Agreements Upper Mahiao ECA are denominatedin could decline significantly after the expiration U.S. Dollars, or computed in U.S. dollars and of the respective scheduled payment periods. paid in Philippine pesos at the then-current . "E ' " 'Y' " ' "'.'EY *

• Philippine kjects Significant portions of the Capacity Fee and The Upper Malu.ao Project was deemed Energy I.ee are indexed to U.S. and Philippme

> n complete inJune 1996 and began receiving inflation rates, respectively. PNOC-EDC,,s capacity payments pursuant to the Upper payment requirements, and its other Mah.iao Energy C.onversion Agreement obligations under the Upper Mahiao C ECA"), in J uly of 1996. The project is ECA are supported by the Government structured as a ten year build-own-operate-of the Philippines through a performance transfer project CBOOT"),.in which the undertaking

• Company's subsidiary CE Cebu Geothermal Pbwer Company,Inc.CCE Cebu"), the Unit I of the Malitbog Project (the "Malitbog project company, is responsible for providing Project") was deemed complete in July 1996 operations and maintenance during the ten and Units 11 and 111 inJuly 1997 at which year BOOT period. The electricity generated times such units commenced receiving by the Upper Mahiao geothermal power capacity payments under the Malitbog ECA.

plant is sold to PNOC Energy Development The Malitbog Project is owned and operated Corporation CPNOC-EDC"), which is also by Visayas GeothermalPower Company responsible for supplying the facility with CVGPC"), a Philippine general partnership the geothermal steam. After the ten year that is wholly owned, indirectly, by the cooperation period, and the recovery by Company. Under its contract, VG PC is to sell the Company ofits capital investment 100% ofits output on substantially the same plus incremental return, the plant will basis as described above for the Upper Mahiao be transferred to PNOC-EDC at no cost. Project to PNOC-EDC, which will in turn sell the power to the National Power Corporation of the Philippines ("NPC"). However, VGPC receives 10(YX ofits revenues from such sales in the form of capacity payments. As with the Upper Mahiao Project, the Malitbog Project

i o. I l i is structured as a ten year BOOT,in which Gas Projects the Company is responsible for providing The Saranac Project sells electricity to New operations and maintenance for the ten year York State Electric & Gas pursuant to a 15 BOOT period. After a ten year cooperation year negotiated power purchase agreement peried, and the recovery by the Company of (the "Saranx PPA"), which provides for its capital investment plus incremental return, capacity and energy payments. Capacity the plant will be transferred to PNOC-EDC payments, which in 1997 total 2.2c per kWh, at no cost. are received for electricity produced during " peak hours" as defined in the Saranac PPA The Mahanagdong Proj.ect (the Mahanagdong Project,)was deemed and escalate at approximately 4.1% annually ' "'"k*'8Y "8 '*

• complete inJuly 1997 and accordingly, payments, which average 6.6e per kWh m the Mahanagdong Project began receiving 1997, escalate at approximately 4.4% annually capacity payments pursuant to the for the remaining term of the Saranac PPA.

Mahanagdong ECA in August of1997. The Saranac PPA expires inJune of 2009. The Mahanagdong Proj.ect is owned and operated by CE Luzon Geothermal Pbwer The Power Resources Project sells electricity l Company, Inc., a Philippine corporation, to Texas Utilities Electric Company ("TUEC") that is expected to be indirectly owned by the pursuant to a 15 year negotiated power n Company (after the KDG Acquisition) subject purchase agreement (the "Pbwer Resources to a minority partner participation. The PPA"), which provides for capacity and energy electricity generated by the Mahanagdong payments. Capacity payments and energy l Project willbe sold to PNOC-EDCon a payments, which in 1997 are $3,032 per "take or pay" basis, which is also responsible month and 2.96t per kWh, respectively, for supplying the facility with the geothermal escalate at 3.5% annually for the remaining steam.The terms of the Mahanagdong term of the Pbwer Resources PPA. The Pbwer ECA are substantially similar to those of the Resources PPA expires in September 2003. UpperMahiaoECA. AllofPNOC-EDC's The NorCon Project sells electricity to obligerions under the Mahanagdong ECA Niagara Mohawk Power Corporation are supported by the Govemment of the i (,. Niagara ) pursuant to a 25 year negotiated l Philippines through a performance undertak-power purchase agreement (the.NorCon ing. The capacity fees are expected to be PPA") which provides for energy payments approximately 97% of total revenues at calculated pursuant to an adjusting formula the design capacity levels and the energy based on Niagara's ongoing Tarift Avoided fees are expected to be approximately 3% Cost and the contractual Long-Run Acoided ofsuch total revenues. Cost. The NorCon PPA term extends through December 2017. The Company and Niagara are currently engaged in discussions regarding a potential restructuring or buyout and termination of the NorCon PPA.

F"""N"""""<<- I t i The. uma Project sells electricity to SDG&E zinc at the Company's Imperial Valley Y under an existing 30-year power purchase Project. The Company is also investigating contract. The energy is sold at SDG&E's producing other minerals and silica from Avoided Cost of Energy and the capacity is the solids precipitated out of the geothermal sold to SDG&E at a ftxed price for the life power process. of the power purchase contract The contract g term extends through May 2024. Under a Bonneville hwer Administration Nerada awlUtah Pmperties ("BPA") geothermal pilot program, the Rooserdt Hot Springs. The Company operates Company has been developing a 30 net MW and owns an appmximately 70% interest net geothermal project which was originally in a geothermal steam field which supplies located in the Newberry Known Geothermal geothermalsteam to a 23 net MW power Resource Area in Deschutes County, Oregon plant owned by Utah Pbwer & Ught Company (the " Telephone Flat Pmject"). Pursuant to an ("UP&L") located on the Roosevelt Hot Springs amended power sdes cc,ntract the project has property under a 30-year steam sales contract. been relocated to Telephone Flat aad BPA has agreed to purchase 30 MW from the project The Company obtained approximately with an option to purchase.p to an additional $20,317 cash under a pre-sale agreement

1. E*I*'* '

with UP&L whereby UP&L paid in advance this attemative location and BPA s purchase for the steam produced by the steam field. The obhgation are subject to obtainmg a fmal Company must make certain penalty payments

• ''*** * *"'.I**

8 to UP&L if the steam produced does not meet to the new site location. Completion of th. is certain quantity and quality requirements. project is subj.ect to a number ofsignificant Desert P ak. The Company is the owner and uncertainties and cannot be assured. operator of a geothermal plant at Desert Peak,

6. Q, uMurnhnenh Nevada that is currently selling electricity to At December 31,1997, the Company had Sierra Pacific Power Company (" Sierra") at an indirect ownership of approximately 35%

Sierra's Avoided Cost. Subsequent to year end, in the Casecnan Project, a combined irrigation an indirect subsidiary of the Company entered and 150 net MW hydroelectric power into a lease agreement whereby they will lease Sencrati n Project located on the island of the facility to another power producer and Luzon in the Philippines. The Company is receive rental payment:,. expected to indirectly own approximately Salton Sea hiinerals Extraction 70% of the Caseenan Project after the The Company developed and owns the KDG Acquisition. rights to a proprietary process for the The Company had an indirect ownership of extraction ofminerals from elements m 50% in the Mahanagdong Project, subject to solution in the geothermal brine and tiuids a nnna ty panner p nMpati n e Company utilized at its Imperial Valley plants (the willindirectly own 100% of the Mahanagdong "Sahon Sea Extraction Project") as well Pr ject after the KDG Acquisition. as the production of power to be used in the extraction pmcess. A pilot plant has successfully produced commercial quality

<.,i,"""""""""""i i The Company has an approximate 45% The Senior Discount Notes are redeemable at economic interest in Saranac Pbwer Partners, any time on or afterJanuary 15,1999 initially 1.R and a 20% economic interest in NorCon at a redemption price of105.125% declining ' Pbwer Partners, LR as part of the Falcon to 100% onJanuary 15,2002 plus accrued Seaboard acquisition. interest to the date of redemption. The Senior Summary fmancial information for these equityinvestments follows: obligations of the Company. The Senior Discount Notes prohibit payment 3 m ofcash dividends unless certain fmancial As of and for the yur emled December 31,1997: Assets s 482,527 $ 315,671 s 118,415 s 294,250 ratios are met and unless the dividends do not Uabilities 384,369 211,299 115,487 197,575 exceed 50% of the Conw 's accumulated Net income adjusted consolidated ne. ;ome as defined, Sm) (11,267) 43,097 4,072 14 9 )6 subsequent to April 1,1994, plus the As of amt for the year ended December 31,1996: proceeds of any stock issuance. Assets 4>2,1" 425,174 125,956 240,222 Uabaties : 380,737 '213,326 121,223 168,512 9.5% SeniorNotes Net income On September 20,1996, the Company issued G=> . (11,207) ' 40,005 (53; N/A $225,000 of 9.5% Senior Notes (the "9,5% Seni r Notes") due 2006. Interest on the

7. PareniCompanyDeb/

9 Sem tes is payde sendanm-Parent company debt comprises the following at December 31: n March 15 and September 15 ofead a, commencing March 15,1997.The 9.5% w 1996 Senior Notes are redeemable at any time seniorduount notes - s 529,Mo s 527,535 on or after September 15,2001 initially at 9.5meniv notes 224,205 224,150 7.630enior notes 350,000 a redemption price of 104.75% declining to 100% o@ ember 15,2001@ accmed umired recourse senk r interest to the date ofredemption. The 9.5% secured notes. 200,000 200,000 CalEnergy credit facility 100,000 Senior Notes are unsecured senior obligations Revolving credit facility 95,000 of the Company. s 1,303.845 s 1,146,685 7.63% SeniorNotes en. w y - e m e = =

• r w - so,t a u, m On October 28,1997, the Company issued Senior Discount Note,

$350,000 of 7.63% Senior Notes (the In March 1994, the Companyissued "7.63% Senior Notes") due 2007. Interest $400,000 of101/4% Senior Discount n the 7.63% Senior Notes will be payable Notes which accrete to an aggregate principal semiannually on April 15 and October 15 amount of $529,640 at maturity in 2004. feach year, commencing April 15,1998. The original issue discount was amortized The 7.63% Senior Notes are unsecured from the issue date throughJanuary 15,1997, senior obligations of the Company. - during which time no cash interest was paid on the Senior Discount Notes. Cash interest on the Senior Discount Notes is payable semiannuauyonJanuary 15 andJuly 15 ofeach year, commencingJuly 15,1997,

i m o... <......i.m i Umited Recourse Senior Secured Notes Remin*ng Credit Facility OnJuly 21,1995, the Companyissued On July 8,1996, the Company rbrained a $200,000 of 9 7/8% Limited Recourse $ 100,000 three year revolving credit facility. Senior Secured Notes Due 2003(the On November 26,1997, the credit facility " Notes"). Interest on the Notes is payable was amended and increased to $400,000 and onJune 30 and December 30 of each year, extended to November 2000.The facility is commencing December 1995.The Notes unsecured and is available to fund working are secured by an assignmer,c and pledge capital requirements and fmance future of 100% of the outstanding capital stock of business expansion opportunities. Magma and are recourse only to such Magwa ,,,,,, g,p,ym,,,,,,p,,e,, (,,p,,y 9,g, capital stock, the Company s mterest in a ,9p g secured Magma note and general assets of company debt due for the next five years. the Company equal to the Restncred Payment Recourse Amount, as defined in the Note

8. SubsidiaryandProjectDebit Indenture (" Note Indenture"), which was Project loans held by subsidiaries and projects

$0 at December 31,1997, which are non recourse to the Company C mPrise the following at December 31: & any time or from time to time on or prior toJune 30,1998, the Company may, at its 1997 1996 j option, use all or a portion of the net cash salcon sea Notes and Bonds $ 448,754 $ 538,982 proceeds of a Company equity offering (as Northern eurobonds 427,732 439,192 defmed in the Note Indenture) and shall at UK creat racary 128,423 any time use all of the net cash proceeds of j"8 33 any Magma equity offering (as defmed in a gj,c,,,gg pongn, the NoteIndenture)to redeem up to an co,npany sterbng iknas 322,5u aggregate of 35% of the principal amount Power Resources project debt 103,334 114,57I of the Notes originally issued at a redemption CoreFun&ngCorp projectloans 106,616 148346 C nstructonI ans 416,744 300,951 price equal to 109.875% of the principal 'k' 5.962 7s27 amount thereofplus accrued interest to the $ 2,189.007 $ 1,678392 redemption date. On or afterJune 30, 2000, the Notes are redeemable at the option of the Each of the Company's direct or indirect f Company, in whole or in part, initially at a subsidiaries is organized as a legal entity I redemption price of 104.9375% declining to separate and apart from the Company and 100% onJune 30,2002 and thereafter, plus its other subsidiaries. Pursuant to separate accrued interest to the date of redemption. project financing agreements, the assets of l I each subsidiary are pledged or encumbered Ca/ Energy Credit Facility to suppon or otherwise provide the security On October 28,1996, the Company obtained for their own project or subsidiary debt, it a $ 100,000 credit f.cility (the "CalEnergy Credit Facility") of which the Company had should not be assumed that any asset of any such subsidiary will be available to satisfy the drawn $ 100,000 as of December 31,1996. bligations of the Company or any ofits other The Company has repaid the entire balance such subsidiaries; provided, however, that of the CalEnergy Credit Facility.

<m.""""""""""" i i unrestricted cash or other assets which are of CalEnergy's direct or indirect subsidiaries available for distribution may, subject to - (1) owning interests in the Coso, Imperial applicable law and the terms of financing Valley, Saranac, NorCon, Power Resources, arrangements of such parties, be advanced, Mahanagdong, Malitbog, Upper Mahiao, loaned, paid as dividends or otherwise Casecnan, Dieng and Patuha projects or (2) distributed or contributed to the Company owning interests in the subsidiaries that or affdiates thereof. " Subsidiaries" means all own interests in the foregoing projects. Salton Sea NotesandBonds The Salton Sea Funding Corporation, a wholly owned subsidiary of the Company,(the " Funding Corporation") debt securities are as follows: Senior Final Secured Maturity December 31, December 31, Series Date Rate 1997 1996 July 21,1995 A Noces May 30,2000 6.69 % $ 97,354 $ 161.732 July 21,1995 BIkals May 30,2005 7.37 % 133,000 133,000 July 21,1995 C Iknis May 30,2010 7.84 % 109,250 109,250 Jura 20,1996 D Notes May 30,2000 7.02 % 44,150 70,000 77 June 20,1996 E tkals May 30,2011 8.30 % 65,(x10 65,000 $ 448,754 $ 538,982 Principal and interest payments are made Northern Eurobonds in semi-annual installments. The Salton The Northern debt includes a debenture due Sea Notes and Bonds are secured by the in 1999, which bears a fixed interest rate of Company's four existing Salton Sea plants 12.661 %, The debt also includes bearer bonds as well as an assignment of the right to repayable in 2005 and 2020, bearing fixed receive various royalties payable to Magma interest rates of 8.625% and 8.875%, in connection with its Imperial %11ey respectively. properties and distributions from the The balance at December 31,1997 and 1996 Partnership Project. The Salton Sea Notes consists of the following: and Bonds are nonrecourse to the Company. 1997 1996 Puisuant to a depository agreement, Funding , 9 3,g , 99 g Corporation established a debt service reserve Bearer txnjs due 2005 165,236 171.130 fund in the form of a letter of credit in the 3 care,ixni, due 2020 164,966 168.138 amount of $70,430 from which scheduled $ 427,732 $ 439,192 interest and principal payments can be made.

i"'"""""'"""""".i,,m i ) U.K. Credit Racility 2022. The CE Electric UK Funding Company On October 28,1996, CE F.ildings, an Senior Notes and Sterling Bonds prohibit indirect subsidiary of the Company, obtained distributions to any ofits shareholders a E560,000 five year term loan and revolving unless certain fmancial ratios are met credit facility (the "U.K. Credit Facility"). by the Funding Company. The Company did not guarantee, nor was hwer Resources Pmject Financing Debt ect to recourse for, amounts g it otherwise subj. borrowed under the U.K. Credit Facihty. owned subsidiary, has project financing The agreement placed restrictions on debt consisting of a term loan payable distributions from CE Electric to rmy ofits shareholders based on certain financial ratios. pnncipaldu quarterlythr ughOctober CE Electric has repaid the entire U.K. Credit 2003. The debt carries fixed interest rates Facility through the use ofproceeds from of 10.385% and 10.625%. the senior note and sterling bond offerings of CE Electric UK Funding Company Coso Funding Corp. Project Larus described below. The Coso Funding Corp. project loans are r mCosoFundingCorp.,asingle-purpose CE Electric UKFunding Company ' 'P '*'*" *'"' '* ""' "*' I ' 5 ** " 7e SeniorNotesandSterFng Bonds acc unt and act as an agent n behalfof the On December 15,1997,CE Electric UK Coso Project. The Coso Funding Corp. project 1 Funding Company, an indirect subsidiary I ans carry a fixed interest rate with weighted of the Company (the " Funding Company"), average interest rates f 8.65% and 8.46% at issued $ 125,000 of 6.853% senior notes due December 31,1997 and 1996, respectively. 2004, and $237,000 of 6.995% senior notes

1. d E*I**"**

due 2007 (collectively, the "CE Electric thmugh December 2001. The Coso Project UK Funding Company Senior Notes"), has established irrevocable letters of credit and E200,000 of 7.25% Sterling Bonds due of $67,850 as a debt service reserve fund. t AnnualRepayments ofSubsidiary and Project Debt i The annual repayments of the subsidiary and project debt, excluding construction loans, for the years beginning January 1,1998 and thereafter are as follows: CE Electric UK Funding j~ Salton Sea Senks Notes Guo O m pany Notes and Nonhern and Sterling Ibwer Funding Ikals Eurulmis Ilonds Resources Grp. Other Total ( 1998 $ 106,938 $ - $ 12,805 $ 38,912 $ 1,544 $ 160,199 I 1999 57,836 97.530 14,268 31,717 1,297 202,M8 2000 25,072 16,087 4,0x0 1,051 46,290 2001 22,376 18,119 11,907 838 73,240 l 2002 24,298 20.312 1.232 45,542 i Thereafter 212.234 330,202 679,865 21,743 1,244,044 $ 448,754 $ 427,732 $ 679,865 $ 103,334 $ 106.616 $ 5.962 $ 1.772,263

i t.. <....,i.o i 1 i i Construction Loans have provided the construction and term loan The Company's allocable share of non-recourse facilities at variable interest rates (weighted project construction loans comprise the average of 8.48% and 8.15% at December following at December 31: 31,1997 and 1996, respectively). The - internati nal bank portion of the debt will 1997 1996 i u 88 n Po W & ad Upper Whiao $ 150,628 3 150.628 the Company's equity contribution to Visayas mlag ~ 176,657 137,881 G Indonesia Fundmg Grp. 89,459 12,442 Geothermal Power Company ("VG PC") is $ 416,744 $ 300,951 covered by political risk insurance from the Multilateral investment Guarantee Agency The Upper Mahiao and Malitbog and OPIC. The construction loan is expected construction loans are scheduled to be to be converted to a term loan promptly after replaced by non-recourse term project NPC completes the full capacity transmission financing upon complenon ofconstrucnon line, which is currently expected in 1998. and commencement ofcommercial operations. CEIndonesia Funding Corp. UpperAlahiao Construction Loan InJune 1997, the. Company's indirect special. Draws on the construction loan for the purpose subsidiary, CE Indonesia Funding Upper Mahiao geothermal power project Corp., entered into a $400,000 revolving n at December 31,1997 totaled $150,628. credit facility (which is nonrecourse to the - A consortium ofinternational banks provided Company) to fmance the development and the construction financing with variable construction of the Company's geothermal interest rates based on IJBOR or " Prime" power facilities in Indonesia. This credit with interest payments due every quarter frility was used in part to replace the original and at I.lBOR maturity. The weighted average pr> sect financing for Himpurna California interest rate at December 31,1997 and 1996 is Energy's Dieng Unit I. At December 31, approximately 8.43% and 8.01%, respectively. 1997, the Company's share of the credit The Export-Import Bank of the U.S. ("Ex-Im facility relating to Dieng Unit I was $50,481 Bank") is providing political risk insurance t and carried a variable interest rate (weighted commercial banks on the construction loan. average of 7.44% at December 31,1997). The construction loan is expected to be converted to a term loan promptly after On November 18,1997, Himpurna NPC completes the full capacity transmission Califomia Energy announced the funding line, which is currently expected in 1998. The of the Dieng Unit 11 project pursuant to the largest portion of the term loan for the project CE Indonesia Funding Corp. facility arranged will also be provided by Ex-Im Bank. The term inJune 1997. At December 31,1997, the fmancing for the Ex-Im Bank loan will be at Company's share of the credit facility relating a ftxed interest rate of 5.95%. to Dieng Unit II was $11,211 and carried a variable interest rate (weighted average of .Ala/// bog Construction Laan 7.487 at December 31,1997). Draws on the construction loan for the Malitbog geothermal power project at On September 2,1997, Patuha Power December 31,1997 totaled $176,657. announced the funding of the Patuha Unic I . International banks and the Overseas project pur. ant to the CE Indonesia Funding Private Investment Corporation ("OPIC") Corp. facility arranged inJune 1997.

I <o...., i At December 31,1997,the Company's Deferred tax liabilities (assets) are comprised share of the credit facility relating to Patuha of the following at December 31: was $27,767 and carried a variable interest 1997 1996 rate (weighted average of 7,44% at December Depreciaram and 31,1997). ,mo,tization. net s 802,215 s 725,366 hions 19,441 22,883 K0W Em Unremitted foreign earnings 10,781 2,857 Provision for income taxes is comprised other 3.324 3,262 of the following at December 31: 835,761 754,368 1997 1996 1995 Deferred contract costs (193,996) (128,74,, Deferred income (12,690) (9,298) Currendy payable: State $ 5,084 $ 7,520 $ 5,510 Energy and investment tax credits (42 N9) (55,931) Federal 33,114 19,873 11,138 Advance corporanon tax (20,205) Foreign 5,262 2,176 Altemative m nimum tax credits (39,402) (50,819) Accruals n t currendy deductible 43,460 29,569 16/4 8 r ax & (13,3 2) Deferred: Other (7,004) (6,799) State (2(A) 1,619 921 (326,702) (285,169) Federal 14,579 9,209 13,062 Foreign 41,269 1,424 Net deferred taxes $ 509.059 $ 469,199 c3 55,584 12,252 13,983 The Company has unused investment and Total s 99,N4 s 41,821 s 30,631 geothermal energy tax credit carryforwards A reconciliation of the federal statutory tax rate of approximately $42,049 expiring between to the effective tax rate applicable to income 2004 and 2012.The Company also has before provision for income taxes follows: approximately $39,402 of alternative minimum tax credit carryforwards which 1997 1996 1995 have no expiration date, Federal statutory rate 35.00 % 35004 35.00 % Ittcentage depletam in excess of cost deplenon G.77) (6.12) (7.48) Investment and energy tax credits (l>i) (8 34) (1.80) State taxes, net of federal l tax eflect 1.59 4 38 4.09 Goodwdl amortizatum 2.06 2.51 2 53 Non tk4xtible expense 1.33 A1 1.10 f Irase investment (2.18) ( Dmdends on convemble I preferred secuntas of subsaliary trusts * (4.12) (1.17) Tax effect of foreign iruxne 2 64 2.54 Aswt valuation imperment 15 47 Other .75 .15 .20 DTective rax rate 50.31'I 29794 31.56'V

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l C. A L EN8R0, LO asFAD Y. IW t. l

10. Company-Ob//gatedAfandatori/y restated declarations of trusts (collectively, the

~ Redeemable Concertible Preferred " Declarations"). On April 12,1996, February Securities ofSubsidiary Trust,' 26,1997 and August 12,1997, the Company, The Company has organized special purpose through these Trusts, issued Company. Delaware business trusts (" Trust I", " Trust 11-obligated mandatorily redeemable convenible and " Trust 111" or collectively, the " Trusts") preferred securities (collectively, the " Trust pursuant to their respective amended and Securities") as follows: Iouer Issue Date Race Amount Conversion Rate Ce1 Energy CapitalTrust I April 12,1996 6.25 % $ 103,930 1.6728 CalEnergy CapitalTrust 11 February 26,1997 6.25 % $ 180,000 1.1655 CalEnergy CapitalTrust til August 12,1997 6.50 % $ 270,000 1.M7 The Company owns allof the common accrue from the date ofinitial issuance and securities of the Trusts. The Trust Securities are payable quanerly in arrears. TheJunior have a liquidation preference of fifty dollars Debentures are subordinated in right of each and represent undivided beneficial payment to al! senior indebtedness of the ownership interests in each of the Trusts. Company and theJunior Debentures are The assets of the Trusts consist solely of subject to certain covenants, events ofdefault the Company's Convenible Subordinated and optional and mandatory redemption Debentures due March 10,2016, February provisions, all as described in theJunior 25,2012 and September 1,2027, respec-Debenture indentures. tively, in outstanding aggregate principal Pursuant to Preferred Securities Guarantee amounts of $103,930, $180,000 and Agreements (colleco. ly, the" Guarantees ), ve $270,000, respectively (colleco. ly, the ve between the Company and a preferred ,, Junior Debentures ) issued pursuant to their guarantee trustee, the Company has agreed respective indentures. The indentures mclude irrevocably to pay to the holders of the Trust agwements by the Company to pay expenses gg,gg and obhgations incurred by the Trusts. has funds available to make such payments, Each Trust Secun.ty with a par value of $50 is convenible at the option of the holder at 9"*".erly distributions, redemption payments and Lquidation payments on the Trust any time into shares of CalEnergy Common Secun..nes. Considered together, the undertak-Stock based on the conversion rate and subj.ect ings contained in the Declarations, Junior to customary anti-dilun.on adjustments. Debentures, Indentures and Guarantees Until convened into the Company's Common constitute fi JI and unconditional guarantees Sterk, the Trust Securities will have no voting by the Corrmriy of the Trusts' obligations rights with respect to the Company and, under the T ust Securities. except under certain limited circumstances, wdl have no voting rights with respect to the Trusts. Distributions on the Trust Securities (and Junior Debentures) are cumulative,

["""""""""""", ,m

11. PreferredStock from the date of grant or, in some instances, On December 1,1988, the Company a lesser term. Prior to the 1996 Plan, the distributed a dividend ofone preferred share Company granted 256 options at fair market purchase right ("right") for each outstanding value at date ofgrant which had terms of ten share of common stock. The rights are not years and were exercisable at date of grant.

exercisable until ten days after a person or In addition, the Company had issued group acquires or has the right to acquire, approximately 138 options to consultants beneficial ownership of 20% or more of the on terms similar to those issued under the Company's common stock or announces a 1996 Plan. The non-1996 plan optiom are tender or exchange ofter for 30% or more primarily options granted to Kiewit. of the Company's common stock. Each The Company granted 500 shares of nght entitles the holder to purchase one

• "'*"'"'k*'.' "" "88'*8"

one-hundredth of a share of Series A junior market value of $9,500 m exchange for the preferred stock for $52. The n. hts may be reb.nquishment of 500 stock options which g redeemed by the Board of Directors up to ten were canceled by the Company. The shares days after an event triggering the distribun.on g g have all rights of a shareholder, subject to ofcern.ficates for the n. hts.The n. hts will certain restrictions on transferability and y expire, unless previously redeemed or ' *E****I " exercised, on November 30,1998.The equivalent to the market value of the nghts are automatically attached to, and f ssuancewascharged trade with, each share of common stock. to stockholders, equity Such unearned

12. Stock Options and Restricted Stock compensation was amortized over the vesting The Company hasissued various stock period of which 125 shares were immediately options. As of December 31,1997, a total vested and the remaining 375 shares vested of 6,949 shares are reserved for rtock options, throughJanuary 1,1998. Accordingly, of which 6,780 shares have been granted

$5,471, $ 1,535 and $2,494 of unearned and remain outstanding at prices of $3.74 compensation was charged to general and to $40.81 per share. administrative expense in 1997,1996 and The Company has stock option plans under which shares were reserved for grant as incentive or non-qualified stock options, as determined by the Board of Directors. The plans allow options to be granted at 85% of their fair market value at the date of grant. Generally, options.tre issued at 100% of fair market value at the date of grant. Options granted under the 1996 Plan become exercisable over a period of two to five years and expire if not exercised within ten years

7 i I Transactionsin 51ock Options Options Outstanding Shares Avallable for Grant Under Option Price Weighted Avg 1996 Option Plan Shares Per Shares Option Price Total Balance lhember 31,1991 86 9/41 8 3.00- $ 19 00 $ 12.84 $ 123,277 Optons granted (3%) 3% 15.81 - 19 00 18.15 7,188 Options terminated 571 (571) 14 88 - 19.00 18.69 (10,673) Options excrused (135) 3.00 - 15.94 3Al (460) Balarge thember 31,1995 261 9,291 3 00 - 19.00 12 84 119,332 Optkins granted (1,157) 1,157 25M-30.38 28.17 32,590 Options terminated 468 (468) 3.00 - 19.00 17.96 (8,406) Optkms exercised (5,203) 3.00 - 21.68 11.13 (57,931) Additional shares reserved under 1996 Option Plan 739 Balarke December 31,1996 311 4,777 3.00 - 30.38 17.92 85,585 Options granted (2,307) 2,513 29 M - 40.81 34.80 87,457 Optons terminated 165 (165) 3 00 - 29 M 20.04 (3,307) Opnons exercwd (345) 3.74 - 29 M 13.28 (4.583) Adational shares reserved under 1996 Orton Plan 2,(XX) 83 Belance lhemirr 31,1997 169 6,780 $ 3.74- $ 40.81 $ 24.36 $ 165,152 Optons exercisable ac December 31,1995 8,229 $ 3.00- $ 19.00 $ 12.26 $ 100,886 December 31,19% 3,071 $ 3.00- $ 30.38 $ 14.25 $ 43,770 Ihember 31,1997 3/45 $ 3.74- $ 40.19 $ 1812 $ 66,425 The following table summarizes information about stock options outstanding and exercisable as of December 31,1997: Options outstanding Options Exercisable Weighted Weighted Weighted Rangc of Number Average Average Remaining Number Average Exercise Prices Outstanding Exercise Price Contractual 14e Exercisable Exercise Price $ 3.74 $ 11.99 1,161 $ 11.22 3 yean 1,161 $ 11.22 12.00 21.99 2,020 16.90 6 years 1,739 16.82 221X) 31.99 1,092 28.10 8 ) ears 311 28.25 32.00 40 81 2,507 34.83 9 years 454 34 12 6,780 $ 24 36 7 years 3/45 $ 18.12

L " """I" " " " " " " ia< I The Company applies the intrinsic value Simultaneous with the acquisition of the based method of accounting for its stock-remaining equity interest of Magma on based employee compensation plans. If the February 24,1995, the Company completed fair value based method had been applied for a public offering (the " Offering") of 18,170 1997, non-cash compensation expense and shares ofcommon stock, which amount the effect on net income available to common included a direct sale by the Company to stockholders and earnings per share would Kiewit of 1,500 shares and the exercise of have been approximately $3,600, or $0.05 underwriter over-allotment options for 1,500 per share. If the fair value based method had shares, at a price of $ 17.00 per shate. The been applied for 1996 and 1995, non-cash Company received proceeds of $300,388 compensation expense and the effect on net from the Offering. income available to common stockholders

14. Asset Valuation and earnings per share would have been immaterial. The fair value for stock options I*IdI""#"#Cbd'N' was estimated using the Black-Scholes option The non-recurring charge of $87,000 pricing model with assumptions for the risk-represents an asset valuation impairment free interest rate of 5.50% in 1997 and 6.00%

charge under Financial Accounting Standard in 1996 and 1995, expected volatility of 25% No.121, " Accounting for the Impairment of in 1997 and 22% in 1996 and 1995, expected L ng-Lived Assets," relating to CalEnergy's life of approximately 3.7 years in 1997 and assets in Indonesia. Moreover, the Company 4.5 years in 1996 and 1995, and no expected ntends to continue to take actions to attempt dividends. The weighted average fair value to require the government ofIndonesia to of options granted during 1997,1996 and honor its contractual obligations; however, the ultimate outcome of the current uncertain 1995 was $9.55, $8.62 and $5.72 per option, respectively, situation in Indonesia with respect to the possible abrogation by the Indonesian

13. Common Stock Sales government of the Dieng, Patuha and

& RelatedOptions Bali contracts adds significant risk to the On October 17,1997, the Company completicn /those projects. Consequently, completed the public ofTering of 17,100 the charge of $87,000 represents the amount shares ofits common stock (" Common by which the carrying amount of such assets Stock") at $37 7/8 per share (the "Public exceed the fair value of the assets determined Offering"). In addition,2,000 shares of by discounting the expected future net cash Common Stock were purchased from flows of the Indonesia projects, assuming CalEnergy in a direct sale by a trust affdiated proceeds from political risk insurance and with Walter Scott,Jr., the Chairman and no tax benefits. Chief Executive Officer of PKS (the " Direct Sale"), contemporaneously with the closing l of the Public Offering. Proceeds from the Public Offering and the Direct Sale were l approximately $699,920. 1

l caaEmeeoy L. o an e a e v. 6 i, c. ]

15. Extraordinaryitem willing parties, other than in a forced sale or OnJuly 31,1997, the Finance Act in the liquidation. Although management uses its United Kingdom was passed by Parliament best judgment in estimating the fair value of and inchided the introduction of a one time these fmancial instruments, there are inherent so<alled " windfall tax" equal to 23% of limitations in any estimation technique.

the difference between the price paid for Therefore, the fair value estimates presented Northem upon privatization and the I.abour herein are not necessarily indicative of the govemmcm's assessed "value" of Northem amounts which the Company could realize as calculated by reference to a formula set in a current transaction. fonh in theJuly budget. This amounted The methods and assumptions used to $ 135,850, net of minority interest of to estimate fair value are as follows: $58,222, which was recorded as an extraor-dinary item. The first installment was paid Debt instruments-The fair value of all December 1,1997 and the second installment debt issues listed on exchanges has been is payable on December 1,1998. estimated based on the quoted market prices.

16. Fair Value of other financial instruments-All other FinancialInstrument, financial instruments of a material nature The fair value of a financial instrument is fallinto the definition ofshort-term and fair as -

the amount at which the instrument could . value is estimated as the carrying amount. be exchanged in a current transaction between %e carrying amounts in the table below are included under the indicated captions in Notes 7,8 and 10. 1997 1996 Estinured Estimated Carning Fair Carrying Fair W!ue Wlue Wlue %!ue - Sensw dncount notes $ 529,640 $ 569,148 $ 527,535 $ 556,971 9.5% Senior notes 224,205 243,615 224,150 229,866 7.63% Senior notes 350,000 352,857 Ilmited recourse senior secured notes 200,000 217,829 200,000 212,560 CalEnergy credit facihty 100,000 100,000 Revolving hne dcredit 95,000 95,000 S.dton Sea notes and Exmds 448,754 463,720 538,982 531,807 Northerneuroixnfa 427,732 482,064 439,192 445,830 Constructionloans 416,744 416,744 .300,951 300,951 Coso Funding Corp. project loans 106,616 112,932 148,346 153,650 CE Elect ic UK Fundmg Company Senior Notes 357,331 357,331 CE Electric UK Fundmg Company Scerhng ikmds 322,534 333,257 . Power Resourtes project debt 103,334 103,334 114,571 114,571 UK cnxlit facibry 128,423 128,423 Other 5,962 5,962 7,927 7,927 Convertilde preferred suurities dsubAliary enars 553,930 $14,373 103,930 128,354 +

I ..i.o i c

17. Inte>est Rate Su'ap Agreements previousJuly to December period and Xd On December 15,1997,CE Electric UK is set at 3%. The formula also takes account Funding Company entered into certain of the changes in system electrical losses, interest rate swap agreements for the CE the number of customers connected and the Electric UK Funding Company Senior voltage at which customers receive the units Notes with two large multi-national financial ofelectricity distributed.

institutions. The swap agreements effectively In the supply business the current formula convert the U.S. dollar fixed interest rate t applies only to customers with demands a fixed rate in Sterling. For the $ 125,000 of below 100kW Under the current formula 6.853% senior notes, the agreements extend the purchase cost ofelectricity and the cost until December 30,2004 and convert the of transmission, distribution and the fossil fuel t U.S. dollar interest rate to a fixed Steding 1 vy a passed through to customers m full. l rate of 7.744%. For the $237,000 of6.995% That part of the formula governing Northem s seruor notes, the agreements extend until own supply business costs requires that this December 30,2007 and convert the U.S. element of the permitted income falls by 2% dollar interest rate to a fixed Steding rate i E*'""""* " of 7.737%. The estimated fair value of these is due to be replaced trom April 1,1998 with swap agreements is approximately $4,929 a new formula which will require Northern to t based on quotes from the counter party to reduce prices to those customers protected by these instruments and represents the

1. "#* E # ""
2. "* E'*** #8 estimated amount that the Company would at August 1,1997 by about 4.2% (minus expect to pay to terminate these agreements.

inflation) with effect from April 1,1998 and It is the Company s mtennon to hold the a further 3% (minus inflation) with effect swap agreements to the..ir mtended matunty. fm@il L M

18. RegulatoryMatters The market for electricity supplied to Northern is subject to price cap regulation.

customers with demands over 1MW was Price control formulas for the supply and opened to competition in 1990. In 1994 distribution businesses are enforced by the this limit was reduced to 0.lMW In 1998, Office of Electricity Regulation (" OFFER"). liberalization of the entire market is due l In the distribution business the current price to commencein stages with complete control is expected to last until 2000. The liberalization achieved byJune 1999. formula was reviewed with effect from April L9. Pension Commitments 1,1995 and April 1,1996 which resulted Northern participates in the Electricity Supply in one-time reductions m allowed income Pension Scheme, which provides pension and per unit distributed of about 17% and 13% other related defined benefits, based on fmal respectively, with contmuing real reductions pensionable pay, to substantially all employees in each of the subsequent three years 1997/98 throughout the Electricity Supply Industry in to 1999/2000 Thecurrent formula requires the United Kingdom, that each year regulated distribution income per unit is increased or decreased by RPI-Xd where RPI reflects the average of the twelve l month inflation rates recorded for the

c.,,.,""""""""""" i y The actuarial computation for December 31, '20. Commitments andContingencies .1997 and 1996 assumed interest rates of Casernan - . 6.75% and 7.75%, respatively, an expected in November 1995, the Company closed the return on plan assets of 7.25% and 8.25%, fmancing and commenced construction of the respectivdy, and annual compensation Casecnan Project, a combined irrigation and - increases of 4.75% and 5.75%, respectively, 150 net MW hydroelectric power generation over the remaining service lives of employees project (the "Casecnan Project") located in covered under the plan. Amounts funded to the central part of the island of Luzon in the the pension are primarily invested in equity Republic ofthe Philippines. and fixed income securities. Northern's - G Casecnan Water and Energy Company, funding policy for the plan is to contnbute Inc., a Phih.ppme Corporation ("G Casecnan.,) annually at a rate that is intended to remain which is expected to be approximately 70% .a level percentage of compensation for the mdirectly owned by the Company (after the covered employees.- KDG Acquisition), is developing the Casecnan The following table details the funded status Project. G Casecnan fmanced a portion of and the amount recognized in the balance the costs of the Casecnan Project through the sheet of the Company as of December 31, issuance of $125,000 ofits 11.45 % Senior 1997 and 1996. Secured Series A Notes due 2005 and w $ 171,500 ofits 11.95 % Senior Secured Series Atuuw praent ulue of benent obugations: B Bonds due 2010 and $75,000 ofits Secured 3997 g floating Rate Notes due 2002, pursuant to wsted bene 6ts $ 847,694 $ 797,932 ~ an indenture dated as of November 27,1995, Nonvested bene 6ts a a enO Me. Accumulated benefit obhgation 847.694 797.932 Effect offuture increasein The Casecnan Project was being constructed compensation 40,898 58,218 pursuant to a fixed-price, date-certain, Projected bene 6r obhgation ' 888,592 856,150 turnkey construction contract (the "Hanbo Fairvalueofplanw ts 1.012,601 919.163 Contract") on a joint and several basis by Assetsin excess ofprojeced Hanbo Corporation ("Hanbo") and Hanbo bene 6:obhgation 124.009 63,0'13 Engineering and Construction Co., Ltd. Unrecognuednetgain - 61,265 ("HECC"), both of which are South Korean Prepaid pension asset $ 62,744 $ 63,013 Net periodic pension cost for 1997 included Casecnan terrainated the Hanbo Contract the following components (the components due to defaults by Hanbo and HECC for the period from the acquisition date of including the insolvency of each such Northern to December 31,1996 are not company.On May 7,1997 G Casecnan meaningful): entered into a new tumkey engineering, procurement and construction contract to g_ complete the construction of the Casecnan Interest cost on projected benenc abugation 62,300 Atual returoen plan assets (71,300) Project (the " Replacement Contract"). Net penodic pension cost $ 3,600 The work under the Replacement Contract is being conducted by a consonium consisting 4 l l ~..

i i of Cooperativa Muratori Cementisti CMC On September 29,1997,G Casecnan di Ravenna and Impressa Pizzarottie & C. tendered a second cenificate ofdrawing for Spa working together with Siemens A.G., $ 10,828 to KFB and on December 30,1997, Sulzer Hydro Ltd., Black & Vearch and G Caseenan tendered a third certificate Colenco Power Engineering Ltd. (collectively, ofdrawing for $2,920 to KFB. KFB also the " Replacement Contractor"). wrongfully dishonored these draws, but pursuant to a stipulation agreed to deposit the j In connection with the Hanbo Contract draw amounts in an interest bearing account termination, G Casecnan tendered a with the same independent financial institution certificate ofdrawing to Korea First Bank in the United States pending resolution of the ("KFB") on May 7,1997 under the irrevocable appeal regarding the first draw and agreed to standby letter ofcredit issued by KFB as expedite the appeal. security under the Hanho Contract to pay for cenain transition costs and other presently The receipt of the letter ofcredit funds from ascertainable damages under the Hanbo KFB remains essentialand G Casecnan Contract. As a result of KFB's wrongful will continue to press KFB to honor its clear dishonor of the draw request, G Casecnan obligations under the letter ofcredit and to fded an action in New York State Court. pursue Hanbo and KFB for any additional a That Court granted G Casecnan's request damages arising out of their actions to date, . for a temporary restraining order requiring If KFB were to fail to honor its obligations KFB to deposit $79,329, the amount of the under the Casecnan letter of credit, such requested draw, in an interest bearing account action could have a material adverse effect with an independent fmancial institution in on the Caseenan Project and CE Casecnan. the United States. KFB appealed this order, On September 2,1997, Hanbo and HECC but the appellate coun deru. d KFB.s appeal e fded a Request for Arbitration before the and on May 19,1997, KFB transferred funds International Chamber of Commerce ("ICC"). in the amount of $79,329 to a segregated '9" 'A *d " ****"' ""N "5 New York bank account pursuant to the claims by Hanbo and HECC against CE i gg Casecnan relating to the terminated Hanbo On August 6,1997, G Casecnan announced Contract and seeking damages. On October that it had issued a notice to proceed to the 10,1997, G Casecnan served its answer Replacement Contractor. The Replacement and defenses in response to the Request Contractor was already on site and thereafter for Arbitration as well as counterclaims fully mobilized and commenced engineering, against Hanbo and HECC for breaches l procurement and construction work on the of the Hanho Contract. The arbitration Casecnan Project. proceedings before the ICC are ongoing and Casecnan intends to pursue vigorously its On August 27,1997, CE Casecnan announced claims against Hanbo, HECC and KFB in that it had received a favorable summary the proceedings described above. judgment ruling in New Wrk State Court against KFB. The judgment, which has been appealed by the bank, requires KFB to honor the $79,329 drawing by G Casecnan on the $ 117,850 irrevocable standby letter ofcredit.

i t. i t ;;.... to-,....

• t

_] Indonnia of these projects. As a result, the Company On September 20,1997, a Presidential recorded a SFAS 121 asset valuation Decree (the " Decree") was issued in Indonesia, impairment charge of$87,000in the providing for government action to the effect fourth quarter of 1997. This charge includes that, in order to address certain recent all reasonably estimated asser valuation fluctuations in the value of the Indonesian impairments associated with the Company's currency, the start-up dates for a number of assets in Indonesia and gives effect to the private power projects would be: (i) continued political risk insurance on such investments. according to their initial schedule (because construction was underway);(ii) postponed as to their start-up dates (because they are not OnJune 9,1997, Edison filed a complaint alleging breach of the power purchase yet in construction) until economic condinons have recovered; or (iii) reviewed with a view agreements ("SO4 Agreements")between to being continued, postponed or rescheduled, Edison and the CosoJoint Ventures as a depending on the status of those projects. result of alleged improper venting of certain g g In the Decree, Dieng Units I,2 and 3 are energy project. In the complaint Edison seeks approved to continue according to their iruttal schedule; Patuha Unit I and Bali Units 1 and unspec fied damages, m.cluding the refund 2 are to receive further review to determme ofcertain amounts previously paid under the e, SO4 Agreements, and termination of the i whether or not they should be continued.m SO4 Agreements. In September 1997, the t accordance with their imnal schedule; and ) Cosojoint Ventures and the Company fded Bali Units 3 and 4, Patuha Uru.ts 2,3 and 4 a cross-complaint against Edison and its and Dieng Unit 4 are to be postponed for affdiates, The Mission Group and M.. ission an unspecified period. In this regard, the Company notes that its contracts and Power Engineering Company alleging, among i g ,g government undertakmgs for the Dieng, the 1993 settlement agreement which settled ( Patuha and Bali projects do not by their certain h..nganon ansmg from the construction terms permit such categorization or delays i de#M @ by the govemment and that the company by Edison afliliates. In addition, the Coso has obtamed pohncal risk insurance coverage Joint Ventures fded a separate complaint l for its Dieng and Patuha projects. Moreover, against Edison alleging breach of the SO4 the Company intends to continue to take Agreements, unfair business practices, slander j actions to attempt to require the Govemment and various other tort and contract claims, of Indonesia to honor its contractual

9 9g.dM cbligations; however, subsequent actions by in December 1997. As a result of certain A

the Government ofIndonesia and continued i procedural actions by the parties and a economic problems in Indonesia have created November court order, Edison fded an further uncertaint-as to whether the contracts amended complaint on December 16,1997 for such projects wdl be abrogated by the and the Cosojoint Ventures amended their Indonesgn government and accordingly have gg; created sigmficant nsks to the completion proceduralstages and the pleadings )

E <.............,... 7 i have not been settled. The Cosojoint review on July 28,1995. On October 30, Ventures believe that their claims and defenses 1996, all parties filed fmal briefs and the are meritorious and that they will prevail if Court of Appeals heard oral arguments on the matter is ultimately heard on its merits. December 2,1996. On July 11,1997, the The Cosojoint Ventures intend to vigorously Court of Appeals dismissed NYSEG's appeal defend this action and prosecute all available from FERC's denial of the petition on counterclaims against Edison. jurisdictional grounds. NYSEG On August 7,1997,NYSEG filed a On February 14,1995, NYSEG filed with complaint in the U.S. District Court for the l the FERC a Ittition for a Declaratory Order, Northern District of New York against the Complaint, and Request for hlification of FERC, the PSC (and the Chairman, Deputy Rates in Power Purchase Agreements Chairman and the Commissioners of the imposed Pursuant to the Public Utility PSC as individuals in their official capacity), i Regulatory Pblicies Act of 1978 (" Petition") the Saranac Partnership and Lockport Energy seeking FERC(i) to declare that the rares Associates, LP ("lockport") concerning NYSEG pays under the Saranac PPA, which the power purchase agreements that was approved by the New York Public Service NYSEG enteredinto with Saranac Commission (the "PSC") were in excess of Partners and lockport. the level permitted under PURPA and (ii) to NYSEG,s suit asserts that the PSC and the i authon.ze the PSC to reform the Saranac PPA. FERC. improperly. implemented PURPA.m On March 14,1995, the Saranac Partnership authormng the pricing terms that NYSEG, intervened in opposition to the fttition the Saranac Partnerslu.p andlockport agreed '1 asserting, inter alia, that the Saranac PPA fully in those contracts. The action raises similar t id with PURPA, that NYSEG's action

• N**" ' * ** '#5#*N * *
• E was untimely and that the FERClacked FERCin its April andJuly 1995 orders.

authority to modify the Saranac PPA. On NYSEG m. addition asks for retroactive March 15,1995, the C,ompany intervened reformation of the contracts as of the date also in opposition to the Petition and asserted fc mmercial perar.i n and weks a refund similar arguments. On April 12,1995, the of $281 million from the Saranac Partnership. FERC by a unanimous (5-0) decision issued Saranac and ther parties have filed motions an order denying the various forms of relief dismiss and oral arguments on those t 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. OnJune 14, 1995, NYSEG petitioned the United States Court of Appeals for the District of Columbia Circuit (the " Court of Appeals") for review of FERC's April 12,1995 order. FERC moved to dismiss NYSEG's petition for

i <..s...., i Leases

21. GeographicInfonnation Certain retail facilities, buildings and The Company operates in one principal equipment are leased. The leases expire in industry segment: the generation, distribution periods ranging from one to 75 years and

. nd supply ofelectricity to customers located some provide for renewal options. throughout the world. Europe consists At December 31,1997, the Company,s future primarily of Northern. The Company's minimum rental payments with respect to operations by geographic area are as follows: non-cancelable operating leases were as 1997 1996 1995 follows: Revenue Amerkas $ 570,587 $ 486,i89 $ 386,833 ggg g3 1999 4,970 1,566,'442 ~ Eurge 39,191 g CorporarcK)ther 30,922 17,533 11,890 2001 W 2C)2 4,643 $ 2,270,9118 576,195 $ 398,723 Thereafter $3,905 Operatingincome

• Amerkas

$ 301,589 $ 259,665 $ 209,872 $ 78,495 Asia 61,131 16,766 Eurge 191,299 6,163 Corporate /Other (12,882) (10,931) (10,376) 91 8 541,137 $ 271,663 $ 199,496

• 0jeraung swan eva de lau a atury amarment in Gaun, ec onsmst a;penu anddv mon-mamng durge.

1997 1996 Identifiable assets Amerkas $ 2,268,629 $ 2,364,448 Asia 835,516 649,053 Europe 2,937,686 2,384,789 Corporate!Other 1,445,695 231,866 $ 7,487,626 $ 5,630,156

-] r <.*...io-r.. 1 \\

22. Quarterly FinancialData (Unanlited)

Following is a summary of the Company's quarterly results ofoperations for the years ended December 31,1997 and 1996. Three Months Ended

• 1997:"'

March 31 June 30 September 30 Decemtwr 31 Operating revenue $ 542,589 $ 505,922 $ $27,896 $ 589.931 Totai revenue 565,976 524,9M 551,893 628,M8 Totalcosts and expenses 506,104 460,184 467,900 639,863 income (bs)hefore mcome taxes 59,872 64,810 83.993 (11,815) i Provision for income taxes 22,249 24,342 27,929 24,524 income (hs) hefore minority interest 37,623 40,468 56,064 (36,339) Marx >nty interes: 10,175 9,579 9,656 16,583 ) Income (loss) lxfore extraordinary item 27,448 30,889 46,408 (52,922) i Extraordinary item (135,850) Income (loss) attributable to common stockholders 27,448 30,889 (89,442) (52,922) Income (kus)per share before extraordinary item .43 .49 .73 (.67) Extraordmary item (2.14) ~ k Net income (lossigr share .43 .49 (1.41) (.67) l Intome(loss) per share lefore extraordinary item-ddured .42 .46 .67 (.67) Extraordmary item-diluted (1.80) l Net income (loss) per share-ddured .42 .46 (1.13) (.67) i j Three Months Ended

• 1 1996:"'

March 31 June 30 September 30 December 31 l Operanng revenue $ 75,944 $ IM,735 $ 165,487 $ 172,768 t Total reenue 90,356 115,794 179,M8 190,997 ) [ Totalcosts and expenses 69,398 86,039 121,545 158,8f6 t 1 Income before income taxes 20,958 29,755 57,503 32,188 Provir en for income taxes 6,497 9,040 18,325 7,959 Inco ac lefore minonty interest 14,461 20,715 39,178 24,229 l Mir,anty mterest 1,443 1,624 3,055 Net income attributable to common $ 14,461 $ 19,272 $ 37,554 $ 21,174 stockholders Net income per share .28 37 1 .71 34 Net income per share-diluted .27 34 .61 .33 1

• Thr Casperyhper.st== arr umid a sain IIJ Repass acemnem of Natim. Fal,a Sealwrdandihr Parrenhap lurerrir.

l l

a Independent Auditors' Report IloardofDirectorsandShareholdm CalEnergv Comfuny,Inc. - Omaha, Nebraska We have audited the accompanying consolidated balance sheets ofCalEnergy Company, Inc. and subsidiaries as of December 31,1997 and 1996, and the related consolidated statements ofoperations, stockholders' equity and cash flows for each oithe three years in the period ended December 31,1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these fmancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial stater 3ents are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting princip'es used and significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In out opinion, such consolidated financial statements present fairly, in all material respects, the n fmancial position of CalEnergy Company, Inc. and subsidiaries at December 31,1997 and 1996 r od the results of their operations and their cash flows for each of the three years in the period ended December 31,1997, in conformity with generally accepted accounting principles. bl J4f Deloitte & 7bucheUP Omaha, Nebraska February 12,1998 7 l l i t-J

1 i m,......i.. i l 1 1 1 .CorporateInformation CORPORm flEADqtwrius Ca/Eneqy Company,Inc. GARY L 11000 lloard0[D/rerfors CalEnergy Gmpany, Inc. Seniorhianagement: Generamanagn, 9,,, g gowL 302 S. 36th Serect, Sune 400 NorGm Gas Operanons N &M d Omaha,NE681313845 DAVID L SOWL WALTER G. KEENAN Gd Execuuve Officer, Telephone: 402 341-4500 Chairman of the lioard and Director,iluman Resources CalEnergy Company,Inc. Fas; 402-345-9318 Gief Executive Otlker DR. PHlUP S. LAsuss EDGAR D ARON 50N uww.calenergycom GRtGORY E. ABil Managing Duector, Generation, Presdent EDACO'Inc Pnwient and Chief Operating OiTwer Northern Electnc New Yod, NY SmCKTRANSIIR AGENT SmTN A. McAlaucR KENNETH R. IJsis }UDIDi E. AYREs AND REG!s11 TAR Executwe Vice Presulent, General Managet CheacMelbn Shareholder Servies GeneralGunseland Secretary Power Resources dias Operations pu W nmenta mp. 2323 liryan Street, Sune 2300 CRAiu M. IIAMMEIT KEN 1.INGE Dalia, Texas 752012656 Senior We President and Duccror, Financial Planning 800-635-9270 Gicf Financial O&er Nc,rthern Electric Dallas, TX' Overseas callcollect at SmTN G. LYONS DM1D IL DE*uURST 212 613-7427 DOUGus L ANDERSON Propect Manager, Casecnan Chairman and Chief Executive O&er, Assistant GeneralCounsel THOMAS R. MA50N Fakon Seaboard IIoldings, LP, AUDnUR5 and Anistant Loretary - President,CalEnergy flouston,TX I'[? De1D A. BALDWIN Operating Company RICILARD R.J AROs General Manager, Phihppines FREDERICK L MANUEL President (retred), Kiewit Dwersified Omaha, NE 68102 EDWARD F. BAZEMORE Vice President and Chief Group,Inc., Omaha, NE Vice Presulent, Human Resourtes Operating Officer, Asia DAVID R. MORRIS Sun LISTINGS ROBERT S. BECK PAm J. MCATEE Former Chairman,

• S 8'

Director,Informatum Systems Duettor, Corporate Communxatums Northern Electnc pic, DONAID C. BMO!!Y NEIL W MIDGIIY Newcastle upon Tyne, U.K. Pacific Stock Exchange General Manager, Cao Managing Drector, BERNARD W REZNICEK Symbol; G GeothermalOperations Northern Metenng Services National Director, Utihty Marketing, MAtcOi>i G. Cl(ANDLER DONAla M. O' Sun,JR, Central States Indemnity Company INVESTOR RETE 110Ns Director, Northern Electric and President,CalEnergy of Omaha, Omaha, NE - 94 Craig S. Ahen Managing Director, Supply Development Company WALHR SCUIT,JR. Investor Relations Manager R ERIC CONNOR DAVID PEAR $ON President and Chanman of the Board, 2bh IntIl00 Duector, Northern Electric and Director, Marketing and Sales, Itter Kiewit Sons',Inc., Omaha,NE Omaha, NE 68131-3845 Managing D rect r, Utihty Services Northern Electric JOHN R. SHINER Telephone: 402-231-1673 DAVE CROMP1DN Smt RAINE Partner, Mornson & Foerster, Fex:402-231 1578 Managing Direitor, Managing Director, los Angeles CA E, nail: Northern Electric Retail Northern infirmation Systems SIR NmuiTRurTER usig allen @alenergyxom RIGtARD B. DALTON and Northern Electnc Tekuxn Member of ParLament (retired), ~ General Manager,leyte E DAN RORABAUGli United Kingdom House ofCnmmons FORM 10-K AND 8-K Gemhenna! Operatums General Manager, DAVID E.Wrr &G=pryuum.dEpra AMN DICKSON Saranac Gas Operations Chief Executive Offwer, logicat, Inc., hrw 10 Kuf4dusth shrSanruia Tax Manager, Northern Electric JOllN A.SCitarrHN New York, NY andExdange Gmmisios. Pnpasis J. DOUGLAS DIVINE General Manager, otration, suaratim anddm/pers Vice President, Project Development Yuma Gas Operations BEN llOLT (EMixtTus) arrs /prtoe muskr(n=rrrarstia-DAVID A. FAULKNER jAMESj.SE1MER Founder and Chairman (rerired)

• W5d#)deldin 4 Director,Itrsonnel and Gwporate Director, Taxation CE IMt Company GWs Tww 8-K, data / Afanh 6, AEairs, Northern Electric ROBurr S. SILBERMAN (formerly The Ben 1101: Co.)

JOHN L FEADIERSTONE Senior We President, Pasadena, CA I ImfddutthASarniaand '"? GeneralManager, Minerals Adrninistration EVERrrT B. LAYBOURNE, Esq. y g andthe fww 8-Kinshour durrge. VINCENT R. FtSMIRE J AMEs D. STAU)(EYER (EMERrrUS) Cois e/edvhuund;r fers 10 K Vice President, Construction General Gmusel, Northern Electric Attorney atlaw uvEkfureddnpapyariu(, and Engineering DAVID SWAN los Angeles,CA fir gaa/sa sAr Gmpny's maanarde JAMES A. FLORES Director, Northern Ekctric and BAR1DN W SHACKEUURD apseinfurcilmguuh eMin We Presklent, Project finance Managing Direttor, Distribuckm (EMERrrus) Plurdimspaumun rrq=cano: ADRIAN M. FOI1Yll! JAMES T. TURNER Presilent (retired) We President, Markenng General Manager, Imperial Pacific Gas & Electric Gunpany CRAIG S. Au1N DR. JOHN M. FRANCE Valley GeothermalOperations San Francaco, CA investor Relations Manager Regulation Director, Northern Electnc DAVID A.WAITR$ Ca! Energy Gunpany. Inc. G.VAURIE Gius Managing Dwectm, AwUAWuDNG 302 S. 36th Street, Suite 400 Company Secretary, Northern Electric Northern Unbry Services The Annual Meeting d the Sharehoklers will he held on May 21,1998 at 9:00 Omaha, NE 681313845 PADUCKj. GOODMAN JONADIAN M. WEISGALL We President, Chief Accounting Vice President,Irgislanve and a.m. kral time at Joslyn Art Museum-g g O&er and Gmtroller Regulaney AEans Dodge Streer, Omaha, Nebraska BRIAN K. IIANAEL R WN We Presklent and Treasurer Managing Director, EDWARDj. IIEINRICli General Manager, U.S. Gas Operations j l l

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3 4 e 3 ( 6 j .s lYi 12 .~ r Boarc of Directors I Camnergy Company, Inc. I Pomleittonght EverettB taytvume. Esq Ementus Atemtet Attomeyatiaw Ias Angeles. CA EdgarO Aronson President. ECACO. Irt. New York. NY l DJvidE VVt ChiefExecutiveOthcerlowcalInc New York. NY u JohnR Shiner Partner. Meyr:wn & Foersten los Angeles. CA I DavidR Moms former Chauman. Northem Electuc plc. Newcastie upon Tyne. U K l k%)lter Scott, Jr President and Outrman of the Board. Peter Krewit Sons '. Irc. Onwha. Nt l JudithE Ayres Pnocaal The En,wonmentalGroup. San Francisco. CA \\ RictardR Jaros Presientfretuedl Kiewit 0wersihedGroup. irc 0ma!w NE I I DavidL Sokol Oweman ot the Boardand Chief Execatwe 0thcer CalEnergy Compar>y Irc Se Neville Trotter A femter of Parhament (retiredl United Kingdom House of Commons i Benurd W Remicek NatiorelDuector Utihty Marketiry Centrat States Indemorty Company of Omaha. Omaha. NE j DaviaH Denhurst Duirman and Chief Executive 0thcez Falcon SeaboardHoldings. L P, Houston. TX i Ben Holt Ementus Membec founder and Cfwaman tretaedl CE Holt Company (formerly The Ben Holt Co 1 Pasadena, CA Notpictured: RichardK Daydson Ouwman. Union Pacihc Corporation, Da!Ias. TX Barton W Simckefford Ementus Memic President (retwedl Pactfic Gas & Electric Company San frannsco. CA l Senior Manauement i CaNne@' COHijktny, 5 C. Fromleftto right .y Steven A McArthat Execut.ve Vice President. GeneralCounselandSecretary VW GregoryE Atel PremdentandChief Operating Othcer Craig M Hammett '?ntor Vice Pres dentand QuetfinancalOthcer I 4 g w a

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