ML20151Y606

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Calenergy Co,Inc 1996 Annual Rept
ML20151Y606
Person / Time
Site: Quad Cities  Constellation icon.png
Issue date: 12/31/1996
From: Sokol D
External (Affiliation Not Assigned)
To:
Shared Package
ML20151Y560 List:
References
NUDOCS 9809180291
Download: ML20151Y606 (85)
v • d • e


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A L} CalE n s eg y Comynny, 1*(- i y Q FinancialHighlights 1996 1995 $ 576,195,000 $ 398,723,000 Revenue 5 135,713,000 $ 97,051,000 Income BefbreTaxes $ 93,892,000 $ 66,420,000 Income' Net Income Available to Common Shareholders $ 92,461,000 $ 62,335,000 $ 1.60 $ 1.25 Net Income Per Share t' $ 880,790,000 $ 543,532,000 Common Stockholders' Equity ' Befort mmortly Interest an.1perferredJin. Jends. y a r W W W 6 g e a g a gg y ,apr 92 93 94 91 96 yver 92 91 94 91 96 year 92 91 94 91 96 year 92 91 94 91 96 dollars 128 149 886 399 176 dellars SM.R 4 5.1 SH.N 66.4 9 4.9 nMton.92 IJun.91 1.21 1.60 slallar, 82 102 8 30 278 ins Revenue Income' Net income EBITDA' AfRhons Mdliuns Mdlions Per Share' IMlan

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  • Esrerngdsfar arma law. Japmsanon arnd,emoruzan m Contents 3

\\V'ho \\re Are: ouvreiew 4 hIessagefrom Ihe Chairman IV' hat IV' Plan to Do: 8 e Ilow Expected Future Changes Affect the Present 14 \\\\%t Occurred: Sigrn)Tcant Events of1996 20 \\\\%t \\f' Do: e Our Commisnwnt 26 ff'hereIV& Do it: Our GlobalStratqy (,,g,, (o,,,,, 7,,,,w;,,,,,,,, 35 1996 FinancialReport publidy on the New %rk Stxk Exd>ange, the DirectorsandOfficers Paajc Stxk Exchange andthe London Stock Exchange under the trading symbd "CE " (Inside Back Coter)

C a l li n e r g y Ceepney, lec. Who Wi Are Overtiew 3 CalEnergy Company, Inc. ("CalEnergy"), established Growth Resultsfrom Both in 1971, is an international provider ofenergy services. Acquisition is just part of our growth strategy. Successfully developing, acquiring, constructing, A large percentage ofour growth continues to owning and operating facilities for power generation, come from new project development. Our ability related energy activities and the supply and distribu-to favorably structure financing for our projects tion ofelectricity is the foundation for our planned allows us enhanced flexibility in development consistent, disciplined and strategic growth. Known and construction at reduced fmancial risk. Through as an innovator and opportunistic acquirer in our achieving operational excellence and cost efficiencies, industry, we have a history of accomplishment we are able to bring new facilities on-line, on time that is demonstrated by our performance. and within budget. This results in the reliable, price-Performance DrivesSuness '*"P 5 ' I"' d'"Y "I 'I*"'Y '" ""' '"""' Less than three years ago, with assets of approxi-Our success is directly related to our exceptional mately $700 million and all revenues derived performance and our ability to identify and capture from U.S. activities, the aggregate capacity of opportunities in the face ofindustry change. Our our operating projects was 297 net megawatts future growth will be the result of our diligent [ (MW). One year ago, we reported assets of more attention to both. than $2.6 billion, revenues of $399 million, and an aggregate net capacity of 575 MW As you read through the pages ofour 1996 annual report, we think you will better understand who we Today, an extremely successful year later, we have are as a company. Above all, CalEnergy is a company ( increased revenue 45 percent and net income has driven by achievers and innovators who share the increased 48 percent. Our ownership interest in pn> mission "to become a leading global provider of jects-both in the United States and internationally-a full range ofenergy services." has increased to more than 1,300 net MW a result of rhe commencement ofoperation at one new facility Plant of rator males rr,utine inspeaions at the Upper Mahiao Geothermal m the Umted States, two in the Philippines and the Pya. latdon d< idiidoflote, Republic ofthe Phdippines. acquisitions of Falcon Seaboard Resources, Inc. in y,, the United States and Northern Electric plc in the l United Kingdom.With the year-end acquisition of Northern Electric, we have expanded our generation business to include distribution and supply of electricity and related energy activities, a move that we expect will add significandy to our current and future revenues, income and assets. w Change Creates Opportunity L The Northern Electric acquisition is a significant step toward CalEnergy's goal of becoming a leading j global provider of energy services. The landscape ) y ofour industry is changing - and we expect the results of that change will be positive for CalEnergy as deregulation and privatization continues through-out the world and additioaal opportunities present themselves. The experience and knowledge we gain as a result of the Nortnern Electric acquisition should position us well to be a leading provider in the global energy market. l l[ b v ' hs,

j '. Cs /E u o rg y Cempany. Inc. Messagefirnu the Chairman i s Nineteen ninety-six was a very important year These accomplishments are significant in their in CalEnergy's history for three primary reasons: own right; however, more importantly, they expand first, we successfully completed our first international the platform from which we intend to aggressively project on schedule and within budget; second, we position CalEnergy as we move into the 21st century. significantly expanded our U.S. natural gas-based Our growth, which was fueled primarily by individual electricity production capabilities with the acquisition project development through the first halfof this of the Falcon Seaboard facilities in New York, Texas decade, will increasingly be driven by the privatization j and Ibnnsylvania; and third and most significantly, and deregulatory tidal wave which is impacting the we materially expanded our skill base with the elect ric energy industry on a worldwide scale. With successful year-end acquisition of Northern Electric the anticipated break-up of the previously monopo-plc in the United Kingdom ("U.K."). lized U.S. electricity industry, CalEnergy will no longer be limited to domestic electricity generation. In fact, l we are witnessing the gradual exposure to competition of some $800 billion in annual electricity revenues worldwide. This figure includes more than $400 billion in annual revenues in Western Europe and North America alone. As a provider of a full spectrum l of electricity services, CalEnergy is expected to benefit I from these increased revenue opportunities. The deregulation and privatization of the existing electric industry presents enormous opportunities, ~ and when considered along with the increased elec-s tricity demand throughout Asia, they are even more interesting. While it is clear that the opportunities are plentiful,it is also apparent that deregulation ~ and privatization will continue to follow an unclear and highly politic; zed pattern. The end results oflower price and higher quality service may be obvious, bwever, none of the existing utility supplk rs want to lose their monopoly, much less fac( che full exposure of what that monopoly status .osts their customers. As such, we often see these suppliers verbally embracing competition while at the same time utilizing every legal and political tool possible to stop or delay competition and gj Gainnan ofdv INrd damage the efforts of any potential competitors. andGhfEstire Ofiar The existence of these countervailing forces: CdEnero Compan), Inc. lower prices and enhanced customer service versus monopoly control by large politically powerful entities can only slow, but not prevent pregress towards inevitable deregulation. i

C a l li n e r g y Company, let. 5 That point made, we lwlieve that deregulation The vision and associated strategy we have for of the electricity industry is an ever more obvious CalEnergy's continued growth is built upon disci-ultimate reahty. The bene 6ts being achieved in plined fmancial analysis, cautious risk management the various markets where competition has been and equally important, the quality and integrity inenxluced are remarkable. For example, in the ofevery CalEnergy employee. As a representative U.K., where competition was first intnxluced of the Board of Directors and of the management through legislation in 1989, we see that electricity team, I would like to welcome the many individuals rates have been substantially reduced while who have joined us during this past year from Falcon customer service has been significantly enhanced. Seaboard and Northern Electric. I would also like The acquisition of Northern Electric brings us to thank our dedicated and talented employees the experience of this very successful deregulatory for constantly hjoking for better ways to do more, prccess, which in many ways is serving as the and at a lower cost. framework for deregulation in many other Our Board of Directors is pleased to welcome two countries. T}u.s acquisinon will allow us to take the skills we acquired in the U.K. and apply them new members to the Board-Mr. David Dewhurst, m the United States and other markets as soon as the founder and former pn.ncipal shareholder of de egulation occurs. Falcon Seaboard and Mr. David Morris, the former chairman and chief exect. rive of Northern Electric. As part of CalEnergy's continued growth and expan. We are also pleased that Mr. Den Holt will continue sion ofservices in the worldwide energy market, we as an emeritus member ofour Board upon the May have announced a reorganization of the Company's 1997 completion of his current term. Ben has been operations into three geographic regions. These a valuable asset to our Company, and we salute regions-CalEnergy Asia, CalEnergy Europe and his contributions as one of the founders of the Ca! Energy Americas-are managed by teams in modern geothermal power industry. each region. Corporate planning, development, Sinccrely yours, acquisitions, fmance, accounting and legal will continue to operate at our headquarters in the [ ' United States. The result: decentralized operations / and implementation management with centralized David L Sokol planning and strategic decision making. Chairman ofthe %rdandChiefExecutin Officer The vision andassociatedstrategy we havefor CalEnergy's continuedgrowth is built upon disaplinedfinancialanalysis, cautions risk management and equally important, the quality andintegrity ofevery CalEnergy employee.

a What c oes c.eregu ation of tae gloaa power marxet mean to CaEnergy? Deregulation meanspositive change and expanded long-term opportunities for CalEnergy. We will be able to competefor andproptfrom every segment of the marketplace-generation, supply, j anddistribution ofenergy. - We lookforward to the deregulation andprivatization ofelectricity; our past actions-as well as ourfutureplans-prepare us to successfully compete in this wide-open market. Customer sen ja agents ofer a singlepoint ofamtaafr all ofNorthern Elean6 Jutribution netuurk inquiries.

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A What M PlanTo Do How Expected Future Changes Affect the Present ,8 a M Dmyulation: the higpicture. As recently as 15

  • In some states a power exchange will be created to years ago, consumers in the United States purchased operate as a wholesale power pool, with both inde-9 their telecommunications products and services from pendent production facilities and utilities required 3

just one company. Iong distance service, regional to sell the power they generate into the pool. and local service, even the physical telephone itself-

  • Th.is exchange will set the market price based

) offered..m just a handful of colors and styles-were on market forces and all electricity providers wd. l i supplied by just one company. Ancillary services-purchase power from the exchange at that price. No longer will the U.S. utility standard be vertically integrated monopolies as the soleproviders ofbundledgeneration, \\ transmission anddistribution services. ^ l voice messaging, call waiting, call forwarding,

  • Many utility companies will choose to, or be conference calling-were virtually unavailable to pressured to, sell or retire some of their generation the consumer, and there were no other sources from assets, creating additional opportunities for I

which to acquire lower-priced service or products. power generators. This monopoly approach, while beneficial to the

  • It is anticipated that the transmission segment supplier, was a disservice to the consumer. Today of the industry will remain regulated, but utilities however, after telecommunications industry deregu-will be forced to provide open access to their lation, consumers have a wide variety of products to transmission systems to ensure standardized choose from and are free to shop for a full range of pricing and competitive flows of electricity.

quality services at the lowest price.

  • Consumers wd. l continue to have electncity Our industry, just like telecommunications and delivered via a local distribution company. Utilities other industries before us, is fast approaching a new will be obligated to supply electricity to customers era in the form ofderegulation and full competition in their franchise areas but they also may supply among those who provide consumer services and it to customers in other markets. This arrangement products in the U.S. No longer will the U.S. utility benefits the cust:mer in that supply is assured standard be vertically integrated monopolies as the while prmerving competitive choice. Compe-ition sole providers of bundled generation, transmission to engage in the supply and marketing ofelectricity and distribution services. Utilities will be pressured may come from surprisingly diverse participants to provide these services as separate companies such as supermarkets, insurance companies, oil and and compete for business based on value and price.

gas companies-any company with the desire and 'Y '* ' *P ' ' ""0 " " *'"I'i'Y ' ""*' Where U.S. Deregadationis Headed:

  • Although existing generation contracts will be
  • Regional utility companies and independent power grandfathered until their terms expire, generation producers will be able to compete for customers' will become a more price-competitive business, and other electricity needs, including the sales of consumers will have the option to continue to buy energy services such as energy use information electricity from their local utility or from other and management, and more.

suppliers-companies like CalEnergy.

CalE n e rgy Company. Inc. I 9 i itt wit / I. V Matih l I tilitn i.V Mirkct IUlladependently Dwned utdetes 581.000 lndustrial Usms 181H Munopais 12 950 000 CommetaalCostamars 927 Co ups 103 97TODO Residential Custemen tMI Hdima m Whateple Revenues S208 Bdhon m Retad Revenues Soura: Energy injbrmation Alministration.1%unt Data Intmaational. Inc. andEdmn Eledric Institute Competition requires flexibility. Deregulation market. Being in on the ' ground floor' in these will serve to draw a line in the sand between those countries will provide opportunities to make use companies who continue to do business as they of our expanded capabilities in generation, supply have in the past and those with a focused strategy and distribution. on competing to meet the future needs ofconsumers. Our past actions have allowed us to gain experience

  • Our acquisition of three natural gas-fired cogenera-in complementary segments of the industry, and tion plants in New York, Texas and Pennsylvam.a, CalEnergy has positioned itself well to benefit al ng with the construction ofour gas-hred Viking from the opportunities presented by deregulation.

facihty in the U.K. and our hydroelectnc plant in the Philippines (in addition to the construction Howthe Present Affects the Futurel of new geothermal plants in Asia), continues

  • Because the lack of competition has not provided CalEnergy's geographic and fuel diversification incentives for upgrades, many utility companies etTorts and provides low-cost, strategically located are operating older, technologically outdated power assets that will help us compete in the deregulated plants at a relatively high cost. CalEnergy has electric industry of the future, continuously invested in new, advanced facilities
  • The acquisition of Northern Electric in the U.K.

and technologicalimprovements to existing facihtiu, allowing us to generate electncity pmvides ' hands-on' experience in a largely deregu-lated environment and an additional distribution at a lower, more competinve pnce. and supply skill base that we can utilize in the U.S.,

  • Our experience in countries that already have Europe, Asia and elsewhere. Northern Electric undergone privatization prepares us to do business and other regional electric distribution and supply in other markets where private power is just begin-companies in the U.K. purchase almost all of their ning. Both the Philippines and Indonesia have felt electricity from other generating concerns. Revenue the efTects ofprivatization as foreign companies, comes from the retail sale ofpower to consumers such as CalEnergy, have competed for and won and from fees collected from the distribution of a share of the rapidly expanding Asian energy electricity across the wires for other suppliers.

Generation willbecome a moreprice-competitive business, and consumers willhave the option to continue to buy electricity rom theirlocalutility or row other suppliers-companies like CalEnergy.

C a l l: n o r g y C*mPd"). l*C-10

  • The new regional decentralized structure of our Elecidcity Prices andIndustried organization will provide both large and small-Customers in the U.K.

company benefits. With regional headquarters at Industrial customers are businesses and other j three strategic h> cations-in the United States, Europe organizations that typically use more than j and Asia-each division has operating responsibility 100 kW of electricity. for all aspects ofour business in that region including + 55,000 industrial customers can choose the.ir facility management, new business development electncity supplier, and in 1998 th.is wd. l extend and related functions.We believe this reorganization ' "II '"S' "S' is extremely important in that it allows us to stringently supervise activities at all ofour growing

  • U.K. industrial electricity is now the fifth number of worldwide k> cations, yet enables us to least-expensive in Europe,less expensive than react qukkly to challenges and opportunities.

in Germany, Spain, Italy and France. Ilvu' does deregulation affect the consumer /'

  • Prices to those industrial customers who can The potential benefas of deregulation worldwide now choose their supplier have fallen by as much can be illustrated by data provided by the Electricity as 16 percent sinceJanuary 1994, after allowing Association of the United Kingdom about the for intlation.

efTects of deregulation in their country from have been able to save a total 1990 through 1996: of13.6 billion (S5.8 billion USD) on bills since 1989. Electricity Prices andDomestic ,The Industry Customers in the U.ls,.

  • Since privatization, the industry has invested 1,16 Domestic customers are considered to be home and billion ($25.6 billion USD) in improving the UA,.

light industry users-those who typically use less than electncity system-E5 billion ($8 billion USD) 100 kW ofelectncity. on the distribution network alone. + Since 1990, the price ofelectricity has fallen

  • Multi-utd. ity companies have developed, by 11 percent, after allowm.g for mtlan.

on. providing total energy and broader utility

  • Keeping price increases below inflation has services by offering gas, electricity, water enabled customers to save a total of fl.6 billion and telecommunications services.

($2.56 billion USD) on their electricity bills since Sounc: U.K. E/carwiry aimission,1996. UNIPEDE to 89/90 1989-nearly 170 (S 112 USD) per household. EcRosrar 91/2-94!5 6< ries hnA<duaing Enero mda' d.aa). Index fur 95!6 atim.nedusing EA's Non-Fr.inJ>ise l' rices Sarsty

  • Electricity now represcrits under 2.5 percent n; mr 60per.cnt /u/haor.

of average household expenditure.

  • In 1998, full competition in supply will enable U.K. househoki customers to choose the electricity company they prefer.
  • I,atest comparisons show U.K. electricity prices for home consumers are 30 percent less than in France,27 percent less than in Spain and 33 percent less than in Germany.

CalE a o ryy Ceapasy, Inc. 11 In Conduflon generators-sell power into a national pool for equi-As the global electricity industry is deregulated table resale to suppliers who in turn, sell directly to and privatized, opportunities will abound for consumers on a value-and price-competitive basis. astute energy generators, suppliers and marketers. Consumers will purchase electricity in much the The graph on the left below indicates the current same manner in which they now purchase telephone structure of the electricity industry in the United services. They may buy a total solution of services States. The vertical configuration provides limited from one supplier, or they make pick and choose market opportunity for independent power produc-from a variety of suppliers, depending upon which l ers and multiple layers ofcost markups for the con. is able to provide the best, customized solution for l sumer. This model is particularly favorable to utility their specific needs. In either case, electricity will be companies because they control the supply and provided at a competitive rate and at a significant cost distribution ofelectricity to consumers. saving to the consumer over prices currently paid. The graph on the right below indicates the current structure of the deregidated electricity industry in the United Kingdom. It is anticipated that post deregu-lation, the U.S. market will be similarly structured. In this mcxlel, all g-nerating entities-independent power producers, utilities and government-owned Generators l l ' Utilities National 1 TRAN? 9 1; s Suppliers 1 Di LN-1 l Customers

-k 9 r.: How aas Ca. Energy preparec. for c eregu ation? We have strategically positioned CalEnergy to I provide afull range ofenergy services. - We have diversi0ect ourfuelsources ancllowered our generation costs. - Existing projects anci acquisitions have further diversi$ed and strengthened our skill base, provicling the experience andjnancialstrength we need to successfully compete in deregulatedmarkets worldwide. Dexrt Ibh Geothmd Prajat, katalwar Ma, Naala, U.LA.

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l can n en c.. pan. in. a At oaurred j JL_'u Significant &ents of1996 m~ A Year of Strategic Transition. During 1996, C7fqF" we continued to execute our clearly defmed ~ j f-strategy for growth. In addition to maintaining e* our high operational and efEciency standards and achieving our fmancial goals, we continued to focus on growth through acquisition and geographic and fuel source diversification. Much of our determination to fulfdl this strategy is the result of changes within both the U.S. and international energy markets. l In the UnitedStates-Growing consumer pressure, combined with increased political interest, is pushing the electric industry in the United States toward a I more competitive environment. In order to compete A sunrpr carrfully iners the grounddaation at the Dieng Unit I with international counterparts, industrial customers construaion >ite. /<ated on ik idand o/# a. Indonnia. are demanding lower prices and more specialized ser-vices. Corporations and governmental organizations We believe that such a market wd. l provide many are petitioning legislan.ve bodies to allow for the opportunities for CalEnergy. Independent power competitive supply of electncity. producers who utih.ze efEcient, low-cost energy According to some experts, increased competition alternatives will have the competitive edge in a in the electric industry would save U.S. ratepayers price-sensitive marketplace. Our experience and an estimated $80-$100 billion expertise in geothermal, gas and hydroelectric fuel annually. As has occurred sources has us well positioned to successfully compete. in other industries-notably Our recent acquisition of Northem Electric will enable the telecommunications us to provide additional expertise in distribution and and natural gas industries - supply, and the necessary experience to aggressively economic considerations will compete for leadership in the deregulated U.S. market, motivate change and deregula-Internationally-We continue to pursue our tion in the electnc industry. mitianves with existing and prospective customers As deregulation occurs, con-internationally where there is a strong demand for sumers willbe able to purchase power and the need for supporting infrastructure energy services from electricity is tremendous, especially in emerging industrial suppliers primarily on the countries. To compete successfully in these markets, 4 N basis of price and value. Utility it is necessary to be prepared with well-planned companies, power pnxlucers fmancing strategies for individual projects and and distributors who focus on to carefully evaluate timing and risk parameters. l As a result of our international projects, we have delivering the highest quality service at the lowest possible valuable experience in private sector power generation, price will seeincreased demand energy-related infrastructure and innovative fmancing for their pnxiuct. techniques that will benefit us in the rapidly approach-ing competitive U.S. marketplace. One ofkna'splant operaton tests equipment at the Gas-Fired Qeneration Prvga. laatedin Yuma. Arizona. US.A.

C a l li n e r g y Cenpsey. Ier. 15 We are especially pleased with the progress of Also responsible for the company's gas supply busi-our projects in the Philippines and Indonesia. We ness, Northern Ekctric Supply has a license to supply completed construction and commenced commercial domestic gas to customers in southwest England. operation on two projects in the Philippines and commenced construction on another in Indonesia. M are aggressively seeking opportunities in other international k> cations, in luth power production and supply and distribution markets. Our purchase of Northern Electric, marking our entry into Europe and the distribution and supply segment of the indus-try, is another step toward our goal of being a leading energy services provider in the global power market. The Acquisition of Northern Electric.The most q pivotal event at CalEnergy during 1996 was the acquisition of Northern Electric plc, a regional electricity distribution and supply company, with headquarters in Newcastle upon 'lyne, U.K. Our success in and knowledge of power generation, combined with Northern Electric's successful experi-ence with distribution, supply, and ancillary services provides tremendous opportunities for our company. Created as a result of the restructuring and subse-quent privatization of the e!cctric industry in the N""I""' Ch!#N""#' ##Id" "f**"#O##O#i"E "'d'"#di"#"A d*#'"#"""X Um,ted Km.gdom m. 1990, Northern Electnc has Nunhern Elean6 Jutnbunun newk in tiv UnncJ Ksnxdom. a significant performance record and a reputation as a dependable energy supplier with excellent Northern E4rtric Retailsells electrical and gas distribution assets and abilities. Through its sub-appliances and provides account collection and sidiary companies, the company efEciently and customer service throughout Northern Electric's competitively delivers electricity to consumers service area. The company operates retail " super-and offers a diverse menu of complementary stores" to satisfy customer demand for products energy services that provide customers with and offers service and maintenance contracts. reliable, quality service and low energy bills. Northmi Ekstric Gmeration operates a 5 MW Northern E4rtric Distribution encompasses the diesel power generating plant in Northallerton, company's distribution network and is responsible North Yorkshire, and recently began construction on for reliability, customer service, system operation, the Viking Pbwer 50 net MW natural gas-fired power construction and maintenance. Commonly station at Seal Sands on Teesside. The Viking plant known as the " wires" business, Northern Electric will be developed, owned and operated on a 50/50 Distribution provides 1.5 million customers basis by Northern Ekctric Generation and Rolls-Royce with reliable, cost-effective distribution services. Power Ventures. The company also has a 15 A percent Northmi Ekstric Supply is one of nortl.st ownership interest in Tasside Power Limited, which operates a 1,875 MW combm.ed cycle gas-fired England,s largest suppliers in the competitive power station at Wilton. and open electncity market, with customers m all 15 public ekctricity supply areas of the U.K.

=- CalE n e rgy Company, Inc. 3-3 i; 16 Northern Utility Smices is the company's engineer-Northern Metering Smices supplies, installs, ing division tasked with maintaining and adapting refurbishes and certifies meters, and provides meter i Northern Electric's distribution network and operator services and data collection. The company providing reined services to third party markets. has developed and implemented an energy profding Through implementation of advanced technology system to help businesses reduce costs through more and innovative diagnostic equipment, the company efEcient use of fuels. has decreased operating costs by reducing the need Sovereign Exploration ts Northern Electne s gas for intrusive maintenance. exploration and production company with a portfoh. s o of gas interests in the southern basin of the U.K. ..g'. .j - 7. . ~ .f> sector of the North Sea. i 4..5 q.- g. w. i [c.L {, i Additionally, Northern Electric has established ~ gn7j s-( a number of service companies which provide cus- ~.. , 7 D. tomers with insurance, real estate, transportation, 4 , training, telecommunications and information ~ j'~ systems services: j Northern ElectricInsuranceSmices I 1-t Northern Electric Prriperties i Northern Electric 7elecorn Northern ElectricTraining s Northern Electric Transport ,p Northern Information Systems '~ O Y ~ Besides enhancing CalEnergy's abilities to efEciently g.wr#p;, A ,l deliver electricity to consumers in a competitive %g Wg h marketplace, the Northern Electric acquisition f f...' g:. T. .ha "M will significantly increase the size of our company itg qid as shown in the asset and revenue figures below: -s...soss J.f382hiI/ f*lI(59F ~ [, l li ~ .ang pgg,...- ggBB1BBB [L'. f.' O g;. ,. } ' a Nortkre Elearic Distrdution I1J. moniturs Gridsaintations in their ngian oftk UnitedKingJum, E g. i sdlan Adlars & Call.nero 3.7 m Call:neup 137 M Northern 2.0 m Northern 1,um 8 Total 3.7 8 Thtal 2.I37 Comparative Comparative Anets Revenues Bdlions Mdlions

C a l l: n v r g y Company, Inc. 17 As a direct result ofourgrowth strategy, many other significant events occurredin 1996 that will contribute to thefuture success ofCalEnergy. / fTf! We acquired from Edison Mission Energy ]N!y Wecompleted construction ofour 72 the remaining 50 percent of the four geothermal net MW Malitbog Unic 1 geothermal project facilities in the Imperial Valley-Vulcan, Hoch, in the Philippines. Leathers and Elmore-which were obtained by CalEnergy as part of the acquisition ofMagma / #g#s[ CalEnergy acquired Falcon Seaboard Power Company in 1995. Resources, Inc. and its significant ownership interests in three operating gas-fired cogeneration CalEnergy Capital Trust offered and completed plants and a related natural gas pipeline. The the private placement of $ 100 million convertible plants are hicated in Texas, Itnnsylvania and preferred securities (TIDES). Proceeds of the New York, and total 520 net MW in capacity. offering are largely being used to fund future l projects and acquisition opportunities, and for 8f[8/M Of Wecompleted aprivateinstitu-general corporate purposes. We received credit tional offering of $225 million worth ofSenior rating upgrades on our senior unsecured debt Notes. Proceeds will be used to make investments j from Moody's Investor Service,Inc. in future projects, fund future acquisitions, repay debt and for other general corporate purposes. Mdf Noting that "CalEnergy will continue to experience success in completing its projects October We& sed $120 mahon fmancing currently under construction and that the equity on the Dieng Unit I project in Indonesia, a 55 distributions from these and existing projects net MW project which constitutes the first phase l will continue to reduce the company's leveraged of a planned geothermal development effort in I position," Standard and Poor's upgraded the credit Indonesia of more than 1,000 MW I rating on our senior debt, subordinated debentures and convertible preferred securities. b8f8Mb8T We acquired majority ownership l ]NM8 W of Northern Electric plc, a regional electricity e completed the sale of $ 135 million in distribution and supply company in the Senior Secured Notes and Bonds issued through United Kingdom. our Salton Sea Funding Corporation. We completed construction and begar commercial operation of the Salton Sea Unit IV expansion project in the Imperial Valley, bringing an additional 40 net MW on-line. In the Phdippines, we completed construc-tion and commenced commercial operation of the Upper Mahiao 119 net MW project.

L Is CaLEnergy concernec. aaout environmenta anc socia. responsiaiLity? We strongly believe that our responsibility to the communities and cultures in which we live and work is vitally important - and that includes environmental stewardship and dedication to consewation efforts. - Our customers, neighbors and employees deserve a high quality oflife and we are l pleased to be able to actively assist in those efforts. l A child uarches eagely as DiengUnit I Geothrmal Prajat is being wnstruaedin inJonesia.

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CalE n e rg y Company, Inc. What We Do Dur Commitment 20 At CalEnergy, we recognize our many commitments. It is because of these unwavering commitments that First and foremost, we are committed to our cus-we have earned our reputation for excellence-of tomers because without them, there would be no promising what we can deliver and delivering what reason for our existence. Secondly, we are committed we promise. to being a low-cost provider of energy services and Our Commitment to FinancialExcellence l achieving an optimum rate of return for our share-CalEnergy has an outstanding record of financial holders. Finally, we are committed to our employees gr wth and success. Long-term contracts and assets because it is their dedication that drives our success. f m te than $5.7 billion provide a base for our No matter how large or smali the challenge, no future gr wth as well as our capacity to structure matter how trivial or complex the task, our employees capital investments for acquisitions, development understand that our company's success is a direct and construction of power facilities. result of their knowledge, experience and, most of all, their commitment. Smart Project Financing We believe our financial achievements are clearly our Commitment to Our Customers, demonstrated by our recent impressive growth and Shareholders andEmpiayees economic performance. CalEnergy is known for its ire are Committed to... ability to assemble innovative fmancing packages

  • sustaining evalhit operationalprfmnana andejidendes.

in a fashion that enables us to reduce risk-we have

  • maintairi;ig stria adherence tofnandalpafermana obtained more than $5 billion of project financing
      1. '"A*E since 1991. In addition to financings based on our
  • conduaing business uith uncompmmising honest),

long-term power sales conttacts in the United States, integrity, dedication andpr/essindism. we have completed p roject financings for several

  • presening eminnmental n>sponsibility in all major international projects utilizing a variety of aspas ofour business.

sources including the Overseas Private Investment

  • maintaining de highest lade ofsafity.

Corporation (OPIC) and Export-Import Bank of the U.S.(EXIM). Plant ofwrators disass nuintenana sd<dule at ihma's Gas-FindCogeneration 9 .} g Pmpa. Iwatedin luma, Arizona. USA E. ing costs and implement projects quickly-creating benefits that we pass along to our customers in the a form oflower energy costs. Yet, before the process l ^ ever begins, we take the time to do our research. We want to know all the details before any decisions l .h are made. That is how we have proven our abilities to lenders and earned our reputation for excellence in project fmancing. E E I i ~-. L

CalFnergy Ceepany. Inc. 21 ~ ~ - Our Commitment 1 .J ? 10 the Environment Y i' Our company began as a geothermal [ ~ .y energy developer with a focus on s4 providing clean, renewable energy and, during the past 25 years, we 1

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have steadily evolved to become a full 9g' service energy provider with expertise y ~f. in many fuel sources. Through it all,we have maintained our commitment to /4 j - environmental responsibility. As world ,y 7 population grows and the demand v k [ for electricity increases, attention to presemng our natural resources wdl L*: - become even more important. We By maintaining andrestoring Nortkrn Elearic's distribution cre committed to do our part by imple-netta,rk, Nortknr Utility Senias ensures that thousands menting environmentally responsible o(homes, shops. ofias, shouh. kspitab and businessa g gogg ,gg,;g;,; (,g reaite thr?mer thy JpnJon. that are reliable and economical. Our Commitment to OperationalExcellence 30T""=f% As one of the lowest-cost independent power I. D 4 "D providers, CalEnergy generates attractive rates of hh%@((h return on its invested capital through optimal use .'. A _ : ; 4 WF,s f, f ",; 3:n y~. 4 of technology and a focus on operational excellence. j E ;p gg.; y Every day, our plant and field employees strive to .{/ j%p g t g[fqg(j 'Np maintain safety records, increase power generating 3 performance and develop new, innovative cost-cutting k.C ~. ~ grow and prosper. f'dC-measures and services that allow our company to i. T Q [- I Tune and again, we have proven our capabilities by arranging project fmancing, completing projects [ on schedule and on budget while maintaining strict - 4 ? = adherence to operational and environmental stan-dards. In its November 18,1996 issue, Engineering f"#""""# ""# *"#"*"""" ""0"'* """/) "'"h""I'"" "" I" I "" I at tk Sahon Sea Una Ii'apansionprojsa in tk Imperial ildley. lxakJ News Record magazine ranked us fourth in its y,ar c,3patyja, cagj,ja, eSa " Top Firms With Construction in Progress" rport and 21st on its " Top Owners" list-no small feat considering the size and years of service of the companies to which we were compared. 1 l i u

CalE n e rgy Company. lac. 22 Geothermal flydroelectric CalEnergy's geothermal facilities pnxluce ekctncity Hydroelectric power-to be employed at our from naturally occurring geothermal steam. Geother-Casecnan project in the Philippines-is produced mal production wells tap into superheated water from the energy of flowing water. The amount of reservoirs thousands of feet beneath the earth's electricity pnxiuced depends on the volume of water surface to release tremend >us pressure caused by the which passes through hydraulic turbines that drive hot water. At the surface, steam is separated from the the electricity-producing generators. fluids and used to drive turbines to generate electricity. Our Commitment to Our Communities G,eothermal steam is one of the world.s most preferred As our company gmws, we beheve it is imponant energy sources because it is reliable, renewable, clean, to share our success with our neightmrs and associates indigenous and economical, in the communities v<here we live and do business. NaturalGas in the United States, we support the arts and Our cogeneration facilities use plentiful natural gas-community charities, and are active in educational economical, highly etlicient and one of the cleanest organizations, community safety programs and fossil fuel sources in the world-to fuel the turbines environmental activities. that efficiently pnxluce energy in Luth electric and in the United Kingdom, Northern Electric similarly thermal (steam) forms. Exhaust from the pas turbine-supp rts the arts, sporting events, environmental waste f. eat that would otherwise dissipate into the and educati nal pr grams.The company provides atmosphere-is recycled into a heat recovery steam gen-erator (boiler) where high-pressure steam is pnxiuced '"T yees t st fTcommunity activities such as l busmess/ education partnerships and educat onal to drive the steam turbine generator. Then, a portion exhibmons, and it has developed its own campaign-of the steam is extracted and delivered to an industrial Envirocare 2000-to promote awareness of company kx ated near the power plant that uses the envir nmental issues, particularly.m the steam for process or cooling. This method of utilizing ' "*** Ii*P'""i"E ""EY 'fII'i'"'Y' steam that has already performed useful work increases the edicieng of the plant and optimizes fuel use. Sarau Gas-Find Ggeneration Prvjed. lwandin Plamburgh, New %rk. e y e*" g+ ;4 W a h f p; z

CalEnergy Company, Inc. i l 23 Additionally, many of our projects are k>cated in emerging countries where there is a need for more non-traditional assistance. We feel a responsibility to hire from the kical workforce and provide medical, nutritional, and educational assistance as well as other aid. Activities include providing food to indigent families and villages, building roads, providing potable water and much-needed medical supplies and equipment. In the Philippines, we have been very involved with the Bugkalots, an indigenous tribe living near our Casecnan project. During t!.e past year, we estab-lished a Gvic Action Plan which provided for the building of a mountain road that enables travel from their home to a nearby village in three hours-a trip that was previously a two-day hike. Additionally, we provided the Bugkalots with a bus that now is used for shuttle service, and equipment such as hand tractors, mini rice threshers and rice micro mills that will enable inhabitants to increase rice production. Most importantly, educational programs and univer-sity scholarship programs have been established to if provide training in a variety of subjects. Q On the island of Bali in Indonesia, we have imple-mented the " Hearts and Mind" Program, which j provides for the donation of equipment and f building improvements to four k> cal grade schools. CalEnergy employees enjoy working with students and community members to provide innarmation about environmental responsibility and nature conservation. This is done in conjunction with waste removal projects. Additionally, we have supported Plant ojeatun analpulata ntdendfmm tk Upper Alahiao GwikrmalProjea, laatedun the idandofiste. Repiddic oftbe Phdtppina. improvements to national park giounds, provided road improvements, village temple repairs and Isarticipated in tree planting and lake manage-In both the Philippines and Indonesia, Ca! Energy l I ment programs. is collaborating with the Conservation Breeding In Dieng, on the island ofJava, Indonesia, CalEnergy Specialist Group to protect rare indigenous plant and assists with the identification and resolution of agri-anim I species such as Indonesia'sJavan Hawk-Eagle cultural problems, bringing qualified experts from nd a wild Asian buffalo called the Tamaraw, which the United States to share their expertise and provide ountiin the Mppines. assistance to kical farmers. CalEnergy is a responsible business partner, committed to making positive contributions in the communities we serve.

How wil CaEnergy 3enefit from a regionally c ecentralizec structure? We have given responsibility for daily operating performance to divisions within each region ofthe world where we do business-the Americas, Europe and i Asia. - This allows us more control over activities in those regions and enables us to react quickly to opportunities that will arise as deregulation and privatization continues to occm: - The responsibilityfor overallcompanyperformance remains at our company's headquarters in Omaha, Nebraska, in the UnitedStates. Plant operatur makes his ruitn.h at the Saranac Gas-FiredCogeneration Pnjea.

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C a l li n e r g y Company. Inc. Where WE Do It Q l OurGlobalStrateg Americas Region A top-redormer, WL y '"*W M79 w' Q 3; y %.4 Corporate Headquarters: the Coso proicct y% 'f" D;*f omaha, Nebraska, UnitedStates has an outstanding m. d lifetime safety ,Ml Overall, performance of our U.S. facilities in 1996 record, completing was outstanding. Several facilities produced at record 1996 without a levels and, as always, our safety record was excellent ~ lost time injury. among the best of ar.y industry. In 1996, with the Achieving record addition of Saranac, Power Resources and NorCon production levels to our team and the completion ofSahon Sea IV cach year since L6n Gaf-FmdCyncration Profra. we increased our production capacity in the U.S. y99;je g,c lautedin &rth l%t. lAnnnitanu. US.A. by more than 97 percent. facilities at C.oso ran at fullcapacity in 1996. ~~~mm ~9mm*- g sm;;,4~~Y 4-.." .y-- r, qi, ~%.- Additional accomplishments of the Coso project p during 1996 include: f

  • Delivered a record 2,323,000 megawatt hours (MWh) of energy to Southern California Edison, g'

g k.. an average of 261.5 net MW of power sales.

  • Completed construction and began operation of

~~ the new Navy 11 lbS abatement system that safely s -.gyn : ) }4 MW # - _ converts hydrogen sulfide gas to an elemental ..____.. i i N d sulfur that is then used as an agricultural fertilizer. ' a s Nan I G.enmermal Projea, laatcJ near Ridycrnt. La@r>da.US.A. + Completed drilling of two new wells.

  • Completed the Unit 2 and Unit 3 turbine overhauls As the U.S. market moves toward deregulation' on schedule and within budget.

continued operational excellence and cost-contain- ) ment processes already in place at CalEnergy will l work to our advantage as our power production l facilities in the United States are some of the e l strongest peteming, most reliable facilities i found annchue in the world. Gwthermal Projects: Coso ~ The Coso project is the result of a long-term contract O, with the U.S. Department of the Navy, providing for u s a the development of up to 5,000 acres of geothermal g '<. X property at the Naval Air Weapons Station in the y y Mojave Desert at China Lake, Califorma. y; The project consists of three facilities-K vy 1, %, j' l M Navy 11 and BLM-each producing 88 net MW of ekctricity from naturally occurring geothermJ h '. ) ~" steam. Long-term contracts provide for 100 percent W q of the Coso project's 261 net MW capacity to be 1 7g [ b~W s d soki to Southern California Edison Company. 1< m L ' ' S[ 5. l 3 e ,e

CalE u e rg y Company. Ins. l 1 l r Imperiallid4y

  • Achieved an outstanding safety milestone in The Imperial Valley project consists of eight facilities January,1997-operating for the past two years in the Salton Sea Known Geothermal Resource without a lost time accident-more than one Area in Southern California's Imperial Wiley, million man-hours.

producing electricity solely from naturally occurring geothermal steam.

  • Set a single-day generarion record on November 25,1996 of 284.3 A1W Four of the Imperial Wiley facilities-Vulcan, Hoch, Elmore and leathers-are under contract to sell power to Southern California Edison Company (" Edison")

1, under long-term power purchase "L ~ f* agreements. The other four power plants-Salton Sea I,11,111 and IV-also sell energy to Edison under long-term power purchase agreements and produce steam for electricity generation. In the summer of 1996, construction work was completed on budget and on schedule on Salton Sea Unit IV an expansion facility with 40 net AtW of new capacity. This expansion effort M l'"*" 6"A"nal Pn,pn in dy Ini/ mal D/l l 4 xandnur Q/tj>am'a4/p,nna. MA. increased the total output of the Imperial Wiley project by 17.5 percent Deser/ Peak to a combined capacity of 268 net 51W The Desert Peak facility, k>cated near Reno, Nevada, Consistently operating at near full capacity, the produces electricity from naturally occurring geother-mal steam. The 10 net MW facih.ty is 100 percent Imperial Wiley project ran at a combm.ed capacity factor of 98.9 percent in 1996. Total net production owned and operated by Calt.nergy and we bok! rights was approximately 2,179,200 million kilowatt hours to an addinonal 6,000 acres at the site-which off.ers (kWh), yielding an average 248.1 net htW tremendous geothermal development potential. In operat,an since 1985, Desert Peak has operated ten Additional significant accomplishments cithe out of those eleven years without a lost time accident. Imperial Wiley project during 1996 include: Desert Peak has consistently operated at or near

  • Significantly decreased maintenance costs as a capacity and in 1996, CalEnergy operated on a result of the installation of more than 4,000 feet of short-term power sales arrangement with Sierra 24-inch diameter cement-lined pipe at the Irathers Pacific Power Company (SPPCo) to deliver energy facility, which is used to transport production brine at SPPCds short-run avoided cost. In preparation from the wells to the plant.

for this development, we implemented significant

  • Began development of Region I process and cost cutting measures at Desert Peak, which led control consolidation, improvements to extend the way in 1996 as one of the industry s lowest-H2S Diofdter capacity, replacement of brine cost energy pnxiucers.

pipelines in Region 111 and continued to enhance reliability and r-Juce costs at all facilities.

l can,au, co m ar. 1 c. 28 RoosereltIfor Springs In 1996, the three facilities, together with the Yuma Operational since 1983, Roosevelt Hot Springs facility, performed at a combined capacity factor of is located on the first Known Gembermal Resource 93.2 percent, yielding an average 480.1 MW Total Area approved by the Department of the Interior, net production was approximately 4,216,800 MWh. 170 miles southwest of Salt Lake City-an area Scra m c encompassing one of the United States most The Saranac cogeneration plant unlizes low-cost, abundant geothermal reserves. CalEnergy owns ,g gg; gg33;; a 70 percent interest in and operates the well field fuel sources in the world-as its fuel source. The 240 at this site while the power plant is owned by Utah net MW facility, located in Plattsburgh, New York, Power and Light Company. has an agreement to sell electricity to New York State Roosevelt Hot Springs, a 23 net MW facility, has Electric & Gas Corporation and steam to Georgia-performed remarkably well during its 13 years of Pacific Corporation and Tenneco Packaging. operation, and has never experienced a lost time '*'""*""8'"*'"'* E* accident. In 1996, the facility produced 212,400 the Saranac facility ha dtmonstrated an availa ty i MWh ofenergy. in excess of 95 percent.1 he plant is strategically j l Glass Mountain connected via the 22-mile North Country Gas l Development activities for the Newberry project Pipeline to TransCanada's gas transportation have been transferred to Glass Mountain network, providing access to some of the least j in Northern California after reaching expensive natural gas available in North America. 4 l. an agreement with Bonneville Pbwer Administration (BPA). CalEnergy, BPA, Bureau of Land Management, U.S. Forest Service and Siskiyou County, CA, are working together to complete "[ 4-2 i an EnvironmentalImpact Study g

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4 4 (EIS)for the development of the { 'I t C if i - 4* L Glass Mountain resource. ~ NaturalGas/ Cogeneration: In August,1996, CaiEnergy completed the purchase of three operating gas-fired cogeneration plants and a related naturalgas t b""' I" 6"*K"#'#"" N'idd"d'"li" 8I D"K' h

  • K pipeline from Falcon Seaboard Resources, Inc. The facilities include Saranac, Power Resources and NorCon, located in Neer Resources New York, Texas and Pennsylvania respectively, and The Power Resources facility is a 200 net MW provide a total combined capacity of 520 net MW natural gas-fired cogeneration project located near j

Big Spring, Texas-and close to some of the largest The acquisition of these facilities continues CalEnergy,s gas fields in the United States and the country s geographic, customer and fuel diversification efforts lowest gas prices. Power Resources, which has and provides additional low <ost, high efficiency assets demonstrated an availability factor of greater than that wd. l help prepare the company for competition S ' " " *' W E** in the deregulated U.S. electric industry of the future. bE'"*" in 1987, has an agreement to sell electncity to Texas Utilities Electric Company and steam to fina Oil and Chernical Company.

~. - - --a. CalEnergy Company, Ins 29 NotCon y~ The 80 net MW NorCon natural gas-fired 7 ^ ~_- a cogeneration facility is located in North East, Pennsylvania. Having achieved an pj >^ - j. - ',..[f"f availability rating ofover 93 percent since 'a commencing operation ir.1992, the facility N8Wi.J, - (( l j established an all-time r roduction record 8 g g in 1996 of 664,600 MUh. No service Ey, g - i interruptions were expcienced, and the s-4 facility has been able to, crease its delivery f of thermal energy to its steam host. The \\ l facility sells electricity under an agreement s f. with Niagara Mohawk Power Corporation ~' and sells steam for process and cooling to 3 Welch Foods,Inc. ~ ~~'. j !, d Yuma l } Thc highly emcient %ma cogeneration w,, pt,,,,,pr,,,ig,,,4pnc,,,,wo,,,c,,ii,,,,,icita> tma:e,t facility uses natural gas as the fuel for its in Lrth East. Ann 13 ania, ult h turbine and emciently produces energy in two forms-electric and thermal (steam). .le.essule In 1996, the Yuma facility,100 percent owned by CalEnergy, met or exceeded all goals, producing Northern Electric has a 15.4 percent ownersh.ip 383,400 MWh of electncity with an average on-h. interest in Teesside Power Limited, which operates l ne I avadability factor of 98.7 percent. a 1,875 MW combined cyde gas-fired power station at Wilton. To provide customers with electncity, Since beginning operation in 1994, the Yuma Northern Electric purchases 400 MW ofelectricity facility has diligently complied with all safety from the plant under a 15-year contract. and environmental requirements. The Yuma g cogeneration facility provides 50 net MW to San In Northallerton, North Yorkshire, Northern Electnc Diego Gas & Electnc Company under a 30-year power purchase agreement. Thermal steam produced owns and operares a 5 MW diesel power generating l by the plant is sold to a neighboring carpet manufac-plant in which the Company has a 3 MW net 1 turer, Queen Carpet, for process and cooling. ownership interest. Europe Region Construction work recently began at our 50 net Headituarters: F..,atural gas-fired power station at Sc:al Sands Neucastle upon 13ne, Unitedk,ingdom on Teesside. The facility, a joint venture of Northern Our recent acquisition of Northern Electric included Electric and Rolls-Royce Power Ventures, Ltd., ownership interests in two power generation facilities, will be developed, owned and operated by both adding a combined net capacity of 205 MW These companies. The facility will supply gas to the facilities provide electricity to customers in Northern adjacent power station which will be connected England. Construction has begun on a third facility, within Northern Electric's distribution system, and it is expected that development will commence avoiding National Grid transmission costs. The soon at two additional sites. facility is expected to go on-line by the end of 1997.

C-lEuergy Company, l e t'. 30 Our projects in the Philippines represent a total investment of more than $ 1.3 billion. Structured as Build-Own-Operate-Transfer (BOOT) projects, ownership of the projects will transfer from CalEnergy and its partners to the Philippine govemment after an agreed upon period of time ranging from 10 to 20 years. UpperMahiao In J une of 1996, construction was completed on the Upper Mahiao project, a 119 net MW geothermal power plant in the Tongonan Geothermal Reservation on the island of Leyte. The facility, which features a hybrid geothermal cycle in which steam exhausted I from conventional backpressure turbines provides heat to binary bottoming cycle equipment, went Upper Alabiaoplant opeator msares that the pbnt's spion on-line in September. arv unrking srnoothly both day andnight. J pm p mm o' Asia Region Ileadquarters: Jakarta, Indonesia The Philippines To satisfy increasing demands and help stabilize l energy costs in the Philippines, it is extremely important that electricity be dev-loped from sources that are reliable, renewable, clean, indigenous and economical. CalEnergy's projects reflect this goal, utilizing a variety of environmentally responsible technologies and fuel sources, including geothermal Upper Afahiao Geothermal Pinjea, /uated on the islandofInte, Rfublic ofths Philippines. and hydroelectric energy. In addition to recognizing the long-term importance ofenvironmental responsibility, the Philippine gov-The Upper Mahiao project is owned and operated ernment is diligently working to provide the country by CE Cebu Geothermal Pbwer Company, Inc., with elettricity and other commodities necessary a Philippine corporation that is indirectly owned to strengthen the standard ofliving and the country's by CalEnergy. CE Cebu will operate the BOOT economic position in the global market. We appreciate project until ownership is transferred to the Philippine l 1 these efforts along with the efforts and hard work of government after a ten-year cooperation period. our Filipino employees. They have been instrumental The Upper Mahiao project provides an energy con-in helping us integrate our company into the business version service and 100 percent of the plant's capacity community and culture of the Philippines. is dedicated to the PNOC-Energy Development Corporation (PNOC-EDC). The energy delivered from Upper Mahiao is sold by PNOC-EDC to the National Power Corporation (NPC) for distribution and consumption on the island ofCebu,40 miles west of Leyte, via an underwater transmission cable.

CalEnergy Company, Inc. I 'I J 31 Afalithog Power Company, Inc., a ,F Construction was completed on the first unit (72 Philippine corporation that net MW) of the Malitbog project, a three-unit,216 currentlyisowne 50per- .]3 d s net MW geothermal facility engineered and con-cent by CalEnergy and 50 ai g -y structed by Sumitomo Corporation in the Tongonan percent by Kiewit Energy ' d Q;. Geothermal Reservation on the island of Leyte, in Company, a subsidiary of f June of 1996. The unit was operating at up to 30 Peter Kiewit Sons',Inc. a-net MW by the end ofJuly. Generation was limited by the Philippine government as their construction CE Luzon provides an of transmission lines necessary to link the facility '"*'8 Y ' ""*"I to k) cations where the power will be used is not with all plant capacity dedicated to PNOC-yet complete. As required by contract, PNOC-Alahtkg Gwknna/ Pnded. /watedon the idand 1 EDC is paying for the contracted capacity amount. o/4t< R1ablkofthePhibppina Construction of he second and third units is essen-the energy deh.vered from nally complete and they are expected to go on-line the Mahanagdong project by mid-1997. to NPC for distribution on the island of Luzon and to the Philippine capital city of Manila. The Malitbog project is owned, being built and will Casecnan be onerated by Visayas Geothermal Power Company (VGPC), a Philippine partnership wholly-owned " *'" "

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""*" E*I" by CalEnergy. VGPC provides an energy conversion the result of an agreement between CalEnergy and i l service and all plant capacity is dedicated to PNOC-the Philippine Nationalirrigation Adm..mistranon EDC PNOC-EDC resells one third of the energy (NIA) to develop a combm.ed irnganon and hydro-from Malitbog to NPC for distribution on Cebu and ' " " ' I"**'8#"#'"' "E*I"' E*I"'"?

  1. " **#" **'"' f*""

'"'E two thirds for distribution on the island of Luzon. Rivers in Northern Luzon through a 23-kilometer tunnel to the generating plant. The project will provide up to 150 net MW of new hydmelectric capacity to the important Luzon electrical grid, as well as much-needed water for agricultural use in the Luzon Valley. 2 g g yf"W17 me w W r '~ p fp ,m AfabanagLng Gite A) Genthenna!Projat, /ratedon ik idand .y. of4te. Repub/k ofthe Phihypines. Atahanagdong Scheduled to go on-line in mid-1997, the Mahanagdong project is a 165 net MW geothermal Afa^'"dxd""x 6"' 81 G"he""al P"d"1 /*dted o" Ik 'ds"d facility on the Philippine island of Leyte. Overall

  • IN#' ##"

'l' construction remained on budget and on schedule at the end of 1996. The project is being built, and will be owned and operated by CE Luzon Geothermal

. _. ~ _. _ - _ _ _ _ _ _ _ - CalEnergy Company. Inc. 32 l 4.j ( :. f... .. ;. % Q771 Indonesia 25M[Mdd,E:SMk[ ' ggj((9[%0' ' Gj Energy produced by CalEnergy at its three current 7 .. 7 {7/] 'L. j projects in Indonesia will be from naturally occurring j geothermal steam, a preferred energy source because %l!d g" ' it is reliable, renewable, clean, indigenous and economical. Geothermal development is especially n., - I valuable in areas likeJava and Bali where resources are plentiful. It has been gratifying to begin to share our knowledge and abilities in Indonesia where our efforts have been m 1g .je '~n 1" ' enhanced by those ofour Indonesian associates and employees. They have become true partners in our '~ 7.< " ~ endeavors to efliciently and cost-effectively develop g I i &r H M and construct our power facilities. We look forward m o .2 7 - .J to continuing these successful associations. + t. 4' g' f. 3 yy ~'y +, .n i As in the Philippines, our projects in Indonesia are ~ g% T, structured as Build-Own-Operate-Transfer (BOOT) ~ ~ 4 projects whereby, after an agreed upon period of time, ownership will transfer from CalEnergy and its part-nets to the 1ndonesian government. Our combined Construaiun is prxmbng on schedule at ik Dieng Unit I GeotkrnalProjea /watedon the idandoffara. Indonais. contracts in Indonesia permit a planned geothermal development project of more than 1,000 net MW and it is estimated that our total investment in the Energy from the Casecnan project will be produced. country will be in excess of $2 billion. by nonpolluting, renewable, indigenous hydroelectnc sources. It is projected that the project will signifi-Dieng cantly augment the annual harvests of farmers CalEnergy plans to build several geothermal steam by irrigating an additional 50,000 hectares of field and power facilities with an aggregate capacity agriculturalland in the province. of up to 400 net MW at the Dieng geothermal field in CentralJava, one of the few explored and The project was the first multipurpose BOOT commercially proven geothennal fields. Indonesia. m project in the Philippines and the first involvm.g In 1996, we closed financing and began construction NI A and the Philippine Department of Agn. culture, at the Dieng Unit I site, a 55 net MW facility that CalEnergy will have a minimum 35 percent equity is expected to go on-h.ne in late 1997. interest in, and will manage, the joint venture project. Ownership will transfer to NI A at the ,9 %g end of a 20-year cooperation period. jhI h "i, ,,- o. p . i'. I I FidJdmhymat atik Bal Geotlwrm.d l%)ea site, twated en sk idand afl3ali, Indonaia. l

CalEuergy Company. Inc. CalEnergy Projects in Operation, Construction andDevelopment ~ n An affiliate of CalEnergy has a joint operation contract k MW wMw omed with Rnamina, the Indonesian national oil company, Aniericas Region: for the development of the Dieng project. A "take or U"id *'5: onnuoss: pay" energy sales contract with both Rnamina and 3,imn,: PLN, the Indonesian national electric utility, provides Yunu~ ~- ~~~ 5(F - io-~ for the purchase ofelectricity generated there. After { """': _ _ _ - - an agtced-upon time, ownership of the DOOT project x,,,g x,,,, g afy will transfer from affiliates of CalEnergy and its Irnemal valley 26s 268 partners to Wrtamina. fl'"* ]' 'g',' nau/m Nc Well drilling and development activities continue at se, vork: l"i a 100 net MW project site at the Patuba geochennal 7aranx 240 180 field, located on the west side ofJava, less than 100

  • "{(**

s,, u,.,,, g miles from the capital ofJakarta and near two existing Tem geochermal development projects. Land acquisition Nei Emrm ~C C'~ " /~'*;, 2 and permitting efTorts are ongoing while planned S'h; g;gny, y-i,- " f,j"*' exploratory corehole drilling has been completed Dnnormst and production well drilling has begun. Unit I of C"Innia: ""'EF Glass hkuntain

o 30 Net MW l

the Patuha project is scheduhl to begin construction 3%.,,i, g, n i3 is in late 1997. Tmu ruuuus 1, iso 96i An affiliate of CalEnergy and its partners have E""## R'T o"! i a joint operation contract with Wrtamina and (("jyd""" I a "take or pay" energy sales contract with both Tmsiae i.s73 202 Pertamina and PLN. Cossurcuos: m Viking 50 18 Bali Tmutenon i,925 220 saw-mo-t Along with our joint venture partners, we plan to A3/a Rty/on: construct several geothermal production facilities in Philippines: [2,#*[, phases on the Indonesian island of Bali with an output 'jj""' "n"'s: of up to 100 net MW Field development, permitting ((,h3r---- ' h-J h CalEnergy I and land acquisition are underway, and corehole coNSHOCnON: Net MW drilling has begun at the site. ^121"' "8U"""*'" 1" "4 59hanagJong _ __M5 M_ 0wned l ) CalEnergy will serve as managing partner of the g"g7_ -- _- 5 52 venture. As with the Dieng and Patuha projects, Aim nok 7o 70 an affiliate of CalEnergy has signed a joint operation indma: C '*"'C""*: contract with Pertamina and the "take or pay Dieng Unit ! $5 26 l energy sales contract with Pertamina and PLN. Dnuormsm Dwng Phase 11 345 162 l Patuha 400 176_- Tmu Am 1,920 1,o15 Net MW Net MW owned Tm u 5,025 2.196 Nac 7h Gapon < prate allinhynpsi aletkm huide Tks hirt Jc na in/M wullualumiknalhat andpo erfulata tha an indims Nwtkna ikru pi adadiarvprata an/a 5 alt hadana at Nsifalleton thata Northn Elarrujk nkulur} rprata (in u huh th Comparn lus a 3 ht r as ou umky mima!. nor Je a inluk ik BRPUpnets, u huh avr mbyt t+nJmg CPUC antr.c ko-urapmadmg

-~ CalEerrgy Ceapany. let. z-fil C,OIKl1/S1011 u It's been a very successful year for CalEnergy. By Change Creates Opportunity adhering to our focused strategy, we achieved 2everal By intentionally expand;ng our knowledge and milestones that enable us to maintain our leadership experience base, CalEnergy is well equipped to position in the global power industry. We successfully quickly react to and profit from the changing acquired additional assets that have allowed us to environment of the power industry. We k>ok forward diversify our fuel sources and gain valuable expertise to the many opportunities that will accompany the in complementary segments of the industry. This impending deregulation and privatization of global experience will serve us well as worldwide privatiza-energy markets. tion unfolds. Grou th ResultsJimn Both Perforinance Drires Success We believe that CalEnergy's growth and success This is a statement we have found to be resoundingly are the result of our dedication to premium perfor-true. In 1996, the operational performance and safety mance and our ability to recognize and act on the standards ofour facilities continued to be excellent. opportunities presented by a rapidly transitioning Construction and development activities progressed marketplace.1996 was a year of historic growth. on schedule and within budget. We gratefully Acquisitions and continued executional excellence acknowledge the dedication of CalEnergy employees contributed to our bottom line growth-with total to these efforts, as well as applaud their continued assets and revenues increasing exponentially. environmental crewardship. As we continue our course, we remain mindful of the factors that contribute to our success. l Continued Portfolio Diversification l Planned Generation in Operation in Ihe %ar 20(X) A m u_ r.a uo,, n .l Cammm211 Ingerkt bak 1 M e/pr Agulim 1.19 l h( l ~ ~ - 1 y - o nmalm j. .__ _ Agalisinura PRI SYT l

  • 1 l

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CalE n e rgy C o nr p o n y, Inc. CalEnergy Company, Inc. T 1996 FinancialReport Contents 36 FinancialSurntnary 38 Afanagement's Discussion and Analysis ofFinancialCondition andResults ofOperations 50 ConsolidatedBalance Sheets 51 ConsolidatedStaternents ofOperation 52 ConsolidatedStateinents ofStockholders' Equity l$k 53 ConsolidatedStaternents 0l ofCash Flous 54 NotestoConsolidatedFinancial Li Statements y.) 81 Independent Auditors' Report V 82 Corporateinformation

ColEnergy Company, Inc. R FinancialSummary Over the last three years ended December 31, 1996, the Company completed the buy-out for 1996, CalEnergy Company, Inc. (the " Company") approximately $70 million c. fits partner's interests has experienced significant growth. The market (" Partnership Interest") in four electric geuerating capitalization of the Company has risen at a plants in Southem California, resulting in sole compound annual rate of 48% from approximately ownership of the Imperial Wiley Project. In August $656 million in 1993 to approximately $2,140 1996, the Company acquired Falcon Scaix>ard million in 1996, the revenues of the Company Resources, Inc. (" Falcon Seaboard") for approximately have risen at a compound annual rate of 57% $226 million, thereby acquiring significant ownership from approximately $149 million in 1993 to in $20 MW of natural gas-fired electric production approximately $576 million in 1996 and net facilities located in New York, Texas and Pennsylvania income available to common stockholders has and a related gas transmission pipeline. risen at a compound annual rate of 29% from Through its subsidianes and joint ventures, the approximately $43 milh.on m 1993 to approxi-Company presently operates 19 projects with an mately $92 million in 1996. This significant aggregate net capacity of 1,326 MW m which it growth has been ach,eved through:(i) acquisitions has a net ownership interest of 1,107 MW of electnc i that complement and diversify the Company.s generatmg capacity. This includes an aggregate net existing business, broaden the geographic locations 79 g,;g g m g ofits assets and enhance its competitive capab% ties; in the United States (which facilities have an (ii) enhancement of the fmancial and techmcal aggregate net capacity of 1,135 MW of which performance ofexistmg and acquired projects; and 570 MW are fueled with natural gas and 565 (iii) development and construction of new plants. g, g g7 On December 24,1996, CE Electric UK plc, are supplied by two geothermal power production which is 70% owned indirectly by the Company facilities owned and operated by the Company in the and 30% owned indirectly by Peter Kiewit Sons', Philippines. These numbers do not reflect 47 small ~ Inc. ("PKS"), acquired maiority ownership of the scale combined heat and power facilities and a diesel outstanding ordinary share capital of Northern fired power production facility in England that an Electric plc ("Northem") pursuant to a tender indirect Northern subsidiary operates. Finally, the offer. The total amount expected to be paid for Company owns, but does not operate,202 net MW all of Northern's ordinary and preference shares from the 1,875 MW Teesside Project in England. is approximately $1.3 billion. With respect to power generation projects that are l 5 In the last two years, the Company has fmanced and under construction, the Company has consummated three other significant acquisitions, an aggregate net ownership interest of 270 MW 7-in addition to the acquisition of Northem. In of electric generating capacity in two geothermal )!l January 1995, the Company acquired Magma power projects and one hydmelectric project in the flI Pbwer Company (" Magma"), a publicly-traded Philippines, which allectively have an aggregate ll( United States independent power producer with net capacity of 459 MW The Company is also h1 228 megawatts ("MW") of aggregate net operating currently constructing a 55 net MW geothermal l;j capacity and 154 MW of aggregate net ownership proicct in Indonesia,ic which the Company has @[ capacity, for approximately $958 million. The an aggregate net ownership interest of 26 MW Magma acquisition, combined with the Company's of electric generating capacity, as the first phase previously existing assets, made the Company the of the Company's planned Indonesian geothermal s largest independent geothermal power producer in project development of approximately 1,000 MW U the world today (based on the Company's estimate under contract. The Company has commenced ? of aggregate MW ofelectric generating capacity construction of a 50 MW gas fired power project in operation and under construction). In April in England in which the Company has net

Cn/Esergy C o nr y n e y, ler. 37 ownership interest of 18 MW The Company the need to obtain financing, permits and licenses expects that it will ope ate all of these projects. and the satisfactory completion ofconstruction, The Company expects that it will operate all The Company is also currently develop.mgsix additional projects with executed or awarded of these projects. power sales contracts in the Philippines, Indonesia The Company's operations have historically and the United States. The Company is expected been seasonal in nature, with a disproportionate to have an approximate net ownership interest of percentage ofincome earned in the third quarter. 573 MW in these development projects (which As a result of the acquisition of Northern, the represent an aggregate net capacity of 1,260 MW Company's historical results could differ significantly of additional potential electric generating capacity). from the Company's actual results in the future. Substantial contingencies exist with respect to development projects, including, without limitation, Selected FinancialData iMt.on a %wns h.gr hr %v Anat> nar En.hJIMkr 31. 1996' 1995: 1994 1993 1992 5 ales of electricity and steam 8 518,934 $ 335,630 $ 154,562 $ 132,059 $ 117,342 Total revenue 576,195 398,723 185,854 149,253 127,529 Expenses 440,482 301,672 130,018 87,995 76,797 income before provision for income taxes 135,713 97,()51 55,836 61,258 50,732 income before change in accounting prirxiple and extraordmary item 93,892 64420 38,834 43,074 38,810 Cumulative effect of change in accounting principle 4,100 Minority interest 1,431 3,005 Extraordmary item (2,007) (4,991) Net income before preferrni chvidends 92,461 63,415 36,b27 47,174 33,819 Preferred chvidends 1,080 5,010 4,630 4.275 income per share before change in accounting pnnciple and extraordinary item 1 60 1.25 S5 1 00 92 Cumulative effect of change in accounung pnnciple per share .11 Extraordmary item per share 006) (.13) Net income per share pnmary 1.60 1.25 .89 1.11 .79 Total assets 5,712,907 2,654.038 1,131,145 715,984 580,550 f.h Total habilities 4,263,803 2,08 L474 867,703 425,393 336,272 M Company-obhgated mandatorily redeemable / h convertible preferred secunnes of subsidary trust bokhng solely convertible debentures 103,930 f[ Preferred secunties of subsidiary 136,065 5 " Mmority interest 299,252 $l Redeemable preferred stock 6L600 58.800 54,350 /j Stockhoklers' equity 880,790 543,532 179,991 211,503 168,41 M '1 I kjass sqanums ofMarin iAus SaabwJarth Ilortwehp lutnam,lpepaar of th,a Sa Mir 3 to aja,imutaamus. i= 2 hfass,nquantur gng u oumJprp <t 4h yr.or 5a kre 3 u thepu.a.uln.aa wris. n j u%

-~---~ Calfnergy Ce np a ay. lat. Management's Discussion and Analysis 3 ofFinancial Condition and Resnits ofOperations EMlars un Tkanis Eupt hr kw Amunts The following is management's discussion and Strer Generation Projects analysis of certain significant factors which have For purposes ofconsistency in financial presentation, affected the Company's financial condition and plant capacity factors for Navy I, Navy II, and B131 results of operations during the periods included plants (collectively the "Coso Project"), are based in the accompanytng statements of operations. upon a capacity amount of 80 net MW for each As a result of the acquisition of Northern Electric plant. Plant capacity factors for Vulcan, Hoch plc ("Northem"), the Company's historical results (Del Ranch), Elmore, Leathers plants (collectively could differ significantly from the Company's the " Partnership Project"), are based on nominal actual results in the future. capacity amounts of 34,38,38, and 38 net MW respectively, and for Salton Sea 1, Salton Sea II, Salton Sea III and Salton Sea IV plants (collectively N""..###"# On December 24,1996, CE Electnc UK plc the "Salton Sea Project"), are based on nominal ("CE Electric"), which is 70% owned indirectly capacity amounts of 10,20,49.8 and 39.6 net by the Company and 30% owned indirectly by ively (the Partnership Project and the Peter Kiewit Sons', Inc. ("PKS"), acquired majority Salton Sea Project are collectively referred to as the ownership of the outstanding ordmary share capital g ,, p 7 of Northern pursuant to a tender offer (the ' Tender for Saranac, Power Resources, NorCon and Yuma Offer").ThroughJanuary 31,1997, CE Electnc W " Gas Plants") are based on s had pu chased more than 90% of Northern s capacity amounts of 240,200,80 and 50 net MW, ordinary shares. Under Umted Kingdom statutory respectively. Each plant possesses an operating powers available to compulsorily acquire shares not g

g gg purchased in the Tender Offer, CE Electric expects amount listed almve. Utilization of this operating to acquire the remaining Northern shares by margin is based upon a variety of factors and can be Ap 30,199L expected to vary throughout the year under normal Northem's revenue and profit before tax were operating conditions.

approximately $1,412,200 and $236,100 respec-3, %,3%%,,,g,, aq,& c,,,u,,,,g,,, tively, for its fiscal year ended March 31,1996. vre,a-wt In April 1996, the Company completed the buy-Results of0perations Three Years Ended out for approximately $70,000 ofits partner's December 31,1996,1995 and1994 interests (" Partnership laterest") in four electric Sales of electricity and steam increased to $ 518,934 generating plants in Southern Califomia, resulting in the year ended December 31,1996 from $335,630 in sole ownership of the Imperial %Iley Project. in the year ended December 31,1995, a 54.6% [ d In August 1996, the Company acquired Falcon increase. This improvement was primarily due to f Seaboard Resources, Inc. (" Falcon Seaboard") the acquisitions of the Partnership Interest, Falcon for approximately $226,000, thereby acquiring Seaboard and Northem, the deemed completion of significant ownership in 520 MW of natural the Upper Mahiao Project and Unit I of the Malitbog g gas-fired electric production facilities located in Project in the Philippines, the completion of the g New York, Texas and Pennsylvania and a related Salton Sea IV Project and an increase in the Coso f Project's electricity revenues. gas transmission pipeline. 4Q

CalEnergy Company, Inc. 39 The increase in sales ofelxtricity and steam The following operating data represents the in 1995 to $335,630 from $154,562 in 1994 aggregate capacity and electricity production was primarily due to the addition ofproduction of the Salton Sea Project: from the Imperial %11ey Project as a result of the ,y ig pg acquisition ofMagma in the first quaner of 1995, gg c,p 9g, gg an increase in the Coso Project's electricity revenues kwh praluced (in thousands) 817,400 601,300 634,890 and an increase in revenue received from the Yuma capacity NMW(average) 103.0 79.8 79.8 Project which commenced operation in May 1994. i The overall Salton Sea Project capacity factor was The following operating data represents the 92.4% in the fourth quaner of 1996 compared to aggregate capacity and electricity production 97.9%,78.6% and 89.6% for the third, second and of the Coso Project: first quaners of 1996, respectively. The Salton Sea 1996 19e 19W Project capacity factor has increased in 1996 from overallcapiry rutor 110.2 % 00.3% 106.5% 1995 due to the commencement ofoperations at kWh praluced(in thousan&) 2,323.000 2,318,a0 2,238/a) the Salton Sea IV Project. The decrease in 1995 Capuity NMW (average) 240 24a 240 from 1994 is due to the scheduled Salton Sea III The Coso Project capacity factor was 111.0%. Project overhaul in the second quarter of 1995 n the founh quarter of 1996 cornpared to 111.5%, and the conversion of that unit to the pH Mod 109.5% and 108.7% for the third, second and technology m.the founh quarter of 1995. first quarters of 1996, respectively. A steam The following operating data represents the transfer agreement was signed and the interties aggregate capacity and electricity production were constructed in the third quarter of 1995, of the Gas Plants: providing for increased production, primarily 1996 le 19W at the Bl.M Project. g 3, gg g The following operating data represents the kWh ralmed(inthmand0 4.216M 4,43W0 3,144M P aggregate capacity and electricity production InnaHed capurn NMW F0 UO W of the Partnership Project: The capacity factor of the Gas Plants reflects the 1996 1995 19W effect ofcertain contractual cunailments. The ovmlicapuiry factor 104.sx to5 n 10382 C Pacity factors adjusted for these contractual kWh pnxiuced(in thousands) 1,361,800 1,373,310 1,346,000 curtailments are 93.2%,96.8% and 90.6% J, capuicy NMW(average) 148 148 148 for 1996,1995 and 1994, respectively. h2 The Partnership Project capacity factor was 105.7% [ in the fourth quarter of 1996 compared to 106.4%, fy 109.2%, and 97.6% for the third, second, and T first quaners of 1996, respectively. The decreased \\ production in 1996 is a result of scheduled overhauls a at 1.eathers and Elmore. The increased production h in 1995 is a result of minimizing unscheduled g/p downtime at the plants. W[/ p

CalEnergy Cearony. le r. 40 Electric sale price per kWh for the Coso Project, Interest and other income marginally increased Pannership Project and Salton Sea Project varies in 1996 to $44,281 from $43,611 in 1995, a seasonally in accordance with the rate schedule 1.5% increase. This increase is primarily a result included in the 504 agreements and power ofoperator fees received from the Saranx Project purchase agreements.The Coso Project's, and NorCon Project partially offset by the fact the Pannership Project's and Salton Sea Project's Company is no longer recognizing management average electricity prices per kWh in 1996, services income received from the Partnership 1995 and 1994 were comprised of(in cents): Project as the Partnership Project is now owned 100% by the Company due to the Partnership Coso Proicce Energy Capacity & Bonus hal Interest acquisition. Interest and other income . Avenge w 1996 12a ts2 m3 increased in 1995 to $43,611 from $31,292 in 1994. Average 6xal IW5 11.81 1.82 13 63 The increase primarily reflects management services Average 6sca!1994 10.91 1.90 12.81 income received from the Partnership Project. Partnership Project Energy Capacity & Ibnus hal Average 6xal IW6 10.02 2.12 12.14 Overall, the Company's expenses increased in 1996 Average 6xal IW5 11.14 2.10 13.24 due to the acquisitions of Northern, Falcon Seaboard Average 6xal 1994 1029 2.16 12.45 and the Partnership Interest, the commencement Salton Sea Pmject Energy Capacity & Bonus Total ofoperations of the Salton Sea IV Project and the Average 6 scal 1996 8 84 2 29 11.13 deemed completion of the Upper Mahiao Project Average fiscal 1995 9.50 2.33 11.83 gg g gg p Average fiscalIW4 10.07 1.67 11.74 Plant operations increased to $ 108,962 in 1996 Income on equity imestments reflects the Company.s 5 3 share ofeqmty mcome pnmanly from the Saranac The increase is a result of the Falcon Seaboard Project and Nonhem. and the Partnership Interest acquisitions, and Royalty income decreased in 1996 to $6,846 from the commencement ofoperations of the Salton Sea $ 19,482 in 1995, a 64.9% decrease. This decrease IV Project. Operating expense increased to $79,294 is a result of the Company no longer recognizing in 1995 from $33,015 in 1994, an increase of royalty income received from the Partnership Project 1A0.2% as a result of the cost of plant operations as the Pannership Project is now owned 100% by at the Imperial Wiley Project and the full year the Company due to the Partnership Interest ofoperations at the Yuma Project. acquisition. The Company continues to receive royalty income from other projects not owned by the Company. Royalty income in 1995 of $ 19,41 is a result of the acquisition ofMagma which recu,ed royaltje.i from the Pannership Project, and from other projects not owned by the Company. i i

CofEnergy Conynny. Inc. 41 The cost of sales of $31,840 are a result of the 1.oss on equity investment in the Casecnan Project acquisition of Northern and represent costs of reflects the Company's share ofinterest expense electricity sales during the period of the Company's in excess ofcapitalized interest and interest income controlling interest from December 24,1996 at the Casecnan Project, which is currently in through December 31,1996. construction. General and administration costs decreased to Interest expense, less amounts capitalized, increased $21,451 in 1996 from $23,376 in 1995, a decrease in 1996 to $126,038 from $102,083 in 1995, a of 8.2%. This decrease is a result of the Company's 23.5% increase, and increased to $ 102,083 in 1995 continued efforts to reduce costs and reflects the from $52,906 in 1994, a 93.0% increase. Higher elimination of redundant functions subsequent interest expense is primarily due to a larger portfolio to the acquisition ofMagma. General and of facilities and their associated debt partially administration costs increased to $23,376 in 1995 ofTset by the increase in capitalized interest on the compared to $13,012 in 1994, a 79.6% increase Company's international and domestic projects. primarily attributable to the Magma acquisition. The provision for income taxes increased to Royalty costs marginally decreased to $23,693 $41,821 in 1996 from $30,631 in 1995, and in 1996 from $24,308 in 1995, a 2.5% decrease. increased to $30,631 in 1995 from $ 17,002 in This decrease is primarily due to decreased royalty 1994. The efTective tax rate was 30.8%, 31.6% costs at the Desert Peak Proiect due to revenue and 30.5% in 1996,1995, and 1994, respectively. reductions. Royalty cost increas ! to $24,308 in 1995 from $9,888 in 1994, a 145.8% increase. '# '

  • E" mcreased to $ 135,713 in 1996 from $97,051 The 1995 increase was due to the addm..on of the Imperial Wiley Proj.ect, mcreased revenue from the m 1995, a 39.8% increase. Minority interest in
  • E*"I ' E***'

.E* plants the Company owned in 1994 and scheduled royalty increases associated with such plants. Northern for the period from December 24,1996 through December 31,1996. Minority interest 5 Depreciation and amortization increased in in 1995 reflects the Company's partial ownership 1996 to $118,586 from $72,249 in 1995, a in Magma for the period fromJanuary 10,1995 9 64.1 % increase. This increase is primarily due to to February 24,1995. Net income available to j the depreciation and amortization of the allocated common shareholders increased to $92,461 or 4 purchase price and goodwill related to the Magma, $ 1.60 per common share in 1996 compared to j Partnership Interest and Falcon Seaboard $62,335 or $1.25 per common share in 1995 g acquisitions, the Philippine projects and the and $31,817 or $.89 per common share in 1994. g commencement ofoperations at the Salton Sea IV Net income for the year ended December 31, h Project. Depreciation and amortization increased 1994 was reduced by $2,007 or $.06 per share .g to $72,249 in 1995 from $21,197 in 1994, due to an extraordinary item. s a 240.8% increase. The increase was due to depreciation and amortization of the allecated purchase price and goodwill from the Magma acquisition.

CalEnergy C o ns t a n y, Inc. 42 liquidityandCapitalResources On February 26,1997 CalEnergy Capital Trust II, Cash and short-term investments were $429,421 a special purpose Delaware business trust organized at December 31,1996 as compared to $ 106,304 by the Company (the " Trust II"), pursuant to the at December 31,1995. In addition, the Company's Amended and Restated Declaration of Trust (the share of joint venture cash and investments retained " Declaration") dated as of February 26,1997, in project control accounts was $48,083 and $77,590 completed a private placement (with certain shelf at December 31,1996 and 1995, respectively. registration rights) of 6 %%, $ 150,000 aggregate amount ofTrust Convertible Preferred Securities Distributions out of the project control accounts are made monthly to the Company for operation (" Trust Securities"). In addition, an option to and maintenance and capital costs and semiannually purchase an additional 600 Trust Securities, or to each Coso Project partner for profit sharing under $30,000 aggregate amount, was exercised by l a prescribed calculation subject to mutual agreement the initial purchasers to cover over-allotments in l by the partners. In addition, the Company recorded connection with the placement. Each Trust Security j separately restricted cash of $107,143 and $149,227 has a liquidation preference of fifty dollars and is at December 31,1996 and 1995, respectively. The convertible at any time at the option of the holder f restricted cash balances are comprised primarily of into 1.1655 shares of Company Common Stock amounts deposited in restricted accounts from which (equivalent to a conversion price of $42.90 per common share) subject to adjustments in the Company will provide its equity contribution certain circumstances. requirements relating to the Mahanagdong Project, l fund certain capital improvements at the Imperial On December 24,1996 CE Electric, which is 70% Valley Project and the Company's proportionate owned indirectly by the Company and 30% owned share of the Coso Project, the Power Resources . directly by PKS, acquired majority ownersh.ip of m Project, the Upper Mahiao Project and the Ma& bog the outstanding ordinary share capital of Northem Project cash reserves for the debt service reserve funds. pursuant to the Tender Offer commenced in the Accounts receivable normally represents two United Kingdom by CE Electric on November 5, months of revenues, and fluctuates with both 1996.ThroughJanuary 31,1997, CE Electric had f -- production and distribution and supply of electricity. purchased more than 90% ofNorthern's ordinary shares. Under United Kingdom statutory powers The balance due from the joint ventures relates e available to compulsorily acquire shares not purchased operations, mamtenance, and management fees for in the Tender Offer, CE Electric expects to acquire the y Q managmg the Coso Project as well as advances angremaining Northem shares by April 30,1997. deferred revenue on the international projects. This

p amount fluctuates based on the timing of billings As of December 31,1996, the Company had ll contributed to CE Electric approximately $410,000 tis and incurrence ofcosts.

of the approximately $1300,000 required to acquire t: The Company repurchased 472 common shares all of Northem's ordinary and preference shares in t H during 1996 for the aggregate amount of $12,008. connection with the Tender Offer. The Company The Company repurchased 102 shares of common obtained such funds from cash on hand, short-term stock in 1995 at an aggregate amount of $1,590. borrowings, and borrowings of approximately jj As of December 31,1996 the Company holds 299 $ 100,000 under a $ 100,000 Credit Agreement f shares of treasury stock at a cost of $8,787 to provide entered into with Credit Suisse on October 28,1996 l shares for issuance under the Company's employee g Ca! Energy Credit Facility"). As of February 27, stock option and share purchase plan and other gg g g outstanding convertible securities. The repurchase Credit Facility through the use of proceeds of the plan attempts to minimize the dilutive etTect of $150,000 Trust Securities offering. The remaining the additional shares issued under these plans funds necessary to consummate the Tender Ofter

ColEnergy Company, Inc. 43 will be provided from a 1560,000 ($958,888) OnJune 20,1996 the Salton Sea Funding Term Loan and Revolving Facility Agreement, Corporation, a wholly owned indirect subsidiary dated as of October 28,1996 (the "U.K. Credit of the Company (the " Funding Corporation"), Facility") with CE Electric. The Company has not completed a sale to institutional investors of guaranteed, nor is it otherwise subject to recourse $ 135,000 aggregate amount of Senior Secured for, amounts borrowed under the U.K. Credit Notes and Bonds ("the Notes and. Bonds") which Facility. As ofJanuary 31,1997, CE Electric had are nonrecourse to the Company. The Funding horrowed approximately 1321,000 ($ 549,648) Corporation Notes and Bonds which mature in under the U.K. Credit Facility to pay for Northem May 2000 and May 2011 respectively, bear an ordinary and preference shares purchased to date. interest rate of 7.02% and 8.30% respectively. On October 4,1996 the Company closed the The proceeds of the ofTering were used by funding $ 120,000 project fmancing for the Dieng Unic I Corporation to refinance $96,584 of existing project 55 net MW geothermal project locatal in Indonesta. level indebtedness at the Partnership Project, to Dieng Unit I is already under construction and is fund a portion of the Partnership Interest acquisition currently expected to begin commercial operation and for certain capital improvements at the Imperial 3, p by late 1997. On April 12,1996 CalEnergy Capital Trust, a On September 20,1996 the Company completed a sale to institutional investors of $225,000 special purpose Delaware business trust organized 1 aggregate principal amount ofits 91/29c, by the Company (the. Trust '), completed a private g g, Senior Notes due 2006. of $ 100,000 trust preferred convertible securities, Also on September 20,1996 the Company referred to as Company-obligated mandatorily converted the $M,850 convertible debt and redeemable convertible preferred securities asscciated accrued interest into 3,620 common ofsubsidiary trust holding solely convertible shares at a conversion price of $ 18.375 per share. debentures (" TIDES"). In addition, an option In September and October, the Company converted to purchase an additional 78.6 TlDES, or $3,930, substantially all of the convertible subordinated was exercised by the initial purchasers to cover l debentures into 4,443 common shares at a over-allotments in connection with the placement. conversion price of $22.50 per share. In 1996, the Company signed an agreement with an l l OnJuly 8,1996 the Company obtained a intematbnal mining company which provides for the ~ $100,000 three year revolving credit facility extraction of minerals by the mining company at the ofwhich the Company had drawn $95,000 as Imperial Wiley Project and among other things, for .j of December 31,1996. Subsequent to year end, the Company, at its option, to deliver power for the [l the Company had repaid the entire outstanding mineral extraction process. The initial phase of the L. balance. The facility is unsecured and is available project would require at least 15 MW A pilot plant to fund general operating capital requirements has successfully produced zinc at the Imperial Wiley g and fmance future business opportunities. Project. Due to a failure to reach agreement with F the mining company on a satisfactory partnership f and development agreement for construction of a y larger extraction plant, the Company has determinal i to pursue the mineral extraction project on its own or with other partners. If successfully developed, the mineral extraction process will provide an environmentally compatible and low cost minerals recovery methodology.

CalEnergy Company, Inc. 44 In November 1995 the Company closed the The Project Agreement provides for additional fmancing and commenced constmction of the compensation to G Casecnan upon the occurrence Casecnan Project, a combined irrigation and 150 of certain events, induding increases in Philippine net MW hydroelectric power generation project taxes and adverse changes in Philippine law. Upon (the "Casecnan Project") located in the central the occurrence and during the continuance of certain part of the island of Luzon in the Republic of force majeure events, including those associated with Plulippines political action, NIA may be obligated the Philippines. to buy the Casecnan Project from G Casecnan CE Casecnan Water and Energy Company, Inc., at a buy out price expected to be in excess of the a Philippine corporation ("G Casecnan") which aggregate principal amount of the outstanding is presently m. directly owned as to approximately g g 35% ofits equity by the Company and approximately but unpa;d interest. At the end of the Casecnan 35% by PKS,is developing the Casecnan Project Cooperation Period, the Casecnan Project will under the terms of the Project Agreement ("Pmj. g gp

g ect Agreement ) between CE Casecnan and the Nanonal Irrigation Administration ("NIA").UndertheProject Agreement, G Casecnan will develop, fmance and The Republic of the Philippines has provided construct the Casecnan Project over an estimated a Performance Undeitaking under which NIA's four-year construction period, and thereafter own obligations under the Project Agrecment are and operate the Casecnan Project far 20 years guaranteed by the full faith and credit of the (the "Casecnan Cooperation Period"). During the Republic of the Philippines. The Project Agreement Casecnan Cooperation Period, NI A is obligated and the Petformance Undertaking provide for the to accept all deliveries of water and enetgy, and so resolution ofdisputes by binding arbitration in long as the Caseenan Project is physically capable of Singapore under international arbitration rules.

operating and delivering in accordance with agreed ""*""I'" "8 ' "' *" "

  • 3 **

levels set forth in the Project Agreement, N!A will and several basis by Hanbo Corporation and Hanbo pay CE C.asecnan a guaranteed fee for the delivery Engineering & Construction Co. Ltd. (formerly of water and a guaranteed fee for the delivery of known as % One Engineering & Construction Co., [E electncity, regardless of the amount of water or Ltd., and herein referred to as "HECC"), both of l l> electncity actually dehrered. In addition, NIA which are South K,orean corporations, pursuant 'r will pay a fee for all electacity delivered in excess to a fixed-price, date-certain, turnkey construction mn of a threshold amount up to a specified amount. contract (the " Turnkey Construction Contract ). NIA will sell the electric energy it purchases to Hanbo Corporation and HECC(sometimes the National Power Corporation of the Philippines collectively referred to as the " Contractor ) . + l I q S LM ("NPC"), although NIA's obh.'gations to CE are under common ownersh.ip control. Hanbo 4 Casecnan under the Project Agreement are Corporation is an international construction not dependent on the purchase of the electncity ' *E*"7' " '"#" Y **"E' nh ! from NIA by NPC. Allfees to be paid by E' [l NI A to G Casecnan are payable in U.S. dollars. with ver 25 years experience in tunnel T The guaranteed fees for the delivery of water construction, using both the drill-and-blast and energy are expected to provide approximately and tunnel boring machine ("TBM") methods. o q 70% of CE Casecnan s revenues.

CalEnergy C e no p o n y. Inc. 45 The Contractor's obligations under the Turnkey Korean government has informed the Philippine Construction Contract are guaranteed by Hanbo government that the South Korean government Iron & Steel Company, Ltd. ("Hanbo Steel"), will take appropriate actions to support HECCs a large South Korean steel company. In addition, completion of the Casecnan Project. the Contractor's obligations under the Tumkey KFB has recently reconfirmed to CE Casecnan Construction Contract are secured by an unconditional, irrevocable standby letter of that it will honor its obligations under the Casecnan credit issued by b, rea First Bank ("KFB")in the Project letter of credit and also has stated its support approximate amount of $ 118,000. The total cost for the successful completion of the Casecnan Project. However, Moody's investors Service has of the Casecnan Proj.ect, mcluding development, construction, testing and startup, is estunated recently issued a waming for a possible ratings h dWB h& pWp to be approximately $495,000. The current capital gg structure consists of term loans of $371,500 and $ 123,836 m equity contnbutions. The Company,s loans KFB previously made to Hanho Steel. In a portion of the contributed equity is $61,918. related development, the South b, rean government has recently announced that it would provide some in lateJanuary 1997, the Company was advised funding to assist Hanbo Steers creditor banks that Hanbo Corporation and Hanbo Steel had each (including KFB) and its subcontractors. fded to seek court receivership protection in Korea. At the present time, all of the construction work CE Casecnan fmanced a portion of the costs of the on the Casecnan Project is being performed by the Casecnan Project through the issuance of $ 125,000 ofits 11.45'X Senior Secured Series A Notes due second contractor which is party to the Turnkey 2005 and $171,500 ofits 11.95% Senior Secured Construction Contract, HECC. Although HECC, Sen.es B Notes due 2010 pursuant to an indenture Hanbo Corporation and Hanbo Steel are under dated November 27,1995, as amended to date common ownership control, HECC has not fded for receivership protection and is believed to be solvent. .'Casecnan Indenture"). Although no default g g However, no assurances can be given that HECC a result of the announced receiverslu.p of Hanho wd. l not fde for receivership due to the foregoing = developments or that it wd. l rema n solvent and Corporation, CE C.asecnan will continue to ck>sely able to perform fully its obligations under the monitor the Hanho group and KFB developments Turnkey Construction Contract. and pm ect c nstructi n status and deveh>p g = appropriate contingency plans.

g The work on the Casecnan Project, which commenced in 1995, is presently continuing If HECC were to materially fail to perform i

on schedule and within the budget. LE Casecnan its obligations under the Turnkey Construction s.a Contract and if KFB were to fail to honor its

s is presently reviewing its rights, obligations and potential remedies m respect of the recent obligations under the Casecnan letter of credit, h

such actions could have a material adverse effect developments regarding the co-Contractor at the guarantor and is presently unable to speculat. - Project and CE Casecnan. N as to the ultimate effect of such developments on However, based on the m. formation presently 1, CE Casecnan. How ever, CE Casecnan has recently available to it, CE Casecnan does not presently e" received confirmation from HECC that it mtends expect that either such event wdl occur. F to fully perform its obligations under the Turnkey [ Construction Contract and complete the Casecnan Project on schedule and within the budget. Additionally,it has been reported that the South

l CelEaorgy Cemyeny, Inc. 46 In August 1994, the Company closed the fmancing The electricity generated by the Mahanagdag for the 165 net MW Mahanagdong Project located Project will be sold to PNOC-EDC, on a "take in the Philippines (the "Mahanagdong Project"). or pay" basis, which is also responsible for supplying The total project cost for the facility is approxi-the facility with the geothermal steam. The terms mately $ 320,000. The capital structure consists of the Mahanagdong Energy Conversion Agreement of a term loan of $240,000 and approximately ("ECA") are substantially similar to those of the $80,000 in equity contributions. The Overseas Upper Mahiao ECA described in Note 4 to the Private Investment Corporation ("OPIC") and financialstatements. Allof PNOC-EDC's a consortium of international commercial lenders obligations under the Mahangdong Energy are providing the construction debt fmancing Conversion Agreement ("ECA") are supported facility. The debt provided by the commercial by the Govemmmt of the Philippines through lenders is insured against political risk by the a performance undertaking. The capacity fees Export-Import Bank of the United States are expected to b< me o ly 97% of total ("Ex-Im Bank"). Ten year term debt financing revenues at the o < u y levels and the (which will replxe the construction debt) energy fees are expeued to be approximately will be provided by Ex-Im Bank and by OPIC. 3% of such total revenues. As of December 31,1996, the Company's In 1994, the Company closed the fmancing and proportionate share of draws on the construction g g g. p loan totalej $:6,503 and equity investments made a 216 net MW geothermal project, to be constructed by i subsidiary of the Company totaled $35,586. in two phases,72 net MW in 1996 and 144 net OPIC is providing poh.. l risk insurance on the g

,;g tica equity. The Mahanagdong Project is targeted for.

Malitbog Project").The Malitbog Proj.. ect is service in July 1997. The Mahanagdong Proj.ect is being built, and will be owned and operated by e' structured as a ten y ear build-own-operate-transfer Visayas Geothermal Power Company ("VGPC"), project (" BOOT"), in which the Company wdl be a Philippine general partnership that is wholly owned, responsible for implementing construction of the indirectly, by the Company. Unit I of the Malitbog geothermal power plant and, as owner, for providm.g Project was " deemed complete" by PNOC-EDC operations and maintenance for the ten year BOOT as ofJuly 25,1996, meaning that construction of period. After a ten year cooperation period, and the the first 72 net MW unit was completed on time recovery by the Company ofits capital investment but the required transmission line was not completed plus incremental return, the plant wd. l be transferred and provided to VGPC. During deemed completion, to PNOC-E.nergy Development Corporation PNOC-EDC is required to pay, and has m. fact 1 ("PNOC-EDC") at no cost. The Mahanagdong been paying (with respect to Unit I which has { a

d Project will be built, owned and operated by lxen deemed completed), all capacity fees under

'29 CE Luzon Geothern, Power Company,Inc., the take or pay provisions of the Malitbog ECA. M j a Philippine corporanu., that r expected to 7; p '~ be owned post-completion as: ilows: 45% EDC, which will m.tum sell the power to the NPC. d by the Company,45% by PKS, and up to [ 10% by another industrial company. The turnkey contractor conse.m consists of ? Kiewit Construction Grc p, Inc. (with an 80% interest) and CE Holt Company, a wholly owned subsidiary of the Company (with a 20% interest). u 5

Cele n e rg y C o n, p a a y, Inc. 47 The Malitbog Project has a total project cost control of PNOC-EDC or the Government of of approximately $280,000, including interest the Philippines or any agency or authority thereof. during construction and project contingency costs. The Capacity Payments are designed to cover, A consortium ofintemational banks and OPIC under expected operating conditions, the Malitbog have provided a total of $210,000 ofconstruction Project's operating and maintenance expenses and term loan facilities, the $ 135,000 international and VGPCs debt service and to provide a return bank por ion of which is supported by political risk on investment to the partners in VGPC. insurance from OPIC. As of December 31,1996, A substantial majority of the Capacity Payments draws on the construction loan totaled $ 137,881 are required to be made by PNOC-EDC in U.S. and equity investments made by subsidiaries of the dollars. The portion of Capacity Payments payable Company totaled $70,000. The Company's equity by PNOC-EDC in pesos is expected to vary over participation is covered by political risk insurance the term of the Malitbog ECA from 10% of from OPIC. The Malitbog Project is structured as VGPCs revenues in the early years of the 10 year a BOOT, in which the Company will be responsible cooperation period to 23% of VGPCs revenues for implementing construction of the geothermal at the end of the cooperation period. Payments power plar.t and, as owner, for providing operations made in pesos will generally be made to a peso-and maintenance for the ten year BOOT period. denominated account and will be used to pay peso-Units 11 and 111 of the Malitbog Project are being k" " **" E"#"' " * * * '*"*"'

  • E#"S**

constructed by Sumitomo Corporation pursuant with respect to the Malitbog Project and Philippine to a ftxed-price, date-certain, turnkey supply and Ed4 m % 04 Mdi% P@'s construction contract. Commercial operation of debt service. The Government of the Philippines Uru.ts 11 and 111 are scheduled to commence prior has entered into a performance undertaking, which toJuly 25,1997' provides that all of PNOC-EDCs obligations pursuant to the Malitbog ECA carry the full faith The Malitbog Project is located on land provided and credit of, and are affirmed and guaranteed by PNOC-EDC at no cost. The electrical energy by, the Government of the Philippines, i produced by the facility will be sold to PNOC-EDC on a take-or-pay basis. Specifically, PNOC-EDC The Malitbog ECA cooperation period will expire ten years after the date ofcommencement ofcommercial I is obh.' gated to make payments (the " Capacity Payments") to VGPC based upon the available operation of Unit Ill. At the end of the cooperation capacity of the Malitbog Project. The Capacity period, the facility will be transferred to PNOC-EDC Payments equal approximately 100% of total revenues. The Capacity Payments will be payable so long as the Malitbog Project is available to prcduce electricity, even if the Malitbog Project H is not operating due to scheduled maintenance, because PNOC-EDC fails to supply steam to the "i Malithog Project as required or because NPC is unable (or unwilling) to accept delivery ofelectricity [ from the Malitbog Project. In addition, PNOC. I EDC must continue to make the Capacity Payments if there is a force majeure event (e.g., war, nationalization, etc.) that affects the operation of the Malitbog Project and that is within the reasonable

CalEaorgy Campany, Inc. 48 On October 4,1996 the Company closed the it would withdraw its Edison BRPU bid in $120,000 project financing for the Dieng Unit I consideration for the payment ofcertain sums. 55 net MW geothermal projen located in Indonesia In December,1996, the Company entered into a (the "Dieng Unit I Project"). The loan carries a confidential cash buyout agreement with SDG&E. variable interest rate (weighted average of 7.19% These agreements are subject to CPUC approval. at December 31,1996) and has scheduled project TheC.ompany is actively seeking to develop, term repayments through 2002. Dieng Unit I is construct, own and operate new power projects under construction and is currently expected t utilizing geothermal and other technologies, both begin commercial operation by late 1997. The domestically and internationa!!y, the completion Dieng Unit 1 Project has drawn $12,442 as of of any of which ts subject to substantial risk. The Company has. development or under December 31,1996. m Magma sought new long-term final SO4 power construction, projects representing an aggregate purchase agreements in the Salton Sea area throughgenerating capacity in excess of the generating the bidding process adopted by the CPUC under capacity of those currently in operation. Its 1992 Biennial Resource Plan Update ("BRPU"). Development can require the Company In its BRPU, the California Public Utilities to expend significant sums for preliminary Commission ("CPUC") cited the need for an engineering, permitting, fuel supply, resource additional 9,600 MW of power production through exploration, legal and other expenses in preparation 1999 among Califomia's three investor-owned for competitive bids which the Company may not win or before it can be determined whether a project utilities, Southern California Edison Company (" Edison"), San Diego Gas and Electric ("SDG&E") is feasible, economically attractive or capable and Pacific Gas and Electric Company. Of this of being financed. Successful development and amount,275 MW was set aside for bidding by construction is contingent upon, among other independent power producers (such as Magma) things, negotiation on terms satisfactory to the utilizing renewable resources. Pursuant to an order Company of engineering, construction, fuel supply of the CPUC datedJune 22,1994 (confirmed and power sales contracts with other project on December 21,1994), Magma was awarded participants, receipt of required governmental 163 net MW for sale to Edison and SDG&E, with permits and consents and timely implementation in-service dates in 1997 and 1998. On February 23, of construction. Further, there can be no assurance 1995 the Federal Energy Regulatory Commission that the Company, which is substantially leveraged, will obtain access to the substantial debt and equity j ("FERC") issued an order finding that the CPUC's BRPU program violated the Public Utilities capital required to continue to develop and construct j Regulatory Policies Act ("PURPA") and FERC's electric power projects or to refinance projects. The implementing regulations and recommended Company's future growth is dependent, in large negotiated settlements. In response, the CPUC part, upon the demand for significant amounts of j issued an Assigned Commissioners Ruling additional electrical generating capacity and its ability Sl encouraging settlements between the final winning to obtain contracts to supply portions of this capacity. 1 bidders and the utilities. The utilities are expected There can be no assurance that development efforts to continue to challenge the BRPU and, in light on any particular project, or the Company's efibrts y ,j of the regulatory uncertainty, there can be no generally, will be successful. assurance that power sales contracts will be executed 1 i or that any such projects will be completed. In light of these developments, the Company agreed to 1 execute an agreement with Edison on March 16, 1995 providing that in certain circumstances

CalE n o rg y Cuupany, lus. 49 I The Company believes that the international Inflation has not had a substantialimpact on the independent power market holds the majority of Company's operating revenues and costs; energy new opportunities for financially attractive private payments for electricity for the Coso Project, power development in the next several years. The Partnership Project, Salton Sea Il Project and fmancing, construction and development ofprojects Salton Sea !!! Project will continue to be based outside the United States entail significant po!itical upon scheduled rates and are not adjusted for and fmancial risks (including, without limitation, inflation through the initial ten year period uncertainties associated with first time privatization ofesch power purchase agreement. efforts in the countries involved, currency exchange rate fluctuations, currency repatriation restrictions, political instability, civil unrest and expropriation) and other structuring issues that have the potential to cause substantial delays or material impairment "of value to the project being developed, which the Company may not be fully capable ofinsuring against. The uncertainty of the legal environment in certain foreign countries in which the Company may develop or acquire projects could make it more difficult for the Company to enforce its rights under agreements relating to such projects. In addition, the laws and regulations ofcertain countries may limit the ability of the Company to hold a majority interest in some of the projects that it may develop or acquire. The Company's international projects l may, in certain cases, be terminated by a government. l Projects in operation, construction and development I-l are suh,at to a number of uncertainties, more specifically described in the Company's Form 8-K dated February 25,1997, filed with the Securities and Exchange Commission. f _]

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CalEnergy Ceayany, Inc. T ConsolidatedBalance Sheets As e/Ihmher 31,1996 and1993 ik%n andhm on %wnds Empt Per %n Anwnn 1996 1995 l Assets $ 424,500 72,114 f Cash and cash equivalents 48,083 77,590 Joint venture cash and investments 107,143 149,227 Restricted cash 4,921 34,190 Short-term investments 342,307 57,909 Accounts receivable 17,556 27,273 Due from joint ventures 3,348,583 1,781,255 l Properties, plants, contracts and (quipment, net 790,920 302,288 Excess of cost over fair value of net assets acquired, net 196,535 60,815 Equity investments 432,359 91.377 Deferred charges and other assets $ 5,712,907 $ 2,654,038 Total assets P liabilities andStockholdm' Equity Liabilities: $ 218,182 6,638 Accounts payable 674,842 87,892 Other accrued liabilities 1,146,685 842,205 Parent company debt 1,754,895 921,219 Subsidiary and project debt 469,199 226,520 Deferred income taxes 4,263,803 2,084,474 f 'Ibtalliabilities 1 29,067 26,032 l Deferred income Commitments and contingencies (Notes 3,17,18,19 and 20) Company-obligated mandatorily redeemable convertible preferred securities of subsidiary 103,930 trust holding solely convertible debentures 136,065 Preferred securities of subsidiary 299,252 Minority interest Stockholders' equity: Preferred stock-authorned 2,000 shares, no par value Common stock-par value $.0675 per share, l authorized 80,000 shares, issued 63,747 and 50,680 shares, outstanding 63,448 4,303 3,421 li, and 50,593 shares, respectively 563,567 343,406 j Iji Additionalpaidin capital 297,520 205,059 fb B-tained earnings 29,658 ? *{ Cumulative effect of foreign currency translation adjustment (8,787) (1,348) { jh. Treasury stock-299 and 87 common shares at cost (5,471) (7,006) Ql Unearned compensation-restncred stock rg i 880,790 543,532 j 'j Total stockholders' equity $ 5,712,907 $ 2,654,038 ,L Total liabilities and stockholders' equity %m9anyrng awe an an miapaspart ofshrief namuln,uemenn. l

CalE n e rgy Company, lac ConsolidatedStatements ofOperatwn u Iwshe ihm %n Emlalikumber 31, I996 thil,on ami%m in Thumb Eugpt hr har Amunn 1996 1995 1994 Revenue: l klesofelectricL andsteam $ 518,934 $ 335,630 $ 154,562 f Income on equity investments 6,134 I Royalty income 6,846 19,482 Interest and other income 44,281 43,611 31,292 l Total revenues 576,195 398,723 185,854 Cost and expenses: Operating expense 108,962 79,294 33,015 Cost ofsales 31,840 General and administration 21,451 23,P6 13,012 Royalty expense 23,693 24,308 9,888 Depreciation and amortization 118,586 72,249 21,197 las on rquity investment in Casecnan 5,221 362 Interesc expense 165,900 134,637 62,837 Irss interest capitahzed (39,862) (32,554) (9,931) Dividends on convertible preferred securities ofsubsidiary trust 4,691 1btal expenses 440,482 301,672 130,018 locome before provision for income taxes 135,713 97,051 55,836 Provision for income taxes 41,821 30,631 17,002 income before extraordinary item 93,892 66,420 38,834 Extraordinary item (2,007) Income before minority interest and preferred dividends 93,892 66,420 36,827 Minority interest 1,431 3,005 Net income 92,461 63,415 36,827 Preferred div;dends 1,080 5,010 Net income available to common stockholders $ 92,461 $ 62335 $ 31,817 income per share before extraordinary item 1 14) 1.25 95 Extraordmary item (.06) Net income per share-primary 1 14) 1.25 .89 Net income per share-fully diluted 1.50 1.18 .88 m Average number of shares outstanding-primary 57,870 49,971 35,721 { Fully diluted shares 67,164 5 i,142 40,166 (gj Tin,ma:payng ma er on surgutper qkpswut aats,,rnu. yFg {M, p r;{ i l l

CalEnergy Coayany, i n c. Q Consolidated Statements ofStockholders' Equity forik Tk %n EmirJikcemkr 31, !996 Ddlan ami%u ae Tkaml Outstanding Additional 14irrign Commun Common Paid in Retained Currency Treasury Unearned shares Stxk Capital Earnings A?just. Saxk Compensation *Ibtal Balance December 31,1993 35,446 $ 2,4(W $ 100,965 $ 111,0t1 $ - $ (2,897) $ - $ 211,503 Exercise of stock options 46 3 379 382 Forchase of treasury stock (3,765) (65,119) (65,119) Exercise ofstock options from treasury stock 96 (1,473) 1,772 299 Employee stock purchase plan issues from treasury stock 26 (122) 470 348 Preferred stock dividends, j l Series C, including cash distribution of $121 (4,921) (4,921) l 672 672 l Tax benefit from stock plan Net income before preferred dividends 36,827 36,827 Balance December 31,1994 31,849 2A07 100,421 142,937 (65,774) 179,991 Equity offering 18,170 1,004 240,825 56,801 - 298,630 Exercise ofstock options 102 -7 303 310 Restricted stock 500 848 8,652 (9,500) Amortization of unearned compensation 2,494 2,494 Employee stock purchase plan issues 41 3 559 562 Exercise of stock options from (416) 563 147 treasury stock 33 (1,590) (1,590) Purchase of treasury stock (102) Preferred stock dividends, E. Series C, including cash (1,293) distribution of $43 (1,293) Tax benefit from stock plan 866 866 Net income before preferred dividends 63,415 63,415 = 1 i Balance December 31,1995 50,5('3 3,421 343,406 205,059 (1 348) (7,006) 543,532 l E Exercise of stock options and other equity '[ transactions 4,971 335 57,190 1 57,526 r 1 $- Amortization of unearned { compensation 1,535 1,535 Employee stock purchase plan issues 60 2 547 588 1,t 37 g Exerck of stock options from E) trea ary stock 232 (4,707) 3,980 (727) ) Purcha e of treasury stoc k

472)

(12,008) (12,008) 'l Converson ofdebt 8,061 545 164,912 165,457 I ) Tax benefit from stock plan 2,219 2,219 Foreign currency translation adjustment 29,658 29,658 g Net income 92,461 92,461 Balance December 31,1996 63,448 $ 4,303 $ 563,567 $ 297,520 $ 29,658 $ (8,787) $ (5,471) $ 880,790 Tk am9,mymt man avr an arrgralpart ofikwf namulaatemmet 1

ColEwargy Co ap n ey, inc, ConsolidatedStatements ofCash Flows i~ hethe Tk %n EnkdDurarkr 31, I996 DAsnin ikwah 1996 1993 1994 Cash flows from operating activities: i Net income $ 92,461 $ 63,415 $ 36,827 Adjustments to reconcile net cash flow from operating activities: Depreciation and amortization 109,447 65,244 21,197 Amortization of excess of cost over fair value of net assets acquired 9,139 7,005 Amortization of original issue discount 50,194 45,409 31,946 I Amortization of deferred financing costs 9,677 8,979 1,885 Amortization of unearned compensation 1,535 2,494 Prosision for c'eferred income taxes 12,252 13,983 8,258 loss (income)on equity investments (910) 36' Income applicable to minority interest 1,431 3,005 Changes irn>ther items: Accounts receivable (13,936) 213 (6,614) Accounts payable and ocher accrue J liabilities (942) 5,922 19,3(A Deferred income 3,035 6,181 (437) Net cash flows from operating activities 273,383 222,212 112.426 Cash flows from investing activities: Purchase of Northern, Falcon Seaboard, Partnership Interee and Magma, net ofcash acquired (474,443) (907,614) 0,043) Distributions from equiry investments 8,222 Capital expenditures relating to operating projects (24,821) (27,120) 0 8,078) Philippine construction (167,160) (289,655) (69997) Indonesian and other development (81,068) (8,973) (2 445) Salton Sea IV construction (63,772) (62,430) Pacific Northwest, Nevada, and Utah exploration costs (4,885) (10,445) > 8,493) Decrease (increase)in short-term investments 33,998 80,565 (,0,000) Decrease (increase) in restricted cash 63,175 (17,452) (83,670) Orher (2,591) 11,514 1,847 investment in Casecnan (61,177) Net cash flows from investing activities (713,345) (1,292,787) (253,879) Cash flows from financing activities: Pnx eeds fnim sale of common and treasury stock and exeyase of sto k options 54,935 299/>l9 1,580 Proceeds from convertible preferred securities of subsidiary trust 103,930 Prcceeds from issuance of parent ccmpany debt 324,l36 200,000 400,000 Net proceeds from revolver 95,000 i Preceeds from subsidiary a.,d project debt 428,134 654,695 31,503 %g Repayments ofsubsidiary and project debt (210,892) (176/41) (l3,800) i Deferred charges re!ating to debt fmancing 0 6,010) O 4,733) (l1,905) $d Decrease (increase)in amounts due from joint ventures 10,756 (29,169) 316 K;ih] Purchase of treasury stook (12/008) (1,590) (65,119) f Preteeds from merger facility 500,000 al Recapitalization of merger facihty (500,000) 'T Defeasance of 12% senior notes (35,730) g Net cash flows fmm financing activities 757,981 912,188 306,845 2H Effect ofexchange rate changes 4,860 Net increase (decrease) in cash and investments 322,879 (158,387) 165,392 R ;i Cash and cash equivalents at beginning of period 149,704 308,091 142,699 f l Cash and cash equivalents at end of period $ 472,583 $ 149,7M $ 308,091 i Supplemental Disclosures: Interest raid (net of amounts capitalized) $ 92,829 $ 50,840 $ 12,624 Income taxes paid 5 23,211 $ 14,812 4,92(> sa n+ 6 nursng emerwmikk ta eqan Tk.smtwymg sures or en miegrdpset isk)\\n,emialastewnn

CalEnergy Company, Inc. T Notes to Consolidated Financial Statements heilm Tbnr %n MJIkemiwr 31, IW6 Udlan al51was en Twsk Empt Pa%rr Amants Company acquired the remaining 50% interest

1. Business in the Partnenhip Project. In August 1996, the CalEnergy Company, Inc. (the " Company")

is a United States-based global power company Company acquired Falcon Seaboard Resources, Inc. (" Falcon Seaboard") which includes significant which generates, distributes and supplies electricity interests in three operating gas-fired cogeneration to utilities, government entities, retail customers facilities and a related natural gas pipeline. On and other customers krated throughout the December 24,1996, CE Electric UK plc ("CE world. The Company was founded in 1971 and Electric"), which is 70% owned indirectly by the through its subsidiaries is primarily engaged in the development, ownership and operation of Company and 30% owned indirectly by Petet Kiewit Sons', Inc. ("PKS"), acquired majority environmentally responsible independent power production facilities worldwide utilizing geothermal ownership of the outstanding ordinary share capital resources, natural gas and hydroelectric or c,ther of Northern pursuant to a tender offer (" Tender Offer"). The total amount expected to be paid for energy sources, such as oil and coal. In addition, all of Northern's ordinary and preference shares through its recently acquired subsidiary, Northern, the Company is engaged in the distribution and is approxi:nately Si.3 billion. supply of electricity to approximately 1.5 million Northern is one of the twelve regional electric customers primarily in northeast England as well companies (. RECS,,) which came into existence as the generation and supply of electncity (cogether as a result of the restructuring and subsequent with other related business activities) throughout privatization of the electncity industry m the Um. d te England and Wales. lu,.ngdom.in 1990. Northern is priman.ly engaged in the distribution and supply ofelectricity. Northem The Company has organized several partnerships and joint ventures (herein referred to as the "Coso was granted a Public Electricity Supply (" PES") license under the Electricity Act to distribute and Joint Ventures") in order to develop geothermal energy at the China Lake Naval Air Weapons supply electricityin Northern's Authorized Area j Station, Coso Hot Springs, China Lake, California. (" Authorized Area").Northem's Authorized Area Colkctively, the projects undertaken by these Coso covers approximately 14,400 square kilometers with g Joint Ventures are referred to as the Coso Project. a population of approximately 3.2 million people j and includes the counties of Northumberland, Tyne In 1992, the Ccenpany entered into the natural p and Wear, Durham, Cleveland and North Yorkshire. Oh gas-fired electrical generation market through the Northem distributes and supplies electricity outside J purchase of a development opportunity in Yuma, its Authorized Area pursuant to second tier PES j Arizona which commenced commercial operation licenses. Northern also is involved in non-regulated d in May 1994. In 1993, the Company started activities, incicJing the generation of ekctricity, Q developing a number ofinternational power project ,j opportunities where private power generating electrical appliance retailing and gas exploration programs have been initiated, including the and production. W]M Philippines and Indonesia. In 1995, the Company

2. SummaryofSigruf. cant acquired Magma Power Company (,, Magma.,).

unh.ng Nu..res y'? Magma's operating assets included four projects The consolidated fmancial statements include referred to as the Partnership Project in which the accounts of the Company, its wholly-owned Magma had a 50% interest, and three projuts subsidiaries,und its proportionate share of the referred to as the Salmn Sea Project of which partnerships and joint ventures in which it has an Magma owned HX)1 A fourth project included undivided interest in the assets and is proportionally in the Salmn Sea Project was constructed after the li ble for its share ofliabilities. Other investments acquisition of Magma and cornmenced operations and c rporate j int ventures where the Company in June 1996. In addition, in April 1996, the has the ability to exercise significant inAuence are l

CalE n e rgy C o nt p a n y, Inc. 55 accounted for under the equity method of DeferrrdIrH/andReuerk Costs accounting. Investments, where the Company's Well rework costs are deferred and amortized ability to influence is limited, are accounted for over the estimated period between reworks. These under the cost method of accounting. All deferred costs, net of accumulated amortization, significant inter-enterprise transactions and are $8,371 and $7,086 at December 31,1996 and accounts have been eliminated. The results of 1995, respectively, and are included in other assets. operations of the Company include the Company's l proponionate share of results ofoperations of Properties, Plants, Contracts, Equipment andDepreciatwn entities acquired as of the date of each acquisition. The cost of major add..itions ano betterments Investments andRestrictedCash are capitalized, while renixements, maintenance, Investments other than restricted cash are primarily and repairs that do not improve or extend the commercial paper and money market securities. lives of the respective assets are expensed. The restricted cash balance includes such securities and mortgage backed securities, and is mamly Depreciation of the operating power plant costs, composed of amounts deposited in restricted net of salvage value, is computed on the straight-line accounts from which the Company wd. l source methal over the estimated useful lives, between 10 its equity contributions and debt service reserve and 30 years. Deprecianon of furniture, fixtures and requirements relating to the projects. These funds equipment, which are recorded at cost, is computed are restricted by their respective project debt on the straight line method over the estimated agreements to be used only for the related proj. useful lives of the related assets, which range from ect. three to ten years. At December 31,1996, all of the Company's investments are classifed as held-to-maturity The Northern, Falcon Seaboard, Partnership and are accounted for at their amortized cost Interest and Af agma acquisitions by the Company basis. The carrying amount of the investments have been accounted for as purchase business approximates the fair value based on quoted market combinations. Allidentifiabic assets acquired and liabih.. ties assumed were assigned a portion prices as provided by the tmancial institution which holds the investments. of the cost of acquinng the respeco.ve companies i equal to their fair values at the date of the ((q7 irHl, Resourre Dere/opment andExploration Costs acquisition and include the following: The Company follows the full cost methal of accounting for costs incurred in connection with Property and equipment of Northern is depreciated < >Q" the exploration and development ofgeochermal using a systematic method, w hich approximates the i straight line methal, over the estimated useful lives H resources. All such costs, which include dry hole costs and the cost ofdrilling and equipping of the related assets which range from 1-40 years. R' prcduction wells and directly attributable Northern's investment in Teesside Power Limited f administrative and interest costs, are capitalized is being amortized over the rema;ning contract c, and amortized over their estimated useful lives life of 11 years using a straight line method. ,3 when production commences. The estimated useful lives ofproduction wells are ten to twcnty years Power sales agreements are amortized separately depending on the characteristics of the underiving over (1) the remaining portion of the scheduled resource; exploration costs and development costs, price periods of the power sales agreements and (2) other than pnxluction wells, are generally amortized for the Partnership Interest and 51agma acquisitions over the weighted average remaining term of the the 20 year avoided cost periods of the power sales Company,s power and steam purchase contracts. agreements using the straight line methat Alinend reserves are amortized on the units of pnxiuction method.

~ CalEnergy Company, Inc. Excess ofCost overlitir1idue Fair iEdues ofFinancialInstruments Total acquisition costs in excess of the fair values The following methods and assumptions were assigned to the net assets acquired are amorrized used by the Company in estimating fair values of over a 40 year period for the Northern and fmancial instruments as discussed herein. Fair values Magma acquisitions and a 25 year period for have been estimated based on quoted market prices the Falcon Seaboard acquisition, both using for debt issues listed on exchanges. Fair values of fmancial instruments that are not actively traded are the straight line method. based on market prices of similar instruments and/or Capitali:ation ofInterest and Deferred valuation technique using market assumptions. Financing Costs Prior to the commencement of operations, The Company assumes that the carrying amount of interest is capitalized on the costs of the plants short-term fmancialinstruments approximates their and geothermal resource development to the fair value. For these purposes, short-term is defmed extent incurred. Capitalized interest and other as any item that matures, reprices, or represents deferred charges are amortized over the lives a cash transaction between willing parties within six months or less of the measurement date. of the related assets. Deferred fmancing costs are amortized over the NetIncomeperCommon Share term of the related fmancing using the implicit Primary and ftdly diluted earnings per common share are based on the weighted average number interest method. of common and dilutive common equivalent shares Retenne Recognition outstanding during the period computed using Revenues are recorded based upon service rendered the treasury stock method. Fully diluted earnings and electncity and steam delivered to the end per common share also assumes the conversion at of the month. Royaln.es earned from providing the begm.mng of the year of the convertible debt geothermal resources to power plants operated into 3,529 common shares at a conversion price by other geothermal power pn>ducers are recorded of $18.375 per share, the conversion at the on an accrual bas.is. beginning of the year of the convertible subordinated debentures into 4,44 i common DeferredIncome Lxes The Company recognizes deferred tax assets shares at a conversion price of $22.50 per share, .) and liabilities based on the difference betuen the convertible preferred securities of subsidiary the fmancial statement and tax bases of assets into 3,477 common shares at a conversion price j and liabilities using estimated tax rates in effect of $29.89 per share and the exercise of all dilutive y/ for the year in which the differences are expected stock options outstanding at tl.eir option prices, 6 f,h to reverse. The Company intends to repatriate with the option exercise proceeds used to repurchase yh earnings of foreign subsidiaries in the foreseeable shares of common stock at the ending market price 4 future. As a result, deferred income taxes are for fully diluted earnings per share. For primary provided for retained earnings ofinternational earnings per share, shares ofcommon stock are J[% [ subsidiaries and corporate joint ventures which assumed to be repurchased at the average price K9 are intended to be remitted. for the period. wn 4 ! I

CalE n e rgy Company, lnc. 57 CashIkjuivalents

3. Acquisitions The Company considers all investment instruments Nortbern purchased with an original maturity of three months On December 24,1996, CE Electric, which is 70%

or less to be cash equivalents. Restricted cash is not owned indirectly by the Company and 30% owned considered a cash equivalent. indirectly by PKS, acquired mabrity ownership of Impairment oflimg-l3redAssets the outstanding ordinary shue capital of Northern OnJanuary 1,1996, the Company adopted pursuant to the Tender Offer. ThroughJanuary 31, Statement of h..nancial AccountingStandards 1997, CE Electnc had purchased more than 90% of No.121 C.SFAS 121,,), 'Accountmg for the Northern's ordinary shares. Under United lu,.ngdom Impairment oflong-Lived Assets and for Iong-statumry procedures available to compulsorily Lived Assets to be Disposed Of.. hich requires acquire shares not purchased in the Tender Offer, w that long-lived assets and certain identifiable CE Electric expects to acquire the remaining intangibles be reviewed for impairment whenever Northern ordinary shares by April 30,1997. even s or changes in circumstances indicate that As of December 31,1996, the Company and the carrying amount of an asset may not be PKS had contributed to CE Electric approximately recoverable. The adoption ofSFAS 121 did $410,000 and $ 176,000 respectively, of the not have a material effect on the Company's approximately $ 1,300,000 required to acquire financial statements. all of Northern's ordinary and preference shares in Redassifcatson connec: ion with the Tender Offer. The Company Certain amounts in the fiscal 1995 and 1994 obtained such funds from cash on hand, short-fmancial statements and supponing footnote term borrowings, and borrowings of approximately disck>sures have been reclassified to conform to $100,000 under a Credit Agreement entered into the facal 1996 presentation. Such reclassificanon with Credit Suisse on October 28,1996 (the did not impact previously reported net income "CalEnergy Credit Facility"). The remaining funds or retained camings. necessary to consummate the Tender Offer m.il be provided from a 1560,000 ($958,888) Term Loan UnofEstimates and Revolving Facility Agreement, dated October The preparation of fmancial statements in 28,1996 (the "U.K. Credit Facility"). jj conformity with generally accepted accounting i; principles requires management to make estimates j} and assumptions that afTect the reported amounts (' of assets and liabilities and disclosure of contingent c assets and liabilities at the date of the fmancial b;j b-{ l statements and the reported anmunts of revenues p j and expenses during the reporting period. Actual results could difTer from those estimates. 4 [., R { } t e

5. CalE n e rgy C e c.r p e n y, Inc. q 58 The Northern acquisition has been accounted for The Labour Party has asserted that, if they arc elected as a purchase business combination. All identifiable at the next General Election, which must be held no assets acquired and liabilities assumed were assigned lat. : than May 22,1997, they will seek to introduce a portion of the cost of acquiring Northern, equal a " windfall" assessment to be levied on the privatized to their fair values at the date of the acquisition. utilities including Northern. The Company has Minority interest is recorded at historical cost. The established a liability for such an assessment as part total cost of the acquisition through December 31, ofits purchase accounting reserves. 1996 was allocated as follows: The preferred securities reflect the fair value Cah s 2m,399 of the outstanding preferred stock of Northern. Propertes, plants and equipment 1,101,84) odwr usets 541,554 Fakon Seaboard Northern propt debt (417,119) On August 7,1996 the Company completed I & counts payable (213,710) the acquisition of Falcon Seaboard for a cash price kcrued habihties (606,525) of M500iW4 gih m h@ hitnority interest (297,821) the acquisition, the Company. directly acquhed in Preferred secunties (136,065) significant ownership interests in three operating Excess ofcost over fair value of net assets acquired, net of deferred taxes of s129,493 267,648 gas-fired cogeneration facilities and a related natural-gas pipeline. The plants are located in s 410,221 Texas, Pennsylvania and New York and total I In 1993, Northern entered into a contract relating 520 MW in capacity. to the purchase of 400 MW ofcapacity from a 15 A% owned related party, Teesside Pt>wer Limited The Falcon Seaboard acquisition has been ("Teesside"), for a period of 15 years beginning April accounted for as a purchase business combination. j 1,1993. The contract sets escalating purchase prices All identifiable assets acquired and liabilities at predetermined levels. Currently the escalating assumed were assigned a portion of the cost contract prices exceed those paid by the Company of acquiring Falcon Seaboard, equal to their fair l i to the electricity pool (the "Ptol") which is operated values at the date of the acquisition. The total by the National Grid Group. However, under current cost of the acquisition was allocated as follows: price cap regulation expected to expire March 31, cash

22,923 j

1998 the Company is able to recover these costs. operanng fxaties 14 w 6 J For the period after March 31,1998, the Company her sales agn ements 23,282 E uit:in=menn ut656 / has established a, liability for the estimated loss as 9 Ud*'"*u 27,229 I a result of this contract. Project loans t 119,478) h other habihties (15,527) Northem utilizes contracts for differences ("CFDs") L*=f """*' f^"3!"' d "*' "*" 'n to mitigate its exposure to volatility in the prices "4"id' "'"# d"I'"ed taxes d s93.27 5,239 of electricity purchased through the Ptx)l Such s 22 e m j contracts allow the Company to effectively tenv rt the maiority ofits anticipated Pool purchases twm Ldison Alission Energy's Partnership Interest market to fixed prices. As of December 31,1996, On April 17,1996 the Company completed the j CFDs were in place to hedge a portion of electricity acquisition of Edison Mission Energy's Partnership l l purchues of approximately 55,000 GWh through Interests in four geothermal operating facilities in the year 2008. California for a cash purchase price of $71,000 mcluding acquisition costs. The four projects, l Vulcan, Hoch (Del Ranch), Leathers and Elmore, are k>cated in the Imperial Wiley of California. Prior to this transaction, the Company was a 50% owner of these facilities.

CalE n e rgy Company. lac. $9 l The Partnership Interest acquisition has been Unaudited pro forma combined revenue, net income accounted for as a purchase business combination. and primary earnings per share of the Company, All identifiable assets acquired and liabilities assumed Northern, Falcon Seaboard, the Partnership Interest were assigned a portion of the cost of acquiring the and hiagma for the twelve months ended December Partnership Interest, equal to their fair values at 31,1996 and 1995, as if the acquisitions had occurred the date of the acquisition. The total cost of the at the beginning of 1995 after giving effett to certain acquisition was alh>cated as follows: pro forma adjustments related to the xquisition were $2,162,381, $M,811 and $ 1.12, compared to a s u.956 Restntred cash I3,226 $2,006A96, $ 53,887 and $ 1.02, respectively. ";';','j,**"""'"' {,*,j,'

4. Properties, Plants, Contracts Projett kans (48,161) andEquipment Liabihnes (5,311)

Properties, plants, contracts and equipment s 71,mo comprise the following at December 31: Alagma Neer Company 1996 1995 OnJanuary 10,1995, the Company acquired Operating Proiect costs: epproximately 51% of the outstanding shares of n" P '55 ""'l &$"*'"""" system s 2361,089 s 623ms I wem and mac devch mem wis29 3 m 14 common stock of AIagma (the "$1agma Common t h)wer sales apeements 232,228 188,415 btnck") through a cash tender offer (the "h!agma g, ym,,ji,,na m,, Tender Offer") and completed the Atagma devet ment in progress 66,207 58,5i t acquisition on February 24,1995 by acquiring ro,a yra,;nggamc, 3.o3i,433 i,200,u4 the approximately 499s of the outstanding shares less ammuutea aceraianon ofhf agma Common Stock not owned by the and amonization (271,216) (i(v1.184) Gmpany through a merger. Net operanny kihnes 2780,237 Lo35s40 The hiagma acquisition has been accounted for ?"" ' '"'" 2 " # 29 Lonstruction in progress: as a purchase business combination. Allidentifiable y3g 33 3,i i4 g 33 assets acquired and liabilities assumed were assigned Mahanagaing u3.567 %.560 h a portion of the cost of acquiring Alagma, equal to Other international development 84,944 11,418 h their fair values at the date of the acquisition. The l'pper Mahiao Ik8ml total cost of the acquisition was alk>cated as follows: _ saton sea ly 108,769 y Total $ t 148,583 $ 1,781,255 [H i Cash s 62,116 Operating rauhnes and propt cash 29I,365 Coso Project Operating Facilities h% Power sales agreements 17i73o The Coso Project operating facilities comprise the t Mmeral reserves 160,4 8 Company's proportionate share af the assets of three Construction in progress 93,174 a ofits CosoJoint Ventures' Coso h,. nance Partners Prmess keme and other W,WI g laess orcost over rer value ornet assets (" Navy Ijoint Venture"), Coso Energy Developers Q uquirnt, net of Jererred cues of s 168s14 137,455 ("I3thf Joint Venture"), and Coso Ibwer Developers s 957,9u (" Navy II Joint Venture"). The Navy I power plant is kicated on land owned by and leased from the U.S. Navy to December 2009, with a 10 year extension at the option of the Navy. Under terms of the Navy IJoint Venture, profits and losses were alkicated

~ CalEnuvgy Cempany, inc. (f) approximately 49% before payout of Units 2 Significant Customers and Contracts and 3 and approximately 46.4% thereafter to the All of the Company's sales of electricity from the Company. As of December 31,1994, payout had Coso Project and Imperial Valley Project, which bem reached on Units 2 and 3 of the Navy 1 Joint comprise approximately 77% of 1996 electricity Venture. The BBt power plant is situated on lands and steam revenues, are to Edison and are under leased from the U.S. Bureau of Land Management long-term power purchase contracts. under a geothermallease agreement that extends The Coso Project and the Partnership Proj.ect sell until October 31,2035. The lease may be extended all electncity generated by the respective plants to 2075 at the option of the BB1. Under the pursuant to seven long-term SO4 Agreements terms of the BBiJoint Venture agreement, the between the projects and Edison. These SO4 Company,s share of pro 6ts and losses before and afterAgreements provide for capacity payments, payout is approximately 45% and 48%, respectively. capacity bonus payments and energy payments. The BB1 Joint Venture reached payout mJune Edison makes fixed annual capacity payments to 1994. Under terms of the Navy IIjoint Venture, the projects and, to the extent that capacity factors all profits, kisses and capital contributions for exceed ertain benchmarks,is required to make Navy II are divided equally by the two partners. capaciry bonus payments. The price for capacity impericd Iidley Project Operating Facilities and upacity bonus payments is 6xed for the The Company currently operates eight geothermal life of the SO4 Agreements. Energy is sold at power plants in the Imperial %11ey in California. mcreasing scheduled rates for the 6rst ten years Four of these plants were developed by Magma. after 6tm operation and thereafter at Edison's The Partnership Project consists of the Vulcan, Avoided Cost of Energy. Hoch (Del Ranch), Elmore, and Leathers The scheduled energy price periods of the Coso Partnersh.ips.The remaining four plants which Project SO4 Agreements extend until at least comprise the Salton Sea Project are indirect wholly August 1997, March 1999 andJanuary 2000 owned subsidiaries of the Company, three of which for each of the units operated by the Navy I, were purchased by Magma on March 31,1993 BBi and Navy 11 Partnerships, respectively 'Ihe from Union Oil Company ofC. liforn.a and the Company,s share of the annual capacity payments a mm fourth which was completed by the Company. is approximately $5,600 to $5,900 per annum for m Cp June 1996. These geothermal power plants consist

    • ' E **

"# "Y "* E"Y" #" ph of the Salton Sea 1, Salton Sea ll, Salton Sea 111 and is approximately $1,000 per annum for each plant. the Salma SeaIV The Partnership Pro. ject and the Y Salton Sea Project are collectively referred to as the The scheduled energy price periods of the Partnership g Imperial %lley Project. The Imperial Valley Project Project SO4 Agreements extended until February 1996 for the Vulcan Partnership and extend until commencement dates and nominal capacities 4 December 1998, December 1998, and December S are as follows: 1999 f r e ch of the Hoch (Del Ranch), Elmore imperialwitey commencement sminar and Leathers Partnerships, respectively. The annual Plants Dare Capacity capacity payments are approximately $24,500 and di vakan February 10,1986 34 MW the bonus payments are approximately $4,400 in wMW 3 11txh(nel Ranch) January A 1989 Linn January 1,1989 38MW aggregate for the four plants. Irathen January 1.1990 38 MW 10 MW 5ahon Sea i Je!y 1,1987 Sakon Sea 11 Aptd 5,1990 20 MW Sahon Sea 111 February 13.1989 49.8 MW Sakon Sea IV May 24.199/> 39.6 MW

CalEuergy C o nt p a n y, Inc. 61 i Excluding Vulcan, which is receiving Edison's (14 MW). The capacity payment price for the 20 Avoided Cost of Energy, the Company's SO 1 MW portion adjusts quarterly based upon specified Agreements provide for energy rates ranging from indices and the capacity payment price for the 14 12.6c per kWh in 1996 to 15.6c per kWh in 1999 MW portion is a fixed levelized rate. The energy The weighted average energy rate for all of the payment (for deliveries up to a rate of 39.6 MW) Company's SO1 Agreements was 11.7< per is at a fixed price for 55.6% of the total energy kWh in 1996. delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total Salton Sea i sells ekrtricity to Edison pursuant to a 30-year negotiated power purchase agreement, energy delivered by Salton Sea lV The contract '#9" ' as amended (the "Salton Sea I PPE), which provides for capacity and energy payments. The energy to purchase the 20 MW ofcapacity and energy payment is calculated using a Base Pnce which is originally attributable to the Salton Sea 1 PPA subject to quarterly adjustments based on a basket option after September 30,2017, the original termination date of the Salton Sea 1 PPA. ofindices. T he time period weighted average energy payment for Salton Sea I was 5.1e per kWh during For the year ended December 31,1996, Edison's 1996. As the Salton Sea I PPA is not an SO4 average Avoided Cost of Energy was 2.5 cents per Agreement, the energy payments do not revert kWh which is substantially below the contract to Edison's Avoided Cost of Energy. The capacity energy prices earned for the year ended December payment is approximately $ 1,100 per annum. 31,1996. Estimates of Edison's future Avoided "8Y **#f '" *"'

    • I"*'
  • I**

Salton Sea II and Salton Sea III sell electricity to Edison pursuant to 30-year modified SO4 The Company cannot predict the likely level of Agreements that provide for capacity payments' Avoided Cost of Energy prices under the S01 capacity lunus payments and energy payments. Agreements and the modified SO4 Agreements gg g The price for contract capacity and contract capacity bonus payments is fixed for the life of the modified "'""**8'""' Y#

  1. E*I#"'

SO4 Agreements. The energy payments for the first operating under SO4 Agreements could decline ten year period, which period expires in April 2000 signi6 candy afta the apkation oMe respese and February 1999 are levelized at a time period scheduled payment periods. g weighted average of 10.6e per kWh and 9.8c per The Upper Mahiao Project was deemed complete ]j@ kWh for Salton Sea 11 and Salton Sea Ill, respectively, inJune 1996 and began receiving capacity payments Thereafter, the monthly energy payments will be pursuant to the Upper Mahiao Energy Conversion Edison's Avoided Cost of Energy. For Salton Sea II Agreement ("ECK), in July of 1996. The project pH only, Edison is entitled to receive, at no cost, 5% is structured as a ten year BOOT, in which the h of all energy Mered in excess of 80% of contract Company's subsidiary CE Cebu Geothermal hl capacity throgn September 30, 2001. The annual Pbwer Company, Inc. ("CE Cebu"), the project capacity and bonus payments for Salmn Sea 11 company, is responsible for providing operations p and Salton Sea 111 are approximately $3,300 and maintenance during the ten year BOOT period. f and $9,700, respectively. The electricity generated by the Upper Mahiao I ( The Sa!mn Sea IV Project sells electricity to E# ""

  • " E #"* * *" '

""EY Edison pursuant to a modified SO4 agreement Development Corporation ("PNOC-EDC"), which l which provides for contract capacity payments is also responsible for supplying the facility with the on 34 MW of capacity at two different rates geothermal steam. After the ten year cooperatic;. based on the respective contract capacities deemed period, and the recovery by the Company or,its attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA

~ CalEnergy Company, Inc. 1 m PNOC-EDC is obligated to pay for electric capacity The Sararac Project sells electricity to New York that is nominated each year by CE Cebu, irrespective State Electric & Gas pursuant to a 15 year negotiated l of whether PNOC-EDC is willing or able to accept power purchase agreement (the "Saranac PPA"), delivery ofsuch capacity. PNOC-EDC pays to which provides for capacity and energy payments. CE Cebu a fee (the " Capacity Fee") based on the Capacity payments, which in 1996 total 2.1e per plant capacity nominated to PNOC-EDC in kWh, are received for electricity produced during any year (which, at the plant's design capacity, " peak hours" as defined in the Saranac PPA and is approximately 95% of total contract revenues) escalate at appoximately 4.1% annually for the and a fee (the " Energy Fee") based on the electricity remaining term of the contract. Energy payments, actually delivered to PNOC-EDC (approximately which average 6.3c per kWh in 1996, escalate at 5% of total contract revenues). The Capacity Fee approximately 4.4% annually for the remaining serves to recover the capital costs of the project, term of the Saranac PPA. The Saranac PPA expires to recover fixed operating costs and to cover return inJuneof 2009. on investment. The Energy Fee is designed to cover The Power Resources Project sells electncity to Texas all variable operating and maintenance costs of the Utih.. Electnc Company ("TUEC..) pursuant to ties power plant. Payments under the Upper Mahiao a 15 year negotiated power purchase at;reement (the ECA are denominated in U.S. Dollars, or computed " Power Resources PPA',), which provides for capacity in U.S. dollars and paid in Philippine pesos at the and energy payments. Capacity payments and then-current exchange rate, except for the E.nergy energy payments, which in 1996 art $2,930 per Fee, which will be used to pay Philippine peso-month and 2.86t per kWh, respectively, escalate denominated expenses. S.ignificant portions of the at 3.5% annually for the remaining term of the Capacity F,ee and Energy Fee are. dexed to U.S. Power Resources PPA. The Power Resources PPA in and Phih.ppme mflation rates, respectively.. expires in September 2003 PNOC-EDC's payment requirements, and its other obligations under the Upper Mahiao ECA The NorCon Project sells electricity to Niagara Q are supported by the Government of the Philippines Mohawk Power Corporation (" Niagara") pursuant through a performance undertaking. to a 25 year negotiated power purchase agreement (the "NorCon PPA") which provides for energy i 6 C Unit I of the Malitbog Pro. ject was deemed complete payments calc dated pursuant to an adjusting y mJuly 1996.'I.he Malitbog Pro.;ect is being built, formula based u is ongoing Tariff Avoided b b owned and operated by VGPC, a Philippine general Cost and the contr. ee-Run Avoided Cost. C N" partnership that is wholly owned, indirectly, by the The NorCon PPA term s ds through December M Company. VGPC is selling 100% ofits capacity on 2017. The Company and Niagara are currently w" cubstantially the same basis as descn. bed above for '"F"E" """'E"' 8 P"U m the Upper Mahiao Project to PNOC-EDC, which restructuring or buyout and termination of the e. wd. lin turn sell the power to the NPC. As w. h Nort,on PPA. it w tne Upper Mahiao project, the Malithog project m h is structured as a ten year BOOT, in which the The Yuma Project sells electricity to SDG&E under Company will be responsible for implementing u existing 30-year power purchase contract. The i construction of the geothermal power plant and, energy is sold at SDG&E's Avoided Cost of Energy as owner, for providing operations and maintenance and the capacity is sold to SDG&E at a fixed price for the ten year BOOT periocl. After a ten year for the life of the power purchase contract. The f cooperation period, and the recovery by the Company contract term extends through May 2024. ofits capital investment plus incremental return, the plant willle transferred to PNOC-EDC at no cost. l l

CalE n e rgy Company, Inc. f 63 L Royalty Expense The Salton Sea Project's weig'.ited average royalty Royalty expense comprises the following for the expense in 1996 was approximately 5.2%. The years ended: royalties are paid to numerous recipients based on varying percentages ofelectrical revenue or steam 39 % ig3 g Navy I, Una i s 1,620 s 1,622 $ 1,611 Navy 1, Unin 2 and 3 3,512 3,391 3,171 Nerada andUtah Nperties lui ' 538 3 o36 41' Navy !! 712 5,571 963 Pannenhip Pnext 6,702 6,820 and owns an approximately 70% interest in a Salmn Sea Pmint 3,526 3.578 geothermal steam field which supplies geothermal then Itak 53 287 26s steam to a 23 net Af W power plant owned by Utah Taal s 23,693 s 21,30s s 9.sss Pbwer & Light Company ("UP&I") h>cated on the The amount of royalties paid by Navy I to the U.S. Roosevelt Hot Springs property under a 30-year steam sales contract. Navy to develop geothermal energy for Navy 1, Unit 1 on the lands owned by the Navy comprises The Company obtained approximately $20,317 (i) a fee pavable during the term of the contract cash under a pre-sale agreement with UP&L based on ditTerence between the amounts paid whereby UP&L paid in advance for the steam by the ? to Edison for specified quantities of produced by the steam field. The Company electricit nd the price as determined under the must make certain penalty payments to UP&L hich currendy approximates 73% of if the steam produced does not meet certain contrau that paid by the Navy to Edison), and (ii) $25,000 quantity and quality requirements. payable in December 2009, of which the Company's share is $ 11,600. The $25,000 payment is secured Desert Peal The Company is the owner and operator of a geothermai phnt at Desert Peak, Nevada that by funds placed on deposit monthly, which funds, is currently selling electncity to Sierra Pacific Power plus accrued interest, will aggregate $25,000. The Company (" Sierra")at Sierra's Avoided Cost. j l monthly oeposit is currently $50. As of December 31,1996, the balance of funds deposited Glasshuntain ]l approximated $5,311, which amount is included Under a Bonneville Pbwer Administration ("BPA") i; in restricted cash. geothermal pilot program, the Company has been developing a 30 net MW peochermal project which Units 2 an J 3 of Navy I and the Navy 11 power was originally, h>cated in the Newberry k,nown plants are on Navy lands, for which the Navy Geothermal Resource Area in Deschutes County, h receives a royalty based on electnc sales revenue at Oregon. Pursuant to two power sales contracts [ the initial rate of 4% escalating to 22% by the end executed in September 1994, an affdiate of the ('a of the contract m December 2019. The BB1 is paid Company agreed to sell 20 MW to BPA and a royalty of 10% of the value ofsteam produced by 10 MW, to Eugene Water and Electnc Board b. the geothermal resource supplying the BLM Plant. (..EWEB") from the Project. In addition, BPA h The Partnership Project pays royalties based on and EWEB together have an option to purchase [ l both energy revenues and total electricity revenues. up to an additional 100 MW of production from l Hech (Del Ranch) and Leathers pay royalties of the project under certain circumstances. These l approximately 5% ofenergy revenues and 1% of power sales contracts provide that under certain total electricity revenue. Elmore pays royalties of circumstances the contracts may be utilized at approximately 5% of energy revenues. Vulcan an alternative k: cation. pays royalties of 4.167% ofenergy revenues.

ColEntrey Company, luc. M Pursuant to its resource exploration program,

6. Parent Company Debt the Company has determined that the geothermal Parent company debt comprises the following resource at Newberry is not sufficient to support at December 31:

the contracts and accordingly has determined to 1996 1995 utdize the contracts at its leasehold position in "d**""'""'" Glass Mountain (the " Glass Mountain Project") $cnior notes 221,150 in Northern California, where it has two successful umired remurse wnior semmi ran* 2auxx) m eon production wells, The Company and BPA have carnergycreaufmi,y 100,000 agreed to relocate the project to Glass Mountain. Revolving cretht facday 95,000 omvertible subordmaced debentures loo.rm Under the relocation agreement, BPA will purchase C"""bl' d "U 30 MW from the project.The movement of the 8 l146 u $ 842,205 project to this alternative location and BPA's h r/ w /*.u< %,a so,,t w u m purchase obligation are subject to nbtaining a fmal environmentalimpact statement relating Senior Discount Notes to the new site location. L)iscussions with EWEB In March 1994, the Company issued $400,000 are continuing. of 10 %% Sem.or Discount Notes which accrete The Glass Mountain Project is currently expected to an aggregate principal amount of $529,M0 at maturity in 2004. The original issue discount (the to commence commercial operation in 2000. difference betw een $400,000 and $529/10) will Completion of this project is subject to a number be amortized from issue date throughJanuary 15, of significant uncertainties and cannot be assured. 1997, during which time no cash interest will be

5. Equity Investments paid on the Senior Discount Notes. Commencing The Company has a present indirect ownership July 15,1997, cash interest on the Senior Discount of approximately 35% in the Casecnan Project, Notes will be payable semiannually onJanuary 15 a combmedirrigation and 150 net MW and July 15 of each year. The Senior Discount Notes hydroelectric power generation project located are redeemable at any time on or afterJanuary 15, on the island of Luzon in the Philippines.

1999 initially at a redemption price of 105.125% declining to 100% onJanuary 15,2002 plus The Company acc uired an approximate 4N accrued interest to the date of redemption. The h4 economic interest in Saranac Power Partners, LP Senior Discount Notes are unsecured senior d and a 20% economic interest in NorCon Power Partners, LP as part of the Falcon obligations of the Company. Seaboard acquisition. The Senior Discount Notes prohibit payment of g cash dividends unless certain fmancial ratios are met $3 Summary fmancial information for these equiry and unless the dividends do not exceed 50% of the M investments follows: N Company's accumulated adjusted consolidated net income as defmed, subsequent to April 1.1994, Ca3ecnan Saranac NorCon a Mm As of and for the year ended E ] Ikccmher 31,19'Xi: Assets $ 192,166 $ 325,174 $ 125,956 Senjgr ygfe3 On September 20,1996 the Company completed Labaaies wo,737 213.326 121.223 g Net inuvne (kss) (!I,207) 40,u)5 (53) a private sale to institutional investors of $ 225,000 [ As of December 31,1995: b b". Aswts 501,160 N/A N /A due 2006. Interest on the Senior Notes will be nahias 3n,524 N/A N/A payable semiannually on March 15 and September l l

CalE n e rgy Company. Inc. l l 65 l l 15 of each year. The Senior Notes an redeemable at time. Subsequent to year end, the Company repaid any time on or after September 15,2001 initially at the entire balance of the CalEnergy Credit Facility. a redemption price of 101.75 % declining to 100% . gjj .jj on September 15,2004 plus accrued interest to the On July 8,1996 the Company obtamed a $ 100,000 date ofredempn.on. 'I,he Sem.or Notes are unsecured senior obligations of the Company. three year revolving credit facility. The facih..tyis unsecured and is avad. ble to fund general operating a limited Recourse Senior Secured Notes capital requirenents and fmance future business OnJuly 21,1995 the Company issued $200,000 opportunities. The Company had drawn $95,000 of 9 7/8% Limited Recourse Senior Secured Notes as of December 31,1996. Subsequent to year end, Due 2003 (the " Notes"). Interest on the Notes is the Company repaid the entire balance. payable on June 30 and December 30 ofeach year' Convertible Subordinated Debentures commencing December 1995. The Notes are secured by an assignment and pledge of 100% InJune of 1993, the Company issued $ 100,0(X) of the outstanding capital stock of Magma and principal amount of 5 % convertible subordm.ated are recourse only to such Magma capital stock, debentures (" debentures") dueJuly 31,2000. the Company's interest in a secured Magma note Substantially all of the debentures were converted and general assets of the C,ompany equal to the mto 4,443 common shares m. September and Restricted Payment Recourse Amount, as defmed October 1996 at a conversion price of $22.50 in the Note Indenture (" Note Indenture"), which I" was 30 at December 31,1996. Concertible Debt At any time or from time to time on or prior to On November 19,1991, the Company sold one June 30,1998, the Company may, at its option, thousand shares of convertible preferred stock, Series use all or a portion of the net cash proceeds of a C, at $50,000 per share to Kiewit Energy Company Company equity ofTen.ng (as defmed in the Note Inc. ("h,iewit"), a subsidiary of PKS, in a private Indenture) and shall at any time use all of the net placement. Each share of the Sen.es C preferred stock cash pmceeds of any Magma equity offering (as was convertible at any time at $ 18.375 per common defmed in the Note Indenture) to redeem up to customary adjustments. The Senes L,' preferred stock D'3 an aggregate of 35 % of the principal amount of the l Notes ongmally issued at a redemption price equal had a dividend rate of 8.125W, commencing March [ i to 109.875% of the principal amount thereof plus 15,1992 through conversion date or December 15, t ~ accrued interest to the redemption date. On or after 2003. The dividends, which were cumulative, were a June 30,2000, the Notes are redeemable at the E"I" # 9""""

  • " " ' " #E" kb Series C, through March 15,1995 and m cash W

option of the Company, m.whole or in part, initially x. on subsequent dividend dates. HN at a redempn.on price at 104.9375% declining to F 100% onJune 30,2002 and thereafter, plus Pursuant to the terms of the Securities Purchase [y f, accrued interest to the date of redemption. Agreement, the Company exercised its rights to yg exchange the preferred stock, Series C, on March 15, (' Ca/Engredit &d//9 On October 28,1996 the Company obtamed 1995 for $61,850 principal amount 9.5% convertible F a $100,000 credit facility (the "CalEnergy subordinated debenture of the Company due 2003, c' p ' ' " " " " * * " ' * * " " " E#' Credit Facility") of which the Company has drawn $ 100,000 as of December 31,1996. stock, Series C. On September 20,1996, the C,ompany converted the $61,850 convertible debt Borrowings under the Calu..nergy Credit Facility are unsecured and mature on October 28,1997, subject to prepayment by the Company at any shares at a conversion price of $ 18.375 per share.

~ CalEnergy Compsuy, Inc. (f> The annual repayments of the parent company the Company's four existing Salton Sea pfants as debt for the years beginningJanuary 1,1997 well as an assignment of the right to receive various royalties payable to Magma in connection with its are as follows: Imperial Valley properties and distributions from sen r umited o the Partnership Project. Discount senior accourse ,g g g;gg; Notes Notes Notes

  • g gg

'#*"i**d "5 " l'8*1 *"'I'Y S*P*'*** ""d "P"'* I' * $29.65 225g$ 2mn$ 5 the Company and its other subsidianes. It should e $ 529,a0 $ 225a m $ 200.000 not be assumed that any asset of any such subsidiary %., % % -.,,,w -a m so,n o w u i m will be available to satisfy the obligations of the

7. Subsidiary andProject Debt Company or any ofits other such subsidiaries; Project loans held by sabsidiaries and projects of the provided, however, that unrestricted cash or other assets which are available for distribution Company comprise the following at December 31:

may, subject to applicable law and the terms 1996 em of financing arrangements of such parties, be. Salton Sea Notes and Bonds $ 538,982 $ 452,088 advanced, loaned, paid as dividends or otherwise Northern eunkonds 439,192 distributed or contributed to the Company or Coso Funding Corp. project loans 148,346 203,226 U.K Credit facihty 128.423 affdiates thereof. Substantially all of the assets of Power lhwurces project debt Ii1,571 Cach subsidiary listed below (except Vulcan /BN Construction loans 377,454 211,198 Geothermal Power Company and certain other Other 7,927 54,707 subsidiaries involved in project financing activities) $ 1,754.895 $ 921,219 have been encumbered to secure obligations owed to the creditors of such subsidiary: Pursuant to separate project financing agreements, substantially all the assets of the Company are Fish /Je Pouer Gmpan) pledged or encumbered to support or otherwise Sahon Sea Brine Processing L.R provide the security for the project or subsidiary debt. Sahon Sea Power Genaation L.R Vulcan Puun Cornpan Sahon Sea Notes andBonds OnJune 20,1996 andJub 25,1995, the Company Ca/Emtg) Operating Gmpany Sahon Sea F/auling Grporation through its wholly owned subsidiary, Salton Sea 8dS*"I'd F9"5' 05/d"> Funding Corporation (' Funding Corporation"), Sahon Sea Rajahy Gmpany completed sales to institutional investors of F"kan/BN GeothemdPer Gmpany $ 135,000 and $ 475,000, respectively, of Salton DJRanch LR Sea Notes and Bonds (the " Notes and Bonds"). E/more, LR The Salton Sea Notes and Bonds are nonrecourse I'ddM LR l to the Company. The Funding Corporation debt l securities were offe;ed as follows: Pursuant to the Depository Agreement, Funding l senior Corporation established a debt service reserve fund [ Secured Series Due Rare Amount in the form of a letter of credit in the amount of July 25,1995 A Notes May 30,2000 6.69 % $ 232,750 $70A 30 from which scheduled interest and ( July 25,1995 B ikinds May 30,2005 7.37W l33,000 principal payments can be made. July 25. IM CBonds May 30,2010 7Ai% 109,250 June 20,1996 D Notes May 30,2000 7.02 % 70px) June 20,1996 EDonds May 30,2011 8.30 % 65#x) The Salton Sea Notes and Bonds are secured by

CalE n e rgy Compney, Inc. 67 Northern Eumbonds Mission Pbwer Group, subsidiaries of Edison Corp., The Northern debt includes a 155,000 ($94,177) and the Coso Project reached a final settlement of debenture due in 1909, which bears a fixed interest all of their outstanding disputes and claims relating rate of 12.661%. The debt also includes bearer to the construction of the Coso Project. As a result bonds repayable in f100,000 ($ 171,230) amounts of the various payments and releases involved in in 2005 and 2020, bearing ftxed interest rates of such settlement, the Coso Project agreed to make 8.625% and 8.875%, respectively. a net payment of $20,000 to MPE from the cash The balance at December 31,1996 consists reserves f the Coso Project contingency fund of the following: and MPE agreed to release its mechanics' liens on the Coso Project. After making the $20,000 Debenture due 1999 $ 99,924 payment, the remaining balance of the Coso Project Ikerer innds due 2005 171,13 contingency fund (approximately $49,300) was used Bearerinnds due 2020 168,138 l to increase the Coso Project debt reserve fund from l s 439.192 approximately $43,000 to its maximum fully-funded Coso Funding Corp. FWert I wns requirement of $67,900. The remaining $24,400 The Coso Funding 0 a loans are from balance of contingency fund was retained within the Coso Funding Corp.,,ingepurpose corporation Coso Project for future capital expenditures and for formed to issue notes for its own account and act Coso Project debt service payments. Since the Coso as an agent on behalf of the Coso Project. On Project debt service reserve is fully funded in advance, December 16,1992, pursuant to separate credit Coso Project cash flows otherwise intendcd to fund agreements executed between Coso Funding Corp. the Coso Project debt service reserve fund, subject and each CosoJoint %nture, the proceeds from to satisfaction of certain covenants and conditions Coso Funding Corp.'s note offering were loaned contained in the Cosojoint Ventures' refmancing to the Coso Project. The proceeds of $560,245 were documents, may be available for distribution to used by the Coso Proj,;ct to (i) purchase and retire the Company in its proportionate share. project fmance debt comprised of the term loans The Coso Funding Corp. project loans are and construction loans m the amount of $424,500, collateralized by, among other things, the power i (ii) ftmd contingency funds m the amount ot plants, geothermal resource, debt service reserve $68,400, (iii) fund debt service reserve ftmds in funds, contingency funds, pledge ofcontracts, and the amount of $40,000, and (iv) fmance $27,345 an assignment of all such C.oso Project,s revenues of capital expenditures and transaction costs. which will be applied against the payment of 4 The contingency fund and debt service reserve obligations ofeach CosoJoint Venture, including fund were required by the project loan agreements. the project loans. Each Cosojoint Venture's assets The contingency fund represented the approximate will secure only its own project loan, and will not W maximum amount, if any, which could theoretically be cross-collateralized with assets pledged under f3 have been payable by the Coso Project to third parties other CosoJoint Venture's credit ara ments. The s] to discharge all liens ofrecord and other contract project loans are nonrecourse to any partner in the fH claims encumbering the Coso Project's plants at Cosojoint Ventures and the Coso Funding Corp. l the time of the project loans. The contingency fund shall solely look to such CosoJoint Venture's R. was established in order to obtain investment-grade pkdged assets for satisfaction of such project loans. j ratings to facilitate the offer and sale of the notes by However, the loans are cross-collateralized by the l Coso Funding Corp., and such establishment did available cash flow of each CosoJoint Venture. Each l not reflect the Coso Project's view as to the merits CosoJoint Venture after satisfying a series ofits own l or likely disposition of such litigation or other obligations has agreed to advance support loans i contingencies. OnJune 9,1993, MPE and the (to the extent of available cash flow and, under

CalE n e rgy Company, Inc. 68 certain conditions, its debt service reserve funds) in restrictions on distributions from CE Electric to any the event revenues from the supporting CosoJoint ofits shareholders based on certain financial ratios. l Ventures are insufficient to meet scheduled principal As of December 31,1996, CE Holdings had drawn ( I and interest on their separate project loans. f75,000 ($ 128,423) under the agreement. The Coso Funding Corp. project loans carry a fixed Pourr Resources Project Financing Debt interest rate with weighted average interest rates of Power Resources, an indirect wholly-owned 8.46% and 8.29% at December 31,1996 md 1995, subsidiary, has project financing debt consisting respectively. The loans have scheduled repayments of a term loan payable to a consortium of banks l through December 2001. with interest and principal due quarterly through f October 2003. The debt carries fixed interest rates U.K. Credit Facility of 10.385% and 10.625%. The loan is collateralized On October 28,1996 CE Holdings obtained by all of the assets of Power Resources. j a f560,000 ($958,688) five year term loan and i revolving credit facility (the "U.K. Credit Facility"). The annual repayments of the subsidiary and i The Company has not guaranteed, nor is it otherwise project debt, excluding construction loans, for the { subject to recourse for, amounts borrowed under years beginning January 1,1997 and thereafter I the U.K. Credit Facility. The agreement places are as follows: Salton Sea Coso Notes and Funding UKCredit Ibwer l lbnds Northern Corp. Facility Resources Other l 1997 $ 90,228 $ 41,729 $ 11,228 8 873 1998 106,938 38,912 12,805 1,678 1999 57,836 99,924 31,717 14.268 1,421 2000 25,072 4,080 16,087 1,1S1 2001 22,376 31,908 128,423 18,119 959 "Ihereafter 236,532 339,268 42,0M a,415 $ 538,982 $ 439,192 $ 148,346 $ 128,423 $ 114,571 $ 7,927 UpperMahiao Construction Loan Construction Loans The Company's share of project construction loans Draws on the construction loan for the Upper comprise the following at December 31: Mahiao geothermal power project at December 31,1996 t taled $150,628. A consortium of j[ 1996 1995 SP I! Upper Malaao $ 150,628 $ 134.619 fmancing with interest rates at LIBOR or " Prime" j[ MatAig 137,881 36.863 with interest payments due every quarter and at d! Mahanagdong 76,$03 39,716 @t Dieng Unit i 12.442 UBOR maturity. The weighted average interest rate at December 31,1996 and 1995 is approximately $ 3n 454 $ 211,198 )[ 8.01% and 8.31%, respectively. The Export-Import '4i The construction loans are scheduled to be replaced Bank of the U.S. ("Ex-Im Bank")is providing by term project financing upon completion political risk insurance to commercial banks on the 7 of construction and commencement of construction loan. The construction loan is expected -l} commercial operations. to be converted to a term loan promptly after NPC

CalEsergy C o ns t a n y, Inc. 69 completes the full capacity transmission line, which Dieng Construction Loan is currently expected in early 1997. The largest On October 4,1996 the Company ck> sed the portion of the term loan for the project will also $ 120,000 project fmancing for the Dieng Unit I 55 he provided by Ex-Im Bank. The term fmancing net MW geothermal project located in Indonesia. for the Ex-Im Bank loan will be for a ten year term The loan carries a variable interest rate (weighted at a fixed interest rate of 5.95%. average of 7.1996 at December 31,1996) and has Alalithog Construction Loan scheduled project tenn repayments through 2002. Draws on the construction loan for the Malithog Dieng Unit 1 is under construction and is currently geothermal power project at December 31,1996 expected to begin commercial operation by late totaled $ 137,881. Credit Suisse and OPIC have 1997. The Company has drawn $ 12,442 as of December 31,1996. provided the construction and term loan facih.. ties. The eight year project term loan facilities will be S. Income Taxes at variable interest rates (weighted average of Provision for income taxes is comprised of the 8.15% and 8.42% at December 31,1996 and following at December 31: 1995, respectively). The international bank portiun 1996 1995 1994 of the debt will be insured by the Overseas Private Currendy payable: Investment Corporation ("OPIC") against political 3y,, 3 7,329 3 3,3, g 3,,97g risks and the Company's equity contribution to reaca 19.873 11,138 5.829 Visayas Geothermal Power Company ("VGPC") Foreign 2,176 is covered by political risk insurance from the 29.569 16M8 7,799 MultilateralInvestment Guarantee Agency Deferred: and OPIC. sme 1.619 9a i,oi7 Federal 9,209 13,062 7.24i Alahanagdong Construction Loan 9,4, gas 1 The Company's share of draws on the construction 12.32 13.983 8.38 loan for the Mahanagdong geothermal power gj j project at December 31,1996 totaled $76,503. ,xt,,o,am,77, rem 4 i.82i 30.651 16.057 3 The construction debt fmancing is provided by . ras aaaie 3 OPIC and a consortium ofinternational banks. m cm,,am,,y acn, 9u j The construction loan interest rates are at LIBOR we,, %.g j j! or " Prime" with interest payments due quarterly enuoramarnem s 41.sn s 30.63 $ 17.002 ll and at LIBOR maturity. The weighted average interest rate at December 31,1996 and 1995 is O approximately 8.05% and 8.02% respectively. Mi1 Pblitical risk insurance from Ex-Im Bank has been obtained for the commercial lenders. Ten year project term debt fmancing of approximately $ 120,000 will mq be prosided by Ex-Im Bank (which will replace the h; bank construction debt) and by OPIC. The majority fa of the term fmancing is expected to be provided by Ii the Ex-Im Bank at a fixed interest rate of 6.92% 1 1

CalE nergy Company, lac. 70 ( I A reconciliation of the federal statutory tax rate

9. Company-ObligatedMandatorily to the effective tax rate applicable to income Redeemable Convertible Preferred before provision for income taxes follows:

Securities ofSubsidiary Trust Holding 1996 199s 1994 Solely Convertible Debentures On April 12,1996, CalEnergy Capital Trust, a rederalnatutory raie 35 m % 35.00 2 35n0% special purpose Delaware business trust organized ivrcentage depleton in by the Company (the " Trust"), pursuant to the excess of cost depletion (6.12) (7.38) (6.85) investment and energy Amended and Restated Declaration of Trust tax cndts (8M) 0.80) 0.o4) (the " Declaration") dated as of April 4,1996, State taes, net of federal completed a private placement (with certain shelf tax effect 4.38 4.09 4.48 coadwalamortaannn 2.51 2.53 registration rights) of $100,000 of convertible Non41eductible expense At 1.10 preferred securities (" TIDES"). In addition, an hase investment (2.18) option to purchase an additional 78.6 TIDES, Tax effect of foreign income 2.54 or $ 3,930, was exercised by the initial purchasers Other .01 .20 .86 to cover over-allotments. 30.82 % 31.56 % 30.45 % The Trust has issued 2,078.6 of 6 %% TIDE 6 Deferred tax liabilities (assets) are comprised of the with a liquidation preference of fifty dollars each. following at December 31: The Company owns all of the common securities of the Trust. The TIDES and the common securities 1996 1995 Depreciation and amortization, net $ 725,366 $ 349,079 represent undivided beneficial ownership interests Itnsions 22,883 in the Trust. The assets of the Trust consist solely Other 6,119 4 N3 of the Company's 6 %% Convertiblejunior 754,368 353,122 Subordinated Debentures due 2016 in an Deferred contract costs 0 28,745) outstanding aggregate principal amount of Deferred iname (9,298) (7,709) $103,930 (" Junior Debentures") issued pursuant m ia d d v of 11 1996.Tk las carryforwards 0,050) $e l'> ') indenture includes an agreement by the Company to pay expenses and obligations incurred by the t n va Akernative nunimum tax credits 6 0,819) 0 2,480) Trust. Each TlDES will be convertible at the j Jr sat royalty receivable o,865) o,865) lj. Accruals not current:y deductible option of the holder thereof at any time into for tax purpmes 0 3,372) 1.6728 shares of CalEnergy Common Stock (j;;- j 5 Other (9 34) (4,611) (equivalent to a conversion price of $29.89 per (285,169) n26,602) share of the Company's Common Stock), subject ]j Net deferred taxes $ 469,199 $ 226,520 to customary anti-dilution adjustments. j The Company has unused investment and Until converted into the Company's Common 's (; geothermal energy tax credit carryforwards of Stock, the TIDES will have no voting rights with ']- approximately $55,931 expiring between 2002 respect to the Company and, except under certain p; and 2011.The Company also has appmximately limited circumstances, will have no voting rights M' $50,819 of altemative minimum tax credit and with respect to the Trust. Distributions on the f11,800 ($20,205) of surplus advance corporation TIDES (and Junior Debentures) are cumulative, tax carryforwards which have no expiration date. accrue from the date ofinitial issuance and are payable quarterly in arrears, commencing June 15, 1996. The J unior Debentures are subordinated in

Cele n e rg y C o ns p o n y, lat. 71 right of payment to all senior indebtedness of the

11. Stock Options and RestrictedStock Company and theJunior Debentures are subject to The Company has issued various stock options.

certain covenants, events of default and optional and As of December 31,1996, a total of 5,088 shares mandatory redemption provisions, all as described are reserved for stock options, of which 4,777 shares in theJunior Debenture Indenture. have been granted and remain outstanding at prices Pursuant to a Preferred Secun.. ties Guarantee of $3.00 to $30.38 per share. Agreement, dated as of April 10,1996 (the The Company has stock option plans under which " Guarantee"), between the Company and a shares were reserved for grant as incentive or non-preferred guarantee trustee, the Company has qualified stock options, as determined by the Board agreed irrevocably to pay to the holders of the of Directors. The plans allow options to be granted TIDES, to the extent that the Trustee has funds at 85% of their fair market value at the date of available to make such payments, quarterly grant. Generally, options are issued at 100% of distributions, redemption payments and liquidation fair market value at the date ofgrant. Options payments on the TIDES. Considered together, the granted under the 1996 Plan become exercisable undertakings contained in the Declaration, Junior over a period ofthree to five years and expire if not Debentures, Indenture and Guarantee constitute exercised within ten years from the date ofgrant or, a full and unconditional guarantee by the Company in some instances a lesser term. Prior to the 1996 of the Trust's obligations under the TlDES. Plan, the Company granted 256 options at fair

10. PreferredStock
    • 'k*'"'*'0*

'E'*"'*""""0""' On December 1,1988 the Company distributed 'M#* *

  • * ' " * ' ' ' ' ' " ' 8 '*"* '

a dividend ofone preferred share purchase right in addition, the Company had issued approximat ly ("right") for each outstanding share of common 138 options to consultants on terms similar to ggp 9g stock. The nghts are not exercisable until ten days after a person or group acquires or has the n. ht t plan options are primarily options granted to g Kiewit (See Note 12). !i acquire, beneficial ownerslup of 20% or more of 3[ the Company's common stock or announces a The Company granted 500 shares of restricted Lp tender or exchange offer for 30% or more of the common stock with an aggregate market value of .l Company's common stock. - a right entitles the $9,500 in exchange for the relinquishment of 500 (/ holder to purchase one one-hundredth of a share stock options which were canceled by the Company. fy ofSeries A junior preferred stock for $52. The rights The shares have all rights of a shareholder, subject y g may be redeemed by the Board of Directors up to to certain restrictions on transferability and risk of ten days after an event triggering the distribution forfeiture. Unearned compensation equivalent to g; ofcertificates for the rights. The rights plan was the market value of the shares at the date ofissuance b; amended in February 1991 so that the agreement was charged to Stockholders' equity. Such unearned (0i l with Kiewit would not trigger the exercise of the compensation is being amortized over the vesting rights. The rights will expire, unless previously period of which 125 shares were immediately vested

W redeemed or exercised, on November 30,1998.

and the remaining 375 shares vest straight line over P The rights are automatically attached to, and approximately five years. Accordingly, $1,535 and [ trade with, each share of common stock. $2,494 of unearned compenscion was charged to general and administrative expense in 1996 and 1995, respectively.

Ca lE ne cany, loc. 72 1ransactionsin Stock options Options Outstanding Shares Available for Grant Under Option Price Weighted Asg 1996 Option Plan Shues Per Shares Option Price Total Balance December 31,1993 439 8,514 $ 3.00-$ 19.00 $ 12.32 $ 104,931 (954) 1,243 12.00 - 17.25 15.49 19,260 Options grant.d 15 (15) 3.00 - 15.94 13.67 (205) Optkms terminated Optums exercised (l41) 3.00 - 15.94 5.03 (709) Additional shares reserved under 1996 Optain Plan 586 86 9/41 3.00 - 19.00 12.84 123,277 Balance Dnember 31,1994 0 96) 3% 15.81 - 19.00 18.15 7,168 Options granted 571 (571) 14.88 - 19 00 18.69 (10,673) Options terminated Optains exertised (l35) 3.00 - 15.94 3.41 (460) 261 9,291 3.00 - 19.00 12.84 119,332 Balance December 31,1995 (1,157) 1,157 25.06 - 30.38 28.17 32,590 Optms granted 468 (468) 3.00 - 19.00 17.96 (8,406) Options terminated Options exerdsed (5,203) 3.00 - 21.68 11.13 (57,931) Additmal shares reserved under 1996 Option Plan 739 Balance December 31,1996 3)) 4.777 $ 3.00 - $ 30.38 $ 17.92 $ 85,585 Options exercisable at: 7,897 $ 3.00- $ 19.00 $ 11.8' $ 93,705 December 31,1994 8,229 $ 3.00-$ 19.00 $ 12.26 $ 100,886 December 31,1995 3,071 $ 3.00-$ 30 38 $ 14.25 $ 43,770 December 31,1996 The following table summarizes information about stock options outstanding and exercisable asof December 31,1996: Options Outstanding Options Exercisable Weighted Weighted Average Weighted Rimge of Number Average Remaining Ember Awrage 2 Exercise Prices Outstanding Exercise Price Contractual Life Exercisable E2.ercise Price - [ T- $ 3.00 $ 11.99 1,251 $ 10.70 4 years 1,251 $ 10.'O 12.00 20.99 2.369 16.72 7 years 1,786 16.50 r Aj -Gf 21.00 30.38 1,157

28. !'.

9 years 34 29.25 1 f)a 4.777 3 17.92 7 years 3,071 $ 14.25 @j \\ ;:( -{; '( w. $g i

Calt e o rgy C o nt p a n y, Inc. n In Octobet 1995, the Financial Accounting The Company and Kiewit signed a Stock Standards Board issued Statement of Financial Purchase Agreement and related agreements, Accounting Standards No.123 ("SFAS 123"), dated as of February 18,1991. Under the terms " Accounting for Stock-Based Compensation." of the agreements, Kiewit purchased 4,000 shares SFAS 123 defines a fair value based method of ofcommon stock at $7.25 per share and received accounting for stock-based employee compensation options to buy 3,000 shares at a price ofi9 per plans and encourages all entities to adopt that share exercisable over three years and an additional method of accounting. However, it also allows 3,000 shares at a price of $ 12 per share exercisable an entity to continue to measure compensation over five years (subject to customary adjustmeras). cost for those plans using the intrinsic value based method of accounting. In May 1994, pursuant to a special antidilution provision of the 1991 Stock Purchase Agreement The Company ha:: decided to continue to apply the between the Company and Kiewit, the Company intrinsic value based method of accounting for its increased Kiewit's existing option (granted in 1991) stock-based employee compensation plans. If the fair to purchase 3,000 shares at $ 12 per share by an value based method had been applied for 1996 and additional 289 shares as a fmal adjustment under 1995, non-cash compensation expense and the effect such provisions. on net inco.ne available to common stockholders and earnings per share wom,d have been immaterial. in connection with this ininal stock purchase,

  • E*"I ""
        • '"'i
  • i" The fair value for stock options was estimated other agreements pursuant to which h. "'

"d iewit an using the Black-Scholes option pricing model its affth.ates agreed not to acquire more than 34% with assumptions for the n. k-free interest rate of s 6.00%, expected volatility of 22%, expected life of of the outstanding common stock (the " Standstill approximately 4.5 years, and no expected dividends. Percentage ) for a five-year period endm.g in The weighted average fair value ofoptions granted February 1996 and h..iewit became entitled to during 1996 and 1995 was $8.62 per option and nominate at least three of the Company,s directors. $5.72 per option, respectively. OnJune 19,1991, the board approved a number of

12. Common Stock Sales & Related Options amendments to the Stock Purchase Agreemenc and the related agreements. As part of those amendments, Su.nultaneous with the acquisition of the remaining the Company extended the term of the $9 and $ 12 eqmty interest of Magma on February 24,1995, options to seven years; tnodified certain of the other the Company completed a public offering (the terms of these options; grant 1 to Kiewit an option b

"OtTering") of I 8,170 shares of common stock' to acquire an additional 1,000 shares of the common 2E which amount included a direct sale by the stock at $11.625 per share for a tcy w term; and d Company to Kiewit of 1,500 shares and the increased the Standstill Itrcentage from 34% to 49%. ~~s exercise of underwriter over-allotment options for 1,500 shares, at a price of $ 17.00 per share. On November 19,1991, the Board approved the g, The Company received proceeds of $300,388 issuance by the Company to Kiewit of one thousand U from the OtTering. shares of Series C preferred stock for $50,000. In I: connection with the sale of the Series C preferred [ stock to Kiewit, the Standstill Agreement was [ amended so that the 49% Standstill Percentage restriction would apply to voting stock rather than just common stock.

1 cate w n c.n a n y, i.e. 74 l

13. RelatedParty Transactions all development costs equally. The Company and PKS each will provide 50% of the equity required The Company charged and recognized for fmancing a project developed by the joint a management fee and interest on advances venture and the Company will receive from the to its Cosojoint Ventures, which aggregated approximately $5,731, $6,075 and $5,569 in the project a development fee (generally 1 % of project years ended December 31,1996,1995 and 1994, capital) and will operate and manage such projects respectively. The Company has a note receivable for a fee.The agreement creates a joint development structure under which, on a project by project basis, from the Cosojoint Ventures included in deferred charges and other assets which bears a fixed interest the Company w31 be the development manager, rate of 12.5% and is payable on or before March mant.ging partner and/or project operator, and equal equity participant with PKS and a preferred 19,2002. The balance of the note is $ 11,558 and $14,254 as of December 31,1996 and 1995, participant in the construction consortium and PKS respectively. This note is subordinated to the senior will be an equal equity participant and the preferred turnkey construction contractor. The joint venture project loan on the project.

agreement may be terminated by either party The Mahanagdong Pro. ject is being constructed on 15 days written notice, provided that such by a consortium (the "EPC Consortium") of termination cannot afTect the pre-existing Kiew. Construction Group,Inc.("KCG")atd contrac.ual obligt.tions of either party. it the CE Holt Company, a wholly owned subsidary of the Company, pursuant to fixed-price, date-1 i. Extraordinary item certain, turnkey supply and construction contracts in conjunction with the Company's Senior Discount (colkctively, the "Mahanagdong EPC"). The Notes offering in 1994, the 12% Senior Notes were defeased. This resulted in an extraordinary item in obligations of the EPC Consortium under the the amount of $2,007, after the income tax efTect Mahanagdong EPC are supported by a guaranty of KCG at an aggregate amount equal to of $945. The extraordinary item represents the approximately 50% of the Mahanagdong EPC amount necessary to defease the interest payments price.TheV.ahanagdong EPC provides for and the unamortized portion of the deferred l{ maximum liability for liquidated damages of up financing costs on the 12% Senior Notes. !3 to $ 100,500 and total liability of up to $ 201,000.

13. Fair Hilue offinancialInstruments ld KCG, a wholly owned subsidiary of PKS, is the The fair.alue of a fmancialinstrument is

'c lead member of the EPC Consortium, with an the amount at which the instrument could be M 80% interest. KC'i performs construction services exchanged in a current transaction between willing 4 for awide rang public and privatecustomers parties, ther than in a forced sale or liquidation. N in the U.S. and internationally. CE Holt Company Although management uses its best judgment N provides design and engineering services for the in estimating the fair value of these fmancial EPC Consortium, and holds a 20% interest. The instruments, there are inherent limitations in any \\ Company has provided a guaranty of CE Holt estimati n techniques.Therefore, the fair value Company's obligations under the Mahanagdong estimates presented herein are not necessanly i EPC Contract. indicative of the amounts which the Company The Company has an intemational joint could realize in a current transact on. venture agreement with PKS, a stockholder The methods and assumptions used to estimate of the Company, which the Company believes fair value are as follows: enhances.its capabih.. ties m foreign power markets. The joint venture agreement is limited to Debt instruments-The fair v.lue of all debt issues international power proixt development activities listed on exchanges has been estimated based on and provides that,if both the Company and PKS the quoted market prices. agree to participate in a project, they will share h

CalE n o rgy Cemyany, Inc. 75 Interest rate swap agreements-The fair value Other fmancial instrurnents-All other fmancial ofinterest rate swap agreements is estimated instruments of a material nature fall into the based on quotes from the counter party to these defmition of short-term and fair value is estimated instruments and represents the estimated amounts as the carrying amount. that the Company would expect to receive or pay The carrying amounts in the table below are to terminate the agreements. It is the Company,s intention to hold the swap agreements to their mcluded under the m. dicated captions in Notes mtended maturity. 6 and 7 except for the interest rate s,eaps which are discussed in Note 16. 1996 1995 Estimated Estimated Carrying Fair Carrying Fair \\Wue \\Wue \\Wue \\Wue Financial assets: Interest rate swap retervable $ 100 $ 222 61 $ 561 Financialliabilitix Senior dacount r.otes $27,535 556,971 477,355 503,158 Senior rores 224.150 229,866 1.imited retour.c senior secured notes 200,000 212,560 200,000 210,500 Ca! Energy cre& fxihty 100,000 100,000 Revolving hnc ofcredit 95,000 95,tX)0 Convertible sulwrdinated debentures 100 910 100,500 Salton Sea notes and lxmds 538,982 531,807 452,088 459,629 Northern eurobonds 439,192 415,830 Construcnon loans 377,454 377,454 211,198 211,")8 Cao Fundng Corp. prwett loans 148,346 153,650 203,226 214,917 lbwer Resources Inc. project financmg deix i14,571 114.571 U K. treat faciLry 128,423 128,423 Other 7,927 7,927 54,707 54.707 Interest rate swap payable 226 672

16. Interest Rate Swap Agreements accretes annually to a maximum amount af y$

InJanuary 1993, the CosoJoint Ventures entered approximately $29,300 in 1997. Under the ~ into five year deposit interest rate swap agreements. agreements, which mature on January 11,1998, the The subject deposits represent debt service reserves CosoJoint Ventures make semi-annual payments to y established in conjunction with refmancing the Coso the counter party at variable rates based on UBOR, N Joint Ventures loans through Cosa Funding Corp. reset and compounded every three months, and in h The deposit interest rate swaps effectively convert return receive payments based on a fixed rate of b interest earned on the debt service reserve deposits 6.34W. The effective UBOR rate ranged from h from a variable rate to a fixed rate, in order to match 5.5313% to 5.9375% during 1996 and was F the nature of the interest rate on the borrowings 5.5313% at December 31,1996. The counter used to fund the debt service rescue deposi s. The party to these agreements is a large multi-national Company's proportion of the deposit amount of financialinstitution. $27,239 included in restricted cash and investments

~ CalEne'81 Co=Pany, Inc. 76

17. RegalatoryMatters during privatization in 1990; the nonfranchise Northem is subject to price cap regulation.

markets above 100kW were opened to full The Office of Electricity Regulation (" OFFER") competition starting in April 1994. controls the revenues generated by Northern in g gg gg its distribution and supply businesses by applying

    • P*

P * ** " * *

  • ""N"PP Y l

a price control formula, P + RPI - X (where X is Pens. ion Scheme, which provides pension and other i currently 3% for distribution and 2% for supply), related defmed benefits, based on fmal pensionable where Pis the price levelat the begm. rung ofeach pay, to substantially all employees throughout the new regulatory period, RPI is the change m.the Electncity Supply Industry m the Un. d Kingdom. ite Retail Pn.ceIndex and Xis an adjustment factor The actuarial computation assumed an interest ) determined by OFFER. "" '*P'"# In the distribution business, the Distribution Price "P#** Control Formula ("DPCF")is usually set for a 6ve-of 5.75% over the remaining service lives of year period, subject to more frequent adjustments employees covered under the plan. Amounts as determined necessary by the Director General funded to the pension are primarily invested 1 i of Electncity Supply (the" Regulator ). At each in equity and fixed. income secunties. l review, the Regulator can require a one-time price reduction. An initial review by the Regulator of The following table details the funded status and { allowable income in the distribution business led to the amount recognized in the balance sheet of l a reduction of the price level by 17% for Northern the Company as of December 31,1996. l starting April 1,1995, followed by efliciency factors p,,g g f of X = 2% for each year until March 2000. On %g wnce, s 797,932 July 6,1995, the Regulator announced the resuk mnwa wne&s of a further distribution price review which was humutuaknes 4Wm 79t932 precipitated by certain market events in the Effett of future increaw in corngnsatum 58,218 UK electric utility industry. For Northern, such Proiena knes eum 836aso announcement meant a further real reduction Fair vdue ofplan assets 919.163 of 11% in allowable distribution income for the Precalnenen asset s 63.o13 twelve months from April 1,1996, followed by an mm menhanMnh.ngen e efficiency factor X= 3% for each year until March There were no material outstanding lawsuits i 31, 2000, before an allowed increase for inflation. as of December 31,1996, ) i in the supply business, which is progressively being 0"" i opened to competition, price regulation still applies In November 1995, CE Casecnan Water and f to the market for customers with demand of not nergy Company, Inc., a Philippine corporation b more than 100kW The calculation of the maximum ("CE Casecnan"), closal the financing and supply charge is based on a Supply Price Control c nunenced mnstma n f theCasecnan Project, 9 ! Formula, similar to the DPCF and is set for a four-a c mbinedirrigation and 150 net MW

f year period. In 1993, OFFER announced the supply hydroelectric power generation project (the Mi franchise market (i.e., with demand of not more than "Casecnan Project") located in the central part 3l 100kW) income entitlement for the four-year period f the island of Luzon in the Republic of the i

ending March 1998. A relatively small efficiency Philippines. The Casecnan Project will consist factor of X = 2% was applied to Northem and is generally f diversion structures in the Casecnan being offset '; an allowance for both unit and and Denip Rivers that will divert water into a tunnel customer growth. The nonfranchise markets f appmxim tely 23 kilometers.The tunnel will (above 1 MW) were opened to full competition

CalE n e rg y Company, i n,- 77 transfer the water from the Casecnan and Denip The Project Agreement provides for additional Rivers in the Pantabangan Reservoir for irrigation compemation to CE Casecnan upon the airrence and hydroekttric use in the Central Luzon area. An of certain events, induding increases in Philippine underground powerhouse located at the end of the taxes and adverse changes in Philippine law. water tunnel and before the Pantabangan Reservoir Upon the occurrence and during the continuance will house a power phnt consisting of approximately of certain force majeure events, including those 150 MW of newly instalkd rated electrical capacity. associated with Philippines political action, NIA A tailrace tunnel of approximately three kilometers may be obligated to buy the Casecnan Project from will deliver water from the water tunnel and the new CE Casecnan at a buy out price expected to be in powerhouse to the Pantabangan Reservoir, providing excess of the aggregate principal amount of the additional water for irrigation and increasing the outstanding CE Casecnan debt securities, together potential electrical generation at two downstream with accrued but unpaid interest. At the end of existing hydroelectric facilitie:, of the National the Cooperation Period, the Casecnan Project will Power Corporation of the Philippines ("NPC"). be transferred to NIA and NPC for no additional consideration on an "as is" basis. CE Casecnan, which is presently m. directly owned as to approximately 35% ofits equity by the Company The Republic of the Philippines has provided and approximately 35% by PKS, is developing a Performance Undertaking unJer which NI A's the Casecnan Project under the terms of the Project obligations under the Project Agreement are Agreement between CE Casecnan and the National guaranteed by the full faith and credit of the irrigation Administration ("NIA"). Under the Republic of the Philippines. The Project Agreement Project Agreement, CE Casecnan will develop, and the Performance Undertaking provide for the fmance and construct the Casecnan Project over resolution ofdisputes by binding arbitration in an estimated four-year construction period, and Singapore under international arbitration rules. thereafter own and operate the Casecnan Project The Casecnan Proj.ect is being constructed on for 20 years (the " Cooperation Pen. d"). During o the Cooperation Period, NIA is obligated to accept a joint and several basis by Hanbo C,orporation all deh.venes ofwater and energy, and so long as the and Hanbo Engineering & Construction Co. Ltd. Casecnan Proj.ect is physically capable of operating (formerly known as You One Engineering & Construction Co., Ltu., and herem. referred to and deh.venng n accordance w. h agreed levels set it as "HEWMWh M h forth in the Pro;xt Agrtement, NIA will pay tE Casecnan a guaranteed fee for the delivery of water ' 'E '"U "'I""*" " certain, turnkey construction contract (the and a guaranteed fee for the deh.very ofelectncity, " Turnkey Construction Contract ). Hanho regardless of the amount of water or electncity e actua!!y delivered. In addinon, NI A will pay a Corporation and HECC(sometimes collectively referred to as the "C,ontractor ) are under commor, fee for all electncity deh.veredin excess of a threshold ownersh.ip cc. ural. Hanbo Corporation is an amount up to a specified amount. Nl A will sell the electric energy it purchases to NPC, although international construction company. HECC, [ NI A's obligations to CE Casecnan under the Proj. which recently emerged from a court-adm..inistered M. ect b Agreement are not dependent on NPC's purchase receivership, is a contractor with over 25 years F s: of the electricity from NIA. All fees to be paid by

    • P'"""'""*""'

"'" "S b NIA to CE G, setnan are payable m. U.S. dollars. the drill-and-blast and runnel boring machine t ("TBM") methods. The guaranteed fees for the delivery of water and energy are expected to provide approximately 70% ofCE Casecnan's revenues. f

Cele n e rgy C o u p., n y, Inc. 78 The Contractor's obligations under the Turnkey KFB has recently reconfirmed to CE Casecnan Construction Contract are guaranteed by Hanbo that it will honor its obligations under the Caseenan Iron & Steel Company, Ltd. ("Hanbo Steel"), Project letter of credit and also has stated its support a large South Korean steel company. In addition, for the successful completion of the Casecnan the Contractor's obligations under the Turnkey Project. However, Moody's Investors Service has Construction Contract are secured by an recently issued a waming for a possible ratings unconditional, irrevocable standby letter of downgrade for KFB because ot the possible irpact ~ credit issued by Korea First Bank ("KFB") in the of the Hanbo Steel receivership on the substantial approximate amount of $ 118,000. The total cost loans KFB previously made to Hanbo Steel. In a of the Casecnan Project, including development, related development, the South Korean goven. ment construction, testing and startup, is estimated has recently announced that it would provide some to be approximately $495,000. funding to assist Hanbo Steel's creditor banks (including KFB) and its subcontractors. In lateJanuary 1997, the Company was adv. d ise that Hanbo Corporation and Hanbo Steel had each CF Casecnan fmanced a portion of the costs of the / fded to seek court receivership protection in Korea. Casecnan Project through the issuance of $125,000 At the present time, all of the construction work on ofits 11 A5% Senior Secured Series A Note due the Casecnan Project is being performed by the 2005 and $171,500 ofits 11.95% Senior Secured second contractor which is party to the Turnkey Series B Notes due 2010 pursuant to an indenture j Construction Contract, HECC. Although HECC, dated November 27,1995, as amended to date { Hanbo Corporation and Hanbo Sal are under (the "Casecnan Indenture"). Although no default common ownership control, HECC has not fded for has occurred under the Casecnan Indenture as receivership protection and is believed to be solvent. a result of the announced receivership of Hanbo However, no assurances can be given that HECC Corporation, CE Casecnan will continue to closely will not fde for receivership due to the foregoing monitor the Hanbo group and KFB developments developments or that it will remain solvent and and project construction status and develop able to perform fully its obligations under the appropriate contingency plans. Turnkey Construction Contract. If HECC were to materially fail to perform.its 4 - The work on the Caseenan Project, which obligations under the Turnkey Construction jj commenced in 1995,is presently continuing Contract and if KFB were to fail to honor its jl on schedule and within the budget. CE Casecnan obligations under the Casecnan letter ofcredit, 4 is presently reviewing its rights, obligations such actions could have a material adverse effect f((' and potential remedies in respect of the recent on the Casecnan Project and CE Casecnan. E developa.ents regarding the co-Contractor and However, based on the information presently p the guarantor and is presently unable to speculate available to it, CE Casecnan does not presently y as to the ultimate eflect of such developments on expect that either such event will occur. CE Casecnan. However, CE Casecnan has recently received confirmation from HECC : hat it intends Certam retan facih. ies, buildmgs and equipment t (l to fully perfbrm.its obligations under theTurnkey

  • ***** *N" " E*

"Y"8 Construction Contract and complete the Casecnan fun ne t 75 years and some prcvide for Project on schedule and within the budget. E' ~i Additionally, it has been repor~d that the South Korean government has informed the Philippine govemment that the South Korean government will take appropriate actions to support HECC's completion of the Ca<ecnan Project.

Calf e r rgy C o nt p a n y. Inc. 79 At December 31,1996, the Company's future at the option of the holder thereof at any time minimum rental payments with respect to into 1.1655 shares of Ca! Energy Common Stock non-cancelable operating le tses were as follows: (equivalent to a conversion price of $42.90 per share of the Company's Common Stock), subject , 9y, 1998 8,897 to Customary anti-dilution adjustments. [j Until converted into the Company's Common gg Stock, the Trust Securities will have no voting rights h em 6 t.w with respect to the Company and, except under 3 g9n certain limited circumstances, will have no voting rights with respect to the Trust. Distributions on

20. Subsequent Erent the Trust Securities (andJunior Debentures) are On February 26,1997, CalEnergy Capital Trust II, cumulative, accrue from the date ofinitial issuance a special purpose Delaware business trust organized and are payable quarterly in arrears, commencing by the Company (the " Trust 11"), pursuant to the Amended and Restated Declaration of Trust (the

'fune 1,1997. TheJunior Debentures are subordinated in right of payment to all senior qeclaration") dated as of February 26,1997, indebtedness of the Company and theJunior completed a private placement (with certain shelf Debentures are subject to certain covenants, registration rights)of $150,000 of trust preferred events of default and optional and mandatory comertible securities, referred to as Company-redemption provisions, all as described in the obligated mandatorily redeemable convertible Junior Debenture indenture. preferred securities of subsidiary trust holding solely convertible debentures (" Trust Securities"). Pursuant to a Preferred Securities Guarantee In addition, an option to purchase an additional Agreement (the " Guarantee"), between the 600 Trust Securities, or $30,000, was exercised Company and a preferred guarantee trustee, by the initial purchasers to cover over-allotments. the Company has agreed irrevocably to pay to the holders of the Trust Securities, to the u,:nt The Trust has issued 3,600 of 6 %% Trust Securities that the Trust has funds available to make such with a liquidation preference of fifty dollars each-payments, quarterly distributions, redemption The Company owns all of the common securities payments and liquidation payments on the Trust of the Trust. The Trust Securities and the common Securities. Considered together, rhe undertaking I securities represent undivided beneficial ownership contained in the Declaration, Junior Debentures, interests in the Trust. The assets of the Trust consist Indenture and Guarantee constitute a full and solely of the Company's 6 %% Convertible unconditional guarantee by the Company of the p Junior Subordinated Debentures due 2012 in h Trust's obligations under the Trust Securities. an outstanding aggregate principal amount of p $ 180,000 (" Junior Debentures") issued pursuant A ortion of the net proceeds of the Trust p, P to an indenture dated as ofFebruary 20,1997. Securities offering were used to repay the i The indenture includes an agreement by the CalEnergy Credit Facility. [ Company to pay expenses and obligations incurred I by the Trust. Each Trust Security will be convertible

[. Cn/Eesegy Coayany, Inc. 1 m

21. GeographicInformation The Company operates in one principal industry segment: the generation, distribution and supply of electricity to customers located throughout the world. The Company's operations by geographic area are as follows:

1996 1995 1996 1995 1994 identifiable assets Revenue Americas 457,032 355,112 154,562 Americas $ 2,613,830 $ 2,194,873 Asia 35,691 Asia 713,570 459,165 39,191 Europe 2,385,507 Europe 531,914 355,112 154,562 $ 5,712,907 $ 2,654,038 l Operating inconw (loss) Americas 203.305 155,885 77,450 Asia 17,914 Europe 6,163 ) 227,382 155,885 77,450 1 1

22. Quarterly FinancialData (Unaudited)

Following is a summary of the Company's quarterly results of operations for the years ended De and December 31,1995. Three Enths Endal

  • March 31 June 30 kptember 30 December 31 4

1996:(D Sales of elecincity and steam 8 75,944 $ 104,735 $ 165,487 $ 172,768 Ltal revenue 90,356 115,794 179,M8 190,997 l Total cost. and expenses 69,398 87,482 123,169 160,433 income before provmon for income taxes and minority mterest 20,958 28,312 55,879 30,5M t Provisam for income taxes 6,497 9,NO 18,325 7,959 Net income before minority interest 14,461 19,272 37,554 22/>05 l. Minonry interest 1,431 Net income attnbutable to :ommon shares $ 14,461 $ 19,272 $ 37,544 $ 21,174 Net income per share - pnmary $.27 $.35 $.67 $.33 Net mcome per share - fully diluted $.26 $.33 $.59 $.32 Three Enths Ended * -d March 31 June 30 September 30 December 31 ,[ 1995:(2) lh Sales of electrnity and steam $ 72,978 $ 81,756 $ 102,423 $ 78,473 86,685 97,096 119,717 95,225 lh Taal revenue I;[ Total costs and expenses 68,527 76,957 79,898 76,290 ,a income before provisioc 'or income taxes and minonry interest 18,ISS 20,139 39,819 18.935 Provision for income taxes 5,540 6,;48 12,457 6,386 J0. Net income before minonry mterest 12,618 13,891 27,362 12.549 3,005 Minority interest 9,613 13,891 27,362 12,549 -l Net income Preferred dividerxis 1,080 Net income attributable to common shan $ 8,533 $ 13,891 $ 27,362 $ 12.549 $.21 $.27 $.52 $.24 Net income pet share - pnmary Net income per share -fully dduted 3.21 $.27 $.48 $.18

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CalE n u gy C e nt p a n y, Inc. hidependent Auditors' Report i Board ofDirectors and Sharr!.ws/ders CalEmrgy Company. Inc. Omaha, Nebraska We have audited the accompanying consolidated balance sheets of CalEnergy Company, Inc. and subsidiaries as of December 31,1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three yean in the period ended December 31,1996. These financial statements are the respondbihty of the Lompany's management. Our responsibility is to express an opinion on these financial statements baxd on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are j free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts J and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audits provide a reasonable basis fo our opinion. In our opinion, such consolidated fmancial sta:ernents present fairly, in all material respects, the f.nancial position of CalEnergy Company, Inc. and subsidiaries at December 31,1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1996, in conformity with generally accepted accounting principles, karb W wo Deloitte & '1buche iLP Omaha, Nebraska January 31, I997 (rebrnary 27,1997 s to NA 6 sm/ 20) h - ? y r F r

C ale n e rg y Centany. Inc. \\ T Co$ orate Information \\ CommAn AND AMERICAS REGON Exa dire Ojken kardofDirnton david L Somt DwtD L Somt ilEADQtARTIR5 Chairman of the Board and Chairman cf the Board and CalEnergy Company,Inc. Guef Executive OGcer Gief Executive OGcer 302 S 36th Street, Suite 400 Omaha, NE 68131-3845 Ca! Energy Company,Inc. GREuoRY E. Anti Telephone: 402-341-4500 j Omaha, NE Presilent and ChiefOperating OGcer, Fax: 402-345-9318 j CalEnergy Europe and EDcAR D. ARON 50N i EURort REuoNllEADQUARnRS Chief Acuunting Ot&er, PresiJent Northern Electric plc CalEnergy Company,Inc. EDACO,Inc. Carhullbuse New York, NY Tuosto R. MASON Market Street l Preslent and Chief Operaung Other, JUDmt E. AYREs Newcastle upon Tyne NE16NE l CalEnergy AmerKas Pnnapal Telephme: 01144-191210-2000 j The Environmental Gr ap I STWEN A.McARmUg Fax:Oll 44-191 210-2109 San francisco,CA Seninr We Preslent. General Giunsel AstA REuoN HEADQUARTERS and Secretary JAMES Q. Crows CalEnergy International Chairman tide Board DONAl.D M.O'SHEt,JR. Plaza Barindo WbrlJCom,Inc. Preslent and D OperatingO&er, Menara I. 26th [1oor Omaha, NE CalEnergy Asia f RimARD K. DAviDsON RoaERT S. SILBERMAN Chairman and Oiicf Execunve Ot&er g Senior We President, Union Pad 6c Grporation fax:011-6221526-6662 Marketing /implernentation/ Bethlehem, PA Strategw Planning DAv1D 11. DElmCRST ChaseMellon Shareholder Senkes JOHN G. Sum Chairman andChief Executive Orker 2 23 B m S e2m Senkr Vice President and Falcon Se ard Holdings, LP g Chief Financial OGce, 8 " 35-9210 open Overseas call collect at 212-613-7427 DoruAs L ANDERSON re n ^""5 Assistant General Counsel and Kiewir Diversi6ed Grtmp,Inc. De ne & Touc.ne1.LP Assistant Secretary, CalEnergy and Omaha, NE 2000 First Nanonal Center l GeneralCounselCa1 Energy Americas DAnD R. MORRIS Omaha, NE 68102 Er TARD F. BAzcMoRE Chairman (retired) 8*8 We President, Human Resources Northern Electnc plc ew YMUWxhge SymW l J.DoUctas Dime Newcasde upon Tyne,U K. London Stak Exchange Symbol: CE We Prestent, Strategic Planning BERNARD W REZNICEK Pau6c Stock Exchange Symtol:CE VLvINT R. FEsMIRE National Directm, Utility Marketing "" EI#"8 Wy Pvsident, Constnrtion Central States indemrury Company ofOmaha M*Y Omaha, NE and Engineering ADRIAN M. FOLEY WALTER SCtJIT,JR. We Presilent, Marketing President and Chairman of the Duard 302 S. 36th Street, Suite 400 Itter IGewit Sons',Inc-Omaha, NE 68131-3M5 PATRickJ. GOODMAN ,a Omaha, NE Telephone: 402-341-4500 Controller .:)[ JOHN R. SHINEk Fax: 402 231 1578 $[ BRIAN K. ((ANKEt E-mad: ilaudin@ mcimail.cnm Partner Treasurer j Q" j MMrison Fuemer FORM II)-K AND 8-K E! FREDERKK L MANUEL la Angeles,CA TheGmAmp AmalR4wr on Tvre 10 Kiffikd b[ Vice President, Indonesia u,sh ok yuntia amt Exhay, co,muio,. tw,at, DwlD E. WIT k DALE R.SmvsTER Chief Executive OGcer in 9 erat,3,, anomfjon,vddadpirvrit air udjar to ' "W"*"#"'* ***"P*'NNI 'I"'"U'", i We PresiJent, Implemencarion J th Cm/onis fune 8-K, datalfebruary 21 1997 ?l JwEs D.STAtmmR ew Assistant General Gunsel, CalEnergy EN IloLT (Extants) f4durth sk kertria.rm/ Eu4ege Genmueen. Tk anJ GeneralCoumel,Ca! Energy Asia Founder and Chairman (retirnh Catany ui#/ntdr a crpy ofsk Furs to-Kandthe Tvrm 8-K usikat darge. Copin efahdtts to sk Fem U'" CE Hdt Company ce President and General Manager, (formedy The Ben Holt Co.) 10 K ail /6e/unrihdu/enpay=nt ofafr equ. die sl} - she Ganpanis muon.dk afema mfurrailing unh W' Pasadena,CA O'in P/w dems ywr unna quas tw JmAmAN M.WEncrit EvtRErr B. LAnioCRNE, EsQ. (EMERITUS) Uce President,legidative and Attomey at Law JEFFREY S. IAUDIN Investor Relations Manager E'8"I*"# # *"' la Angeles,CA CalEnergy Company,Inc. Buros W SHMIE110RD(EMtRrfUS) 302 S. 36th Street, Suite 400 President ( etired) Omaha, NE 68131-3M5 Padic Gas & Electric Company San Francisco,CA E al Meeting of the Shareholders will be held on May 15,1997 at 9:00 a.rn. kral tirne at Joslyn Art Museum, Witherspuun Concert ifall,2200 Dodge Street, Omaha, Nebraska

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