ML20205J608

Forwards pre-merger Calenergy Co,Inc,pre-merger Midamerican Energy Holdings Co,Also Showing pre-merger Midamerican Co, Current non-operating Owner of Quad Cities & Consolidated Chart Reflecting Each of Listed Entities.Without Encls

ML20205J608
Person / Time
Site:	Quad Cities
Issue date:	09/16/1998
From:	Lessy R AKIN, GUMP, STRAUSS, HAUER & FELD (FORMERLY AKIN
To:	Pulsifer R NRC
Shared Package
ML20205J573	List: ML20205J569 ML20205J583 ML20205J593 ML20205J597 ML20205J601 ML20205J608
References
FOIA-99-134 NUDOCS 9904120103
Download: ML20205J608 (3)

Text

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J S AKIN, GUMP, strauss, HAUER & FELD, L.L.P.

ATTORNEYS AT LAW BRUSSC'.S A REolSTERED UMrrED UABILMY PARTNERSHIP cauas sucwoemo PMorEsslONAL CORPORADONS 1333 NEW HAMPSHIRE AVENUE, N.W.

Losano m SUITE 400 Moscow WASHINGTON D.C. 20030 new " (202) 8e7 4000 "N"

FAX (202) e67 42e8 8^"

• www skingump.com WRrrER'S E-MAIL ADDRESS Riessy@akjngump.com Roy P. Lessy, Jr.

(202)887-4500 September 16,1998 VIA HAND DELIVERY Foben M. Pulsifer Senior Project Manager l U.S. Nuclear Regulatory Commission Mail Stop - 13D One White Flint North 11555 Rockville Pike Rockville, Maryland 20852-2738 Re: Quad Cities Nuclear Power Station, Units 1 and 2 50.80 Apolication l

Dear Mr. Pulsifer:

Attached pursuant to your request to Mr. Mark E. Wagner of Comed, are copies of the following organizational charts:

1) Pre-Merger CalEnergy Company, Inc.;

2) Pre-Merger MidAmerican Energy Holdings Company, also showing pre-merger i MidAmerican Energy Company, the current non-operating owner of Quad Cities, and;  ;

3) A (consolidated) chart reflecting each of the above entities, post-merger. This chart is entitled " Post-Merger MidAmerican Energy Holdings Company."

I 9904120103 990407 '

PDR FOIA 2 ORABER99-134 PDR

f AKIN. GuMP, STRAu23. HAutR & FELD L.L.P.

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September 16,1998 Page 2 i

If there are any questions relative to the abeve, or if any additional information i required, please contact the undersigned or Mr. Bob Rybak of Comed.

Very truly y urs, s

Roy . Lessy, Jr.

Merrill L. Kramer, P.C.

AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

(202) 887-4500 f Counsel for CalEnergy Company, Inc. and i

MidAmerican Energy Company l

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L Michael DusarJ:vskyj, NRR, Mail Stop 0-11-Fi Bob Rybak, Comid

NRR WORK REQUEST i30 sec.

13G PM REQUEST AGREED TO* /

Priority: 3 Priority: ,

Target Date: 12/15/98 Target Date: /

Staff-hr Estimate: 80 Staff-hr Estimate: [

PD Signature /Date:$ 9/AliB Branch Signature /Date- 1 BACKGROUND INFORMATION Plant: Quad Cities I

. Unit (s): 1&2 Project Director: Stu Richards O-i3C9 l Project Manager: Bob Pulsifer , A' W/7 Phone: 415-3016 Email: RMP3 M/S: 0-13D1 I TAC No(s): MA3516 MA1 d #7M_. ,

Licensee Proposed Action /Suptffittal Date: Letter dated Seotember 10.1998 reauests acoroval of an indirect license transfer between MidAmerican Enerav_Co. (25% owners of Quad Cities) and CalEnerav Comoany oursuit to 10 CFR 50.80.

ASSISTANCE REQUESTED l i

Technical Branch: PGEB Other tbs Providing Input / Concurrence: .

l Scope of Review / Product Requested: Review reauest and orovide safetv evaluation.

Possible Precedents: MidAmerican indirect license transfer to MidAmerican Energy Holdings -

Comoany dated 7/29/96. M/

PM Signature /Date: -M . b, , -

/ , NC 4.3 Iv I

$ q,b TECHNICAL BRANCH RESPONSE TB Product: 56/2 i

Assigned Reviewer: M. hu4dM4 /SM4'[ Phone: W-M Email: NO/

Comments:

m]& & PA hg N SS 6 nub'Md o SN UW' ' '

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) }

• Any change in target date, pn'ority or staff-hr estimate should be negotiated with the PM before revising.

In addition, please inform the PM of any additional tbs required, that are not identified above, for the review.

- Return to PM Within 5 Workina Davs of Recejnt-I

Commmi*ealth Ikliwo Cumiuny 14un opu. Pt. ace Durners Grswe.11. fMIMhil

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September 10,1998 U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555-0001 Quad Cities Nuclear Power Station, Units 1 and 2 Facility Operating License Nos. DPR-29 and DPR-30 NRC Docket Nos. 50-254 and 50-265  ;

1 Subject- Request for Approval of an Application for Indirect Transfer of Control l Involving Facility Operating License Nos. DPR-29 and DPR-30 Pursuant to 10 CFR 50.80 The purpose of this letter is to request approval from the Nuclear Regulatory Commission (NRC), pursuant to 10 CFR 50.80, for the indirect transfer of all of MidAmerican Energy Company's interest in the facility operating licenses for Quad Cities Nuclear Power Station, Units 1 and 2, to MidAmerican Energy Company, as a wholly-owned subsidiary of CalEnergy Company. CalEnergy Company and MidAmerican Energy Holdings Company have entered into a merger agreement, I under which CalEnergy will acquire MidAmerican Energy Holdings Company (MEHC). I the current parent company of MidAmerican Energy Company. MidAmerican Energy Company will remain as the NRC licensee as described in the existing facility operating licenses for Quad Cities Nuclear Power Station, Units 1 and 2.

The application for the proposed indirect transfer of control is enclosed. This application is accompanied by a cover letter on behalf of MidAmerican Energy Company. MidAmerican Energy Company will continue to hold a twenty-five percent (25%) non-operating ownership interest in Quad Cities Nuclear Power Station, but as a wholly owned subsidiary of CalEnergy Company. Commonwealth Edison (Comed)

Company will continue to own the remaining seventy-five percent (75%) and will remain the licensed operator of the facility with exclusive responsibility and control over the construction, operation and maintenance of the facility. The proposed transfer of control has no impact on the terms and conditions of tne existing operating licenses or Technical Specifications for Quad Cities Nuclear Power Station, Units 1 and 2, and in no way impacts the organization or personnel responsible for operation of the facility. Therefore, a request for a change to the facility operating licenses is not required.

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U.S. Nuclear Regulamry Commission 2 September 10.199s In order to facilitate the merger described in the enclosed application, Comed requests that the NRC approve the Indirect transfer of all of MidAmerican Energy Company's interest in the facility operating licenses for Quad Cities Nuclear Power Station, Units 1 and 2, to MidAmerican Energy Company as'a wholly owned subsidiary of CalEnergy Company, by December 31,1998.

The following commitments are ir:cluded in the enclosed application.

e When all fifteen of the directors of Ca! Energy are selected, Ca! Energy will promptly notify the NRC and will provide all information required by the NRC regarding any director.

. MidAmerican will provide the Director of the Office of NucJear Reactor Regulation a copy of any application, at the time it is submitted, to transfer from MidAmerican to its proposed parent or to any other affiliated company, excluding grants of security interests or liens, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding ten percent (10%) of MidAmerican's consolidated net utility plant, as recorded on MIdAmerican's books of account.

Comed is notifying the State of Illinois of this appilcation by transmitting a copy of this letter and its enclosure to the designated state official.

If you have any questions conceming this letter, please contact Bob Rybak at (630) 663-7286.

Respectfully l h R. M. Kric -

Vice President-Regulatory Services l.

Enclosure:

Application of CalEnergy Company and MidAmerican Energy Company for Indirect Transfer of Control ec: Regional Administrator- NRC Region 111 NRC Senior Resident inspector - Quad Cities Nuclear Power Station

UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION Commonwealth Edison Corrr c.ny ) Docket Nos. 50-254 and 50-265 and ) ,

Facility Operating License Nos.

MidAmerican Energy Company ) DPR-29 and DPR-30

) Quad Cities Nuclear Power Station, Units 1 and 2 APPLICATION of CALENERGY COMPANY and MIDAMERICAN ENERGY COMPANY for INDIRECT TRANSFER OF CONTROL Commonwealth Edison Company (" Comed") and MidAmerican Energy Company

("MidAmerican") are the holders of Facility Operating License Nos. DPR-29 and DPR-30 (the Licenses) for Quad Cities Nuclear Power Station, Units 1 and 2 (Quad Cities). MidAmerican holds a twenty-five percent (25%) ownership interest in Quad Cities. Comed owns the I

remaining seventy-five percent (75%) share of Quad Cities and is the licensed operator of the facility. By Agreement and Plan o Merger ated as of August 11,1998 (" Merger Agreement"),

CalEnergy Company Inc. (hereinafter "CalEnergy"), a Delaware corporation based in Omaha, h

Nebraska, agreed t acquirei didAmerican Energy Hol?' , Company ("MEHC")) an Iowa s

Corporation and the parent company of MidAmerican, for 527.15 a share in cash. or 52.65 billion, plus the assumption of S1.4 billion in debt and preferred stock. By this Application, CalEnergy and MidAmerican, with the support of Comed, request the consent of the Nuclear l Regulatory Commission (NRC), pursuant to 10 C.F.R. Q 50,80, for the indirect transfer of all of MidAmerican's interests in the above-referenced Quad City licenses to CalEnergy. A wholly-owned subsidiary of CalEnergy will merge with and into MEHC, resulting in CalEnergy g

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becoming the parent company of MEHC. MidAmerican, an " electric utility," will remain as the l

NRC licensee as described above, but will become a wholly-owned subsidiary of CalEnergy, with MEHC as an intennediary holding company.

CalEnergy also will reincorporate in Iowa and change its name thdArnerican Energy Holdings Company (MHC References herein to "CalEnergy" would be applicable to MHC N

following its reincorporation.

DISCUSSION:

I. Introduction CalEnergy and MEHC have entered into an Agreement and Plan of Merger, dated as of August 11,1998, (the Merger Agreement). A copy of the Merger Agreement is attached hereto as Exhibit 1. Pursuant to the Merger Agreement, a wholly-owned subsidiary of CalEnergy will merge with and into MEHC. As a result of this merger, MidAmerican shall become a wholly-owned subsidiary of CalEnergy, through MEHC. i MidAmerican was formed as the result of a merger between Iowa-Illinois Gas and Electne Company, Midwest Power Systems Inc. and Midwest Resources Inc. as of July 1,1995.

In December of 1996, MEHC was formed as the holding company of MidAmerican. MEHC is i an exempt holding company under Section 3(a)(1) of the Public Utility Holding Company Act of  !

1935,15 U.S.C. @ 79c(a)(1) (PUHCA). MidAmerican, an " electric utility" pursuant to 10 C.F.R. 50.2, is engaged principally in the business of generating, transmitting and distributing electric energy to approximately 648,000 customers and providing natural gas service to 619,000 customers in Iowa, Illinois, Nebraska and South Dakota. The largest c'.,mmunities to whom MidAmerican provides electric service are Des Moines, Sioux City, and Council Bluffs, Iowa and the Quad Cities metropolitan area ofIowa and Illinois. MidAmerican's gas customers are j 2

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I located largely in the in the Des Moines, Sioux City and in the Iowa City, Cedar Rapids, Otumwa and Fon Dodge, Iowa areas, the Quad Cities metropolitan area, as well as in smaller areas in South Dakota and Nebraska. In addition, MiMmerican has a long-term contract for the ACE AS C,V STOtiiER. 'Ei/ Puh.4Aslu6. (oMY) .

purchase of fifty percent (50%) of the capacity and energy from the Cooper Nuclear Station.

Quad Cities Station is a two-unit nuclear electric generating facility which is operated by Comed on behalf ofitself and MidAmerican pursuant to the Quad Cities Station Ownership Agreement, dated as of March 17,1967, as amended (Ownership Agreement), and the Quad Cities Operating Agreement, dated as of November 24,1967, as amended (Operating Agreement), and in accordance with the applicable Licenses. Under the Ownership Agreement and Operating Agreement, Comed acts as agent for MidAmerican and has exclusive ,

l responsibility and control over the construction, operation and maintenance of Quad Cities Station. As noted above, Comed owns a seventy-five percent (75%) ownership share of the

! Quad Cities Station, and MidAmerican owns the remaining twenty five percent (25%) ownership l

share.

! II. The Merger As a result of the Merger Agreement, a wholly-owned subsidiary of Ca1 Energy will merge with and into MEHC in a transaction, as the result of which MEHC shall become a wholly-owned subsidiary of CalEnergy (as renamed and reincorporated in Iowa) and the stockholders of MEHC will receive cash in the amount of 527.15 for each share of common stock, no par value, of MEHC common stock held by them.

Immediately prior to consummation of the merger, CalEnergy (a Delaware corporation) will change its state ofincorporation by merging with and into another wholly-owned subsidiary, CalEnergy Reincorporation Sub (an Iowa corporation), in a transaction in which CalEnergy 3

Reincorporation Sub will be the surviving entity, to be renamed MidAmerican Energy Holdings Company upon consummation of the merger.

l Upon effectuation of the merger, CalEnergy, by reason of the merger, will succeed to the l ownership of all of the property and interests of MEHC. In addition, CalEnergy and its subsidiaries will asserae all of the business activities ofits predecessor companies.

By succeeding to the ownership of all of the property of MidAmerican by reason of the merger, CalEnergy will become the parent holding company of MidAmerican and MidAmerican's twenty-five percent (25%) ownership interest in Quad Cities Station. The merger will not affect the ownership rights of Comed in Quad Cities Station or its operating l responsibilities under the Ownership Agreement and the Operating Agreement, nor will the merger affect MidAmerican's standing as an " electric utility." Moreover, MidAmerican shall continue to be subject to both of the above Quad Cities agreements and its NRC licenses upon l the closing of the merger.

n-The proposed merger will have no effect on the operation of Quad Cities Station, its

[ operator or the Licenses. Therefore, Comed will continue to operate Quad Cities Station after the merger as required by the Ownership Agreement, the Operating Agreement and the Licenses.

Subject to SEC review, proxy materials are currently expected to be distributed to the shareholders of CalEnergy and MEHC during the week of September 21,1998 with special meetings of the shareholders of CalEnergy and MidAmerican are expected to be held on October i

30,1998.

In addition to this Application, other applications, reviews or proceedings relating to the proposed merger are required by, and are being submitted to the Federal Energy Regulatory Commission (FERC), the United States Department of Justice (DOJ), the Federal Trade Commission (FTC), and the Iowa Utilities Board. There are no state utility regulatory reviews in 4

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Nebraska, South Dakota, or Illinois, although MidAmerican is required to comply with certain notice and reporting requirements under Illinois law.

The information required to be included in an application for transfer of a license pursuant to 10 C.F.R. 50.80 is provided below. This information demonstrates that this J requested consent is consistent with applicable provisions oflaw, NRC regulations and NRC orders.

III. Requested Consent The proposed merger requires no change in the design or eperation of Quad Cities I

Station. Furthermore, the merger does not require or contemplate any change in the tenns of the l

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technical specifications for Quad Cities Station. Howeve., the merger may be deemed to affect a change in control of the ownership of MidAmerican's twenty-five percent (25%) interest in Quad Cities Station. Accordingly, this request is for consent under 10 C.F.R. { 50.80 for transfer of the Licenses to reflect the effective change in control of such non-operating ownership I interest.

IV. General Information Concerning the Licensee A. Name and Address of Current Licensee:

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MidAmerican Energy Company 666 Grand Avenue P.O. Box 657 Des Moines,IA 50303 Name and address of Proposed Licensee: j MidAmerican Energy Company (a wholly-owned subsidiary )

666 Grand Avenue P.O. Box 657 of Inc.CalEnergy Company ')

of Omaha, Nebraska I Des Moines,IA 50303

' CalNHC comorate headquarters will relocated to Des Moines, Iowa upon consummation of the merger.

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! Description of Business or Occupation of Proposed Licensee:

L Following the merger, MidAmerican will continue to be an " electric utility" primarily engaged in the generation, transmission, distribution and sale of electricity and gas in Iowa, I

- Illinois, Nebraska (gas only) and South Dakota.

B. . Organization and Management of Licensee:

MidAmerican is engaged in the business of generating, transmitting, distributing and selling electric energy and distributing, selling and transporting natural gas. MidAmerican L

provides electric service in Iowa, Illinois and South Dakota, and gas service in Iowa, Illinois,

. Nebraska and South Dakota. MidAmuican provides retail electric service to approximately 648,000 customers a tail gas service to approximately 618,000 customers. MidAmerican also sells electric energy at wholesale and provides interstate transmission service over its l'

electric transmission facilities.

MEHC is an Iowa corporation headquartered in Des Moines, Iowa. MEHC is an exempt public utility holding company pursuant to Section 3(a)(1) of PUHCA. MEHC is the parent company of MidAmerican.

CalEnergy, a Delaware corporation headquanered in Omaha, Nebraska, is a global energy company that manages and owns interests in'over 5,000 megawatts of power generation facilities in operation (1,689 MW of equity interests), constmetion and development. Through _

its U.K. subsidigy.,

i CalEnergy supplies and distributes electricity and gas to 2.0 million customers in the United Kingdom. CalEnergy produces energy from diversified fuel sources, including geothermal, natural gas and hydroelectric. In the year ended December 31,1997, CalEnergy generated revenues of over $2.2 billion and had assets of approximately 57.5 billion.

The principal executive offices of Cal Energy are located at 302 South 36'h Street, Suite 400, Omaha, Nebraska 68131, and its telephone number is (402) 341-4500.

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The officers of MidAmerican, who are all citizens of the United States and can be reached at MidAmerican Energy Holding Company c/o Paul J. Leighton at 666 Grand Avenue, P.O. Box 657, Des Moines,IA 50303, and their titles are:

Jack L. Alexander Vice President l

James Avenveg Vice President Stanley J. Bright Chairman, President and Chief Executive Officer Brent E. Gale Vice President & Assistant Secretary Ronald J. Giaier Vice President, Treasurer & Assistant Secretary i

Keith D. Hartje Vice President l James J. Howard Vice President and Assistant Secretary l

l Paul J. Leighton Vice President, Corporate Secretary & Asst. Treasurer l

David J. Levy Senior Vice President John A. Rasmussen, Jr. Senior Vice President and General Counsel

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l J. Sue Rozema Vice President Larry M. Smith Vice President & Controhr Wayne O. Smith Executive Vice President l Ronald W. Stepien Executive Vice President Beverly A. Wharton Senior Vice President Alan L. Wells Senior Vice President and Chief Financial Officer The directors of MidAmerican Energy Holdings Company, who are all citizens of the United States and can be reached at MidAmerican Energy Holdings Company, c/o Paul J.

Leighton,666 Grand Avenue, Des Moines, Iowa 50303, are:

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John W. Aalfs Stanley J. Bright Ross D. Christensen Russell E. Christiensen John W. Colloton Frank S. Cottrell Jack W. Eugster Nolden Gentry Richard L. Lawson Robert L. Peterson Nancy L. Seifert . W. Scott Tinsman Leonard L. Woodruff The directors of MidAmerican, who are all citizens of the United States and can be reached at MidAmerican Energy Company, c/o Paul J. Leighton,666 Grand Avenue, Des I

Moines,Io va 50303 are:

Stanley J. Bright Wayne O. Smith Ronald W. Stepien The senior officers of CalEnergy who are all citizens of the United States, with the exceptions of Messrs. Abel and McAnhur, who are citizens of Canada, and Messrs. Conner, l

gdler and Youngs, who are citizens of the United Kingdom, and can be reached at Cal Energy Company, Inc. c/o Steven A. McArthur at 302 South 36* Street, Suite 400, Omaha, L

Nebraska 68131, and their titles are as follows:

i David L. Sokol Chairman of the Board and Chief Executive Officer l

Gmgory E. Abel President and Chief Operating Officer 8

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Steven A. McArthur Executive Vice President, General Counsel and Secretary Craig M. Hammett Senior Vice President and Chief Financial Officer AT 4k9F Malcolm G. Chandler Managing Director, Supply -

1 Eric Connor Managing Dire.ctor, Utility Services )

Patrick J. Goodman Vice President, Chief Accounting Officer and Controller Brian K. Hankel Vice President and Treasurer M Thomas R. Mason President and Chief Operating Officer, CalEnergy Operating Company 7

j. ~ Donald M. O'Shei, Jr. President and Chief Operating Officer,

( CalEnergy Development Company w

Roben S. Silberman Senior Vice President, Administration Peter Youngs Managing Director, Gas Exploration and Development The senior officers of CalEnergy, upon closure of this transaction, who are all citizens of the United States, except as noted above, their current business addresses and designated titles, will be a blend of the senior officers of MidAmerican and CalEnergy referenced above with the following persons who are all United States citizens and their titles cunently designated: l l David L. Sokol Chairman and Chief Executive Officer l

Gregory E. Abel President and Chief Operating Officer Alan L. Wells Chief Financial Officer John A. Rasmussen, Jr. General Counsel 4

i The Merger Agreement in Section 7.10 provides that the initial number of directors comprising CalEnergy's Board of Directors at the effective time of the merger shall be fifteen 9

(15), with eleven (11) designated by CalEnergy and four (4) designated by MEHC (including Stanley Bright) prior to the effective time of the merger. The current directors of CalEnergy are:

Edgar D. Aronson, Judith E. Ayres, Richard R. Jaros, David R. Morris, John R. Shinc Bemard o

W. Reznicek, Walter Scott, Jr., David L. Sokol, Sir Neville Trotter, and David E. Wit. (One vacancy cunently exists on this Board, but it is contemplated that such vacancy will be eliminated or will be filled by a United States citizen).

All of the Directors designated by MidAmedcan will be from among the current directo ,

of MEHC and will include Stanley Bdght, MidAmerican's Chairman, President and Chief Operating Officer. The cunent Directors of CalEnergy are all citizens of the United States, with the exception ofMessrs. Trotter and Morris, who are citizens of the United Kingdom. The th CalEnergy Directors, who can be reached at c/o Steven A. McAnhur,302 South 36 gg Suite 400, Omaha Nebraska, are as follows:

Edgar D. Aronson Judith E. Ayres Richard R. Jaros David R. Morris Bernard W. Reznicek Walter Scott, Jr.

John R. Shiner David L. Sokol Sir Neville Trotter David E. Wit When all fifteen (15) of the directors of MHC (previously Ca1 Energy) are selected, I

CalEnergy will promptly notify the NRC and will provide all information required by the NRC 1 regarding any director. Furthermore, all directors selected are contemplated to be citizens of the United States, with the exception of Messrs. Trotter and Morris, who are citizens of the United Kingdom. _X y

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CalEnergy is a United States public company, traded on the New York Stock Exchange and is not now owned, controlled or dominated by an alien, a foreign corporation or a foreign 10 {

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po(L.6 4Q Q\nORW10 government nor will it be so upon consummation of the merger, as described above.

Furthermore, the planned merger will not result in ownership, control, or domination of MidAmerican by a foreign corporation or a foreign govermnent, nor is it presently so dominated or controlled. Neither CalEnergy nor MidAmerican is acting as agent or representative of any other person in filing this Application.

C. Technical Aspects

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Applicants are requesting authority to transfer Class' 104 Licenses for the duration of those Licenses, to reflect a change in control of a minority, non-operating, owner of the facility.

Applicants are not requesting any change in the required design or operation of Quad Cities Station or any change in the tenns and conditions of the existing Licenses or technical specifications. FoTaving the merger, Co:nEd and MidAmerican (as a wholly-owned subsidiary of CalEnergy) will continue to be the owners and Licensees of Quad Cities Station. Li addition, the Applicants are not proposing any change to either the required organization or personnel responsible for operation of Quad Cities Station. Therefore, after consummation of the merger, Comed will continue as the operator of Quad Cities Station. Consequently, because there will be no change in the required design or operation of the plant or any change in the terms and conditions of the exidng Licenses or technical specifications, the significant hazards  !

considerations under 10 C.F.R. 50.92 are not invoked. The holding company structure and

_ i merger transaction describeu above retains the MidAmerican utility stmeture as a discrete and whol y separate entity that will function in the same fashion as it did before this merger. The utility will continue to make its own decisions with regard to utility planning, operation, financial requirements, purchasing and sales.

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D. Financial Aspects MidAmerican (as a wholly owned subsidiary of CalEnergy) will continue to be committed under the Ownership Agreement and Operating Agreement to providing, on a pm rata basis in accordance with the respective ownership percentage, all funds necessary for the safe operation, maintenance, repair, decontamination and decommissioning of Quad Cities Station in conformance with NRC regulations, subject to the same obligations, terms and conditions which apply to MidAmerican under the exit, ting Licenses. MidAmerican will reinain an " electric utility" as defined in 10 C.F.R. { 50.2. MidAmerican will continue to be engaged in the generation, transmission and distribution of electricity and will remain subject to the rate regulatory authority of the Federal Energy Regulatory Commission, the Illinois Commerce Commission, the Iowa Utilities Board, and the South Dakota Public Utilities Commission. After the merger, MidAmerican's financial ability to fund its share of the se costs will be equal to, or greater than, that of MidAmerican prior to the merger. The total u . tree of funds for MidAmhrican's obligations after the merger with respect to Quad Cities Stat lon, therefore, will be the same as is currently the case for MidAmerican. This will ensure that MidAmerican will continue to maintain the financial resources for saf: operation and decommissioning ofits share of Quad Cities. CalEnt:rgy/MHC expressly recognizes that MidAmerican is obligated to provide the funds accumulatr! by MidAmerican prior to and after the merger for MidAmerican's share of the decommissionin of Omd Cities Station. which MidAmerican will nmvide Consistent with NRC's past practice regarding recent mergers, the Applicants make the following express commitment to the NRC:

MidAmerican will provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security l interests or liens) from MidAmerican to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy 12

having a depreciated book value exceeding ten percent (10%) of MidAmericar's I consolidated net utility plant, as recorded on MidAmerican's books of account.

' Because all costs associated with operating Quad Cities Station will continue to be bome on a Dr.Q Iala basis in accordance with the respective ownership percentages ofMidAmerican and Comed and because MidAmerican's ability to fund these costs after the merger will be the same j I

as that of MidAmerican prior to the merger, a full financial qualifications review should not be necessary as a result of the approval requested in this Application. Accordingly, the information required under 10 C.F.R. Q 50.33(f) regarding the financial qualifications of the Licensees to carry out the activities d$ scribed in this Application should not be necessary. However, the Applicants will previde additional financial information if requested by the NRC.

E. Rate Regulation

, The names and addresses of each regulatory agency which will havejurisdiction over the rates and services ofMidAmerican derived from the Quad Cities' Station are:

Federal Energy Regulatory Commission 8881" Street, N.E.

Washington, D.C. 20426 lowa Utilities Board 350 Maple Street Des Moines, Iowa 50319-0069 Illinois Commerce Commission 527 East Capitol Avenue Springfield, Illinois 62701 l I

South Dakota Public Utilities Commission  !

State Capitol Pierre, South Dakota 57501-5070 l

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F. Restricted Data This Application does not contain any restricted data or other classified defense information, and it is not expected that any such information will become involved.

V. ' Antitrust Considerations ,

There are no antitrust conditions attached to MidAmerican's NRC License, nor have antitrust matters been included in the NRC staff's prior findings for MidAmerican's 1995-96 merger and related transactions. Information for antitrust review purposes is not required as Quad Cities is a " grandfathered" plaat, for antitnist review purposes, pursuant to { @ 104(b) and 105 of the Atomic Erergv Act of1954, as amended. Hence, antitrust infonnation is not required to be submitted with this application. In that regard, it should be noted that competitive issues will be considered by the FERC, the FTC and the DOJ. Upon request, CalEnergy will provide copies of competitive information in the same format as submitted before such other agencies, as well as provide additional infonnation as requested by the staff of the NRC. However, as noted above, antitrust findings by the NRC are not required in connection with this Application. ,

i VI. Environmental Considerations The Applicants request the NRC to issue and publish a finding ofno significant i

environmental impact pursuant to 10 C.F.R. Q 51.32 and 51.35, as there are no radiological nor j non-radiological environmentalimpacts resulting from the proposed action. The proposed action is intended solely to reflect the ownership change of a non-operating owner, as described above.

The indirect transfer of control will not affect the facilities' Technical Specifications, license enditions or the organization and practices of Comed, the licensed operator. Morecever, the indirect transfer of control will not affect the numbers, qualifications, or organizational affiliation of the personnel who operate the facility, as Comed will continue to be responsible for the operation of the faci 1ity.

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Accordingly, the probability or consequences of accidents would not be increased by the transfer of ownership, and post-accident radiological releases would not be greater than 1

previously determined. The transfer of ownership also would not affect radiological plant I effluents and would not increase occupational radiological exposure. Hence, there are no significant radiological or non-radiological environmental impacts associated with the proposed action. l VII. Effective Date As discussed above, the merger also requires the approval of the FERC and the Iowa Utilities Board. In addition, it is subject to review by the DOJ and the FTC and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The merging companies intend that the merger will take place as soon as possible after all regulatory approvals have been obtained which is currently anticipated to occur prior to December 31,1998, and in no event, later than the end of the first quarter of 1999. The applicants are, therefore, seeking to obtain all necessary approvals prior to December 31,1998.

The applicants, therefore, request that the NRC review this application on a schedule that will l

pennit an immediately effective and final order as promptly as possible and in any event before i

December 31,1998. The applicants will keep the NRC staffinformed as to the status of the other necessary regulatory approvals nd of any changes in the estimated completion date for consummation of the merger.

VIII. Request forNRC Action Applicants request, for the reasons stated above, that the NRC consent to the transfer of all of MidAmerican's interests in the Quad City Licenses from MidAmerican (as a wholly owned subsidiary of MEHC) to MidAmerican (as a wholly-owned subsidiary of CalEnergy, Inc.) by 15

reason of the proposed merger as being consistent with the applicable provisions oflaw, regulations and the orders issued by the NRC pursuant thereto, and that the NRC issue its consent as promptly as possible.

Respectfully submi CALENER . IP 'C By: / '" '

4D d d MSokol Chairman and Chief Executive Officer W00MfES10NEXPrnESMAR;H31. CC3, 02A.bG/f' Aflll.j OA$f of C bl se/9/ng MIDAM CA1 . RG COMPANY

, i By:

Stanfey{. Bright Chairmah, President and Chief Executive Officer W CC!.?tESCi! ET/5.ES f/20H ",1. 2;;3 SGfflflI'lYi

.b $ c of- (- ce l

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AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

ATTORNEYS AT LAW sausscLa A mconstrato uwTre uAssuTV pumatmsme cmAs sucwoewo poortssiowAL concomATiows Mou**"

l 333 NEW HAMPSHIRE AVENUE. N.W.

SUTTE 400 moscow WASHINGTON. D.C. 20036

"'"A ,J #is1ff.. s sA= merome www.soungump.com wasMm0'fDN WRffER*$ E44 AIL ADDRE5s Riessy@akirigump.com Roy P. Lessy, Jr.-

(202) 887-4500 September 10,1998 U.S. Nuclear Regulatory Commission 1 Attention: Document Control Desk Washington, D.C. 20555-0001 Quad Cities Nuclear Power Station Unites 1 and 2 Facility Operating License Nos. DPR-29 and DPR-30 NRC Docket Nos. 50-254 and 50-265

Subject:

Proposed Indirect Transfer of Control Involving Facility Operating License Nos. DPR-29 and DPR-30, Pursuant to 10 C.F.R. 50.80 Ladies and Gentlemen:

l Pursuant to Section 184 of the Atomic Energy Act, as amended,10 C.F.R. { 50.80 and NRC administrative letter 96-02, MidAmerican Energy Company, a non-operating twenty-five percent (25%) owner of the Quad Cities Nuclear Power Station, Units 1 and 2 (" Quad Cities"),

supported by Commonwealth Edison Company, the licensed operator and remaining seventy-five (75%) owner of Quad Cities, request the consent of the Nuclear Regulatory Commission

("NRC") for the indirect transfer of control of all of MidAmerican Energy Company's possessory interests in the Quad Cities licenses that will occur as a result of a merger transaction briefly described as follows.

By Agreement and Plan of Merger dated as of August 11,1998, CalEnergy Company, Inc. (hereinafter "CalEnergy") a Delaware Corporation based in Omaha, Nebraska, agreed to acquire MidAmerican Energy Holdings Company, an Iowa Corporation and the parent company ,

of MidAmerican, the NRC non-operating owner and licensee, for $27.15 a share in cash or 52.65 billion. By the attached Application, CalEnergy and MidAmerican, with the support of Ce nEd, are requesting the consent of the NRC, pursuant to 10 C.F.R. Q 50.P3, for the indirect transfer of l all of MidAmerican's interest in the Quad Cities licenses to Mi.1American, as a wholly-owned -

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subsidiary ciCalEnergy. As described in the Application, MidAmerican, an " electric utility", in l accordance with 10 C.F.R. Q 50.2, will remain as the NRC licensee, but will become a wholly- l owned subsidiary of CalEnergy.

The Applicants request NRC review of this application and the issuance of a 10 C.F.R. Q 50.80 consent letter by the NRC on an expedited basis. The Applicants and CalEnergy, believe that the NRC should be able to consent to the indirect transfer of control occasioned by the proposed merger, since the merger will have no idverse affect on either the technical management or operation of Quad Cities; will not require an antitrust review inasmuch as Quad Cities is a " grandfathered" plant for antitmst review purposes pursuant to @ 104(b) of the Atomic Energy Act of 1954, as amended; and there are no radiological nor non radiological environmental impacts resulting from the proposed action.

If there are any questions or if any additional information is required, please contact the counsel designated below, Mr. Roy P. Lessy, Jr. at (202) 887-4500, or Mr. Bob Rybak of Comed, so designated in the attached separate transmittal letter of Comed.

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Very tmly y,ours, Roy . Lessy, Jr Merrill L. Kramer, P.C.

AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

1333 New Hampshire Avenue, N.W., Suite 400 Washington, D.C 20036 (202)887-4500 2

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0486030.08 4

EXHIBIT 1 i

AGREEMENT AND PLAN OF MERGER among CALENERGY COMPANY, INC.,

MAVERICK REINCORPORATION SUB, INC.,

-MIDAMERICAN ENERGY HOLDINGS COMPANY i and I

I MAVH INC.

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l Dated as'of August 11, 1998 i'

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- TABLE OF CONTENTS 7.AES ARTICLE I. THE MERGER......................................... 1 Section 1.1. The Merger. ................................. 1 Section'1.2. Effective Time. ............................. 1 Section 1.3. Effect_of the Merger ........................ 2 Section 1.4. -Subsequent Actions. ......................... 2 Section 1.5. Articles of. Incorporation;~By-Laws. ......... 2 Section-1.6. Reincorporation ............................. 2 ARTICLE II. TREATMENT OF SHARES............................... 3 Section 2.1. Conversion of Securities. ................... 3 Section 2.2. Dissenting Shares. .......................... 3 Section 2.3. Surrender of Shares; Stock Transfer Books. .. 4 l Section 2.4. MidAmerican Option Plan. .................... 6 1

4 ARTICLE III. THE CLOSING...................................... 7 Section 3.1. Closing ..................................... 7 l ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF MAVERICK AND l MERGER SUB ..................................... 7 l Section 4.1. Organization and Qualification .............. 7 l Section.4.2. Subsidiaries ................................ 8 L Section 4.3.- Capitalization .............................. 8 l

Section 4.4. Authority; Non-Contravention; Statutory Approvals; Compliance.................... 9 Section 4.5. Reports ~and Financial Statements ........... 11 Section 4.6. Absence of Certain Changes or Events;

Absence of Undisclosed Liabilities...... 12 Section 4.7. Litigation ................................. 13 Section 4.8. Joint Proxy Statement ...................... 13 Section 4.9. Tax Matters ................................ 14 Section 4.10. Employee Matters; ERISA ................... 17

-Section~4.11. Environmental Protection .................. 20

'Section 4.12. Regulation as a Utility .............a.... 24 Section 4.13. Vote Required ........................L.... 24 Section 4.14. Insurance .......................... ......24 j

Section 4.15. Opinions of Financial At. visors .... .......24 Section 4.16. Brokers ................................... 24 1

-Section 4.17. Financing Arrangements. ................... 25 I l

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF WK........... 25 i Section 5.1.. Organization'and-Qualificatio .............25 Section 5.2. Subsidiaries ............................... 25 Section 5.3. Capitalization ............................. 26 Section 5.4. Authority; Non-Contravention; Statutory j Approvals; compliance................... 27 i Section 5.5. Reports and Financial Statements ........... 29  !

Section 5.6. Absence of Certain Changes or Events; Absence of Undisclosed Liabilities...... 30 Section 5.7. Litigation ................................. 31 Section 5.8. Joint Proxy Statement ...................... 31  !

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Section 5.9. Tax Matters ................................ 31 1'

Section 5.10. Employee Matters; ERISA ................... 35

. Section 5.11. Environmental Protection .................. 39 Section 5.12. Regulation as a Utility ................... 40 Section 5.13. Vote Required ............................. 41 Section 5.14. Insurance ..............'................... 41 Section 5.15. Opinion of Financial Advisor .............. 41 Section 5.16. Brokers ................................... 41 Section 5.17. Non-Applicability of Certain Provisions of Iowa Act............................. 41 Section 5.18. MidAmerican Rights Agreement .............. 42 ARTICLE VI.- CONDUCT OF BUSINESS PENDING THE MERGER.......... 42 Section 6.1. Conduct of Business by MidAmerican Pending the Merger.............................. 42 Section'6.2. Conduct of Business by CalEnergy Pending-the Merger.............................. 45 Section 6.3. Additional covenants by MidAmerican and CalEnergy Pending the Merger............ 47

' ARTICLE VII. ADDITIONAL AGREEMENTS.......................... 48 Section 7.1. Access to Information ...................... 48 Section 7.2. Joint Proxy Statement ...................... 49 Section 7.3. Regulatory Approvals and Other Matters. .... 49 Section 7.4. Stockholder Approvals ...................... 50 Section 7.5. Directors' and Officers' Indemnification ... 51 Section 7.6. Disclosure Schedules ....................... 52 Section 7.7. Public Announcements ....................... 53 Section 7.8. No Solicitations ........................... 53 Section 7.9. Expenses ................................... 55  ;

'Section 7.10. Board of Directors ........................ 55 Section 7.11. Consulting Agreement ....................... 55 Section.7.12. Current Employment Arrangements ........... 56

.Section 7.13. Post-Merger Operations and Workforce Matters................................. 56 Section 7.14. Name of Parent ............................. 57 Section 7.15. Contributions to Rabbi Trusts .............. 57-ARTICLE VIII. ' CONDITIONS.................................... 57 Section 8.1. Conditions to Each Party's Obligation to Effect the Merger....................... 57 Section 8.2. Conditions to Obligation of MidAmerican to Effect the Merger....................... 58 Section 8.3. Conditions to Obligation of CalEnergy, Parent and Merger Sub to Effect the Merger.................................. 58

-ARTICLE IX. TERMINATION, AMENDMENT AND WAIVER............... 60 l Section 9.1. Termination .................................FO Section 9.2. Effect of Termination .......................'3 l' Section 9.3. Termination Fee; Expenses ...................d3 j

Section 9.4. Amendment .................................. 65 Section 9.5. Waiver ..................................... 65 I

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ARTICLE X.

GENERAL PROVISIONS............................... 66 o Section 10.1. Non-Survival; Effect'of Representations and Warranties..........................

66' Section 10.2. Brokers ................................... 66 Section 10.3. Notices ................................... 66 Section 10.4. Miscellaneous .c........................... 67 Section 10.5.- Interpretation ............................ 67 Section 10.6. Counterparts;.Effect ...................... 67 Section 10.7. Enforcement ............................... 67 Section 10.8. Parties in Interest ....................... 68 Section 10.9. Further Assurances ........................ 68 Section 10.10. Waiver of Jury Trial ..................... 69 i Section 10.11. Certain Definitions ....................... 69 l l

EXHIBIT.A Consulting Agreement l b l

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AGREEMENT AND PLAN OF MERGER

, AGREEMENT AND' PLAN OF MERGER, dated as of August 11, 1998 (this "Acreement"), among CalEnergy Company, Inc., a Delaware corporation ("CalEntrev") , MidAmerican Energy Holdings Company, an Iowa corporation ("MidAmerican") , Maverick Reincorporation Sub, Inc., an-Iowa corporation which is a wholly-owned subsidiary of CalEnergy ("Reincorocration Sub"), and MAVH Inc.,'an Iowa corporation which.is, directly or indirectly, a wholly-owned subsidiary:of.CalEnergy;(" Mercer sub").

HIIEEEEEIE:

T WHEREAS,tthe Boards of Directors of CalEnergy and MidAmerican each have determined that the acquisition of MidAmerican by CalEnergy is in the best interests of each of its companies' stockholders and employees and, in the case of-MidAmerican, those customers and communities served by MidAmerican; and WHEREAS, in furtherance thereof, the Boards of Directors of CalEnergy, Reincorporation Sub, MidAmerican and Merger Sub have l approved the business combination transaction provided for in

this Agreement, pursuant to which Merger Sub will merge with and

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l into MidAmerican, with MidAmerican being the surviving corporation, in accordance with the Iowa Business Corporation Act

.(the " Iowa Act") and upon the terms and subject to the conditions set forth in this Agreement (such transaction is referred to.as

! the "Meratz"), as-a result-of which Parent (as defined below) l will own, directly or indirectly through a wholly owned l subsidiary, all'of the outstanding shares (the " Shares") of l common stock, no' par value, of MidAmerican (aMidAmerican Common Stock").

NOW, TEEREFORE, in' consideration of:the premises and the representations, warranties,. covenants'and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I.

THE MERGER Section 1.1. The Mercer. At the Effective Time (as defined in.Section'1.2) and upon the terms and subject to the conditions of this Agreement'and-the. Iowa.Act, Merger sub shall be merged with and into MidAmerican, the separate corporate existence of Merger Sub shall cease, and MidAmerican shall continue as the surviving -corporation (sometimes hereinaf ter referred to as the

, "Survivina Corocration").

'Section 1.2.. Effective Time. On the Closing Date (as defined,in'Section 3.1), a certificate'of merger complyir.g with

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the requirements of the Iowa Act shall be executed and f!1ed r

'; MidAmerican anti Merger Sub with the Secretary of State of Iowa.

The Merger shall become effective on the date on which the certificate of merger is duly filed with the Secretary of State of Iowa or at such time as is specified in the certificate of merger (the "Ef fective Time") .

Section 1.3. Effect of the Mercer. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the Iowa Act. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of MidAmerican and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of MidAmerican and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

Section 1.4. Subsecuent Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of MidAmerican or Merger Sub acquired or to be acquired by the Surviving )

I Corporation as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of either MidAmerican or Merger Sub, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of such corporations os otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out this Agreement. l l

Section 1.5. Articles of Incorocration: Ev-Laws.

(a) Unless otherwise determined by CalEnergy prior to the Effective Time, at the Effective Time the Articles of Incorporation of Merger Sub, as in effect immediately prior to ,

the Effective Tims, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation.

(b) The By-Laws of Merger sub, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation until therrifter amended as provided by law, the Articles of Incorporation of the Surviving Corporation j l - and such By-Laws, j Section 1.6. Reincorporation. CalEnergy shall take such actions, including making all necessary filings in the States of I

0486030.01 1

Iowa and Delaware, to effect, immediately prior to the Effective I Time, the reincorporation of CalEnergy (the "Reincorporation") by l a merger of CalEnergy with and into Reincorporation Sub, which I shall be the surviving corporation in such merger (" Parent") and shall succeed to all of the rights, obligations and liahilities of CalEnergy.

ARTIC'LE II.

TREATMENT OF SEARES Section 2.1. Conversion of Securities. At the Effective l Time, by virtue of the Merger and without any action on the part ]

of Merger Sub, MidAmerican or the holder of any of the following l securities. 3

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I (a) Each Share, together with the associated purchase rights ("MidAmerican Richts") under the MidAmerican Rights Agreement (as defined in Section 5.18), issued and outstanding immediately prior to the Effective Time (other than any Shares to be canceled pursuant to Section 2.1(b) and any Dissenting Shares (as defined in Section 2.2 (a)) shall be canceled and extinguished and be converted into the right to receive 327.15 (the "Per Share Amount") in cash payable to the holder th2reof, without interest, upon surrender of the certificate representing such Share.

Throughout thir Agreement, the term " Shares" refers to the Shares together with the associated MidAmerican Rights.

1 (b) Each Share held in the treasury of MidAmerican and each Share owned by Parent or any direct or indirect subsidiary (as defined below) of Parent or of MidAmerican immediately prior to the Effective Time shall be canceled and extinguished, and no l payment or other consideration shall be made with respect thereto. j I

(c) Each e of common stock, no par value, of Merger Sub issued and outs ng immediately prior to the Effective Time 1 4

shall thereafte. represent one validly issued, fully paid and l

nonassessable sr re of common stock, no par 71ue, of the Surviving Corporation.

Section 2.2. Dissentina Shares.

(a) Notwithstanding any provision of this Agreement to the contrary, any Shares held by a holder who has demanded and perfected his demand for appraisal of his Shares in accordance with Section 1302 of the Iowa Act and as of the Effective Time has neither effectively withdrawn nor lost his right to such appraisal ("Dissentina Shares"), shall not be converted into or represent a right to receive cash pursuant to Section 2.1, but the holder thereof shall be entitled to only such rights in renpect thereof as are granted by Section 1302 of the Iowa Act.

0486030.08 (b) Notwithstanding the provisions of subsection (a) of

,( this Section, if any holder of Shares who demands appraisal of his Shares under the Iowa Act shall effectively withdraw or lote (through failure to perfect or otherwise) his right to appraisal, then as of the Effective Time or the occurrence of such event, whichever later occurs, such holder's Shares shall automatically be converted into and represent only the right to receive cash as provided in Section 2.1(a), withput interest thereon, upon surrender of the certificate or certificates representing such Shares.

(c) MidAmerican shall give CalEnergy or Parent, as the case may be, (i) prompt notice of any written demands for appraisal or payment of the fair value of any Shares, withdrawals of such demands, and any other instruments served pursuant to the Iowa Act received by MidAmerican and (ii) the opportunity o direct all negotiations and proceedings with respect to demands for appraisal under the Iowa Act. MidAmerican shall not voluntarily make any payment with respect to any demands for appraisal and shall not, except with the prior written consent of CalEnergy, settle or offer to settle any such demands.

Section 2.3. Surrender of Shares; Stock Transfer Books.

(a) Prior to the Effective Time, MidAmerican shall designate a bank or trust company to act as agent for the holders i of Shares (the "Exchance Acent") to receive the funds necessary i

to make the payments contemplated by Section 2.1. At the Effective Time, Parent shall deposit, or cause to be deposited, l in trust with the Exchange Agent for the benefit of holders of Shares, the aggregate consideration to which such holders shall be entitled at the Effective Time pursuant to Section 2.1.

(b) Each holder of a certificate or certificates representing any Shares canceled upon the Merger pursuant to .

! Section 2.1(a) may thereafter surrender such certificate or I certificates to the Exchange Agent, as agent for such holder, to I effect the surrender of such certificate or certificates on such holder's behalf for a period ending six months after the Effective Time. Parent agrees that promptly after the Effective Time it shall cause the cistribution to holders of re cord of Shares as of the Effective Time of appropriate materials to facilitate such surrender. Upon the surrender of certificates representing the shares, Parent shall cause the Exchange Agent to pay the holder <F such certificates in exchange therefor cash in an amount equal to the Per Share Amount multiplied by the number of Sharee represented by such certificate, plus the amount of dividends or other distributions with a record date prior to the Effective Time, if any, remaining unpaid with respect to the Shares represented by such certificate immediately prior to the Effective Time. Until so surrendered, each such certificate (other than certificates representing Dissenting Shares and certificates representing Shares canceled pursuant to Section 2.1(b)) shall represent solely the right to receive the aggregate

0486030.08 Per Share Amount relating thereto, subject, however, to Parent's i

obligation (if any) to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared by MidAmerican on the shares of MidAmerican Common Stock in accordance with the terms of this Agreement on or prior to the date of this Agreement and which remain unpaid at the Effective Time.

(c) If payment of cash in respect of canceled Shares is to be made to a Person other than the Person in whose name a surrendered certificate or instrument is registered, it shall be a condition to such payment that the certificate or instrument so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the Person requesting such payment shall have paid any transfer and other tnxes required by reason of such payment in a name other than that of the registered holder of the certificate or instrument surrendered or shall have established to the satisfaction of Parent or the Exchange Agent that such tax either has been paid or is not payable.

(d) At the Effective Time, the stock transfer books of MidAmerican shall be closed and there shall not be any further registration of transfer of any shares of capital stock thereafter on the records of MidAmerican. From and after the Effective Time, the holders of certificates evidencing ownership

, of the Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided for herein or by applicable law.

If, after the Effective Time, certificates for Shares are presented to the Surviving Corporation, they shall be canceled and exchanged for cash as provided in Section 2.1(a). No interest shall accrue or be paid on any cash payable upon the surrender of a certificate or certificates which immediately prior to the Effective Time represented outstanding Shares.

(e) Promptly following the date which is six months after the Effective Time, the Exchange Agent shall deliver to Parent all cash (including any interest received with respect thereto),

certificates and other documents in its possession relating to the transactions contemplated hereby, and the Exchange Agent's duties shall terminate. Thereafter, each holder of a certificate representing Shares (other than certificates representing Dissenting Shares and certificates representing Shares canceled pursuant to Section 2.1(b)) shall be entitled to look to the Surviving Corporation (subject to applicable abandoned property, escheat and similar laws) only as general creditors thereof with ,

respect to the aggregate Per Share Amount payable upon due i surrender of their certificates, without any interest or dividends thereon. Notwithstanding the foregoing, neither Parent, the Surviving Corporation nor the Exchange Agent shall be liable to any holder of a certificate representing Shares for the Per Share Amount delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

r 0486030.01 l-l (f) The Per Share Amount paid in the Merger shall be net to the holder of Shares in cash, subject to reduction only for any applicable federal back-up withholding or, as set forth in Section 2.3 (c), stock transfer taxes payable by such holder.

Section 2.4. MidAmerican Ootion' Plan.

! (a) CalEnergy or, as the case may be, Parent shall take all i actions necessary to provide that, upon consummation of the Merger, each then outstanding option to purchase shares of MidAmerican Common Stock or stock appreciation right representing the right (contingent or other) to purchase shares of MidAmerican Common Stock or, following the Merger, of shares of common stock, no par value, of Parent (" Parent Common Stock), or grant of i performance shares representing the right (contingent or other) to purchase shares of MidAmerican Common Stock or, following the Merger, of Parent Common Stock, or other similar interest (collectively, the "MidAmerican Ootions") whether grantea under MidAmerican's 1995 Long-Term Incentive Plan (the "MidAmerican Oetion Plan") or under any other plan or arrangement, whether or not then exercisable or vested, all of which, together with the applicable exercise prices, are disclosed in Section 5.10(a) of the MidAmerican Disclosure Schedule (or as otherwise permitted from and after the date of this Agreement pursuant to Section 6.1 (c) ) shall be assumed by Parent at the Effective Time (except in the case of performance shares of MidAmerican, which will be paid the Per Share Amount at the Effective Time), and each such MidAmerican Option shall become an option to purchase the number l of shares of Parent Common Stock rounded to the nearest whole number (a "MidAmerican Substitute Ootion") equal to the number of shares of MidAmerican Common Stock subject to such MidAmerican option multiplied by the number (the "Exchance Ratio") determined by dividing the Per Share Amount by the CalEnergy Share Price (as defined below). The "CalEnerev Share Price" shall be equal to the average of the closing prices of the common stock, par value

$0.0675 per share, of Ca1 Energy ("CalEnerev Common Stock), on the New York Stock Exchange Composite Transaction Reporting System, as reported in The N'a ll Street Journal, for the 20 trading days immediately preceding the second trading day prior to the Effective Time. The per share exercise price for each MidAmerican Substitute Option shall be the current exercise price per share-of MidLmerican Common Stock divided by the Exchange Ratio (rounded up to the nearest full cent), and each MidAmerican Substitute Option otherwise shall be subject, in all material respects, to the other terms and conditions of the original MidAmerican option to which it relates.

(b) Prior t', the Effective Time, MidAmerican shall take such actions as are necessary under applicable law and the applicable agreements and the MidAmerican Option Plan to ensure that each outstanding MidAmerican option shall, from and after the Effective Time, represent only the right to purchase, upon exercise, shares of Parent Common Stock.

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(c) As soon as reasonably practicable after the Effective 1

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Time, Parent shall cause to be included under a registration statement on Form S-8 of Parent all shares of Parent Common Stock which are subject to MidAmerican Substitute Options, and shall maintain the effectiveness of such registration statement until all such MidAmerican Substitute options have been exercised, expired or forfeited.

ARTICLE III.

l THE CLOSING l Section 3.1. Closina. The closing of the Merger (the

! "Closina") shall take place at the offices of Willkie Farr &

Gallagher, 787 Seventh Avenue, New York, New York, 10019 at 10:00 <

l A.M., New York time, on the second business day immediately followina the date on which the last of the conditions set forth in tim @e,rticle date andVIIIjhereof is fulfilledand place as CalEnergy or MidAmerican waived, or atshall suchmutually other j agree (the "Closina Date").

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES OF MAVERICK AND MERGER SUB CalEnergy and Merger Sub hereby represent and warrant to "

MidAmerican as follows:

l Section 4.1. Orcanization and Oualification.

Ca1 Energy and each of the CalEnergy Subsidiaries and, to the knowledge of CalEnergy, each of the CalEnergy Joint. Ventures is a corporation or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite power and authority and has been duly authorized by all necessary approvals and orders to own, . lease and operate its assets and properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its. assets and properties makes such qualification necessary other than in such jurisdictions where the failure to so qualify and be in good standing, when taken together with all other such failures, would not have a material adverse effect on the business, operations, properties, assets, condition (financial or other), prospects or the results of operations of ,

CalEnergy and the CalEnergy Subsidiaries taken as a whole or on  !

the consummation of the transactions contemplated by this '

Agreement (any such material adverse effect, a "CalEnerav Material Adverse Effect"). The term " Subsidiary" of a Person shall mean any corporation or other entity (including partnerships andfother business associations and joint ventures) in which such Person directly or indirectly owns at least a majority of the voting power represented by the outstanding  ;

capital stock or other voting securities or interests having j

F 0486030.01 voting power under ordinary circumstances to elect a majority of the directors or similar members of the governing body, or otherwise to direct the management and policies, of such corporation or entity, and the term "CalEnergy Subsidiary" shall mean a Subsidiary of CalEnergy. The term '.' Joint Venture" of a Person shall mean any corporation or other entity (including partnerships and other business associations and joint ventures) in which such Person directly or. indirectly owns an equity interest that is less than a majority of any class of the outstanding voting securities or equity of any such entity, other than equity interests held for passive investment purposes which are less than 5% of any class of the outstanding voting securities or equity of any such entity, and the term "CalEnerev Joint Venture" shall mean a Joint Venture of CalEnergy.

Section 4.2. Subsidiaries. Section 4.2 of the CalEnergy Disclosure Schedule delivered by CalEnergy to MidAmerican prior to the execution of this Agreement (the "CalEnerav Disclosure Schedule") sets forth a list of all the CalEnergy Subsidiaries and the CalEnergy Joint Ventures, including the name of each such entity, a brief description of the principal line or lines of business conducted by each such entity and the interest of CalEnergy and the CalEnergy Subsidiaries therein. Except as set forth in Section 4.2 of the Ca1 Energy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy subsidiaries nor any of the Ca1 Energy Joint Ventures is

, a " holding company," a " subsidiary company" cf a holding company or an " affiliate" of a holding company within the meaning of Section 2 (a) (7) , 2 (a) (8) or 2 (a) (11) of the Public Utility l Holding Company Act of 1935, as amended (the "1935 Act") , l respectively, and none of such entities is a "public utility company" within the meaning of Section 2 (a) (5) of the 1935 Act.

Except as set forth in Section 4.2 of the CalEnergy Disclosure Schedule, (i) all of the issued and outstanding shares of capital stock of each CalEnergy Subsidiary are validly issued, fully l paid, nonassessable and free of preemptive rights and to the ,

extent owned, directly or indirectly, by CalEnergy, are owned '

free and clear of any liens, claims, encumbrances, security interests, charges and options of any nature whatsoever (" Liens")

and (ii) there are no outstanding subscriptions, options, calls,  ;

contracts, voting trusts, proxies or other pledges, security )

interests, encumbrances, commitments, understandings, {

restrictions, arrangements, rights or warrants, including any j right of conversion or exchange under any outstanding security, instrument or other agreement, obligating Ca1 Energy or any CalEnergy Subsidiary to issue, deliver or sell, pledge, grant a security interest or encumber, or cause to be issued, delivered or sold, pledged or encumbered or a security interest to be granted on, shares of capital stock of any CalEnergy Subsidiary or obligating CalEnergy or any CalEnergy Subsidiary to grant,

! extend or enter into any such agreement or commitment.

Section 4.3. Caeitalization. The authorized capital stock of CalEnergy consists of 180,000,000 shares of CalEnergy

0486030.01 Common Stock and 2,000,000 shares of preferred stock, no par

! _value, none of which preferred stock is outstanding. As of the close of_ business on the_date of this Agreement, (i) 59,531,007 shares of CalEnergy Common Stock are outstanding, (ii) not more than 5,837,838 shares of'CalEnergy Common Stock are reserved for issuance pursuant to CalEnergy's exist'ing stock option agreements and plans and its 1994 Employee Stock Purchase Plan and 401(k)

Savings Plan (such agreements and plans, collectively, the

~

"CalEnercy Stock' Plans"), (iii) 23,448,493 shares of CalEnergy Common. Stock are held by.CalEnergy in its treasury or by its

, wholly owned subsidiaries, and (iv) except as set forth in Section 4.3 of the Ca1 Energy Disclosure Schedule, no bonds, debentures, notes or other indebtedness having the right to vote (or convertible into securities having the right to vote) on any matters on which stockholders may vote ("Votino Debt") is issued or outstanding. All of the issued and outstanding shares of CalEnergy Common Stock are validly issued, fully paid, nonassessable and free of preemptive rights. As of the date of this Agreement, except as set forth in Section 4.3 of the CalEnergy Disclosure Schedule or as may be provided by the CalEnergy Stock Plans, there are no outstanding subscriptions, options, calls, contracts, voting trusts, proxies, or other pledges, security interests, encumbrances, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement, obligating CalEnergy or any CalEnergy Subsidiary to issue, deliver or sell, pledge, grant a security interest or encumber, or cause to be-issued, delivered or sold, pledged or encumbered or a security interest to be granted on, shares of capital stock or any Voting Debt of CalEnergy or obligating CalEnergy or any CalEnergy Subsidiary to grant, extend or enter into any such agreement or commitment.

Section-4.4. Authority Non-Contravention; Statutorv

.Appyovals: Comoliance.

(a) Authority. CalEn. of, Reincorporation Sub and Merger

.Sub have all requisite powe- and authority to enter into this Agreement and, subject to the receipt of the CalEnergy Stockholders' Approval (as defined in Section 4.13) and the CalEnergy. Required Statutory Approvals (as defined in Section 4.4 (c) ) , to. consummate the transactions contemplated hereby. The execution and delivery'of this Agreement and the consummation by

-CalEnergy, Reincorporation,Sub and Merger Sub of the. transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of CalEnergy and Merger Sub, subject

.to obtaining the Ca1 Energy Stockholders' Approval. This Agreement has been duly and validly executed and de'.ivered by calEnergy, Reincorporation Sub and Merger Sub, and, assuming the due authorization, execution and delivery hereof by MidAmerican, this_ Agreement constitutes the valid and binding obligation of each of CalEnergy, Reincorporation Sub and Merger Sub enforceable against each of them in accordance with its terms, subject, as to

0486030.01 enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity.

(b) Non-Contravention. The execution and delivery of this Agreement by CalEnergy, Reincorporation Sub and Merger Sub do

- not, and the consummation of the transactions contemplated hereby f will not, in any respect, violate, conflict with or result in a breach of any provision of, or ebnstitute a default (with or without notice or lapse of time or both) under, or result in the termination or modification of, or accelerate the performance required by, or result in a right of termination, cancellation or acceleration of any obligation or the loss of a benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of CalEnergy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures (any such violation, conflict, breach, default, right of -

termination, modification, cancellation or acceleration, loss or creation, is referred to herein as a " violation" with respect to CalEnergy, and such term when used in Article V shall have a correlative meaning with respect to MidAmerican) pursuant to any provisions of (i) the certificate or articles of incorporation, by-laws or similar governing documents of Ca1 Energy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures, (ii) subject to obtaining the CalEnergy Required Statutory Approvals and the receipt of the CalEnergy Stockholders' Approval, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority (as defined in Section 4.2 (c)) applicable to CalEnergy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures or any of their respective properties or assets or (iii) subject to obtaining the third-party consents set forth in Section 4.4 (b) of the CalEnergy Disclosure Schedule (the "CalEnerav Recuired consents"), any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which CalEnergy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures is a party or by which it or any of its properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii) such Violations which would not, in the aggregate, have a CalEnergy Material Adverse Effect. _.

(c) Statutorv Acerovals. Except as described in Section 4.4 (c) of the CalEnergy Disclosure Schedule, no declaration, filing or registration with, or notice to or authorization, consent or approval of, any court, federal, state, local or foreign governmental or regulatory body (including a stock exchange or other self-regulatory body) or authority (each, a

" Governmental Authority") is necessary for the execution and delivery of this Agreement by CalEnergy, Reincorporation Sub and Merger Sub or the consummation by CalEnergy, Reincorporation Sub and Merger Sub of the transactions contemplated hereby (the "CalEnerav Recuired Statutory Acorovals," it being understood

0486030.01 that references in this Agreement to " obtaining" rsuch CalEnergy

! Required Statutory Approvals shall mean making such declarations, filings or registrations; giving such notices; obtaining such authorizations, consents or approvals; and having such waiting periods expire as are necessary to avoid a. violation of law). ,

I (d) Comoliance. Except as set forth in Section 4.4 (d) or 4.11 of the Ca1 Energy Disclosure Schedule or as disclosed in the CalEnergy SEC Reports (as defined in Section 4.5) filed as of the date of this Agreement, neither CalEnergy nor any of the CalEnergy Subsidiaries nor, to the knowledge of CalEnergy, any CalEnergy Joint Venture is in violation of, is, to the knowledge of CalEnergy, under investigation with respect to any violation of, or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any Governmental i Authority, except for violations which individually or in the aggregate do not, and insofar as reasonably can be foreseen will not, have a CalEnergy Material Adverse Effect. Except as set forth in Section 4.4 (d) or 4.11 of the CalEnergy Disclosure Schedule, CalEnergy and the CalEnergy Subsidiaries and, to the knowledge of CalEnergy, the CalEnergy Joint Ventures have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted which are material to the

, operation of the businesses of CalEnergy and the CalEnergy Subsidiaries. Except as set forth in Section 4.4 (d) of the CalEnergy Disclosure Schedule, CalEnergy and each of the

)

1 CalEnergy Subsidiaries and, to the knowledge of CalEnergy, CalEnergy Joint Ventures is not in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with lapse of time or action by a third party, could result in a default by CalEnergy or any CalEnergy Subsidiary or, to the knowledge of CalEnergy, any I CalEnergy Joint Venture under (i) its certificate or articles of incorporation, by-laws or other organizational document or (ii) any contract, commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond, license, approval or other instrument to which it is a party or by which CalEnergy or any CalEnergy Subsidiary or any CalEnergy Joint Venture is bound or to which any of its property is subject, except in the case of clause (ii) above, for violations, breaches or defaults which individually or in the aggregate do not, and insofar as reasonably can be foreseen will not, have a CalEnergy Material Adverse Effect.

Section 4.5. Beoorts and Financial Statements. The filings required to be made by CalEnergy and the CalEnergy Subsidiaries under the Securities Act of 1933, as amended (the

" Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchance Act"), the Public Utility Regulatory Policies Act of 1978 ("PURPA"), the 1935 Act and state, municipal and other local laws, including all forms, statements, reports,

0486030.01 agreements (oral or written) . and all documents, exhibits, amendments and supplements appertaining thereto, have been filed

- with the Securities and Exchange Commission (the "SEg") or the Federal Energy Regulatory Commission (the "EEEC"), or other- i appropriate Governmental Authorities, as the case may be, and complied, as of their respective dates, in all material respects with all applicable requirements of the appropriate statutes and the rules and regulations thereunder. ~CalEnergy has made available to MidAmerican a true and complete copy of each report, )

schedule, registration statement and' definitive proxy statement and all amendments thereto filed with the SEC by CalEnergy or any i Ca1 Energy Subsidiary (or their predecessors) pursuant to the requirements of the Securities Act or. Exchange Act since January 1, 1996 (as such documents.have since the time of their filing ber;n amended, the "CalEnerev SEC Reoorts"). As of their respective dates, the CalEnergy SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact-required to be stated therein or necessary to make the statements therein, in light of the circumstances under which

.they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of Ca1 Energy included in the CalEnergy SEC Reports (collectively, the "CalEnerav Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on'a consistent basis ("GAAp") (except as may be indicated therein or in the notes thereto) and fairly present the financial i position of Ca1 Energy, as of the dates thereof and the results of their operations and cash flows for the periods then ended,

. subject, in the case of the unaudited interim financial

-statements, to normal, recurring audit adjustments. True, accurate and complete copies of the articles of incorporation and

-by-laws of CalEnergy, as in effect on the date of this Agreement, are included (or incorporated by reference) in the CalEnergy SEC Reports.

Section 4.6. Absence of Certain Chances or Events; Absence of Undisclosed Liabilities.

(a) Absence of Certain Chances or Events. Except as set forth in Section 4.6 (a) of the CalEnergy Disclosure Schedule l' or as disclosed in the CalEnergy SEC Reports filed prior to the date of this Agreement, since December 31, 1997, CalEnergy and each of-the CalEnergy Subsidiaries, and, to the knowledge of CalEnergy, each of the CalEnergy Joint Ventures, have conducted their_ business only in the ordinary course of business consistent with past practice and there has not been, and no fact or condition exists which would have or, insofar as reasonably can be foreseen, could'have, a CalEnergy Material Adverse Effect.

(b) Absence of-Undisclosed Liabilities. Neither CalEnergy nor'any-CalEnergy Subsidiary, nor, to the knowledge of CalEnergy, any CalEnergy Joint Venture, has any liabilities or obligations (whether absolute, accrued, contingent or otherwise  ;

and including, without limitation, margin loans) of a nature l l

1 1

0486030.01 required by GAAP to be reflected in a consolidated corporate i balance sheet, except liabilities, obligations or contingencies which are accrued or reserved against in the consolidated financial statements of CalEnergy or reflected in the notes thereto for the year ended December 31, 1997, or which were incurred after December 31, 1997 in the ordinary course of business and would not, in the aggregate, have a CalEnergy Material Adverse Effect. .

Section 4.7. Litication. Except as set forth in Section 4.7 or 4.11 of the CalEnergy Disclosure Schedule or as disclosed in the CalEnergy SEC Reports filed prior to the date of this Agreement, (a) there are no claims, suits, actions or proceedings by any Governmental Authority or any arbitrator, pending or, to the knowledge of CalEnergy, threatened, nor are  ;

there, to the knowledge of CalEnergy, any investigations or reviews by any Governmental Authority or any arbitrator pending or threatened against, relating to or affecting CalEnergy or any of the CalEnergy Subsidiaries or, to the knowledge of CalEnergy, the CalEnergy Joint Ventures, (b) there have not been any

]

significant developments since December 31, 1997 with respect to j such disclosed claims, suits, actions, proceedings, investigations or reviews and (c) there are no judgments, decrees, injunctions, rules or orders of any Governmental Authority or any arbitrator applicable to CalEnergy or any of the CalEnergy Subsidiaries or, to the knowledge of CalEnergy, applicable to any of the Ca1 Energy Joint Ventures, which, when taken together with any other nondisclosures described in clauses (a), (b) or (c), insofar as reasonably can be foreseen, could, if

determined adversely, have a CalEnergy Material Adverse Effect.

Section 4.8. Joint Proxy Statement. None of the information supplied by CalEnergy, Reincorporation Sub or Merger Sub, their officers, directors, representatives, agents or employees (the " Purchaser Information") , for inclusion in the Joint Proxy Statement (as defined in Section 5.8), or in any

amendments thereof or supplements thereto, will, on the date the Joint Proxy Statement is first mailed to stockholders, at the time of the MidAmerican Meeting (as defined below) and at the time of the CalEnergy Meeting (as defined below) or at the Effective Time (giving effect to any documents incorporated by I reference-therein), contain any statement which, at such time and in light of the circumstances under which it will be made, will be false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the MidAmerican Meeting or the CalEnergy Meeting which has become false or misleading.

Notwithstanding the foregoing, CalEnergy and Merger Sub do not make any representation or warranty with respect to any information that has been supplied by MidAmerican or its accountants, counsel or other authorized representatives for use in any of the foregoing documents.

L

0486030.01 Section 4.9. Tax Matters. " Taxes," as used in this

( Agreement, means any federal, state, county, local or foreign taxes, charges, fees, levies or other assessments, including all net income, gross income, sales and use, ad valorem, transfer, gains, profits, excise, franchise, real and personal property, gross receipt, capital stock, production, business and occupation, disability, employment, payroll, license, estimated, stamp, custom duties, severance pr withholding taxes or charges imposed by any governmental entity, and includes any interest and penalties (civil or criminal) on or additions to any such taxes and any expenses incurred in connection with the determination, settlement or litigation of any Tax liability. " Tax Return," as used in this Agreement, means a report, return or other information required to be supplied to a governmental entity with respect to Taxes including, without limitation, where permitted or required, combined or consolidated returns for any group of entities that includes CalEnergy or any CalEnergy Subsidiary or MidAmerican or any MidAmerican Subsidiary, as the case may be.

(a) Filina of Timelv Tax Returns. Ca1 Energy and each of the CalEnergy subsidiaries have filed (or there has been filed on i their behalf) all Tax Returns required to be filed by each of 3 them under applicable law. All such Tax Returns were and are in all material respects true, complete and correct and filed on a timely basis.

(b) Pavment of Taxeg. CalEnergy and each of the CalEnergy Subsidiaries have, within the time and in the manner [.rescribed by law, paid (and until the Closing Date will pay within the time and in the manner prescribed by law) all Taxes that are currently due and payable, except for those contested in good faith and for which adequate reserves have been taken.

(c) Tax Reserves. CalEnergy and the CalEnergy Subsidiaries have established (and until the Closing Date will maintain) on their books and records reserves which adequately reflect its estimate of the amounts required to pay all Taxes in accordance with GAAP (or, with respect to foreign Calenergy Subsidiaries, of l the applicable foreign generally accepted accounting principles). l (d) Tax Liens. There are no Tax liens upon the assets of CalEnergy-or any of the CalEnergy Subsidiaries except liens for Taxes not yet due. ,

(e) Withholdine Taxes. CalEnergy and each of the CalEnergy subsidiaries have complied (and until the Closing Date will comply) in all material respects witn the provisions of the l Internal Revenue Code of 1986, as amended (the " Code") (or, with respect to foreign CalEnergy Subsidiaries, the comparable applicable foreign law), relating to the payment and withholding of Taxes, including, without limitation, the withholding and reporting requirements under Code Sections 1441 through 1464, 3401 through 3406 and 6041 through 6049, as well as similar provisions under any other laws, and have, within the time and in l

l 1 l

0486030.CG the manner prescribed by law, withheld from employee wages and I paid over to the proper governmental authorities all amounts  !

required.

(f) Extensions of Time For Filine Tax Returns. Except as set forth in Section 4.9(f) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries has' requested any extension of time within which to file any Tax Return, which Tax Return has not since been timely filed.

(g) Waivers of Statute of Limitations. Except as set forth in Section 4.9(g) of the CalEnergy Disclosure Schedule, neither 1 i

CalEnergy nor any of the CalEnergy Subsidiaries has executed any I outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Tax Returns.

(h) Exciration of Statute of -Limitations. Except as disclosed in Section 4.9 (h) of the CalEnergy Disclosure Schedule, the statute-of limitations for the assessment of all Taxes has expired for all applicable Tax Returns of CalEnergy and the CalEnergy Subsidiaries or those Tax Returns have been examined by the appropriate taxing authorities for all tax periods ending before the date.of this Agreement, and no deficiency for any

. Taxes has been proposed, asserted or assessed against Ca1 Energy "or any of the CalEnergy Subsidiaries that has not been resolved

and paid in full.

l (i) Audit, Administrative and Court Proceedines. Except as

set forth in Section 4.9 (i) of the CalEnergy Disclosure Schedule, no audits or other administrative proceedings or court i

proceedings are presently pending, or, to the knowledge of I CalEnergy, threatened, withg regard -tx) any Taxes or Tax Returns of l CalEnergy or any of the CalEnergy Subsidiaries. l (j) Powers of Attornev. Except as set forth in Section 4.9 (j) of the .CalEnergy Disclosure Schedule, no power of attorney currently in force'has been granted by CalEnergy or any of the CalEnergy Subsidiaries concerning any Tax. matter.

(k)- Tax Rulinos. Neither CalEnergy nor any of the j Ca1 Energy Subsidiaries has received or requested a Tax Ruling (as  !

defined below) or entered into a closing Agreement (as defined below), with any taxing authority that would have a continuing adverse effect after the Closing Date. " Tax Rulina," as used in this Agreement, shall mean a written ruling of a taxing authority relating to Taxes. "Closine Aereement," as used in this agreement, shall mean a written and legally binding agreement i with a taxing authority relating to Taxes, j (1) . Availability of Tax Returns. CalEnergy has made  !

available to MidAmerican complete and accurate copies of (i) all

. federal and state income Tax Returns for open years, and any amendments thereto, filed by CalEnergy or any of the CalEnergy I

h-

,. . . . , . .. ..a ., - ,. .

0486030.01 Subsidiaries,' (ii) all audit reports or written proposed

(' adjustments (whether formal or informal) received from any taxing authority relating to any Tax Return filed by CalEnergy or any of the Ca1 Energy Subsidiaries and (iii) any Tax Ruling or request for a Tax Ruling applicable to CalEnergy or any of the CalEnergy Subsidiaries and Closing. Agreements entered into by CalEnergy or any of the CalEnergy Subsidiaries.

. ('m) Tax Sharine Aoreements'. Except as disclosed.in Section 4.9(m) of.the CalEnergy Disclosure Schedule, neither CalEnergy nor any CalEnergy Subsidiary is a party to any agreement relating to allocating or sharing of Taxes.

(n) Code Section 341 (F) . Neither CalEnergy nor any of the CalEnergy Subsidiaries has filed (or will file prior to the

' Closing) a consent pursuant to Code Section 341(f) or has agreed to have Code Section 341(f) (2) apply to any disposition of a subsection (f) asset (as that term is defined in Code Section 341(f ' (4) ) , owned by CalEnergy or any of the CalEnergy subsidiaries.

(o) . Code Section 168. Except as set forth in Section 4.9(o) of the CalEnergy Disclosure Schedule, no property of CalEnergy or any of the Ca1 Energy Subsidiaries is property that CalEnergy or any CalEnergy Subsidiary or any party to this transaction is or will be required to treat as being owned by another person pursuant to the provisions of Code Section i

168 (f) (8) (as in effect prior to its amendment by the Tax Reform Act of 1986) or is " tax-exempt use property" within the meaning of Code Section 168(h).

(p) Code Section 481'Adiustments. Except as set forth in

Section 4.9(p) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries is required to include in income for any tax period ending after the date hereof any adjustment pursuant to Code Section 481(a) by reason of a voluntary change in accounting method initiated by CalEnergy or any of the CalEnergy Subsidiaries, and, to the knowledge of CalEnergy, the Internal Revenue Service ("1RE") has not proposed any such adjustment or change in accounting method.

(q) -Accuisition Indebtedness. Except as set forth in Section 4.9(q) of the CalEnergy Disclosure Schedule, no indebtedness of CalEnergy or any of the CalEnergy' Subsidiaries is

" corporate' acquisition indebtedness" within the meaning of Code Section 279 (b) .

(r) Intercompany Transactions. Except as set forth in Section 4.9(r) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries has engaged in any intercompany transactions within the meaning of Treasury Regulations 1.1502-13 or -14 or Temporary Treasury Regulation Section 1.1502-13T or -14T for which any income or gain remains unrecognized as of the'close of the last taxable year prior to

0486030.01 the closing Date, and no excess loss account within the meaning of Treasury Regulhtion Section 1.1502-14, -19 or -32 exists with respect to CalEnergy or any of the CalEnergy Subsidiaries.

(s) Code Section 280G. Except as set forth in Section 4.9 (r) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries is a party to any agreement, contract or arrangement that could reasonably be, expected to result, on account of the transactions contemplated hereunder, separately or in the aggregate, in the payment of

" excess parachute payments" within the meaning of code Section 280G or any amount that may not be fully deductible by reason of application of Section 162 (m) of the Code.

(t) Consolidated Tax Returns. Except as set forth in Section 4.9 (t) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries has ever been a member of an affiliated group of corporo*. ions (within the meaning of Code Section 1504 (a)) filing consolidated returns, other than the affiliated group of which CalEnergy is the common parent.

(u) Code Section 338 Elections. Except as set forth in Section 4.9 (u) of the CalEnergy Disclosure Schedule, no election under Code Section 338 (or any predecessor provision) has been made by or with respect to CalEnergy or any of the CalEnergy Subsidiaries or any of their respective assets or properties.

I (v) 5% Foreien Stockholders. To CalEnergy's knowledge, based on Schedule 13D and 13G filings with the SEC with respect to CalEnergy, no foreign person owns, as of the date of this Agreement, 5% or more of the outstanding shares of CalEnergy Common Stock.

Section 4.10. Emolovee Matters: ERISA.

(a) Benefit Plans. Section 4.10(a) of the CalEnergy Disclosure Schedule contains a true and complete list of each employee benefit plan, practice, program or arrangement currently sponsored, maintained or contributed to by CalEnergy or any of the CalEnergy Subsidiaries for the benefit of employees, former employees or directors and their beneficiaries in respect of services provided to any such entity, including, but not limited to, any employee benefit plans within the meaning of Section 3 (3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), employee pension benefit plan, program, arrangement or agresment, any health, medical, welfare, disability, life insurance, bonus, option, stock appreciation plan, performance stock plan, restricted stock plan, deferred compensation plan, retiree benefits plan, severance pay and other employee benefit or fringe benefit plan and any employment, consulting, non-compete, severance or change in control agreement (collectively, the "CalEnerav Benefit Plans"), together with, for any option, stock appreciation plan, performance stock plan, restricted stock plan, deferred compensation plan and

04e6030.01 l supplemental retirement plan, the current amounts or benefits granted or payable under each and reasonable details (including exercise prices) regarding the CalEnergy Options or other securities which represent the right (contingent or other) to purchase or receive shares of CalEnergy Common Stock or, following the Merger, of Parent Common Stock. For the purposes of this Section 4.10, the term "CalEnerev" shall be deemed to include predecessors thereof. ,

Contributions. Except as set forth in Section 4.10(b) of the CalEnergy Disclosure Schedule, all material contributions and other payments required to be made by CalEnergy or any of the CalEnergy Subsidiaries to any Ca3 Energy Benefit Plan (or to any person pursuant to the terms thereof) have been timely made or the amount of such paymeat or contribution obligation has been reflected in the CalEnergy Financial Statements. Except as set forth in Section 4.10(b) of the CalEnergy Disclosure Schedule, (i) the current value of all accrued benefits under any CalEnergy Benefit Plan which is a defined benefit plan did not, as of the date of the most recent actuarial valuation for such plan, exceed the then current value of the assets of such plan, based on the actuarial assumptions set forth in such valuation for calculating the minimum funding requirements of Code Section 412, which actuarial assumptions and calculations have been provided to MidAmerican prior to the date of :his Agreement, and (ii) neither CalEnergy nor any enti y which is or ever has been considered as a single employer together with CalEnergy pursuant to Section 414 of the Code contributes, or has contributed, during the eight-year period immediately prior to the date of this Agreement, to a multiemployer plan (as defined in Section 3(37) of ERISA), or has any liability under ERISA Section 4203 or Section 4205 in respect of any such plan.

(b) Oualification: Comoliance. Except as set forth in Section 4.10(c) of the CalEnergy Disclosure Schedule, each of the CalEnergy Benefit Plans intended to be " qualified" within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified, and, to the knowledge of CalEnergy, no circumstances exist that are reasonably expected by CalEnergy to result in the revocation of any such determination. CalEnergy and each of the CalEnergy Subsidiaries are in compliance in all material respects with, and each CalEnergy Benefit Plan is and has been operated in all material respects in compliance with the terms thereof and all applicable laws, rules and regulations governing such plan, including, without limitation, ERISA and the Code. Each CalEnergy Benefit Plan intended to provide for the deferral of income, the reduction of salary or other compensation or to afford other income tax benefits complies with the requirements of the applicable provisions of the Code or other laws, rules and regulations required to provide such income tax benefits.

(c) Liabilities. With respect to the CalEnergy Benefit Plans individually and in the aggregate, there are no actions,

0486030.01 l

s suits, claims pending or, to the knowledge of CalEnergy,

, threatened and no event has occurred, and, to the knowledge of CalEnargy, there exists no condition or set of circumstances that I could subject CalEnergy or any of the CalEnergy Cubsidiaries to any liability arising under the Code, ERISA or any other applicable law (including, without limitation, any liability of any kind whatsoever, whether direct or indirect, contingent, I inchoate or otherwise, to any such plan or the Pension Benefit Guaranty Corporation (the "PBGC"), or under any indemnity agreement to which CalEnergy or any of the CalEnergy Subsidiaries is a party, in each such case, which liability, individually or in the aggregate, could reasonably be expected to have a CalEnergy Material Adverse Effect.

(d) Welfare Plans. Except as set forth in Section 4.10 (e) of the CalEnergy Disclosure Schedule, none of the CalEnergy Benefit Plans that are " welfare plans", within the meaning of Section 3 (1) of ERISA, provides for any benefits payable to or on behalf of any employee or director after termination of employment or service, as the case may be, other than elective continuation required pursuant to Code Section 4980B or coverage which expires at the end of the calendar month following such event. Each such plan that is a " group health plan" (as defined in Code Section 4980B(g)) has been operated in compliance with Code Section 4980B at all times, except for any non-compliance that would not, or insofar as reasonably can be determined could not, give rise to a CalEnergy Material Adverse Effect.

(e) Documents Made Available. CalEnergy has made available to MidAmerican a true and correct copy of each collective bargaining agreement to which CalEnergy or any of the CalEnergy subsidiaries is a party or under which CalEnergy or any of the CalEnergy Subsidiaries has obligations, and with respect to each CalEnergy Benefit Plan, to the extent applicable, (i) such plan I and summary plan description (including all amendments to each I such document), (ii) the most recent annual report filed with the  !

IRS, (iii) each related trust agreement, insurance contract, (

service provider or investment management agreement (including I all amendments to each such document), (iv) the most recent determination of the IRS with respect to the qualified status of such plan. (v) the most recent actuarial report or valuation and (vi) all material employee communications.

(f) Payments Resultinc from Mercer and Other Severance Payments. Except as set forth in Section 4.10(g) of the CalEnergy Disclosure Schedule or es specifically provided for in this Agreement, (i) the announcement or consummation of any transaction contemplated by this Agreement will not (either alone or upon the occurrence of any additional or further acts or events, including, without limitation, termination of employment) result in any (A) payment (whether of severance pay or otherwise) becoming due from CalEnergy or any of the CalEnergy Subsidiaries to any officer, employee, former employee or director thereof or to the trustee under any " rabbi trust" or similar arrangement or

0486030.01 (B) benefit being established or becoming accelerated, vested or payable under any CalEnergy Benefit Plan and (ii) neither CalEnergy nor any of the CalEnergy Subsidiaries is a party to (A) any management, employment, deferred compensation, severance (including any payment, right or benefit resulting from a change in control), bonus or other contract for personal services with any officer, director or employee, (B) any consulting contract with any person who prior to entering into such contract was a director or officer of CalEnergy or any of the CalEnergy Subsidiaries or (C) any material plan, agreement, arrangement or understanding similar to the foregoing.

(g) Labor Aareements. As of the date hereof, except as set forth in Section 4.10(h) of the CalEnergy Disclosure Schedule, neither CalEnergy nor any of the CalEnergy Subsidiaries is a party to any collective bargaining agreement or other labor agreement with any union or labor organization. To the knowledge of CalEnergy, as of the date hereof, there is no current union representation question involving employees of Ca1 Energy or any of the CalEnergy Subsidiaries, nor does Ca1 Energy know of any activity or proceeding cf any labor organization (or representative thereof) or employee group to organize any such j employees. Except as set forth in Section 4.10 (h) of the CalEnergy Disclosure Schedule, (i) there is no unfair labor practice, employment discrimination or other complaint against

CalEnergy or any of the CalEnergy Subsidiaries pending or, to the knowledge of CalEnergy, threatened, which has or could reasonably l be expected to have a CalEnergy Material Adverse Effect, (ii) l there is no strike, dispute, slowdown, work stoppage or lockout l pending, or, to the knowledge of CalEnergy, threatened, against l l

or involving CalEnergy or any of the CalEnergy Subsidiaries which

has or could reasonably be expected to have, a Ca1 Energy Material Adverse Effect and (iii) there is no proceeding, claim, suit, action or governmental investigation pending or, to the knowledge of Ca1 Energy, threatened, in respect of which any director, officer, employee or agent of CalEnergy or any of the CalEnergy Subsidiaries is or may be entitled to claim indemnification from Ca1 Energy pursuant to their respective articles of incorporation or by-laws. Except as set forth in Section 4.10 (h) of the Ca1 Energy Disclosure Schedule, CalEnergy and the CalEnergy subsidiaries have complied in all material respects with all lawa relating to the employment of labor, including without limitation any provisions thereof relating to wages, hours, collective bargaining and the payment of social security and similar taxes, and no person has, to the knowledge of CalEnergy, asserted that CalEnergy or any of the CalEnergy Subsidiaries is liable in any material amount for any arraars of wages or any taxes or penalties for failure to comply with any of the foregoing.

Section 4.11. Environmental Protection.

(a) Definitions. As used in this Agreement:

l

0486030.01 (i) " Environmental claim" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, liens, investigations, proceedings or notices of noncompliance or violation (written or oral) by any person or entity (inc)uding any Governmental Authority) alleging potential liab1_ity (including, without limitation, potential responsibility for or liability for enforcement, investigatory costs, cleanup costs, spent fuel or waste disposal costs, decommissioning costs, governmental response costs, removal costs, remediation costs, natural resources damages, property damages, personal injuries or penalties) arising cut of, based on or resulting from (A) the presence, Release or threatened Release into the environment of any Hazardous Materials at any location in which CalEnergy or any of the CalEnergy Subsidiaries (for purposes of this Jection 4.11) has an economic or ownership interest or in which MidAmerican or any of the MidAmerican Subsidiaries (for purposes of Section 5.11) has an economic or ownership interest, whether or not owned, operated, leased or managed by Ca) Energy or any of the CalEnergy Subsidiaries or CalEnergy Joint Ventures (for purposes of this Section 4.11) or by MidAmerican or any of the MidAmerican subsidiaries or MidAmerican Joint Ventures (for purposes of Section 5.11);

or (B) circumstances forming the basis of any violation or alleged violation of any Environmental Law or (C) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence or Release of any Hazardous Materials.

(ii) " Environmental Laws" means all applicable federal, state and local laws, rules, regulations, ordinances, orders, directives and any binding judicial or administrative interpretation thereof, and regulatory common law and equitable doctrines relating to pollution, the environment (including, without limitation, _adoor or ambient air, surface water, groundwater, land surface or subsurface strata) or protection of human health or safety as it relates to the environment including, without limitation, those relating to Releases or threatened Releases of Hazardous Materials, or otherwise relating to the manufacture, generation, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.

(iii) " Hazardous Materiala" means (A) any petroleum or petroleum products, radioactive materials, asbestos in any form that 2s or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls; (B) any chemicals, materials or substances which are now defined as or included in the definition of " hazardous substances,"

" hazardous wastes,'" " hazardous materials," " extremely

0486030.01 hazardous wastes," " restricted hazardous wastes," " toxic substances," " toxic pollutants" or words of similar import; under any Environmental Law and (C) any other chemical, material, substance or waste, exposure to which is now prohibited, limited or regulated under any Environmental Law in a jurisdiction in which CalEnergy or any of the CalEnergy Subsidiaries or CalEnergy Joint Ventures (for purposes of this Section 4.11) operates or in which MidAmerican or any of the MidAmerican Subsidiaries or MidAmerican Joint Ventures (for purposes of Section 5.11) operates.

(iv) "Egigang" means any release, spill, emission, leaking, injection, deposit, disposal, discharge, dispersal, leaching or migration into the atmosphere, soil, surface water, groundwater or property.

(b) Comoliance. Except as set forth in Section 4.11(b) of the CalEnergy Disclosure Schedule, CalEnergy and each of the CalEnergy Subsidiaries and, to the knowledge of CalEnergy, the CalEnergy Joint Ventures are in compliance with all applicable Environmental Laws except where the failure to so comply would not have a Ca1 Energy Material Adverse Effect, and neither Ca1 Energy nor any of the CalEnergy Subsidiaries has received any communication (written or oral), from any person or Governmental Authority that alleges that CalEnergy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures is not in such compliance with applicable Environmental Laws. To the knowledge of Ca1 Energy, compliance with all applicable Environmental Laws will not require CalEnergy )r any CalEnergy Subsidiary or, to the knowledge of CalEnergy, any CalEnergy Joint Venture to incur costs beyond that currently budgeted in the five CalEnergy fiscal 1998 (as disclosed to MidAmerican i

years beginning with January 1, j prior to the date of this Agreement) that will be reasonably I likely to result in a CalEnergy Material Adverse Effect, including but not limited to the costs of CalEnergy and CalEnergy Subsidiary and CalEnergy Joint Venture pollution control equipment required or reasonably contemplated to be required in the future.

(c) Environmental Permits. Except as set forth in Section 4 .11 (c) of the CalEnergy Disclosure Schedule, CalEnergy and each of the CalEnergy subsidiaries and, to the knowledge of CalEner y, the CalEnergy Joint Ventures, have obtained or has applied foi all permits, registrations and governmental authorizations required under any Environmental Law (collectively, the j

" Environmental Permits") .ecessary for the construction of its l facilities or the conduct of its operations except where the l failure to so obtain would not have a CalEnergy Material Adverse  ;

Effect, and all such Environmental Permits are in good standing or, wnere applicable, a renewal application has been timely filed l and is pending agency approval, and CalEnergy and the CalEnergy subsidiaries and, to the knowledge of CalEnergy, the CalEnergy Joint Ventures are in compliance with all terms and conditions of all Environmental Permits necessary for the construction of its

r 0486030.08 l facilities or the conduct of its operations, except where the failure to so comply, in the aggregate, would not have a CalEnergy Material Adverse Effect.

(d) Environmental Claims. Except as set forth in Section 4.11(d) of the CalEnergy Disclosure Schedule, there is no Environmental Claim pending (or, to the knowledge of CalEnergy, threatened) (A) against CalEnergy or any of the CalEnergy subsidiaries or, to the knowledge of CalEnergy, any of the CalEnergy Joint Ventures, (B) to the knowledge of CalEnergy, against any person or entity whose liability for any Environmental Claim CalEnergy or any of the CalEnergy Subsidiaries or, to the knowledge of CalEnergy, any of the CalEnergy Joint Ventures has or may have retained or assumed either contractually or by operation of law, or (C) against any real or personal property or operations which CalEnergy or any of the CalEnergy Subsidiaries or, to the knowledge of CalEnergy, any of the CalEnergy Joint 7entures owns, leases or manages, in whole or in part, which, if adversely determined, would have, in the aggregate, a CalEnergy Material Adverse Effect.

(e) Releases. Except as set forth in Section 4.11(e) of the CalEnergy Disclosure Schedule, CalEnergy has no knowledge of any Releases of any Hazardous Material that would be reasonably likely to form the basis of any Environmental Claim against CalEnergy or any of the CalEnergy Subsidiaries or the CalEnergy Joint Ventures, or against any person or entity whose liability z for any Environmental Claim CalEnergy or any of the CalEnergy j Subsidiaries or the CalEnergy Joint Ventures has or may have I retained or assumed either contractually or by operation of law except for any Environmental Claim which would not have, in the aggregate, a CalEnergy Material Adverse Effect.

(f) Predecessors. Except as set forth in Section 4.11(f) of the CalEnergy Disclosure Schedule, CalEnergy has no knowledge, I with respect to any predecessor of CalEnergy or any of the l CalEnergy Subsidiaries or the CalEnergy Joint te7tures, of any Environmental Claim pending or threatened, or of any Release of Hazardous Materials that would be reasonably likely to form the basis of any Environmental Claim, which, if determined adversely could reasonably be expected to require payments of $20 million or more or_which could reasonably be expected to have a CalEnergy Material Adverse Effect.

(g) Disclosure. CalEnergy has disclosed in writing to MidAmerican all material facts which CalEnergy reasonably believes form the basis of an Environmental Claim which could have a CalEnergy Material Adverse Effect arising from (i) the cost of CalEnergy pollution ccntrol equipment (including, without limitation, upgrades and other modifications to existing equipment) currently required or reasonably contemplated to be l required in the future, (ii) current remediation costs or costs to CalEnergy or any of the CalEnergy Subsidiaries for remediation f reasonably contemplated to be required in the future or (iii) any J

l I

04860 J.01 other environmental matter affecting CalEnergy or any of the CalEnergy Subsidiaries.

(h) Cost Estimates. To CalEnergy's knowledge, no environmental matter set forth in the CalEnergy SEC Reports or the CalEnergy Disclosure Schedule could reasonably be expected to exceed the cost estimates provided in the CalEnergy SEC Reports by an amount that individually or in the aggregate could reasonably be expected to have a'CalEnergy Material Adverse Effect.

Section 4.12. Reculation as a Utility. Except as set ,

forth in Section 4.12 of the CalEnergy Disclosure Schedule, {

neither CalEnergy nor any " subsidiary company" or " affiliate" (as I each such term is defined in the 1935 Act) of CalEnergy is l I

subject to regulation as a public utility or public service company (or similar designation) by the FERC or any municipality, locality, state in the United States or any foreign country. l Section 4.13. Vote Recuired. The approval of the Reincorporation by the affirmative vote of a majority of the  ;

votes entitled to be cast by holders of shares of CalEnergy j Common Stock (the "CalEnerov Stockholders ' Anoroval") is the only l vote of the holders of any class or series of the capital stock {

of CalEnergy or any of ;he CalEnergy Subsidiaries that is required to approve th.4s Agreement, the Merger and the other transactions contemplat.ed hereby.

Section 4.14. Insurance. Except as set forth in Section 4.14 of the CalEnergy Disclosure Schedule, CalEnergy and each of the CalEnergy Subsidiaries is, and has been continuously since January 1, 1996, insured with financially responsible insurers in such amounts and against such risks and losses as are customary in all material respects for companies conducting the business as conducted by CalEnergy and the CalEnergy Subsidiaries during such time period. Neither CalEnergy nor any of the CalEnergy Subsidiaries has received any notice of cancellation or termination with respect to any material insurance policy of CalEnergy or any of the CalEnergy Subsidiaries. The insurance policies of CalEnergy and each of the CalEnergy Subsidiaries are valid and enforceable policies in all material respects.

bection4.15. Ooinions of Financial Advisors.

CalEnergy has obtained the opinions of Credit Suisse First Boston Corporation ("CSFB") and Lehten Brothers Inc. ("Lehman"), dated the date of this Agreement, to the effect that, as of the date thereof, the Per Share Amount to be paid to holders of .

MidAmerican Common Stock pursuant to this Agreement is fair from a financial point of vjew to CalEnergy.

j Section 4.16. Hr,kers. No broker, finder or investment bEnker (other than CSFB and Lehman) is entitled to any brokerage, finder's or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of l

0486030.01 CalEnergy. CalEnergy has heretofore furnished to MidAmerican a complete and correct copy of all agreements between CalEnergy and each of CSFB and Lehman, respectively, pursuant to which such firms would be entitled to any payment relating to the Merger.

Section 4.17. Financine Arrancements. CalEnergy has received " highly confident letters" from CSFB and Lehman to arrange, subject to the conditions set forth therein, sufficient debt and/or equity financing to permit Parent to purchase all of the shares of MidAmerican Common Stock pursuant to the Merger.

Copies of such letters have been heretofore furnished to MidAmerican by CalEnergy.

ARTICLE V.

REPRESENTATIONS AND WARRANTIES O HAWK l

MidAmerican hereby represents and warrants to CalEnergy and i Merger Sub as follows:

Section 5.1. Oreanization and Oualification.

MidAmerican and each of the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, each of the MidAmerican Joint Ventures is a corporation or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite power and authority and has been duly authorized by all necessary approvals and orders to own, lease and operate its assets and properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary other than in such jurisdictions where the failure to so qualify and be in gooo standing, when taken together with all other such failures, would not have a material adverse effect en the business, operations, properties, assets, condition

! (financial or other), prospects or the results of operations of l MidAmerican and the MidAmerican Subsidiaries taken as a whole or l on the consummation of the transactions contemplated by this Agreement (any such material adverse effect, a "MidAmerican Material Adverse Effect"). The term "MidAmerican Subsidiary"

! shall mean a Subsidiary of MidAmerican, and the term "MidAmer:can l Joint Ventura" shall mean a Joint Venture of MidAmerican.

Section 5.2. Subsidiaries. Section 5.2 of the j MidAmerican Disclosure Schedule delivered by MidAmerican to CalEnergy prior to the execution of thic Agreement (the "MidAmerican Disclosure Schedule") sets forth a list of all the MidAmerican Subsidiaries and the MidAmerican Joint Ventures, including the name of each such entity, a brief description of the principal line or lines of business conducted by each such entity and the interest of MidAmerican and the MidAmerican Subsidiaries therein. MidAmerican is a "public utility holding company" (as defined in the 1935 Act) exempt from all provisions

0486030.01 (other than Section 9 (a) (2)) of the 1935 Act, pursuant to Section 3 (a) (1) in accordance with Rule 2 of the 1935 Act, and MidAmerican Energy Company ("MidAmerican Utility") is a "public utility company" within the meaning of Section 2 (a) (5) of the 1935 Act. With the exception of MidAmerican Utility, no MidAmerican Subsidiary or MidAmerican Joint Venture is a " holding company" or a "public utility company" within the meaning of Sections 2 (a) (7) and 2 (a) (3) of.the 1935 Act, respectively, nor, except with respect to their relationship with MidAmerican, are any of such entities an " affiliate" or a " subsidiary company" of a holding company within the meaning of Sections 2 (a) (11) and 2 (a) (8) of the 1935 Act, respectively. Except as set forth in Section 5.2 of the MidAmerican Disclosure Schedule, (i) all of the issued and outstanding shares of capital stock of each MidAmerican Subsidiary are validly issued, fully paid, nonassessable and free of preemptive rights and to the extent owned, directly or indirectly, by MidAmerican, are owned free and clear of any Liens, and (ii) there are no outstanding subscriptions, options, calls, contracts, voting trusts, proxies or other pledges, security interests, encumbrances, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement, obligating MidAmerican or any MidAmerican Subsidiary to issue, deliver or sell, pledge, grant a security interest or encumber, or cause to be issued, delivered or sold, pledged or encumbered or a security interest to be granted on, shares of capital stock of any MidAmerican Subsidiary or obligating MidAmerican or any MidAmerican Subsidiary to grant, extend or enter into any suen agreement or commitment.

l Section 5.3. Caoitalization.

1 (a) MidAmerican. The authorized capital stock of I MidAmerican consists of 350,000,000 shares of MidAmerican Common

! Stock and 100,000,000 shares of preferred stock, ao par value, i none of which preferred stock is outstanding. As of the close of business on the date of this Agreement, (i) 94,541,813 shares of MidAmerican Common Stock are outstanding, (ii) no shares of f MidAmerican Common Stock are reserved for issuance pursuant to I the MidAmerican Stock Option Plan, (iii) 437,131 shares of MidAmerican Common Stock are held by MidAmerican in its treasury j or by its wholly owned Subsidiaries, and (iv) no Voting Debt is issued or outstanding. All of the issued and outstanding shares of MidAmerican Common Stock are validly issued, fully paid, .

nonassessable and free of preemptive rights. As of the date of  !

this Agreement, except as set forth in Section 5.3 (a) of the MidAmerican Disclosure Schedule or as may be provided by the MidAmerican Option Plan, there are no outstanding subscriptions, options, calls, contracts, voting trusts, proxies or other pledges, security interests, encumbrances, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement, obligating

0486030.01 MidAmerican or any MidAmerican Subsidiary to issue, deliver or sell, pledge, grant a security interest or encumber, or cause to be issued, delivered or sold, pledged or encumbered or a security interest to be granted on, shares of capital stock or any Voting Debt of MidAmerican or obligating MidAmerican or any MidAmerican Subsidiary to grant, extend or enter into any such agreement or commitment.

(b) MidAmerican Utility. The authorized capital stock of MidAmerican Utility consists of 350,000,000 shares of common stock and 100,000,000 shares of preferred stock, no par value

("MidAmerican Utility Preferred Stock"), consisting of 49,458 shares of $3.30 Series MidAmerican Utility Preferred Stock

("$3.30 Serieg"), 38,305 shares of S3,75 Series MidAmerican Utility Preferred Stock ("$3. 75 Series") , 32,630 shares of $3.90 Series MidAmerican Utility Preferred Stock ("$3.90 Series"),

47,362 shares of $4.20 Series MidAmerican Utility Preferred Stock

("$4.20 Series"), 49,945 shares of $4.35 Series MidAmerican Utility Preferred Stock ("$4.35 Series"), 50,000 shares of $4.40 Series MidAmerican Utility Preferred Stock ("S4.40 Series"),

49,898 shares of $4.80 Series MidAmerican Utility Preferred Stock

("$4. 8 0 Series") , 100,000 shares of $5.25 Series MidAmerican Utility Preferred Stock ("S5.25 Series") and 400,000 shares of

$7.80 Series MidAmerican Utility Preferred Stock ("$7.80 Serieg"). As of the close of business on the date of this Agreement, (i) 70,980,203 sh?res of MidAmerican Utility Common Stock are outstanding, all of which are owned by MidAmes can free and c.'. ear i' any Liens, (ii) 49,456 $3.30 veries shares, ?,30;

$3.75 Series shares, 32,630 $3.90 Series shares, 47,362 o 3 Series shares, 49,945 $4.35 Series shares, 50,000 $4.40 Se.er shares, 49,898 $4.80 Series shares, 100,000 $5.25 Series shares and 400,000 $7.80 Series shares were ic4ued and outstandirig and (iii) no Voting Debt is issued or outstanding. All of the issued and outstanding shares of MidAmeri,*n Utility capital stock are validly issued, fully paid, nonassessable and free of preemptive rights. As of the date of this Agreement, except as set forth in Section 5.3(b) of the MidAmerican Disclosure Schedule, there are I

no outstanding subscriptions, options, calls, contracts, voting trusts, proxies or other pledges, security interests, encumbrances, commitments, understandings, restrictions, i arrangements, rights or warrants, including any right of conversion.or exchange under any outstanding security, instrument or other agreement, obligating MidAmerican or any MidAmerican l' Subsidiary to issue, deliver or sell, pledge, grant a security interest or encumber, or cause to be issued, delivered or sold, pledged or encumbered or a security interest to be granted on, t shares of capital stock or any Voting Debt of MidAmerican Utility or obligating MidAmerican or any MidAmerican Subsidiary to grant, extend or enter into any such agreement or commitment.

Section 5.4. Authority; Non-Contravention; Statutory Acorovals: Comoliance.

1

0486030.01 (a) Authority. MidAmerican has all requisite power and authority to enter into this Agreement and, subject to the receipt of the MidAmerican Stockholders' Approval (as defined in Section 5.13) and the MidAmerican Required Statutory Approvals (as defined in Section 5.4 (c) ) , to consummate the transactions contemplated hereby. The execution and delivery of this Agreement ;nd the consummation by MidAmerican of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of MidAmerican, subject to obtaining the MidAmerican Stockholders' Approval. This Agreement has been duly and validly executed and delivered by MidAmerican, and, assuming the due authorization, execution and delivery Fereof by the other signatories hereto, this Agreement constitutes the valid and binding obligation of MidAmerican enforceable against it in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of  ;

general applicability relating to or affecting creditors' rights  !

and to general principles of equity.

(b) Non-Contravention. The execution and delivery of this -

Agreement by MidAmerican do not, and the consummation of the transactions contemplated hereby will not, result in a Violation i pursuant to any provisions of (i) the articles of incorporation, by-laws or similar governing documents of MidAmerican or any of the MidAmerican subsidiaries or the MidAmerican Joint Ventures, (ii) subject to obtaining the MidAmerican Required Statutory Approvals and the receipt of the MidAmerican Stockholders' Approval, any statute, law, ordinance, rule, regulation, i judgment, decree, order, injunction, writ, permit or license of l any Governmental Authority applicable to MidAmerican or any of i the MidAmerican Subsidiaries or the MidAmerican Joint Ventures or l any of their respective properties or assets or (iii) subject to

ot' .~ng the third-party consents set forth in Section 5.4 (b) of l t' M. American Disclosure Schedule (the "MidAmerican Recuired l Can ; ent s " ) , any note, bond, mortgage, indenture, deed of trust, l l licetse, franchise, permit, concession, contract, lease or other ins rume_t, obligation or agreement of any kind to which MidAmerican ( any of the MidAmerican Subsidiaries or the MidAmerican Joint Ventures is a party or by which it or any of I

its properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii) such Violations which would not, in the aggregate, have a MidAmerican Material Adverse Effect.

(c) Statutory Anorovals. Except as described in Section 5.4 (c) of the MidAmerican Disclosure Schedule, no declaration, filing or registration with, or notice to or. authorization, ,

consent or approval of, any Governmental Authority is necessary for the execution and delivery of this Agreement by MidAmerican or the consummation by MidAmerican of the transactions contemplated hereby (the "MidAmerican Reauired Statutory Anorovals," it being understood that references in this Agreement to " obtaining" such MidAmerican Required Statutory hpprovals  !

shall mean making such declarations, filings or registrations;

0486030.01 giving such notices; obtaining such authorizations, consents or l

approvals; and having such waiting periods expire as are necessary to avoid a violation of law).

(d) Comoliance. Except as set forth in Section 5.4 (d) or 5.11 of the MidAmerican Disclosure Schedule or as disclosed in the MidAmerican SEC Reports (as defined in Section 5.5) filed as of the date of this Agreement, neither MidAmerican nor any of the MidAmerican Subsidiaries nor, td the knowledge of MidAmerican, any MidAmerican Joint Venture is in violation of, is, to the knowledge of MidAmerican, under investigation with respect to any violation of, or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any Governmental Authority, except for violations which individually or in the aggregate do not, and insofar as reasonably can be foreseen will not, have a MidAmerican Material Adverse Effect.

Except as set forth in Section 5.4 (d) or 5.11 of the MidAmerican Disclosure Schedule, MidAmerican and the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, the MidAmerican J. int Ventures have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted which are material to the operation of the businesses of MidAmerican and the MidAmerican Subsidiaries. Except as set forth in Section 5.4 (d) of the MidAmerican Disc losure Schedule, MidAmerican and each of the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, MidAmerican Joint Ventures is not in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with lapse of time or action by a third party, could result in a  !

default by MidAmerican or any MidAmerican Subsidiary or, to the knowledge of MidAmerican, any MidAmerican Joint Venture under (i) its articles of incorporation, by-laws or other organizational document or (ii') any contract, commitment, i agreement, indenture, mortgage, loan agreement, note, lease, bond, license, approval or other instrument to which it is a ]

party or by which MidAmerican or any MidAmerican Subsidiary or i any MidAmerican Joint Venture is bound or to which any of its l property is subject, except in the case of clause (ii) above, for l violations, breaches or defaults which individually or in the aggregate do not, and insofar as reasonably can be foreseen will not, have a MidAmerican Material Adverse Effect.

Section 5.5. Reoorts and Financial Statements. The filings required to be made by MidAmerican and the MidAmerican Subsidiaries under the Securities Act, the Exchange Act, the 1935 Act, the Federal power Act (the " Power Act") and applicable i state, municipal, local and other laws, including franchise and  ;

I public utility laws and regulations, including all forms, statements, reports, agreements (oral or written) and all documents, exhibits, amendments and supplements appertaining thereto, have been filed with the SEC, the FERC and the

0486030.01 appropriate Iowa, Illinois, South Dakota, Nebraska or other )

appropriate Governmental Authorities, as the case may be, and i

complied, as of their respective dates, in all material respects with all applicable requirements of the appropriate statutes and the rules and regulations thereunder. MidAmerican has made .

available to CalEnergy a true and complete copy of each report, l schedule, registration statement and definitive proxy statement and all amendments thereto filed.with the SEC by MidAmerican or any MidAmerican Subsidiary (or their predecessors) pursuant ta the requirements of the Securities Act or Exchange Act since January 1, 1996 (as such documents have since the time of their filing been amended, the "MidAmerican SEC Reoorts"). As of their i respective dates, the MidAmerican SEC Reports did not contain any untrue statement of a material fact or omit to state a material ,

fact required to be stated therein or necessary to make the  !

statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of MidAmerican and MidAmerican Utility included in the MidAmerican SEC Reports (collectively, the "MidAmerican Financial Statements") have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of MidAmerican and MidAmerican Utility, as the case may be, as of I the dates thereof and r.he results of their operations and cash  !

flows for the periode then ended, subject, in the case of the )

unaudited interim financial statements, to normal, recurring i audit adjustments. True, accurate and complete copies of the articles of incorporation and by-laws of MidAmerican and MidAmerican Utility, as in effect on the date of this Agreement, ,

are included (or incorporated by reference) in the MidAmerican i SEC Reports.

Section 5.6. Absence of Certain Chances or Events:

Absence of Undisclosed Liabilities. l (a) Absence of Certain Chances or Events. Except as set forth in Section 5.6 (a) of the MidAmerican Disclosure i Schedule or as disclosed in the MidAmerican SEC Reports filed  !

prior to the date of this Agreement, since December 31, 1997, MidAmerican and each of the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, each of the MidAmerican Joint ventures, have conducted their business only in the ordinary course of l

business consistint a th past practice and there has not been, and no fact or cm it..on exists which would have or, insofar as reasonably can be +veseen, could have, a MidAmerican Material Adverse Effect.

(b) Absence of Undisclosed Liabilities. Neither MidAmerican nor any MidAmerican Subsidiary, nor, to the knowledge of MidAmerican, any MidAmerican Joint Venture, has any liabilities or obligations (whether absolute, accrued, contingent or otherwise and including, without limitation, margin loans) of a nature required by GAAP to be reflected in a consolidated 1

F 0486030.01 corporate balance sheet, except liabilities, obligations or contingencies which are accrued or reserved against in the l consolidated financial statements of MidAmerican and MidAmerican l Utility or reflected in the notes thereto for the year ended i December 31, 1997, or which were incurred after December 31, 1997 in the ordinary cource of business and would not, in the aggregate, have a MidAmerican Material Adverse Effect.

Section 5.7. Litication. Except as set forth in Section 5.7 or 5.11 of the MidAmerican Disclosure Schedule or as disclosed in the MidAmerican SEC Reports filed prior to the date of this Agreement, (a) there are no claims, suits, actions or proceedings by any Governmental Authority or any arbitrator, pending or, to the knowledge of MidAmerican, threatened, nor are there, to the knowledge of MidAmerican, any investigations or reviews by any Governmental Authority or any arbitrator pending or threatened against, relating to or affecting MidAmerican or any of the MidAmerican Subsidiaries or, to the knowledge of MidAmerican, the MidAmerican Joint Ventures, (b) there have not been any significant developments since December 31, 1997 with respect to such disclosed claims, suits, actions, proceedings, investigations or reviews and (c) there are no judgments, decrees, injunctions, rules or orders of any Governmental Authority or any arbitrator applicable to MidAmerican or any of the MidAmerican Subsidiaries or, to the knowledge of MidAmerican, applicable to any of the MidAmerican Joint Ventures, which, when taken together with any other nondisclosures described in clauses (a), (b) or (c), insofar as reasonably can be foreseen, could, if determined adversely, have a MidAmerican Material Adverse Effect.

Section 5.8. Joint Proxy Statement. None of the information supplied or to be supplied by or on behalf of MidAmerican for inclusion or incorporation by reference in the joint proxy statement in definitive form relating to the meetings of CalEnergy and MidAmerican stockholders to be held in connection with the Merger and the other transactions contemplated hereby (" Joint Proxv Statement") will, at the dates mailed to stockholders of CalEnergy and MidAmerican and at the times of the meetings of such stockholders to be held in connection with the Merger and the other transactions contemplated hereby, include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, MidAmerican does not make any representation or warranty with respect to any information that has been supplied by any of CalEnergy, Reincorporation Sub or Merger Sub or their accountants, counsel or other authorized representatives for use in any of the foregoing documents. The Joint Proxy Statement will comply as to form in all material respects with the provisions of applicable federal securities law.

Section 5.9. Tax Matters.

0486030.01 (a) Filine of Timelv Tax Returns. MidAmerican and each of the MidAmerican Subsidiaries have filed (or there has been filed on their behalf) all Tax Returns required to be filed by each of them under applicable law. All such Tax Returns were and are in all material respects true, complete and correct and filed on a timely basis.

(b) Pavment of Taxes. MidAmerican and each of the MidAmerican Subsidiaries have, w'ithin the t and in the manner prescribed by law, paid (and until the C3~ . Date will pay within the time and in the manner prescri i law) all Taxes

! that are currently due and payable, excep those contested in good faith and for which adequate reserves hav been taken.

(c) Tax Reserves. MidAmerican and the MidAmerican Subsidiaries have established (and until the Closing Date will maintain) on their books and records reserves which adequately ,

reflect its estimate of the amounts required to pay all Taxes.in accordance with GAAP.

(d) Tax Liens. There are no Tax liens upon the assets of l MidAmerican or any of the MidAmerican Subsidiaries except liens

! for Taxes not yet due.

(e) Withholdina Taxes. MiuAmerican and each of the MidAmerican Subsidiaries have complied (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the payment and withholding of Taxes, including, without limitation, the withholding and reporting requirements under Code Sections 1441 through 1464, 3401 through 3406 and 6041 through 6049, as well as similar provisions under any other laws, and have, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required.

(f) Extensions of Time For Filino Tax Returns. Except as set forth in Section 5.9(f) of the MidAmerican Disclosure Schedule, neither MidAmerican nor any of the MidAmerican Subsidiaries has requested any extension of time within which to file any Tax Return, which Tax Return has not since been timely filed.

(g) Faivers of Statute of Limitations. Except as set forth in Section 5.9(g) of the MidAmerican Disclosure Schedule, neither MidAmerican nor any of the MidAmerican Subsidiaries has executed any outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Tax Returns.

l (h) Exoiration of Statute of Limitations. Except as disclosed in Section 5.9(h) of the MidAmerican Disclosure Schedule, the statute of limitations for the assessment of all Taxes has expired for all applicable Tax Returns of MidAmerican and the MidAmerican Subsidiaries or those Tax Returns have been

0486030.01 examined by the appropriate taxing authorities for all tax g

periods ending before the date of this Agreement, and no deficiency for any Taxes has been proposed, asserted or assessed against MidAmerican or any of the MidAmerican subsidiaries that has not been resolved and paid in full.

(i) Audit, Administrative and Court Proceedings. Except as disclosed in Section 5.9(i) of the MidAmerican Disclosure Schedule, no audits or other administrative proceedings or court proceedings are presently pending, or, to the knowledge of MidAmerican, threatened, with regard to any Taxes or Tax Returns of MidAmerican or any of the MidAmerican Subsidiaries.

(j) Powers of Attornev. Except as disclosed in Section

5. 9 (j ) of the MidAmerican Disclosure Schedule, no power of attorney currently in force has been granted by MidAmerican or any of the MidAmerican Subsidiaries concerning any Tax matter.

(k) Iax Rulinas. Neither MidAmerican nor any of the I MidAmerican Subsidiaries has received or requested a Tax Ruling or entered into a Closing Agreement, with any taxing authority that would have a continuing adverse effect after the Closing Date.

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(1) Availability of Tax Returns. MidAmerican has made I available to CalEnergy complete and accurate copies of (i) all l federal and state income Tax Returns for open years, and any amendments thereto, filed by MidAmerican or any of the MidAmerican Subsidiaries, (ii) all audit reports or written proposed adjustments (whether formal or informal) received from any taxing authority relating to any Tax Return filed by MidAmerican or any of the MidAmerican Subsidiaries and (iii) any Tax Ruling or request for a Tax Ruling applicable to MidAmerican or any of the MidAmerican Subsidiaries and closing Agreements ,

entered into by MidAmerican or any of the MidAmerican I Subsidiaries.

(m) Tax Sharina Aareements. Except as disclosed in Section 5.9(m) of the MidAmerican Disclosure Schedule, neither  !

MidAmerican nor any MidAmerican Subsidiary is a party to any I agreement relating to allocating or sharing of Taxes. l l

l (n) ~~ Code Section 341 (F) . Neither MidAmerican nor any of the MidAmerican Subsidiaries has filed (or will file prior to the Closing) a consent pursuant to Code Section 341(f) or has l

agreed to have Code Section 341(f) (2) apply to any disposition of a subsection (f) asset (as that term is defined in Code section 341(f) (4 ) ) , owned by MidAmerican or any of the MidAmerican Subsidiaries.

(o) Code Section 168. Except as set forth in Section 5.9(o) of the MidAmerican Disclosure Schedule, no property of MidAmerican cv any of the MidAmerican Subsidiaries is property that MidAmer or any MidAmerican Subsidiary or any party to

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0486030.01 l this transaction is or will be required to treat as being owned by another person pursuant to the provisions of code Section 16 B (f) (8) (as in ef fect prior to its amendment by the Tax Reform Act of 1986) or is " tax-exempt use property" within the meaning of Code Section 168(h).

(p) Code Section 481 Adiustments. Except as set forth in Section 5.9(p) of the MidAmerican Disclosure Schedule, neither MidAmerican nor any of the MidAm'erican subsidiaries is required to include in income for any tax period ending after the date hereof any adjustment pursuant to code Section 481(a) by reason of a voluntary change in accounting method initiated by MidAmerican or any of the MidAmerican Subsidiaries, and, to the knowledge of MidAmerican, the IRS has not proposed any such adjustment or change in accounting method.

(q) Acouisition Indebtedness. Except as set forth in Section 5.9 (q) of the MidAmerican Disclosure Schedule, no indebtedness of MidAmerican or any of the MidAmerican Subsidiaries is " corporate acquisition indebtedness" within the meaning of Code Section 279 (b) .

(r) Intercomoany Transactions. Except as set forth in Section 5.9 (r) of the MidAmerican Disclosure Schedule, neither MidAmerican nor any of the MidAmerican Subsidiaries has engaged in any intercompany transactions within the meaning of Treasury Regulations 1.1502-13 or -14 or Temporary Treasury Regulation Section 1.1502-13T or -14T for which any income or gain remains unrecognized as of the close of the last taxable year prior to the Closing Date, and no excess loss account within the meaning of Treasury Regulation Section 1.1502-14, -19 or -32 exists with respect to MidAmerican or any of the MidAmerican Subsidiaries.

(s) Consolidated Tax Returns. Except as disclosed in Section 5.9(s) of the MidAmerican Disclosure Schedule, neither MidAmerican nor any of the MidAmerican Subsidiaries has ever been a member of an affiliated group of corporations (within the meaning of Code Section 1504 (a)) filing consolidated returns, other than the affiliated group of which MidAmerican is the common parent.

(t) . Code Section 338 Elections. Except as set forth in Section 5.9(t) of the MidAmerican Disclosure Schedule, no election under Code Section 330 (or any predecessor provision) '

has been made by or with respect to MidAmerican or any of the MidAmerican Subsidiaries or any of their respective assets or l

properties.

( (u) 5% Foreien Stopkholders. To MidAmerican's knowledge, ,

based on Schedule 13D a' L3G filings with the SEC with respect j to MidAmerican, no fores erson owns, as of the date of this l Agreement, 5% or more of outstanding shares of MidAmerican l Common Stock.

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! I i Section 5.10. Emolovee Matters: ERISA.

(a) Benefit Plans. Section 5.10(a) of the MidAmerican

! Disclosure Schedule contains a true and complete list of each employee benefit plan, practice, program or arrangement currently sponsored, maintained or contributed to by'MidAmerican or any of the MidAmerican subsidiaries for the benefit of employees, former l employees or directors and their beneficiaries in respect of services provided to any such entity, including, but not' limited to, any employee benefit plans within the meaning of Section 3 (3) of ERISA, employee pension benefit plan, program, arrangement or agreement, any health, medical, welfare, disability, life insurance, bonus, option, stock appreciation plan, performance stock plan, restricted stock plan, deferred compensation plan, retiree benefits plan, severance pay and other employee benefit or fringe benefit plan and any employment, consulting, non-

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compete, severance or change in control agreement (collectively, the "MidAmerican Benefit Plans"), together with, for any option, stock appreciation plan,-performance stock plan, restricted stock i plan, deferred compensation plan and supplemental retirement l plan, the current amounts or benefits granted or payable under

! each and reasonable details (including exercise prices) regarding the MidAmerican Options or oth securities which represent the j 1

right (contingent or other) to purchase or receive shares of i MidAmerican Common Stock or, following the Merger, of Parent l i

Common Stock. For the purposes of this Section 5.10, *he term j "MidAmerican" shall be deemed to include predecessors thereof. j

. (b) Contributions. Except as set forth in Section 5.10to)

! of-the MidAmerican Disclosure Schedule, all material '

co.ntributions and other payments required to be made by MidAmerican or any of the MidAmerican Subsidiaries to any MidAmerican Benefit Plan (or to any person pursuant to the terms thereof) have been timely made or the amount of such payment or contribution obligation has been reflected in the MidAmerican

, Financial Statements. Except as set forth in Section 5.10(b) of l the MidAmerican Disclosure Schedule, (i) the current value of all accrued benefits under any MidAmerican Benefit Plan which is a l defined benefit plan did not, as of the date of the most recent l actuarial valuation for such plan, exceed the then current value of the assets of such plan, based on the actuarial assumptions set forth in such valuation for calculating the minimum funding requirements of Code Section 412, which actuarial assumptions and calculations have been provided to CalEnergy prior to the date of this Agreement, and (ii) neither MidAmerican nor any entity which l

is or ever has been considered as a single employer together with l MidAmerican or MidAmerican Utility pursuant to Section 414 of the Code contributes or has contributed, during the eight-year period immediately prior to the date of this Agreement, to a multiemployer plan (as defined in Section 3 (37) of ERISA), or has any liability under ERISA Section 4203 or Section 4205 in respect of any such plan.

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(c) Oualification: Comoliance. Except as set forth in Section 5.10(c) of the MidAmerican Disclosure Schedule, each of the MidAmerican Benefit Plans intended to be " qualified" within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified, and, to the knowledge of MidAmerican, no circumstances exist that are reasonably expected by MidAmerican to result in the revocation of any such t determination. MidAmerican and,each of the MidAmerican j Subsidiaries are in compliance in all material respects with, and i each MidAmerican Benefit Plan is and has been operated in all l l material respects in compliance with the terms thereof and all applicable laws, rules and regulations governing such plan, including, without limitation, ERISA and the Code. Each MidAmerican Benefit Plan intended to provide for the deferral of income, the reduction of salary or other compensation or to afford other income tax benefits complies with the requirements of the applicable provisions of the Code or other laws, rules and regulations required to provide such income tax benefits.

(d) Liabilities. With respect to the MidAmerican Benefit Plans individually and in the aggregate, there are no actions, suits, claims pending or, to the knowledge of MidAmerican, threatened and no event has occurred, and, to the knowledge of MidAmerican, there exists no condition or set of circumstances that could subject MidAmerican or any of the MidAmerican Subsidiaries to any liability arising under the Code, ERISA or any other applicable law (including, without limitation, any '

l liability of any kind whatsoever, whether direct or indirect, contingent, inchcate or otherwise, to any such plan or the PBGC, or under any indemnity agreement to which MidAmerican or any of the MidAmerican Subsidiaries is a party, in each such case, which liability, individually or in the aggregate, could reasonably be expected to have a MidAmerican Material Adverse Effect.

(e) Welfare Plans. Except as set forth in Section 5.10 (e) of the MidAmerican Disclosure Schedule, none of the MidAmerican Benefit Plans that are " welfare plans", within the meaning of Section 3 (1) of ERISA, provides for any benefits payable to or on behalf of any employee or director after termination of employment or service, as the case may be, other than elective continuation required pursuant to Code Section 4980B or coverage which expires at the end of the calendar month following such event. Each such plan that is a " group health plan" (as defined in Code Section 4980B(g)) has been operated in compliance with I

Code Section 4980B at all times, except for any non-compliance i

that would not, or insofar as reasonably can be determined could not, give rise to a MidAmerican Material Adverse Effect.

(f) Documents Made Available. MidAmerican has made available to CalEnergy a true and correct copy of each collective bargaining agreement to which MidAmerican or any of the MidAmerican Subsidiaries is a party or under which MidAmerican or any of the MidAmerican Subsidiaries has obligations, and with respect to each MidAmerican Benefit Plan, to the extent l

04Q6030.01 applicable, (i) such plan and summary plan description (including

, all amendments to each such document), (ii) the most recent {

annual report filed with the IRS, (iii) each related trust agreement, insurance contract, service provider or investment management agreement (including all amendments to each such document), (iv) the most recent determination of the IRS with respect to the qualified status of such plan, (v) the most recent actuarial report or valuation and (vi) all material employee communications. ~

(g) Payments Resultina from Mercer and Other Severance Payments. Except as set forth in Section 5.10(g) of the MidAmerican Disclosure Schedule or as specifically provided for in this Agreement, (i) the announcement or consummation of any transaction contemplated by this Agreement will not (either alone L or upon the occurrence of any additional or further acts or events, including, without limitation, termination of employment) result in any (A) payment (whether of severance pay or otherwise) becoming due from MidAmerican or any of the MidAmerican Subsidiaries to any officer, employee, former employee or director thereof or to the trustee under any " rabbi trust" or similar arrangement or (B) benefit being established or becoming accelerated, vested or payable under any MidAmerican Benefit Plan and (ii) neither MidAmerican nor any of the MidAmerican Subsidiaries is a party to (A) any management, employment, deferred compensation, severance (including any payment, right or benefit resulting from a change in control), bonus or other

contract for personal services with any officer, director or employee, (B) any consulting contract with any person who prior to entering into such contract was a director or officer of MidAmerican or any of the MidAmerican Subsidiaries or (C) ercy material plan, agreement, arrangement or understanding similar to the foregoing.

(h) Labor Acreements. As of the date hereof, except as set forth in Section 5.10(h) of the MidAmerican Disclosure Schedule, i

neither MidAmerican nor any of the MidAmerican Subsidiaries is a l party to any collective bargaining agreement or other labor i

agreement with any union or labor organization. To the knowledge of MidAmerican, as of the date hereof, there is no current union representation question involving employees of MidAmerican or any of the MidAmerican Subsidiaries, nor does MidAmerican know of any activity or proceeding of any labor organization (or representative thereof) or employee group to organize any such employees. Except as set forth in Section 5.10(h) of the MidAmerican Disclosure Schedule, (i) there is no unfair labor practice, employment discrimination or other complaint against MidAmerican or any of the MidAmerican Subsidiaries pending or, to the knowledge of MidAmerican, threatened, which has or could reasonably be expected to have a MidAmerican Material Adverse Effect, (ii) there is no strike, dispute, slowdown, work stoppage or lockout pending, or, to the knowledge of MidAmerican, threatened, against or involving MidAmerican or any of the MidAmerican Subsidiaries which has or could reasonably be

0486030.01 expected to have, a MidAmerican Material Adverse Ef fect and (iii) there is no proceeding, claim, suit, action or governmental investigation pending or, to the knowledge of MidAmerican, threatened, in respect of which any director, officer, employee or agent of MidAmerican or any of the MidAmerican subsidiaries is or may be entitled to claim indemnification from MidAmerican pursuant to their respective articles of incorporation or by-laws or as provided in the Indemnification Agreements listed in Section 5.10(h) of the MidAmeric'an Disclosure Schedule. Except as set forth in Section 5.10 (h) of the MidAmerican Disclosure Schedule, MidAmerican and the MidAmerican Subsidiaries have, complied in all material respects with all laws relating to the employment of labor, including without limitation any provisions thereof relating to wages, hours, collective bargaining and the payment of social security and similar taxes, and no person has, to the knowledge of MidAmerican, asserted that MidAmerican or any of the MidAmerican Subsidiaries is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing.

(i) Parachute payments. Section 5.10 (i) of the MidAmerican l

Disclosure Schedule sets forth (1) the name of each employee, former employee or other person who is or was providing services to MidAmerican or any MidAmerican Subsidiaries and who, in connection with the transactions contemplated with this l Agreement, will receive, or will or may become entitled to i l

receive in the future or upon termination of such person's l employment, any payments (including without limitation l accelerated vesting of MidAmerican options or other equity-based awards) which could reasonably be expected to constitute " excess parachute payments" with respect to such person within the meaning of Section 280G of the Code (" Excess Parachute payments"), (2) with respect to each such person, the maximum l

amount of Excess Parachute Payments which could reasonably be

! expected to be so received (datermined in accordance with j proposed regulations of the IRS promulgated under Section 280G of the Code), and (3) with respect to each person who is entitled to receive a " gross-up payment" in respect of excise taxes imposed j on such Excess Parachute Payments under Section 4999 of the Code, a reasonable estimate of the amount of such gross-up payment.

(j ). -Section 162 (m) . Except as set forth in Section 5.10 (j) ,

of the MidAmerican Disclosure Schedule, no payments to any executive officer of MidAmerican or any MidAmerican Subsidiaries will fail to be deductible for Federal income tax purposes by reason of the deduction limit imposed under Section 162 (m) of the Code. Section 5.10 (j) of the MidAmerican Disclosure Schedule sets forth the name of each executive officer who will receive compensation which may not be fully deductible by reason of the application of Section 162(m), and a reasonable estimate of the amount of such potentially nondeductible compensation.

0486030.01 Section 5.11. Environmental Protection.

1 (a) Comoliance. Except as set forth in Section 5.11(a) of the MidAmerican Disclosure Schedule, MidAmerican and each of the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, I the MidAmerican Joint ventures are in compliance with all i

applicable Environmental Laws except where the failure to so comply would not have a MidAmeri,can Material Adverse Effect, and neither MidAmerican nor any of the MidAmerican Subsidiaries has received any communication (written or oral), from any person or Governmental Authority that alleges that MidAmerican or any of the MidAmerican Subsidiaries or the MidAmerican Joint Ventures is not in such compliance with applicable Environmental Laws. To the knowledge of MidAmerican, compliance with all applicable Environmental Laws will not require MidAmerican or any MidAmerican Subsidiary or, to the knowledge of MidAmerican, any MidAmerican Joint Venture to incur costs beyond that currently budgeted in the five MidAmerican fiscal years beginning with January 1, 1998 (as disclosed to CalEnergy prior to the date of this Agreement) that will be reasonably likely to result in a MidAmerican Material Adverse Effect, including but not limited to the costs of MidAmerican and MidAmerican Subsidiary and MidAmerican Joint Venture pollution control equipment required or reasonably contemplated to be required in the future. i (b) Environmental Permits. Except as set forth in Section 5.11 (b) of the MidAmerican Disclosure Schedule, MidAmerican and .

each of the MidAmerican Subsidiaries and, to the knowledge of  !

I MidAmerican, the MidAmerican Joint Ventures, have obtained or has applied for all Environmental Permits necessary for the construction of its facilities or the conduct of its operations except where the failure to so obtain would not have a MidAmerican Material Adverse Effect, and all such Environmental Permits are in good standing or, where applicable, a renewal application has been timely filed and is pending agency approval, and MidAmerican and the MidAmerican Subsidiaries and, to the knowledge of MidAmerican, the MidAmerican Joint Ventures are in compliance with all terms and conditions of all Environmental Permits necessary for the construction of its facilities or the conduct of its operations, except where the failure to so comply, ,

in the aggregate, would not have a MidAmerican Material Adverse Effect. --

(c) Environmental claims. Except as set forth in Section 5.11 (c) of the MidAmerican Disclosure Schedule, there is no Environmental Claim pending (or, to the knowledge of MidAmerican, threatened) (A) against MidAmerican or any of the MidAmerican Subsidiaries or, to the knowledge of MidAmerican, any of the )

MidAmerican Joint Ventures, (B) to the knowledge of MidAmerican, ,

l against any person or entity whose liability for any l l Environmental Claim MidAmerican or any of the MidAmerican l Subsidiaries or, to the knowledge of MidAmerican, any of the '

l MidAmerican Joint Ventures has or may have retained or assumed i l

either contractually or by operation of law, or (C) against any 1

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0406030.01 real or personal property or operations which MidAmerican or any

of the MidAmerican Subsidiaries or, to the knowledge of MidAmerican, any of the MidAmerican Joint Ventures owns, leases or. manages, in whole or in part, which, if adversely determined,

would have, in the aggregate, a MidAmerican Material Adverse l Effect.

l (d) Releases. Except as set forth in Section 5.11(d) of l the MidAmerican Disclosure Sched'le,u MidAmerican has no knowledge l of any Releases of any Hazardous Material that would be l reasonably likely to form the basis of any Environmental Claim I against MidAmerican or any of the MidAmerican Subsidiaries or the MidAmerican Joint Ventures, or against any person or entity whose liability for any Environmental Claim MidAmerican or any of the MidAmerican Subsidiaries or the MidAmerican Joint Ventures has or may have retained or assumed either contractually or by operation i of law except for any Environmental Claim shich would not have, in the aggregate, a MidAmerican Material Adverse Effect.

(e) Predecessors. Except as set forth in Section 5.11(e) of the MidAmerican Disclosure Schedule, MidAmerican has no knowledge, with respect to any predecessor of MidAmerican or any of the MidAmerican Subsidiaries or the MidAmerican Joint

! Ventures, of any Environmental Claim pending or threatened, or of any Release of Hazardous Materials that would be reasonably likely to form the basis of any Environmental Claim, which, if determined adversely could reasonably be expected to require payments of S20 million or more or which could reasonably be j expected to have a MidAmerican Material Adverse Effect.

(f) Disclosure. MidAmerican has disclosed in writing to CalEnergy all material facts which MidAmerican reasonably believes form the basis of an Environmental Claim which could l have a MidAmerican Material Adverse Effect arising from (i) the l cost of MidAmerican pollution control equipment (including, without limitation, upgrades and other modifications to existing l equipment) currently required or reasonably contemplated to be required in the future, (ii) current remediation costs or costs to MidAmerican or any of the MidAmerican Subsidiaries for l remediation reasonably contemplated to be required in the future or (iii) any other environmental matter affecting MidAmerican or l any of the-MidAmerican Subsidiaries.

l (g) Cost Estimates. To MidAmerican's knowledge, no environmental matter set forth in the MidAmerican SEC Reports or the MidAmerican Disclosure Schedule could reasonably be expected to exceed the cost estimates provided in the MidAmerican SEC Reports by an amount that individually or in the aggregate could

- reasonably be expected to have a MidAmerican Material Adverse Effect.

Section 5.12. Reculation as a Utility. MidAmerican Utility is regulated as a public utility by the FERC and in the States of Illinois, Iowa, Nebraska and South Dakota and in no i

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0486030.01

, other state. Except as set forth in the preceding sentence or l Section 5.12 of the MidAmerican Disclosure Schedule, neither MidAmerican nor any " subsidiary company" or " affiliate" (as each l such term is defined in the 1935 Act) of MidAmerican is subject l to regulation as a public utility or public service company (or l similar designation) by the FERC or any municipality, locality, l state in the United States or any foreign country. MidAmerican is an exempt holding company und,er Section 3 (a) (1) of the 1935 Act.

l Section 5.13. Vote Recuired. The approval of the Merger by the affirmative vote of a majority of the votes i entitled to be cast by holders of MidAmerican Common Stock (the "MidAmerican Stockholders' Aceroval") is the only vote of the holders of any class or series of the capital stock of MidAmerican or any of the MidAmerican Subsidiaries required to approve this Agreement, the Merger and the other transactions contemplated hereby.

Section 5.14. Insurance. Except as set forth in I Section 5.14 of the MidAmerican Disclosure Schedule, MidAmerican and each of the MidAmerican Subsidiaries is, and has been continuously since January 1, 1996, insured with financially j responsible insurers in such amounts and against such risks and i losses as are customary in all material respects for companies conducting the business as conducted by MidAmerican and the MidAmerican Subsidiaries during such time period. Neither i

MidAmerican nor any of the MidAmerican Subsidiaries has received any notice of cancellation or termination with respect to any material insurance policy of MidAmerican or any of the MidAmerican Subsidiaries. The insurance policies of MidAmerican and each of the MidAmerican Subsidiaries are valid and enforceable policies in all material respects.

Section 5.15. Opinion of Financial Advisor.

I MidAmerican has obtained the opinion of Warburg Dillon Read &

Co., LLC ("Dillon Read"), dated the date of this Agreement, to the effect that, as of the date thereof, the Per Share Amount to be paid to holders of MidAmerican Common Stock pursuant to this Agreement is fair from a financial point of view to the holders of MidAmerican Common Stock.

Section 5.16. Brokers. No broker, finder or  !

investment banker (other than Dillon Read) is entitled to any brokerage, finder's or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of MidAmerican. MidAmerican has heretofore furnished to CalEnergy a complete and correct copy of all agreements between MidAmerican and Dillon Read, pursuant to which such firm would be entitled to any payment relating to the Merger.

l Section 5.17. Non-Acolicability of Certain Provisions of Iowa Act. None of the business combination provisions of l' Section 1109 of the Iowa Act or any similar provisions of the l

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0486030.01 Iowa Act, the articles of incorporation or by-laws of MidAmerican are applicable to the transactions contemplated by this Agreement because such provisions do not apply by their terms or because any required approvals of the Board of Directors of MidAmerican have been obtained.

Section 5.18. MidAmerican Richts Acreement. prior to the date of this Agreement, MidAmerican has delivered to Ca1 Energy and its counsel a true~and complete copy of the Shareholder Rights Agreement, dated December 18, 1996, between continen al Stock Transfer and Trust company and MidAmerican (the "MidAmerican Richts Acreement") in effect as of the date hereof, and the consummation of the transactions contemplated by this Agreement will not result in the triggering of any right or entitlement of stockholders of MidAmerican under the MidAmerican Rights Agreement or any similar agreement to which MidAmerican or any of its affiliates is a party.

ARTICLE VI.

CONDUCT OF BUSINESS PENDING THE MERGER Section 6.1. Conduct of Business by MidAmerican Pendine the Mercer. MidAmerican covenants and agrees, as to itself and each of the MidAmerican Subsidiaries, that after the date of this Agreement and prior to the Effective Time or earlier termination of this Agreement, except as expressly contemplated or permitted in this Agreement, or to the extent CalEnergy shall have otherwise consented in writing, which decision regarding consent shall be made as soon as reasonably practicable (it being understood that if a particular activity is permissible as a result of its being disclosed and, where applicable, approved in writing by CalEnergy under any one of the Section 6.1 subsections of the MidAmerican Disclosure Schedule, that activity will not be prohibited under any of the subsections of Section 6.1):

(a) Ordinary Course of Business. MidAmerican shall, and shall cause the MidAmerican Subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and use all commercially reasonable efforts to preserve intact their present business organizations and goodwill, preserve the goodwill and relationships with customers, suppliers and others having business dealings with them and, subject to prudent management of workforce needs and ongoing or planned programs relating to downsizing, re-engineering and similar matters, keep available the services of their present officers and employees to the end that their goodwill and ongoing businesses shall not be impaired in any material respect at the Effective Time. Except as set forth in Section 6.1(a) of the MidAmerican Disclosure Schedule, MidAmer!.can shall not, nor shall MidAmerican permit any of the MidAmerican Subsidiaries to, (i) enter into a new line of business involving any material investment of assets or resources f or any material exposure to liability or loss to MidAmerican and I

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the MidAmerican Subsidiaries taken as a whole, or (ii) acquire, or agree to acquire, by merger or consolidation with, or by purchase or otherwise, a substantial equity interest in or a substantial portion of the assets of, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any asseto (other than equipment, fuel, supplies and similar items or for capital expenditures, in each case, in the ordinary course of business consistent with past practice); l provided, however, that notwithstanding the above, MidAmerican or any of the MidAmerican Subsidiaries may enter into a new line of i business or make such an other acquisition to the extent the l investment or other acquisition, as the case may be (which shall include the amount of equity invested plus the amount of indebtedness incurred, assumed or otherwise owed by or with l

recourse to MidAmerican or any MidAmerican Subsidiary (other than j the entity being acquired or in which the investment is made or any special purpose entity formed in connection with such investment or other acquisition)), in a new line of business or acquisition, as the case may be, does not exceed, together will all other such investments and other acquisitions made from and j after the date of this Agreement, 5100 million in the aggregate; j and provided, further, that no such investment shall be made in, l and no such other acquisition shall consist of, any common equity securities of any U.S. gas or electric utility company. >

l (b) Dividends. MidAmerican shall not, nor shall MidAmerican 8

permit any of the MidAmerican Subsidiaries to, (i) declare or pay any dividends on or make other distributions in respect of any of their capital stock other than (A) to MidAmerican or its wholly owned Subsidiaries, (JB) dividends required to be paid on any MidAmerican Utility Preferred Stock in accordance with the terms thereof and (C) regular quarterly dividends on MidAmerican Common Stock with respect to the fiscal quarters ending prior to the Effective Date, with usual record and payment dates not in excess of 100% of the average quarterly dividend for the four quarterly dividend payments immediately preceding the date hereof with respect thereto and (D) a special dividend on MidAmerican Common Stock with respect to the quarter in which the Effective Date occurs with a record date on or prior to the Effective Date, ,

which does not exceed an amount equal to $0.30 multiplied by a I fraction, the numerator of which is the number of days in such quarter prior to the Effective Date, and the denominator of which l

is the total number of days in such fiscal quarter; or (ii) l split, combine or reclassify any of their capital stock or issue

! or authorize or propose the issuance of any other securities in respect of, in lieu of, or in substitution for, shares of their capital stock. I l

(c) Issuance of Securities. Except as described in Section 6.1(c) of the MidAmerican Disclosure Schedule, MidAmerican shall not, nor shall MidAmerican permit any of the MidAmerican Subsidiaries to, issue, agree to issue, deliver, sell, award, pledge, dispose of or otherwise encumber or authorize or propose

F 0486030.01 the issuance, delivery, sale, award, pledge, grant of a security '

interest, disposal or other encumbrance of, any shares of their capital stock of any class or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares or convertible or exchangeable securities, other than (i) issuances by a wholly owned Subsidiary of its capital stock to its direct or indirect parent and (ii) issuances of shares of MidAmerican Common Stock after the date of this Agreement pursuant to MidAmerican Options existing as of the date hereof, as identified in Section 5.10 (a) of the MidAmerican Disclosure Schedule.

(d) Indebtedness. Except as set forth in Section 6.1(d) of the MidAmerican Disclosure Schedule, MidAmerican shall not, nor shall MidAmerican permit any of the MidAmerican Subsidiaries to, incur or guarantee any indebtedness (including any debt borrowed or guaranteed or otherwise assumed including, without limitation, i l

the issuance of debt securities or warrants or rights to acquire debt) or enter into any " keep well" or indemnity or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing other than (i) indebtedness or guarantees or " keep well" or other agreements incurred in the ordinary course of business consistent with past practice (including refinancings, the issuance of commercial paper or the use of existing or replacement credit facilities or hedging activities), (ii) arrangements between MidAmerican and wholly owned MidAmerican Subsidiaries or among wholly owned MidAmerican Subsidiaries, (iii) in connection with the refunding or defeasance of existing indebtedness, or (iv) as may be necessary in connection with investments or acquisitions permitted by Section 6.1(a).

, (e) Comnensation, Benefits. Except as set forth in Section 6 .1 ( e ) of the MidAmerican Disclosure Schedule, as may be required by applicable law or as contemplated by this Ar.eement, MidAmerican shall not, nor shall MidAmerican permit any of the MidAmerican Subsidiaries to, (i) enter into, adopt or amend or increase the amount or accelerate the payment or vesting of any benefit or amount payable under, any employee benefit plan or other contract, agreement, commitment, arrangement, plan, trust, fund or policy maintained by, contributed to or entered into by MidAmerican or any of the MidAme: L.an Subsidiaries (including, without limitation, the MidAmerican Benefit Plans set forth in Section 5.10(a) of the MidAmerican Disclosure Schedule) or

increase, or enter into any contract, agreement, commitment or i arrangement to increase in any manner, the compensation or fringe l

ben-fits, or otherwise to extend, expand or enhance the l engagement, employment or any related rights, of any director, officer or other employee of MidAmerican or any of the MidAmerican subsidiaries, except pursuant to binding legal commitments existing on the date of this Agreement and specifically identified in Section 5.10 (a) of the MidAmerican  !

Disclosure Schedule and except for normal increases in the l

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0486030.01 ordinary course of business consistent with past practice that, f in the aggregate, do not result in a material increase in benefits or compensation expense to MidAmerican or any of the MidAmerican Subsidiaries; (ii) enter into or amend any employment, severance, pension, deferred compensation or special pay arrangement with respect to the termination of employment or other similar contract, agreement or arrangement with any director or officer or other employee other than in the ordinary course of business consistent with past practice; or (iii) deposit into any trust (including any " rabbi trust") amounts in respect of any employee benefit obligations or obligations to directors; provided that transfers into any trust, other than a rabbi or other trust with rerpect to any non-qualified dcferred compensation, may be made in accordance with past practice.

'(f) 1935 Act. MidAmerican shall not, nor shall MidAmerican permit any of the MidAmerican Subsidiaries to, except as required or contemplated by this Agreement, engage in any activities which would cause a change in its status, or that of the cidAmerican Subsidiaries, under the 1935 Act, or that would impai.r the ability of MidAmerican or Parent or any subsidiary cf Parent to claim an exemption as of right under Rule 2 of the 1935 Act or that would subject CalEnergy or any CalEnergy Subaidiary to regulation under such Act (other than under Section 9 (a) (2) or as an exempt holding company under Section 3 (a) (1) under such Act),

following the Merger and the Reincorporation.

(g) Third-Party Consents. MidAmerican shall, and shall cause the MidAmerican Subsidiaries to, use all commercially reasonable efforts to obtain all MidAmerican Required Consents.

MidAmerican shall promptly notify CalEnergy of any failure or prospective failure to obtain any such consents and shall provide copies of all MidAmerican Required Consents obtained by MidAmerican to CalEnergy.

(h) Tax-Exemot Status. MidAmerican shall not, nor shall MidAmerican permit any MidAmerican Subsidiary to, take any action that would likely jeopardize the qualification of MidAmerican's outstanding revenue bonds which qualify as of the date hereof under Section 142(a) of the Code as " exempt facility bonds" or as tax-exempt industrial development bonds under Section 103 (b) (4) of the Internal Revenue Code of 1954, as amended, prior to the Tax Reform Act of 1986.

Section 6.2. Conduct of Business by CalEnerov Pendino the Merctr. CalEnergy covenants and agrees, as to itself and each of the CalEnergy Subsidiaries, that after the date of this Agreement and prior to the Effective Time or earlier termination of this Agreement, except as expressly contemplated or permitted in this Agreement, or to the extent MidAmerican shall have 4

otherwise consented in writing, which decision regarding consent shall be made as soon as reasonably practicable (it being understood that if a particular activity is permissible as a result of its being disclosed and, where applicable, approved in

0486030.01 writing by MidAmerican under any one of the Section 6.2 i subsections of the CalEnergy Disclosure Schedule, that activity will not be prohibited under any of the subsections of Section 6.2):

(a) Ordinary Course of Business. CalE'nergy shall, and shall cause the CalEnergy Subsidiaries to, carry on their respective businesses in the usual, regular.and ordinary course in substantially the same manner as heretofore conducted and use all commercially reasonable efforts to preserve intact their present business organizations and goodwill, preserve the goodwill and relationships with customers, suppliers and others having business dealings with them and, subject to prudent management of workforce needs and ongoing or planned programs relating to downsizing, re-engineering and similar matters, keep available the services of their present officers and employees to the end that their goodwill and ongoing businesses shall not be impaired in any material respect at the Effective Time. Except as set forth in Section 6.2 (a) of the Ca1 Energy Disclosure Schedule, CalEnergy shall not, nor shall CalEnergy permit any of the CalEnergy Subsidiaries to, (i) enter into a new line of business involving any material investment of assets or resources or any material exposure to liability or loss to CalEnergy and the CalEnergy Subsidiaries taken as a whole, or (ii) acquire, or agree to acquire, by merger or consolidation with, or by purchase or otherwise, a substantial equity interest in or a substantial portion of the assets of, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets (other than equipment, fuel, supplies and similar items or for capital expenditures, in each case, in the ordinary course of business consistent with past practice); provided, however, that notwithstanding the above, CalEnergy or any of the CalEnergy subsidiaries may enter into a new line of business or make such an other acquisition to the extent the investment or other acquisition, as the case may be (which shall include the amount of equity invested plus the amount of indebtedness incurred, assumed or other wise owed by or with recourse to CalEnergy or any CalEnergy Subsidiary (other than the entity being acquired or in .

which the investment is made or any special purpose entity formed in connection with such inve6tment or other acquisition)), in a new line of business or acquisi6 ion, as the case may be, does not exceed, together will all othgr such investments and other acquisitions made from and after the date of this Agreement, $500 million in the aggregate; and provided, further, that no such investment shall be made in, and no such other acquisition shall consist of, any common equity securities of any U.S. gas or electric utility company.  !

(b) Indebtedness. Except as contemplated by this Agreement, CalEnergy shall not, nor shall CalEnergy permit any of the CalEnergy Subsidiaries to, incur or guarantee any indebtedness (including any debt borrowed or guaranteed or otherwise assumed including, without limitation, the issuance of

l 0486030.01 debt securities or warrants or rights to acquire debt) or enter

into any " keep well" or indemnity or other agr2ement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing other than (i) indebtedness or guarantees or " keep well" or other agreements incurred in the ordinary course of business consistent with past practice (including refinancings, l the issuance of commercial paper or the use of existing or replacement credit facilities or' hedging activities), (ii) arrangements between CalEnergy and wholly owned CalEnergy Subsidiaries or among wholly owned CalEnergy Subsidiaries, (iii) in connection with the refunding or defeasance of existing indebtedness, or (iv) as may be necessary in connection with investments or acquisitions permitted by Section 6.2(a) or in connection with the financing of the transactions contemplated hereby.

(c) 1935 Act. CalEnergy shall not, nor shall CalEnergy permit any of the CalEnergy Subsidiaries to, except as required or contemplated by this Agreement, engage in any activities which would cause a change in its status, or that of the CalEnergy Subsidiaries, under the 1935 Act that would impair the ability of MidAmerican or Parent or any subsidiary of Parent to claim an exemption as of right under Rule 2 of the 1935 Act or that would subject CalEnergy or any CalEnergy Subsidiary to regulation under such Act (other than under Section 9 (a) (2) or as an exempt holding company under Section 3 (a) (1) under such Act), following the Merger and the Reincorporation.

(d) Third-Party Consents. CalEnergy shall, and shall cause the CalEnergy Subsidiaries to, use all commercially reasonable efforts to obtain all CalEnergy Required Consents. CalEnergy shall promptly notify MidAmerican of any failure or prospective failure to obtain any such consents and, if requested by MidAmerican, shall provide copies of all CalEnergy Required Consents obtained by CalEnergy to MidAmerican.

Section 6.3. Additional Covenants by MidAmerican and CalEnerav Pendine the Mercer. Each of CalEnergy and "2dAmerican covenants and agrees, each as to itself and each of its Subsidiaries, that after the date of this Agreement and prior to the Ef fective Time or earlier termination of t' s Agreement, except as expressly contemplated or permitted .a this Agreement, or to the extent the other parties hereto shall otherwise consent in writing, which decision regarding consent shall be made as soon as reasonably practicable:

Cocoeration, Notification. Each party shall (i) confer j (a) on a regular and frequent basis with one or more representatives  !

of the other parties to discuss, subject to applicable law, material operational matters and the general status of its j ongoing operations, (ii) promptly notify the other party of any '

significant changes in its business, properties, assets, condition (financial or other), results of or '.tions or l

0486030.01 prospects, (iii) promptly advise the other party of any change or event which has had or, insofar as reasonably can be foreseen, is reasonably likely to result in a MidAmerican Material Adverse Effect or a CalEnergy Material Adverse Effect, as the case may be, and (iv) pursuant to Section 7.3, promptly provide the other party with copies of all filings made by such party or any of its subsidiaries with any state or federal court, administrative agency, commission or other Gove,rnmental Authority.

(b) No Breach, Etc. Each of the parties shall not, nor shall it permit any of its subsidiaries to, take any action that would or is reasonably likely to result in a material breach of any provision of this Agreement or in any of its representations and warranties set forth in this Agreement being untrue on and as of the Closing Date.

ARTICLE VII.

ADDITIONAL AGREEMENTS )

i I

Section 7.1. Access to Information. Upon reasonable notice, MidAmerican shall, and shall cause the MidAmerican Subsidiaries to, afford to the officers, directors, employees, accountants, counsel, investment bankers, financial advisors and other representatives of CalEnergy (collectively, "Recresentatives") reasonable access, during normal business hours throughout the period prior to the Effective Time, to all of its properties, books, contracts, commitments, records and other information (including, but not limited to, Tax Returns) and, during such period, MidAmerican shall, and shall cause the MidAmerican Subsidiaries to, furnish promptly to CalEnergy (i) access to each significant report, schedule and other document filed or received by it or any of the MidAmerican Subsidiaries pursuant to the requirements of federal or state securities laws or filed with or sent to the SEC, the FERC, the public utility commission of any State, the Nuclear Regulatory Commission, the Department of Labor, the Immigration and Naturalization Service, the Environmental Protection Agency (state, local and federal),

the IRS, the Department of Justice, the Federal Trade Commission, or any other federal or state regulatory agency or commission or other Governmental Authority and (ii) access to all information I concerning-MidAmerican, the MidAmerican Subsidiaries, directors, officers and stockholders, properties, facilities or operations owned, operated or otherwise controlled by MidAmerican, or if not so owned, operated or controlled, which properties, facilities or operations that MidAmerican may nonetheless obtain access to through the exercise of reasonable diligence, and such other '

matters as may be reasonably requested by CalEnergy in connection with any filings, applications or approvals required or contemplated by this Agreement or for any other reason related to the transactions contemplated by this Agreement. CalEnergy i shall, from time to time at the request of MidAmerican, discuss its financing arrangements for the Merger with MidAmerican and shall furnish promptly to MidAmerican such information concerning

f l

0486030.01 its financial condition, together with final drafts of its

financing arrangements for the Merger. Subject to the following sentence, such information provided to MidAmerican may be shown to MidAmerican's investment bankers and financial advisors. Each party shall, and shall cause its subsidiaries and Representatives to, hold in strict confidence all documents and information concerning the other furnished to it in connection with the transactions contemplated by this Agreement in accordance with the Confidentiality Agreement, d'ated as of June 3, 1998, between CalEnergy and MidAmerican (the " Confidentiality Acreement").

Section 7.2. Joint Proxy Statement.

(a) Preparation and Filino. The parties will prepare and file with the SEC as soon as reasonably practicable after the date of this Agreement the Joint Proxy Statement. Each of the parties hereto shall furnish all information concerning itself which is required or customary for inclusion in the Joint Proxy Statement. The information provided by or on behalf of any party hereto for use in the Joint Proxy Statement shall be true and correct in all material respects without omission of any material fact which is required to make such information not false or misleading. No representation, covenant or agreement is made by any party hereto with respect to information supplied by any other party for inclusion in the Joint Proxy Statement.

(b) Opinions of Financial Advisers. It shall be a condition to the mailing of the Joint Proxy Statement to the stockholders of CalEnergy and MidAmerican that (i) Ca1 Energy shall have received the opinions of CSFB and Lehman, dated the date of the Joint Proxy Statement, to the effect that, as of the date thereof, the Per Share Amount to be paid to holders of MidAmerican Common Stock pursuant to this Agreement is fair from a financial point of view to CalEnergy and (ii) MidAmerican shall have received the opinion of Dillon Read, dated the date of the Joint Proxy Statement, to the effect that, as of the date thereof, the Per Share Amount to be paid to holders of MidAmerican Common Stock is fair from a financial point of view to the holders of MidAmerican Common Stock.

(c) Amendments or Sucolements. No amendment or supplement to the Joint Proxy Statement will be made without the approval of all parties. Each party will advise the others, promptly after it receives notice thereof, of any request by the SEC for amendment of the Joint Proxy statement or comments thereon and responses thereto or requests by the SEC for additional information.

Section 7.3. Reculatory Accrovals and Other Matters.

(a) HSR Filinos. Each party hereto shall file or cause to be filed with the Federal Trade Commission and the Department of Justice any notifications required to be filed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the

0486030.01 "HSR Act"), and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. Such parties will use all commercially reasonable efforts to coordinate such filings and any responses thereto, to make such filings promptly and to respond promptly to any requests for additional information made by either of such agencies.

(b) Other Acerovals. Each party hereto shall cooperate and use its best efforts to promptly~ prepare and file all.necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to use all commercially reasonable efforts to obtain all necessary permits, consents, approvals and authorizations of all Governmental Authorities and all other persons necessary or J^d;iole to consummate the transactions contemplated herel y, including, without limitation, the CalEnergy Required St..tutory Approvals, the MidAmerican Required Statutory Approvale, the CalEnergy Required Consents and the MidAmerican Reg'Ared Consents (and any concurrent or related rate filings, if any). CalEnergy and MidAmerican agree that they will consult with each other with respect to the obtaining of all such necessary or advisable permits, consents, approvals and authorizations of Governmental Authorities; provided, however, that it is agreed that MidAmerican shall have primary responsibility for the preparation and filing of any applications with state public utility commissions for approval of the Merger. Each of CalEnergy and MidAmerican shall have the right to review and approve in advance drafts of all such necessary applications, notices, petitions, filings and other documents made or prepared in connection with the transactions contemplated by this Agreement, which approval shall not be unreasonably withheld or delayed.

(c) NYSE Listina. Each party hereto shall use its best efforts to list on the NYSE, upon official notice of issuance, the shares of Parent Common Stock to be issued pursuant to the Reincorporation.

Section 7.4. Stockholder Acorovals.

(a) Acoroval of MidAmerican Stockholders. MidAmerican shall, as soon as reasonably practicable after the date of this Agreement, -(i) take all steps necessary to duly cal!, give notice of, convene and hold a meeting of its stockholders (the "MidAmerican Meetina") for the purpose of securing the MidAmerican Stcckholders' Approval, (ii) distribute to its stockholders the Joint Proxy Statement in accordance with applicable federal and state law and with its Articles of Incorporation and By-Laws, (iii) subject to the fiduciary duties of its Board of Directors, recommend to its stockholders the approval of the Merger, this Agreement and the transactions contemplated hereby and (iv) cooperate and consult with CalEnergy with respect to each of the foregoing matters.

0486030.01 (b) Accroval of CalEnercy Stockholders. CalEnergy shall, f as soon as reasonably practicable after the date of this Agreement, (i) take all steps necessary to duly call, give notice of, convene'and hold a meeting of its stockholders (the "CalEnerov Meetina") for the purpose of securing the CalEnergy Stockholders' Approval and (ii) distribute to its stockholders the Joint Proxy Statement in accordance with applicable federal and state law and with its Restated Certificate of Incorporation and By-Laws, (iii) subject to the fiduciary duties of its Board of Directors, recommend to its stockholders the approval of the Reincorporation, this Agreement and the transactions contemplated hereby and (iv) cooperate and consult with MidAmerican with respect to each of the foregoing matters.

(c) Meetino Date. The MidAmerican Meeting for the purpose of securing the MidAmerican Stockholders' Approval and the CalEnergy Meeting for the purpose of securing the CalEnergy Stockholders' Approval shall be held on such date or dates as CalEnergy and MidAmerican shall mutually determine.

Section 7.5. Directors' and Officers' Indemnification.

(a) Indemnification. From and after the Effective Time, Parent shall, to the fullest extent not prohibited by applicable law, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof, or who becomes

~

prior to the Effective Time, an officer or director of any of the parties hereto (each an " Indemnified Party" and collectively, the

" Indemnified Parties") against all losses, expenses (including reasonable attorney's fees and expenses) , claims, damages or l liabilities or, subject to the proviso of the next succeeding sentence, amounts paid in settlement, arising out of actions or omissions occurring at or prior to the Effective Time that are, i in whole or in part, based on or arising out of the fact that such person is or was a director or officer of such party arising

out of or pertaining to the transactions contemplated by this Agreement (the " Indemnified Liabilities"). In the event of any such loss, expense, claim, damage or liability (whether or not arising prior to the Effective Time), (i) Parent shall pay the reasonable fees and expenses of counsel for the Indemnified Parties selected by Parent, which counsel may also serve as counsel to-Parent and which counsel shall be reasonably I satisfactory to the Indemnified Parties (which consent shall not be unreasonably withheld), promptly after statements therefor are received and otherwise advance to such Indemnified Party upon request reimbursement of documented expenses reasonably incurred, in either case to the extent not prohibited by the Iowa Act, (ii) r Parent will cooperate in the defense of any such matter and (iii)

! any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under the Iowa Act and the articles of incorporation or by-laws of MidAmerican shall be made by independent counsel mutually I acceptable to Parent and the Indemnified Party (the "Indeoendent Counsel"); crovided, however, that Parent shall not be liable for

0406030.01 i any settlement effected without its written consent (which consent shall not be unreasonably withheld). The Indemnified Parties as a group may retain only one law firm with respect to each related matter except to the extent there is, in the written opinion of the Independent Counsel, under applicable standards of professional conduct, a conflict on any significant issue between positions of such Indemnified Party and any other Indemnified Party or Indemnified Parties.

(b) Insurance. For a period of six years after the Effective Time, Parent shall cause to be maintained in effect policies of directors' and officers' liability insurance maintained by MidAmerican; orovided, that Parent may substitute therefor policies of at least the same coverage containing terms that are no less advantageous with respect to matters occurring prior to the Effective Time to the extent such liability insurance can be maintained annually at a cost to Parent not greater than 200 percent of the current annual premiums for such directors' and officers' liability insurance, which existing premium costs are disclosed on Schedule 7.5(b) of the MidAmerican Disclosure Schedule; crovided, further, that if such insurance cannot be so maintained or obtained at such cost, Parent shall maintain or obtain as much of such insurance for MidAmerican as can be so maintained or obtained at a cost equal to 200 percent of the current annual premiums of MidAmerican for its directors' and officers' liability insurance.

(c) Successors. In the event Parent or any of its successors or assigns (i) consolidates with or merges into any o'cher person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person or entity, then and in either such case, proper provisions shall be made so that the successors and assigns of Parent shall assume the obligations set forth in this Section 7.5.

(d) Survival of Indemnification. To the fullest extent not prohibited by law, from and after the Effective Time, all rights to indemnification as of the date hereof in favor of the employees, agents, directors and officers of CalEnergy, MidAmerican and their respective Subsidiaries with respect to their activities as such prior to the Effective Time, as provided in their respective articles of incorporation and by-laws in effect on the date thereof, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time. l Section 7.6. Disclosure Schedules. On or before the date hereof, (i) CalEnergy has delivered to MidAmerican the CalEnergy l Disclosure Schedule, accompanied by a certificate signed by the

! chief financial officer of CalEnergy stating the CalEnergy Disclosure Schedule has been delivered pursuant to this Section 7.6 and (ii) MidAmerican has delivered to CalEnergy the

. 0486030.01 MidAmerican Disclosure Schedule, accompanied by a certificate signed by the chief financial officer of MidAmerican stating the MidAmerican Disclosure Schedule has been delivered pursuant to this Section 7.6. The CalEnergy Disclosure Schedule and the MidAmerican Disclosure Schedule are collectively referred to herein as the " Disclosure Schedules." The Disclosure Schedules shall be deemed to constitute an integral part of this Agreement and to modify the respective representations, warranties, covenants or agreements of the parties hereto contained herein to the extent that such representations, warranties, covenants or agreements expressly refer to the Disclosure Schedules. Anything to the contrary contained herein or in the Disclosure Schedules notwithstanding, any and all statements, representations, warrantien or disclosures set forth in the Disclosure Schedules delivered on or before the date hereof shall be deemed to have been made on and as of the date hereof. From time to time prior to the Closing, the parties shall promptly supplement or amend the Disclosure Schedules with respect to any matter, condition or occurrence hereafter arising which, if existing or occurring at the date of this Agreement, wou3 d have been required to be set forth or described in the Disclosure Schedules. No supolement or amendment shall be deemed to cure any breach of any representation or warranty made in this Agreement or have any effect for the purpose of determining satisfaction of the conditions set forth in Section 8.2 (b) or section 8.3 (b) .

Section 7.7. Public Announcements. Subject to each party's disclosure obligations imposed by law or regulation, CalEnergy  ;

and MidAmerican will cooperate with each other in the developmen* 1 and distribution of all news releases and other public (

information disclosures with respect to this Agreement or any of the transactions contemplated hereby and shall not issue any public announcement or statement with respect hereto or thereto without the consent of the other party (which consent shall not be unreasonably withheld and which decision regarding consent shall be made as soon as reasonably practicable).

Section 7.8. No Solicitations. From and after the date hereof, each party hereto will not, and will not authorize or permit any of its respective Representatives to, directly or indirectly, (i) solicit, initiate or encourage (including by way of furnishing information) or take any other action to facilitate any inquiries or the making of any proposal which constitutes or may reasonably be expected to lead to an Acquisition Propo*al (as defined below), (ii) enter into any agreement with respect to aly Acquisition Proposal or (iii) in the event of an unsolicited written Acquisition Proposal, engage in negotiations or discussions with, or provide any information or data to, any Person (other than to the parties hereto, any of their affiliates or Representatives and except for information which has been previously publicly disseminated by the parties) relating to any Acquisition Proposal; provided, however, that nothing contained in this Section 7.E or any other provision hereof shall prohibit such party or its Board of Directors from (i) taking and 1

0486030.08 disclosing to its stockholders a pos. tion with respect to a

( tender or an exchange offer by a third party pursuant to Rules 14D-9 and 14e-2 promulgated under the Exchange Act or (ii) making such disclosure to its stockholders as, in good .aith judgment of its Board of Directors, after receiving advice from outside counsel, is required under applicable law.

Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding sentence by an executive officer of such party or any investment banker, attorney or other Representative of such party, whether or not such person is purporting to act on behalf of such party or otherwise, shall be deemed to be a breach of this Section 7.8 by such party. Notwithstanding any other provision hereof, each party hereto may (i) at any time prior to the time its stockholders shall have voted to approve this Agreement, engage in discussions or negotiations with a third party who (without any solicitation, initiation, encouragement, discussion or negotiation, directly or indirectly, by or with such party or its Representatives after the date hereof) seeks to initiate such discussions or negotiations and may furnish such third party information concerning such party and its business, properties and assets if, and only to the extent that, ( A) (x) in the case of an Acquisition Proposal for MidAmerican, the third party has first made an Acquisition Proposal that is financially superior to the Merger, (y) the third party has demonstrated that financing for the Acquisition Proposal is reasonably likely to be obtained (as determined in good faith in each case by such party's Board of Directors after consultation witn its financial advisors) and (z) its Board of Directors shall have concluded in good faith, after considering applicable provisions of state law and on the basis of a written opinion of outside counsel, that a failure to do so could reasonably be expected to constitute a breach by its Board of Directors of its fiduciary duties to its stockholders under applicable law and (B) prior to furnishing such information to or entering into discussions or negotiations with such person or entity, such party (x) provides prompt notice to the other party to the effect that it is furnishing information to or entering into discussions or negotiations with such person or entity and (y) receives from such person an executed confidentiality agreement in reasonably customary form,  ;

together with its written acknowledgment and agreement to pay the termination and other fees set forth in Section 9.3 if such Acquisition Proposal is consummated or any other Acquisition Proposal is consummated with such party or any of its affiliates, and (ii) comply with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or exchange offer. Each party shall immediately cease and terminate any existing solicitation, initiation, encouragement, activity, discussion or negotiation with any parties conducted heretofore by such party or its Representatives with respect to the foregoing. Each party shall notify the other party hereto orally and in writing of any such inquiries, offers or proposals (including, without limitation, the terms and conditions of any such proposal and the identity of

04s6030 col -

the person making'it), within 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> of the receipt thereof, 4 shall keep such other party informed of the status and details of any. such inquiry, offer or proposal, and shall give such other party five days' advance notice of any agreement to be entered into with or any information to be supplied to 'any person making such inquiry, offer or propos&l.

The term "Accuisition Procesa*_" shall mean a' proposal or offer (other than by another party' hereto) for a tender or exchange offer, merger, consolidation or other business combination involving the party or any material Subsidiary of the party or any proposal to acquire in any manner a substantial equity interest in or a substantial portion of the assets of the party or any material Subsidiary of the party, other than the transaction,s contemplated by this Agreement and except for arrangements made by CalEnergy in connection with the financing of and the consummation of the transactions contemplated hereby.

Section 7.9. Expenses. . Subject to Section 9.3, all costs and expenses incurred in connection with this Agreement and the i transactions contemplated hereby shall be paid by the party l incurring such expenses, except that those expenses incurred in connection with printing the Joint Proxy Statement, as well as the filing fee relating thereto, shall be paid 50% by MidAmerican and 50% by CalEnergy.

Section 7.10. Board of Directors.

4 (a)' Initial Comeosition. The initial number of directors comprising the Board of Directors of Parent at the Effective Time shall be 15 persons, (i)' 11 of whom shall be desj gnated by

. - CalEnergy prior to the Effective Time and (ii) four of whom shall be MidAmerican Designees (as defined below). The."MidAmerican Designeec a shall be Stanley J. Bright plus three other persons designated by MidAmerican who, as of the date of this Agreement, are on the Board of Directors of MidAmerican.

(b) Initial Board committees. The initial committees'of l the Board of Directors et Parent at the Effective Time shall be- i as follows: Executive,. compensation, Nominating, Environmental I and Audit. At the Effective Time, Stanley J. Bright shall become a member of'such Executive Committee of Parent's Board of Directors. --

(c) Resienations of Directors and Officers. At or prior to the Effective Time, MidAmerican shall obtain the resignation of each director and officer of MidAmerican and any MidAmerican Subaldiary, if so requested by CalEnergy.

Section 7.11. Consultina Acreement. On or prior to the Effective Time, Parent shall enter into a consulting agreement i (the "consultine Aareement") with Stanley J. Bright, <

substantially in the form of Exhibit A attached hereto.

l b

0486030.01 Section 7.12. Current Employment Arranaements. Except

, as provided in the Consulting Agreement, the Surviving Corporation and its subsidiaries shall after the Effective Time honor, without modification, all contracts, agreements, collective bargaining agreements and commitments of the parties prior to the date hereof which apply to any current or former employee or current or former director of the parties hereto; provided, however, that this undertaking is not intended to prevent the Surviving Corporation from enforcing such contracts, agreements, collective bargaining agr("ements and commitments in accordance with their terms, including, without limitation, any reserved right to amend, modify, suspend, revoke or terminate any such contract, agreement, collective bargaining agreement or commitment; and provided, further, that, at or prior to the Effective Time, MidAmerican shall have used its reasonable best efforts to obtain waivers of any and all requirements for a letter of credit under any indemnity agreement or similar arrangement between any officer or director of MidAmerican or any MidAmerican Subsidiary who is such on the Closing Date and any such entity.

Section 7.13. Post-Mercer Operations and Workforce Matterg.

(a) Following the Effective Time, Parent shall maintain its corporate headquarters (excluding the principal office of the Chairman of the Board and Chief Executive Officer and related functions) and the corporate functions designated on Schedule I hereto in Des Moines, Iowa. This provision shall not be modified unless and until the terms of such modification are approved by a vote of eighty percent (80%) of the members of the Board of Directors of Parent.

(b) Workforce Matters. Subject to compliance with applicable law and obligations under applicable collective bargaining agreements, for a period of two (2) years following the Effective Time, any reductions in workforce in respect of employees of Parent or any of its Subsidiaries shall be made on a fair and equitable basis, in light of the circumstances and the objectives to be achieved, giving consideration to previous work history, job experience, qualifications and business needs without regard to whether employment prior to the Effective Time was with MidAmerican or its Subsidiaries or CalEnergy or its Subsidiaries, and any employees whose employment is terminated or jobs are eliminated by Parent or any of its Subsidiaries during such period shall be entitled to participate on such a fair and equitable basis in the job opportunity and employment placement programs, if any, offered by Parent or any of its Subsidiaries.

However, no provision contained in this Section 7.13 (b) shall be deemed to constitute an employment contract between Parent and an); individual, or a waiver of Parent's right to discharge any employee at any time, with or without cause.

04esoso.cl ,

Section'7.14. Name of Parent. Immediately after the

!. Effective Time, Parent shall file an smandment to its articles of incorporation to change its name to MidAmerican Energy Holdings Company.

Section 7.15. Contribytions to P=hbi Trusts. Prior to the Effective Time, MidAmerican shall contribute to the rabbi truste maintained by MidAmerican or its Subsidiaries for its various supplemental retirement plans, deferred compensation plans and incentive compensation plans (the " Rabbi Trusts") the principal sum of $12,000,000. Thereafter, at or prior to the end of each of the first three years commencing with the year in which the closing occurs, Parent shall contribute or cause to be contributed to the Rabbi Trusts the principal sum of $8,000,000.

ARTICLE VIII.

CONDITIONS Section 8.1. Conditions to Each Party's Oblication to Effect the Mercer. The respective obligations of each party to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of the following conditions, except, to thc extent permitted by applicable law, that such conditions may

-- be waived in writing pursuant to Section 9.5 by the joint action of the parties hereto:

(a) 'Stockhp1 der Amerevals. The MidAmerican Stockholders'

\pproval and the CalEnergy Stockholders' Approval shall have been rbtained.

(b) No Iniunction. No temporary restraining order or preliminary or permanent injunction or other order by any rederal or state court preventing consummation of the Merger shall have

- been issued and be continuing in effect, and the Merger and the other transactions contemplated hereby shall not have been prohibited under any applicable federal or state law or regulation.

(c) Statuterv Annrovals. The calEnergy Required Statutory Approvals and the MidAmerican Required statutory Approvals shall have been obtained at or prior to the Effective Time, such approvals shall have become Final orders (as defined below) and such Final Orders shall not ~ impose terms or conditions which, in the aggregate, would have, or insofar as reasonably can beor a forefeen, could have, a CalEnergy Material Adverse Effect

'MidAcarican Material Adverse Effect, or which would be materially inconsistent.with'the agreements of the parties contained herein. l The term " Final Order" shall mean action by the relevanL l regulatory authority which has not been reversed, stayed, 4

l enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by law before the transactions con _ emplaced hereby may be consummated has expired, and as to which all conditions to the consummation of such transactions prescribed by law, regulation er order have been satisfied.

I i

l

0486030.01 1 (d) HSR Act. All applicable waiting periods under the HSR I Act shall have expired or beeq terninated.

Section 8.2. conditions to oblication of MidAmerican to Effect the Mareer. The obligation of MidAmerican to effect the Merger shall be further subject to the satisfaction, on or prior to the Closing Da'te, of the following conditions, except as may be waived by MidAmerican in writin,g pursuant to Section 9.5:

(a) Performance of'Oblications of calEnerav and Parent.

CalEnergy and Parent (and/or appropriate CalEnergy and Parent subsidiaries) will have performed in all material respects its agreements and covenants contained in or. contemplated by this Agreement, which are required to be performed by it at or prior to the Effective Time.

(b) Renrementations and Warranties. The representations

~

and warranties of CalEnergy set forth in Sections 4.1, 4.4 (a) ,

4.4 (b) , 4.4 (c) , 4.8, 4.13, 4.15 and 4.17 of this Agreement shall

- be true and correct in all. material respects (or where any statement in a representation or warranty expressly includes a standard of materiality, such sLatement shall be true and correct in'all respects) as of the date hereof (except to the extent such representations and warranties speak as of an earlier or later date) and as of the Closing Date as if made on and as of the Closing Date, except as ot.herwise contemplated by this Agreement.

(c) closino certifiqagga. MidAmerican shall have received a certificate signed by the chief executive officer and the chief financial officer of Parert, dated the Closing Date, to the effect that, to the best cf such officers' knowledge, the

. conditions set forth in Se; 7 8.2 (a) and Section 5.2 (b) have been satisfied.

(d) . Lecal Opinions as to Cortorate and Reculaterv Matters.

.MidAmerican shall.have received the opinions of (i) Willkie Farr

& Gallagher, Parent's special counsel,.in form and substance customary for transactions of this type and reasonably .

satisfactory to MidAmerican, dated the Effective Time, es to the  :

authorization, validity and enforceability of this Agreement and j (ii) Akin, Ghmp, Strauss, Hauer & Feld,. L.L.P., Parent's special l regulatory. counsel, in form and substance customary for l transactions of this type and reasonably satisfactory to MidAmerican, dated the Effective Time, as to certain regulatory matters, including that all regulatory approvals, permits and consents have been obtained; provided, that such firma may reasonably rely on local counsel as to matters of local law.

i i

(e) consultino Acreement. Parent shall have duly executed and l

< delivered the Consulting Agreement of Stanley J. Bright, and such  ;

agreement shall be in full force and effect.

-SectionL8.3. Conditions to oblication of CalEnarev. Parent and Mercer Sub to Effect the Mercer. The obligation of l I

• 4

1 04ssoso.04 ,

CalEnergy, Parent 'and Merger Sub to effect the Merger shall be ,

( further subject to the satisfactior., on or prior .to the closing Date, of the.following conditions, except as may be waived by Ca1 Energy in writing pursuant to Section 9.5:

(a) Performance of Oblications of MidAmerican. MidAmerican (and/or appropriate MidAmerican Subsidiaries) will have performed in all material respects its agreements and covenants contained in or contemplated by this Agreement which are required to be performed by it at or prior to the Effective Time.

(b) Reoresentations and Warranties. The representations and warranties of MidAmerican set forth in this Agreement shall be true and correct in all material respects (or where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects) as of the date hereof (except to the extent such representations and warranties speak as of an earlier or later i date) and as of the Closing Date as if made on and as of the Closing Date, except as otherwise contemplated by this Agreement.

(c) MidAmerican Material Adverse Effect. No MidAmerican Material Adverse Effect shall have occurred and there shall exist no fact or circumstance that would or, insofar as reasonably can be foreseen, could have a MidAmerican Material Adverse Effect.

(d) MidAmerican Recuired Consents. The MidAmerican i Required Consents shall have been obtained.

(e) closine certificates. Parent shall have received a certificate signed by the chief executive officer and the chief financial officer of MidAmerican, dated the closing Date, to the effect that, to the best of such officers' knowledge, the conditions set forth in Sectienc 8.3 (a), (b), (c) and (d) have been satisfied.

(f) CalEnercy Recuired Consents. The Ca1 Energy Required Consents shall have been obtained. .

(g) Leaal Oninien as to Cornorate and-Reculatory Matterm. Parent shall have r'eceived an opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., MidAmerican's special counsel, in form and substance customary for transactions of this type and reasonably satisfactory to Parent, i dated the Effective Time, as to the authorization, validity and l enforceability of this Agreement.and as to certain regulatory matters, including that all regulatory approvals, . permits and consents have been obtained; provided, that'such firm may reasonably rely on local j counsel as to matters of local law.

(h) C2ntultine Aereement. Stanley J. B: Aght shall have duly. executed and delivered his Consulting Agreement, and such agreement shall be in full force and effect.

i

-9 e

0486030.01 l

(i) Listinc Of Shares of Parent common Stock. The shares i of Parent Common Stock issuable in the Reincorporation shall have been approved for listing on the NYSE upon official notice of l issuance.

l ARTICLE IX.

. l TERMINATION, AMENDMENT AND WAIVER Section 9.1. Termination. This Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the stockholders of the respective parties hereto contemplated by this Agreement: 1 1

(a) by mutual written consent of the Boards of Directors of MidAmerican anc CalEnergy; (b) by any party hereto, by written notice to the other, if {

the Effective Time shall not have occurred on or before March 31,  ;

1999; provided, that such date shall automatically be changed to Decend er 31, 1999 if on March 31, 1999 the c^ndition set forth in Section 8.1(c) has not been satisfied or waived and the other cwid'.tions to the consummation of the transactions contemplated hereby are then capable of being satisfied, and the approvals required by Section 8.1(c) which have not yet been obtained are being pursued with diligence; and provided, further, abat the I i right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by any party hereto, by written notice to the other par;y, if the CalEnergy Stockholders' Approval shcIl not have been obtained at a duly held CalEnergy Meeting 'uding any adjournments thereof; or the MidAmerican Stocki. iers' Approval shall not have been obtained at a duly held MidAmerican Meeting, including any adjournments thereof;

) (d) by any party hereto, if any state or federal law, i order, rule or regulation is adopted or issued, which has the effect, as supported by the written opinion of outside counsel for such p rty, of prohibiting either the Merger or the Reincorporation, or by any party hereto, if any court of competent jurisdiction in the United States or any State shall have issued an order, judgment or decree permanently restraining, -

enjoining or otherwise prohibiting either the Merger or the Reincorporation, and such order, judgment or decree shall have become final and nonappealable; provided, that such termi. .ing party shall have complied with its obligations pursuant to Section 10.9;

0406030.01 (e) by CalEnergy, upon two days' prior notice to MidAmerican, if, as a result of an Acquisition Proposal for CalEuergy, the Board of Directors of CalEnergy determines in good faith that their fiduciary obligations under applicable law require that such Acquisition Proposal be accepted; provided, however, that (i) the Board of Directors of CalEnergy shall have been advised in writing by outside counsel that notwithstanding a binding commitment to consummate an agreement of the nature of this Agreement entered into in the proper exercise of their applicable fiduciary duties, such fiduciary duties could also reasonably be expected to require the directors to reconsider such commitment as a result of such Acquisition Proposal; (ii) the person making the Acquisition Proposal shall have acknowledged and agreed in writing to pay the termination and other fees set forth in Section 9.3 if such Acquisition Proposal is consummated or any other Acquisition Proposal is consummated with such person or any of its affiliates and (iii) prior to any such termination, CalEnergy shall, and shall cause its respective financial and legal advisors to, negotiate with MidAmerican to make such adjustments in the terms and conditions of this Agreement as would enable CalEnergy to proceed with the i transactions contemplated herein; provided, further, that CalEnergy and MidAmerican acknowledge and affirm that notwithstanding anything in this Section 9.1(e) to the contrary, the parties hereto intend this Agreement to be an exclusive agreement and, accordingly, ncthing in this Agreement is intended to constitute a solicitation of an Acquisition Proposal, it being acknowledged and agreed that any such Acquisition Proposal would l interfere with the strategic advantages and benefits which the I parties expect to derive from the Merger; (f) by MidAmerican, upon two days' prict notice to CalEnergy if, as a result of an Acquisition Proposal for l MidAmerican, the Board of Directors of MidAmerican determines in

! good faith that their fiduciary obligations undcr applicable law l require that such Acquisition Proposal be acceptcd; provided, l however, that (i) the Board of Directors of MidAmerican shall have been advised in writing by outside counsel that notwithstanding a binding commitment to consummate an agreement of the nature of this Agreement entered into in the proper exercise of their applicable fiduciary duties, such fiduciary duties coul.d also reasonably be expected to require the directors to reconsider such commitment as a result of such Acquisition Proposal; (ii) the person making the Acquisition Proposal shall have acknowledged and agreed in writing to pay the termination and other fees set forth in Section 9.3 if such Acquisition Proposal is consummated or any other Acquisition Proposal is consummated with such person or any of its affiliates and (iii) prior to any such termination, MidAmerican shall, and shall cause its respective financial and legal advisors to, negotiate with CalEnergy to make such adjustments in the terms and conditions of this Agreement as would enable MidAmerican to proceed with the transactions contemplated herein; provided, further, that CalEnergy and MidAmerican acknowledge and affirm that l

l

0486030.01 notwithstanding anything in this Section 9.1(f) to the contrary,

, the parties hereto intend this Agreement to be an exclusive agreement and, accordingly, nothing in this Agreement is intended to constitute a solicitation of an Acquisition Proposal, it being acknowledged and agreed that any such Acquisition Proposal would interfere with the strategic advantages and benefits which the parties expect to derive from the Merger; (g) by CalEnergy, by written notice to MidAmerican, if (i) there shall have been any material breach of any representation or warranty, or any material breach of any covenant or agreement, of MidAmerican hereunder, and such breach shall not have been remedied within twenty days after receipt by MidAmerican of notice in writing from CalEnergy, specifying the nature of such breach and requesting that it be remedied; or (ii) the Board of Directors of MidAmerican (A) shall withdraw or j modify in any manner adverse to CalEnergy its approval of this j Agreement and the transactions contemplated hereby or its I recommendation to its stockholders regarding the approval of this Agreement, (B) shall fail to reaffirm such approval or recommendation upon the request of CalEnergy, (C) shall approve or recommend any Acquisition Proposal or (D) shall resolve to take any of the actions specified in clause (A), (B) or (C) ;

provided, however, that CalEnergy and MidAmerican acknowledge and affirm that notwithstanding anything in this section 9.1(g) (ii) to the contrary, the parties hereto intend this Agreement to be an exclusive agreement and, accordingly, nothing in this Agreement is intended to constitute a solicitation of an Acquisition Proposal, it being acknowledged and agreed that any such offer or proposal would interfere with the strategic advantages and benefits which the parties expec; to derive from the Merger; (h) by MidAmerican, by written notice to CalEncrgy, if (i) there shall have been any material breach of any representation or warranty contained in Sections 4.1, 4.4 (a) , 4. 4 (b) , 4.4 (c) ,

4.8, 4.13, 4.15 and 4.17, or any material breach of any covenant or agreement (which shall be deemed to include, for this purpose only, the failure of CalEnergy to deliver the cash to the Exchange Agent pursuant to Section 2.3 (a) , assuming all other conditions to Closing have been satisfied or otherwise waived in writing by.CalEnergy), of CalEnergy hereunder, and such breach shall not have been remedied within twenty days after receipt by CalEnergy of notice in writing from MidAmerican, specifying the nature of such breach and requesting that it be remedied; or (ii) the Board of Directors of CalEnergy (A) shall withdraw or modify in any manner adverse to MidAmerican its approval of this Agreement and the transactions contemplated hereby or its recommendation to its stockholders regarding the approval of this Agreement, (B) shall fail to reaffirm such approval or recommendation upon the request of MidAmerican, (C) shall approve or recommend any Acquisition Proposal or (D) shall resolve to i take any of the actions specified in clause (A), (B) or (C); l provided, however, that CalEnergy and MidAmerican acknowledge and i

0486030.01 affirm that notwithstanding anything in this Section 9.1(h) (ii) to the contrary, the parties hereto intend this Agreement to be f,

an exclusive agreement and, accordingly, nothing in this Agreement is intended to constitute a solicitation of an offer or proposal for an Acquisition Proposal, it being acknowledged and agreed that any such offer or preposal would interfere with the strategic advantages and benefits which the parties expect to derive from the Merger.

Section 9.2. Effect of Termination. In the event of termination of this Agreement by either MidAmerican or CalEnergy pursuant to Section 9.1, there shall be no liability on the part of either CalEnergy or MidAmerican or their respective officers or directors hereunder, except as provided in Section 7.9 and 9.3 l and except that the agreement contained in the last sentence of i Section 7.1 shall survive the termination. I 1

Section 9.3. Termination Fee; Excenses.

(a) Termination Fee. If this Agreement (i) is terminated I at such time that this Agreement is terminable pursuant to one of I Section 9.1(g) (i) or Section 9.1(h) (i) (other than in circumstances described in Section 9.3 (c)) but not the other (provided, that, for purposes of this Section 9.3 only, representations and warranties made by MidAmerican with respect l to each of the Quad Cities Station nuclear generation facility and the Ottumwa Unit coal burning generation facility shall be deemed to be made to MidAmerican's knowledge), (ii) is terminated pursuant to Section 9.1(e) or Section 9.1(f) or (iii) is terminated by MidAmerican pursuant to Section 9.1(b) at any time on or after December 31, 1999 when the only approval required by ,

Section 8.1(c) which has not yet been obtained is the CalEnergy I Required Statutory Approval described in Section 4.4 (c) (ii) of the CalEnergy Disclosure Schedule and the other conditions to the consummation of the transactions contemplated by this Agreement are then capable of being satisfied, then (A) in the event of such a termination pursuant to Section 9.1(f) or Section 9.1 (g) (i) , MidAmerican shall pay to CalEnergy, and (B) in the event of such a termination pursuant to Section 9.1 (e) , Section 9.1 (h) (i) or Section 9.1(b), CalEnergy shall pay to MidAmerican, promptly (but not later than five business days after such notice is received pursuant to Section 9.1(g) (i) , Section 9.1(h) (i) or Section 9.'1(b) or is given pursuant to Section 9.1(e) or Section i 9 .1 ( f ) ) an amount equal to $35 million in cash if required to be paid by CalEnergy and $35 million in cash if required to be paid by MidAmerican, plus in each case cash in an amount equal to all documented out-of-pocket expenses and fees incurred by the other party (including, without limitation, fees and expenses payable to all legal, accounting, financial, public relations and other professional advisors arising out of, in connection with or related to the Merger or the transactions contemplated by this Agreement) not in excess of $10 million.

0486030.01 (b) Additional Termination Fees. If (i) this Agreement (w) is terminated by any party pursuant to Section 9.1(e) or Section 9.1(f), (x) is terminated following a failure of the stockholders of MidAmerican or CalEnergy to grant the necessary approvals described in Section 4.13 or Section 5.13, (y) is terminated as a result of such party's material breach of Section 7.4 or (z) is terminated pursuant to Section 9.1(g) (i) or Section 9.1(h) (i) as a result of such party's breach,,and (ii) at the time of such termination or prior to the meeting of such party's stockholders there shall have been an Acquisition Proposal involving, such party or its affiliates which at the time of such termination or of the meeting of such party's stockholders shall not have been (x) rejected by such party and its Board of Directors and (y) withdrawn by the third-party and (iii) within two years of any such termination described in clause (i) above, the party or its  ;

affiliate which is the target of the Acquisition Proposal

("Tarcet Party") becomes a subsidiary or part of such offeror or a subsidiary or part of an affiliate of such offeror, or merges with or into the offeror or a subsidiary or affiliate of the offeror or enters into a definitive agreement to consummate an Acquisition Proposal with such offeror or affiliate thereof, then (A) in the event MidAmerican or one of its affiliates is the Target Party, MidAmerican shall pay to CalEnergy and (B) in the event CalEnergy or one of its affiliates is the Target Party, CalEnergy shall pay to MidAmerican, at the closing of the ,

transaction (and as a condition to the closing) in which such I Target Party becomes such a subsidiary or part of such other person or the closing of such Acquisition Proposal occurs, an additional termination fee equal to $60 million in cash if required to be paid by CalEnergy and $60 million in cash if required to be paid by MidAmerican.

(c) If this Agreement is terminated by MidAmerican, by written notice to CalEnergy, due to the failure of CalEnergy to deliver the amount of cash to the Exchange Agent required pursuant to Section 2.3 (a) at a time when all conditions to CalEnergy's obligation to close have been satisfied or otherwise waived in writing by CalEnergy, then CalEnergy shall pay to MidAmerican a termination fee of $60 million; crovided, however, that CalEnergy shall have no liability under this Section 9.3 (c)

(or for any breach of covenant pursuant to Section 9.3(a)) as a result of-such failure if such failure is the direct result of the inability of CalEnergy to finance the transaction because of the occurrence of any significant disruptions or material adverse changes (i) in the market for new issues of senior debt securities, credit facilities or common, preferred or equity-linked securities by a company having financial characteristics similar to those of CalEnergy or a holding company for MidAmerican, respectively, as of the date of this Agreement, or (ii) in the financial or capital markets in general which make it impracticable for a company having financial characteristics similar to those of CalEnergy or a holding company for MidAmerican, respectively, as of the date of this Agreement, to finance a transaction of the size and nature as that contemplated l 1

4

t 0486030.01 hereunder on commercially reasonable financing terms that are

! available as of the date of such financing.

(d) Excenses. The parties agree that the agreements contained in this Section 9.3 are an integral part of the

' transactions contemplated by this Agreement and constitute liquidated damages and not a penalty. Notwithstanding anything to the contrary contained in this Section 9.3, if one party fails to promptly pay to the other any fee or expense due under this Section 9.3, in addition to any amounts paid or payable pursuant to such Section, the defaulting party shall pay the costs and expenses (including legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Citibank, N.A. from the date such. fee was required to be paid.

(e) Limitation Of Fees. Notwithstanding anything herein to the contrary, the aggregate amount payable by MidAmerican pursuant to Sections 9.3 (a) and (b) and (c) shall not exceed $95 million and the aggregate amount payable by CalEnergy pursuant to Sections 9.3 (a) , (b) and (c) shall not exceed $95 million, in each case, plus' expenses, as provided in Section 9.3 (a) .

Section 9.4. Amendment. This Agreement may be amended by the Boards of Directors of the parties hereto, at any time before or after approval hereof by the stockholders of MidAmerican and CalEnergy and prior to the Effective Time, but after such approvals, no such amendment shall (a) alter or change the Per Share Amount under Article II or (b) alter or change any of the terms and conditions of this Agreement if any of the alterations or changes, alone or in the aggregate, would materially adversely affect the rights of holders of MidAmerican Common Stock or CalEnergy Common Stock, except for alterations or changes that could otherwise be adopted by the Board of Directors of MidAmerican or CalEnergy, without the further approval of such stockholders, as applicable. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto, i

Section 9.5. Waiver. At any time prior to the Effective-Time, the parties hereto may (a) extend the time for the performance of any of the obligations or other acts of the  ;

other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any i document delivered pursuant hereto and (c) waive compliance with  ;

any of the agreements or conditions contained herein, to the  !

extent permitted by applicable law. Any agreement on the part of  :

a party hereto to any such extension or waiver shall be valid if set forth in lui instrument in writing signed on behalf of such party.

E 0486030.01 ARTICLE X.

GENERAL PROVISIONS i Section 10.1. Non-Survival: Effect of Reeresentations and Warranties. No representations or warranties in this Agreement shall survive the Effective Time, except as otherwise provided in this Agreement. .

Section 10.2. Brokers. CalEnergy represents and warrants l

that, except for CSFB and Lehman whose. fees have been disclosed

~

to MidAmerican prior to the date of this Agreement, no broker, finder-or investment banker is entitled-to any brokerage, finder's or other fee or commission in connection with the Merger or=the transactions. contemplated by this Agreement based upon arrangements made by or on behalf of Ca1 Energy. MidAmerican represents and warrants that, except for Dillon. Read,'whose fees have been disclosed to CalEnergy prior to the date of this Agreement, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of MidAmerican.

Section 10.3. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given (a) when delivered personally, (b) when sent by reputable overnight courier service or (c) when telecopied (which is confirmed by copy sent within one business day by a reputable overnight courier service) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice) :

l (i) If to CalEnergy or Merger Sub, to:

CalEnergy Company, Inc.

302 South 36th Street Suite 400 Omaha, Nebraska 68131 Attn: Chief Executive Officer Telecopy: (402) 345-9318 Telephone: (402) 341-4500 with a copy to:

Willkie Farr & Gallagher j 787 Seventh Avenue i I

i New York, New York 10019

! Attn: Peter J. Hanlon, Esq. i

.Telecopy: (212) 728-8111 l Telephone: (212) 728-8000 and 1

L

0486030.01 l (ii) if to MidAmerican, to:

l MidAmerican Energy Holdings Company 666 Grand Avenue Des Moines, Iowa 50306-9244 Attn: Chief Executive Officer Telecopy: (515) 281-2216 Telephone: (515) 242-4300 with a copy to:

LeBoeuf, Lamb, Greene & MacRae, L.L.P.

125 West 55th Street New York, New York 10019 Attn: Douglas W. Hawes, Esq.

Telecopy: (212) 424-8500 Telephone: (212) 424-8000 Section 10.4. Miscellaneous. This Agreement (a) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof (other than the Confidentiality Agreement), (b) shall not be assigned by operation of law or otherwise and (c) shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts executed in and to be fully performed in such State, without giving effect to its conflicts of law rules or principles and except to the extent the provisions of this Agreement (including the documents or instruments referred to herein) are expressly governed by or derive their authority from the Iowa Act. l Section 10.5. Interpretation. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be  !

to a Section or Exhibit of this Agreement, respectively, unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this ,

Agreement. Whenever the words " include," " includes" or l

" including" are used in this Agreement, they shall be deemed to i be followed by the words "without limitation."

Section 10.6. Countercarts: Effect. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

Section 10.7. Enforcement. The parties agree that l irreparable damage would occur in the event that any of the l provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this

0486030.05 ,

Agreement in any court of the United States located in the State

( of New York or in New York stnto court, this being in addition to any other' remedy to which they are entitled at law or in equity.

In addition, each of the parties hereto (a) consents to submit itself to the perconal jurisdiction of any federal court located in the State of New York or any New York state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by thic Agreement, (b) agreec that it will not attempt to deny such personal jurisdiction by motion or other request for leave from any such court and (c) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a federal or state court sitting in the State of New York.

Section 10.8. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, except for rights of Indemnified Parties as set forth in Section 7.5, nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement.

Section 10.9. Further Assurances. Each party will execute such further documents and instruments and take such further actions as may reasonably be requested by any other party in order to consummate the Merger and the Reincorporation in accordance with the terms hereof. CalEnergy and MidAmerican expressly acknowledge that, although it is their current intention to effect a business combination among themselves by means of the Merger and the Reincorporation, it may be preferable for CalEnergy and MidAmerican to effectuate such a business combination by means of an alternative structure in light of the

" conditions set forth in Sections 8.1(c) and 8.3 (d) and (f).

Accordingly, if the only conditions to the parties' cbligations to consummate the Merger and the Reincorporation which are not satisfied or waived are receipt of CalEnergy Required Consents, CalEnergy Required Statutory Approvals, MidAmerican Required .

Consents and MidAmerican Required Statutory Approvals that, in the reasonabic judgment of MidAmerican or Ca1 Energy, would be rendered unnecessary by adoption of an alternative structure that otherwise substantially preserves for CalEnergy and MidAmerican the economic ~ benefits of the Merger and the Reincorporation, MidAmerican or Ca1 Energy, as the case may be, shall notify the other of such judgment no later than 5:00 p.m. Central Time on March 31, 1999 and thereafter the parties shall use their best efforts to effect a business combination among themselves by means of a structure other than the Merger and the Reincorporation that so preserves cuch benefits; provided, that all material third party and Governmental Authority declarations, filings, registrations, notices, authorizations, consents or approvals necessary for the effectuation of such alternative business combination shall have been obtained and all'other conditions to the parties' obligat ons to consummate the Merger

r 0486030.01 and the Reincorporation, as applied to such alternative business

( combination, shall have been satisfied or waived.

Section 10.10. Waiver Of Jury Trial. Each party to this Agreement waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any action, suit or proceeding arising out of or relating to this Agreement. ,

Section 10.11. Certain Definitions. The term " affiliate,"

except where otherwise defined herein, shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. The term " control" (including, with its correlative meanings, " controlled by" and "under common control with") shall mean possession, directly or indirectly, cf power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise).

e e

f-0686030.01 I

IN WITNESS WHEREOF, CalEnergy, MidAmerican, Reincorporation Sub and Merger Sub have caused this Agreement as of the date first written above to be signed by their respective officers thereunto duly authorized.

CALENER M C.

By: 8

)( W.Davisf g. Mokol fftle: Chairman Wnd Chief Executive Officer MIDAMERICAN NE Y DINGS COMPANY l f

/

By: 1 i Name: StanMy J. Bright

Title:

Chairman, President and Chief Executive ficer MAVH IN . r By: g l' David'L. bokol

Title:

Chairman and Chief Executive Officer 7 /

MAVERIC,X E NC P N B, NC.

By: , ,

/ hai nd Chief Executive Officer l

l l

1 1

l j

schedule I

(

Corpcrate Functions Finance (including the office of t'he chief financial officer),

treasury, secretary (other than for Parent), human resources and legal (including general counsel), accounting and ad=4nistration.

0485312.02 I

s e,

• e e

e e 1

1 1

et,'

u_._

g INDEX.OF DEFINED TERMS IaIm . . .

Eaan 8 J 1935 Act...................................................... . .

Acquirition Proposal ...,,...,....,....,.....,'................ 55

............ 69 i affiliate. .....,....................!***t......

.xgreemene...............,... . ,................................. 1 j CalEnergy................................................. 1, 18 j

'CalEnergy Benefit Plans...................................... 17 CalEnergy' Common Stock.....!....................'.............. 6

.CalEnergy D_isclosure Schedule .......... ...................... 812 CalEnergy Financial Statements...............................

CalEnergy. Joint Venture ....................................... 8 CalEnergy Material' Adverse _Effect ............................. 7 51 CalEnergy Meeting............................................

CalEnergy Required Consents .................................. 10 CalEnergy Required Statutory Approvals . . . . . . . . . . . . . . . . . . . . . . . 10 Ca l Ene r gy S E C R e po r t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 CalEnergy Share Price......................................... 6 CalEnergy Stock Plans......................................... 9 CalEnergy Stockholders' Approval ............................. 24 CalEnergy Subsidiary.......................................... 8

, C l o s in g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Closing Agreement............................................ 15 s

Closing Date.................................................. 7 Code ......................................................... 14 Confidentiality. Agreement .................................... 49 Consulting Agreement......................................... 55 control ...................................................... 69 CSFB.........................................................24 iDillon Read..................................................

41 53' I

Di s c l o s ur e S che dul e c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 Dissenting-Shares............................................. ,

2  !

Effective Time................................................

Environmenta'l Claim .......................................... 21 Environmen t al Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 Environmental-Permits........................................ ,

ERI S A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ; . . . . . 17 Excess Parachute Payments .................................... 38 Exchange Act...........................................,..... 11 Exchange Agent................................................ 4  ;

Exchange Ratio.......................'........................ 6 .

FERC.........................................................12 57 Final 0rder..................................................

12 GAAP ..'.......................................................

r i ,

0486030.01 .

Governmental Authority....................................... 10

' Hazardous Mater!. s..........................................21 HSR Act....... .

...........................................50 Indemnified Liabilities...................................... 51 Indemnified Parties.......................................... 51 Indemnified Party............................................ 51 Independent Counsel.............'.................... ........ 51 Iowa Act...................................................... 1 IRS .......................................................... 16 Joint Proxy Sec.:ement ........................................ 31 Joint Venture................................................. 8 Lehman'...................................................... 24

' Liens ......................................................... 8 Merger........................................................ 1 Merger Sub.................................................... 1 MidAmerican................................................... 1 MidAmerican Benefit Plans.................................... 35

- MidAmerican Common Stock...................................... 1 MidAmerican Disclosure Schedule.............................. 25 MidAmerican Financial Statements............................. 30 MidAmerican Joint Venture .................................... 25 MidAmerican Material Adverse Effecc.......................... 25 MidAmerican Meeting.....'..................................... 50 MidAmerican Option Plan....................................... 6

- MidAmerican options-.......................................... 6 MidAmerican Required Consents................................ 28 MidAmerican Required Statutory Approvals..................... 28 MidAmerican Rights............................................ 3 MidAmerican Rights Agreement................................. 42 l Midime rican SEC Report s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 MidAmerican Stockholders' Approval........................... 41 l

- MidAmerican Subsidiary....................................... 25 l MidAmerican Utility.......................................... 26 I MidAmerican Utility Preferred Stock.......................... 27 Parent........................................................3

. Parent Common Stock........................................... 6 PBGC......................................................... 19 Per Share Amount .................-............................. 3 Power Act.................................................... 29 Purchaser Information ........................................ 13 PURPA........................................................11 Reincorporation............................................... 3 Reincorecration Sub........................................... 1 R e l e a s e . . . . . . . . . . . -. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . 2 2 Representatives.............................................. 48 SEC........................................................... 12 s','

. _ _ . _ _ _ ___--_-.__m_ _

0486030.01 -

Securities Act............................................... 11

' Shares..................................................... 1, 3 Subsidiary.................................................... 7 Surviving Corporation......................................... 1 Target Party................................................. 64 Tax Return................................................... 14 Tax Ruling................................................... 15 Taxes ...........................,............................. 14 Violation.................................................... 10 Voting Debt................................................... 9

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1 i

l i

l i

04Q6030.01 .

INDEX OF DEFINED TERMS I

IRIm Pace 1935 Act...................................................... 8 Acquisition Proposal......................................... 55 affiliate.......................'............................. 69 Agreement..................................................... 1

'CalEnergy................................................. 1, 18 CalEnergy Benefit Plans...................................... 17 CalEnergy Common Stock ........................................ 6 CalEnergy Disclosure Schedule................................. 8 CalEnergy Financial Statements............................... 12 CalEnergy Joint Venture....................................... 8 CalEnergy Material Adverse Effect............................. 7 CalEnergy Meeting............................................ 51 CalEnergy Required Consents.................................. 10 CalEnergy Required Statutory Approvals....................... 10 CalEnergy SEC Reports........................................ 12 -

CalEnergy Share Price......................................... 6 Ca1 Energy Stock Plans......................................... 9 CalEnergy Stockholders' Approval................ ............24 CalEnergy Subsidiary........................................... 8 Closing........................................................ 7 Closing Agreer.ient............................................ 15 Closing Date.................................................. 7 Code......................................................... 14 Confidentiality Agreement.................................... 49 Consulting Agreement......................................... 55

. control ...................................................... 69 CSFB.........................................................24 Dillon Read.................................................. 41 Disclosure Schedules......................................... 53 Dissenting Shares............................................. 3 Effective Time................................................ 2 Environmental Claim............................... ..........21 Environmental Laws............................... ...........21 Environmental Permits ........................................ 22 ERISA........................................................ 17 Excess Parachute Payments.................................... 38 Exchange-Act................................................. 11 Exchange Agent................................................ 4 Exchange Ratio................................................ 6 FERC.......................................................... 12 Final Order................................................... 57 GAAP......................................................... 12

p 0486030.01 .

- Governmental' Authority....................................... 10' l

Hazardous Materials.......................................... 21 HSR Act...................................................... 50 Indemnified Liabilities...................................... 51 l . Indemnified Parties.......................................... 51 Indemnified Party............................................ 51 l Independent Counsel............:............................. 51 Iowa.Act...................................................... 1 IRS .......................................................... 16 Joint Proxy Statement........................................ 31 Joint Venture................................................. 8 Lehman....................................................... 24 Liens......................................................... 8 Merger........................................................ 1 Merger Sub.................................................... 1 MidAmerican................................................... 1 MidAmerican Benefit Plans.................................... 35

MidAmerican Common Stock...................................... 1 MidAmerican Disclosure Schedule .............................. 25 MidAmerican' Financial Statements............................. 30 MidAmerican Joint Venture.................................... 25 MidAmerican Material Adverse Effect........ .................25 MidAmerican. Meeting.......................................... 50 MidAmerican option P1an....................................... 6 MidAmerican Options........................................... 6 MidAmerican Required Consents................................ 28 MidAmerican Required Statutory Approvals..................... 28 MidAmerican Rights...... ..................................... 3 MidAmerican Rights Agreement................................. 42 MidAmerican SEC Reports ...................................... 30 ,

MidAmerican Stockholders' Approva1........................... 41 MidAmerican Subsidiary....................................... 25 MidAmerican Utility .......................................... 26 MidAmerican Utility Preferred Stock .......................... 27 Parent........................................................ 3 Parent Common Stock............................................ 6 PBGC ......................................................... 19 Per Share Amount............................................... 3 Power'Act.................................................... 29 Purchaser Information........................................ 13 PURPA......'.................................................. 11 Reincorporation......'......................................... 3 Reincorocration Suh........................................... 1 Release...................................................... 22 Representatives.............................................. 48 SEC.......................................................... 12 i

e

• 0486030.01 .

Securities Act............................................... 11 Shares..................................................... 1, 3

k. . Subsidiary.................................................... 7 Surviving Corporation......................................... 1 Target Party................................................. 64 Tax Return................................................... 14 Tax Ruling............ ...................................... 15 Taxes...........................'............................. 14 Violation..................................................;. 10 Voting Debt.'.................................................. 9 l

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1995 1996 '997

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> 9, ,

Table of Contents

}

l COMPANY OVERVIEW: WH o WE A R E- 4  :

CHAIRM AN'S MESSAGE:

CoMuiTTED To Oun STRATEGY 6

' A Cli ANGING ]NDU$TRY CREATES OPPoRTUNITIE5 8 i

Ova CouMITMENT:

Tut Port.x To M AsE A DarrtnENcE 12 Customers t3

• Shareixdders I4

• Employees' Is

• Communities is

• Entironment le CALENLRGY's GtoB AL PoRTEotlo . 22 PaoJEcr Ovtavitr: A 1. ANDM ARK Yt AR 24 UnitedStates 24 UnitedKingdorn

= ikdand 26 28

\

l Q

• Phihpfines 29

• Indonesia 30 i

• Australia 31 i i

MitLSToNt5 AND SIGNIFICANT EVE NT S OF 1997 34 CALENERGY: A Fonct ton Tur Forunt 40 l

l 1997 FIN ANc1 At Rtroni 41 j i

CALENERGY's Sr N on M AN AGE MENT TE AM inside Back Cover j i I

l l i

, I t . .

t 4

I I

i.

l i  ;

i

CompanyOveniew

\\%1V&Are Oier Perfurisiatice its 1997 CalEnergy has successfully expanded its role from that of an independent power producer i , .. A w

~

Qg~-:~=G pg,/y Q g@ f,y -

4 '

to a global energy company that now supplies and distnbutes electricity and gas to nearly 18

_' million retail customers in the United Kingdom.

8'.

• P and manages and owns interest in over 5.000 net N. - ' ~

megawatts rMW") of power generation facilities in M r b-4w -

, operation, construction and deve!apment worldwide.

4 .; ; .~;w -

Financial results and customer growth at Northem r j.- '

, -~jC  ; f%. Electricplc ourelectricitydistributionandelectncity

1. M. and gas supply company in the U K . have sign'fi-y4h d f

),"(Mt{f'[_fiM,5:g " gg., f4s -

9 .

cantly exceeded our expectations thruughout the past  ;

L.

, ,,fg Q year Through constant improvement of productivity g W . _a ,. ; * / p . . ~ _ 3 .s and cost reductions, our geothermal and natural gas I

,g , ,

generation facilities in the U S have continued to show meneeaeselecmcotorneis'andorterre Repuolic excellent operating performance and have remained a predictable and significant source of cash flow for the Company Also in 1997, we completed construction and began receiving revenue on two geothermal CalEnergy Company. incl CalEnergy.or the Company") was founded in 1971 as a consultant # 98"" " " * #'"**

CalEnergy achieved outstanding financial

, to geotherma! power production facilities in North growth during 1997; i America Since that time, many events have occurred

- Assets increased to nearly $7.5 billion in the United States and e!sewhere that have from $5.6 billion in 1996-provided important opportunities for our Company a33percentincrease As you read through our 1997 Annual Report.

Revenues surged to nearly $2.3 billion we hope that it wi!!'uscome apparent that Ca! Energy from $576 million in 1996-is well prepared to benefit from tha energy industry a294percentincrease deregulation and privatets occurnng worldwide We have long been committed to our micsion to Net income' increased to S139 million

' from $92 mdlion in 1996-become a leading globalprovider of a fullrange

a 51percentincrease 4

of energyservices, a goal we have continued to

$- - Net income per basic share' increased purcue :..1997.

to S2.06 from $1.69 in 1996-l a22percentincrease h* 83 S %

• 87 -

EBITDA' increased to S811 million m from $385 million-m m a 111percentincrease rA3D 7 488 lison aw. tor.hn.m ira aimalam u r?.w a hmo m a...arunny pnnath arodnou-nsnmny na HJ % TORIC AL E.anniv lain mima raw J.pnaan n am ortranw G R 04'T H I N #"' """W #"

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<... ..., i.. .... ... y Our Gion: A Force for the Futury We understand that our success is tied directly CalEnergy has experienced remarkable growth to our performance and flexibility-past, present, i since 1991 when, in respuase to the evolving world and f uture-and to our ability to identify and take I energy markets, we developed a strategy to: prompt, decisive action to seize opoortunities in the l

- employ additionalenargy sources to fuel face of industry change. We are excited about the I ourgenerationassets potential to broaden our supply business in the U.K.  !

- broadenourbaseofeaergyservices and elsewhere, and believe that new and expanding i

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byincluding distribution and supply opportunities exist to introduce Northem Electric's

• expand our target markets to encompass proven and proprietary information technology selectopportunitiesworldwide and customer billing services to the U.S and other  !

Byfocusing on cur core competencies deregulating utikty markets. Additionally, gas and of resource-based development and strategic geothermal exploration and development activities i acquisitions, we hae.; achieved enviable growth will provide the Company with many more exciting l

and financial performance and have established opportunities worldwide.

the experience base, esset base and financial base In this regard, we are convinced that we have j for future growth. Our strategy is based upon: properly structured our organization in preparation

- Cominirmentto OurConstituents for both the challenges and the opportunities that l

+ &cellenc e in Core Business Operations will arise as we approach the new millennium

• Disciplined Acquisitions and New Project and continue our joumey as a force for the future.

Developments l

- Prudent Financialand Risk Management I Today, more than any other time in its history. j te the global energy industry is preparing for change.

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Deregulation and privatization are occurring rapidly _, ,

around the world. Economic uncertainties, as evidenced by Asia, underscore the importance

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to compete successfully in this changing industry, s and has taken measures to protect our investments s , ,

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ChairmadsMessage Committedto OurStrategy For the majonty of our business,1997 was a Tne folhntegration of Northem Electric into year of great accomplishments it was clearly also CalEnergy, the completion of the Mahanagdong and a year of frustration in our Indonesian activities Maktbog geothermal power generation facihties in Revenues exceeded $2.25 bi! hon. Net income, the Phil.ppines, the award and initiation of gas-based excluding non-recurring and extraordinary charges power developments in Poland and Australia. and exceeded $138 milhon. Eamings before interest, the continued strength of the operations of our U S taxes, depreciation, amortization, and non-recurring generating facikties marked an eventful year.

charges (~EBITDA") exceeded $800 million. Of Additionally, the purchase of Peter Kiewit Sons', Inc.

particular note, since 1990, revenue, net income 30 percent holdings in A-rated Northem Electric, and EBITDA have had cumulative annual grc Ah their investments in our Asian projects, and their rates of 57 percent,42 percent, and 45 percent, 20.2 million CalEnergy shares was an impMant step respectively, excluding non-recurring and extraordi- both toward broadening our position as a ading nary charges. By any reasonable measure, these global energy services company and providing a are very respectable results for a growth company source of annual eamings growth for the future.

in our industry in addition, as a result of concrete achievements, we funher refined our strategy to significantly expand our presence in the deregulated energy and gas Df)

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, markets of the United Kingdom arvi the United States. By year-end 1997, through the utilization

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f. of Northern Electnc's proptietaryinfonnation j , .] - technology and innovative marketing initiatives,

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7 4 Northern added nearly 300,000 new gas customers a to t% T 996 base of 1.45 million electricity cus-Ai toms s Ihis equates to a 20 percent increase of

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Noche n's customer base in less than six months, an accomolishment that is virtually unhearo ci in the utikty business absent an acouisition. It is

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[ j^ '.4 are buying energy at lower but proin au ;

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staff, all of Northem's customer satista e sures increased from last year notwithstanuin, the j . '

organizational cha!ienges that typically accompany such rapid business growth We look forward to continuing our customer expansion in the United Kingdom and exporting our capabikties to the United States utikty market as it enters deregulation Ciearly, the Asian economic and currency prob-lems caused enormous dislocation throughout the

'~{ Pacific Rim and in particular have created significant uncertainty and confusion in Indonesia Our projects inIndonesia-Dieng PatuhaandBali-havebeen impacted by these events This uncertainty caused cnaemano r theBoavaecterhecurweance, us to take a prudent $87 milhon. non-recumng i

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( .itIblit*r2} i- r1HnHl!!!Pfl 10 ils Well-(letiiie(I siraitegy illld iillililately. to lH'M\ !!!in2 -W Pr!' r Gl.N 9 .c Polistiliteill- % e se!*\ c lis We coiiiiiiiie oii oiir siiecessfiil path to become a lemline ulobal prm ider of a full range of eneruy services.

i charge in the fourth quarter of 1997 in order - due to the members of our extraordinary team i l to fully provide for the effect on CalEnergy's in Asia, who have discharged their duties with  ;

investmentsinIndonesia Hnwever,itisimportant diligence and enthusiasm. Our employee team to note that our U.S. dollar denominated contracts around the world continues to be one of our in Indonesia have sovereign guarantees from the greatest assets.

Govemment of Indonesia and that we have insured By many companies' standards. CalEnergy's i our investment on the Dieng and Patuha projects performance in 1997 was very good, although through the Overseas Private investment Corporation, by our own standards we are disappointed.

anagencyof theU S.Govemment.Wehaveconsis- However, we are excited about the potential for tently devsloped our projects with all of the structurai Ca1 Energy's future growth and icok forward to safety features we could obtain.The reality remains, a year of strong financial performance in 1998. b.

bcwever, that significant nsk still exists in today's I would like to close by thanking our shareholders gicbal economy. As such, we will continue to work for their continued confidence, our Board of Directors to protect shareholder value by employing all the for their guidance and leadership, our employees protections available. for their exceptional performance, and '.nally to our Our strategy for growth remains focused on the customers for their trust in us We rer. ain focused opportunities that continue to unfold in our industry on satisfying their needs and providing reliable and We plan to utilize our ever-expending skill base low-cost energy services. Ca! Energy is committed to to take advantage of these opportunities, while its well-defir.ed strategy and ultimately, to providing remaining constantly mindful of the necessity to supenor value to the constituents we serve as we provide downside protection. I hope the information continue on our successful path to becorne a leading shared with you in this annual report will provide globalproviderof afullrangeof energyservices.

further insight into our goals and aspirations, as well as a better appreciation of the breadth of ,

our skill base.

Clearly, no one at Ca! Energy is satsfied with our

' ^ l stock performance these past months. Although the DavidL SoAof currency problems in Indonesia have taken a toll on ChairmanoftheBoardand our stock, the decision to invest in Indonesia was ChiefSecutive Officer made by me in 1993 when it was widely considered one of the Asian ' tiger economies' and these emerging countries were experiencing significant economic growth. In fact. until the third quarter of 1997, Indonesia maintained a strong investment grade credit rating As such, I believe compliments are i

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Around the world. energy is a necessity We need it for heating, cooking, kghting, refngeration. transporta-tron, and numerous other basic and luxury items And as economies around the world continue to expand. so does the importance of energy With economic growth comes an increased demand for energy In industnakzed nations, the growth of energy demand may be tempered by the development of energy efficient technologies, j waste reduction, conservation, and better demand-side management plans Developing nations, however, are witnessing massive growth in energy demands as their newly kberated economies expand.

Since 1991, CalEnergy has studied the impact of increasing global industriakzation and population growth on the energy industry The emerging global marketplace presents many opportunities for agite and a ,~.. :, m,Jers and energy supphers Based on these epoortunitiel CalEnergy has raada strategic decisions and implemented a well-formulated plan tc allow us to grow from a developer of geothennal power production facikties in North Amunca to one of tne world's leading independent providers of power and energy-related services.

A liriefIliwory of the linen:y Imlu-In in the United States..

The early structure of the electncay industry required that the generatien, transmissien. and distribution of elecincity be maraged by a pnmary provider. In some countnes, this role fell to the government. In others, pnmanly industnakzed nations like the U S . exclusive fianchises and a:sociated monopolistic power were placed in the hands of utility companies Because of this monopokstic power. regulation of utikties was a necessity Although not necessarily assunng quakty service and low prices, regulation generally provided rehabikty to consumers and a guaranteed rate of retum to the utikties i Around the World..

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Other nations have similarly expenenced the effects of industry changes brought about by shi' ting social. j pohtical and economic factors In 1989. the U K introduceo iegislation to pnvatee and deregulate its national electnc l

industry and thereby yomote competition Statistics indicate that since that time, services have improved while the real pnce of electncity has fallen. Customers in the U K are c'irrently paying 33 percent less than consumers in Cont;nental European countnes that have not yet undergone pnvat:zation With the end of the Cold War and the consequent opening of economic markets worldwide, countnes in Europe. Asia, and South Arrenca began effoas to pnvatize and deregulate their national electnc systems Today. many states in the U S have enacted iegislation to ensure full-scale retail electnc competition by the year 2000 Countnes atound the world are looking to pnvatization and deregulation to help meet the increased energy demands presented by population and economic growth The industry continues to evolve as full scale deregulation end pavatization occurs around the world. Opportunities for power providers and energy supphers will continue to expand, especially for companies kke CalEnergy that possess the expenence and skill base to respond efficiently to the needs of consumers in compet:tive environments l

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is Poised to Reao I the Benefits in developed nations. the deregulation of other industries-notably the telecommunications and airline industries-has paved the way for the deregulation of the energy industry Shopping for electricity. much in the same way consumers do for long distance telephone services and ;ir transportation in the U S., is already a consumer reakty in the U.K. (where CalEnergy's Northern Electnc subsidiary is thriving), and will almost certainly become the norm throughout the U.S. We believe deregulation will bring an end to the monopokes, protected markets, and fixed priang structures that currently rule the U S electnaty industry Lower pnces for consumers will be an inevitable result.

Speafically, deregulation alters the complexion of the electricity industry by 'unbundkng" the trio of functions traditionally performed by utilities. Generation. transmission, and local distribution of power become separate business activities in a fully deregulated environment, utilities. independent power producers and power marketers can o'fer electriaty to consumers anywhere as a result of open access to the transmission grid.

In the deregulated arena. price is not the customer's only basis for choosing a power supplier. Diverse product offenngs, improved customer service, conservation programs, energy efficient product innovations, and non-fossil fired, renewable ' green' power ger,eration (such as geothermal) are among the options offered by energy providers that seek to gain a competitive edge. {

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j Wills au lhe to (lie l'uture l Historically. CalEnergy has conducted extensive research and made nunerous capital commitments t

to improve the efficiency of its power projects-investments that will allow us to compete successfully in a deregulated enwonment. Efforts are now underway in the U S and elsewhere to ensure that a deregulated electnoty industry will provide for and encourage renewable and environmentally responsible energy sources.

CalEnergy's long-time commitment to environmental responsibility and our leading position as a geothermal power producer provide additional opportunities in this area.

To sharpen our competitive edge, the Company continues to invest in and implement sophisticated

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technology to increase operrting efficency reduce overall costs and protect the environment. Operational l excellence and the expenence of a top-line employee team contnbutes to our success Because of the Company's presence in progressively pnvatized and deregulated marketplaces-such j as the U S . U K , the Philippines. Indonesia. Poland, and Australia-we have gained considerable expenence l

in both the wholesale and retail environments All of this equates to a strong f oundation from which CalEnergy is well positioned to excel in it deregulated and privatized global energy markets of the future.

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Oiir .. i,ilie caiialv i lin-ot ar 5 tin'ess. 1 011r Colllllliilllelli in of tr is lo (leliver lilelli reliallle elleip* [nnli (li\ elSilin! [Ilel sonn e3 3nch a3 geoibernial. hy<lmelectric anul nainnil gas, ill inl(lition lo o((ering colnpetitive plice.w aluI a full nnlpe of illllovillive illu} Vallialile elleip' M*IYices. 1 It is IMM'inlM' of Illis (inliCation lo our Onsloinelb that WP 1

IIIU al)le to en':lle Vallie II)r otir d..."<*. a".~.Oltrllel il R'oll te i!Vaila}e io n u lli t ioll sllan'llol(lel# lias illCH'ils'(I Ul a CollljxntlMI11111111111 nlle of aj)lnUXilllilleiy 601 x freint oVer llit' jNist illree yenth. 1 lblIlally illll)ortitill is lllal 011r enlplo,\ ee- alm) 3 ban' in our 3nn' ens j l 1 Commitmentto Our Constituents Our eniployees un our most valunl a-sel aini we n wanI their senice with colupciilive nimpensation tu al benefit packages. tuul maintain a sali> aiul heahby work einininnient. 1 \G also1x lieveit is ourobligation to upport the ennununitie- in which our employn+ live aini when we <lo hnsintw \\i expn ,.,onrappnxiation by hiiing [mm the hical work li> re au ul <lonating to the ans. n >n u nunity charities tu u l onin ach pn > gnu n,. an< l ihn n igh the six>nsuship of nlucational. sali ty. nui eminnunenial pn ignu n,. 1 Finally. since the finnuling of our O n nptuiy we have maintainnla n u nmitment io pn nn1ing the- c m, i n : ihn n igli tiie pn wh u1 ion o[enelpv [n n u , , etninnunenially nwg xni ible snutes. \\i n main liicusal ( on our n u nin un l emin n u nental 3iewan l3 hip.

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Our Commitment The hartoMakea Diffenwe Cilll'.nergy i- conituit1ed to doilig its part to hiing about ineira.cl opportunities tund tui enlianced quality ofliD* 1o all of our constituents tuunnd the world-onr enrIomerr. 3hareholder. . employ ces. tuid the people of the conununitier we serve.We believe that as our Comptuiy grows. it is important to provide identifiable benefits to these groups. who-e -necer-er parallel our on n. ?

                                    'lhe Imgmet ofl'lectricity                                         the next 30 to 40 years, with coal-buming plants, Although e!ectricity only provides 13 percent                  hydropower and other attemative energy processes g;                               of today' send-useenergyworldwide(17nercent inindustriahzedcountriesf.tomostof u nergy expected to become pomary generation sources)

At CalEnergy, we understand that the various is electricity it contnbutes to our auality of hfc countries and communities we serve have different and directly impacts our abihty to make a living. economies and kfestyles and, therefore, different in developed na' ions, electncity is readily avail. energy needs. We are gratified to provide a product able it is generated in many ways-from renewable that has a positive impact on nearly every aspect sources such as geothermal, solar and wind energy of kfe. Access to viable energy supphes will surety to massive plants powered by nuclear fission, or help bring about enhanced living standards in less the combustion of fossil fuels hke oil, gas, or coal. developed parts of the world through increased from there, it is dehvered to end users through an employment opportunities and economic develap-extensive system of transmission knes, transform- ment, higher levels of education, and better pubhc ers and distribution wires running into factories and health in both emerging and industnalized nations, homes. With the fhp of a swttch, electricity powers advanced technology employed by responsible everything from small apphances to large factones power generators will help reduce air emissions In many parts of the world. however, electncity and lessen the impact of a growing population isnotafactof hfe Avastmajontyof thepopulation on the environment. of developing countries have httle or no direct access to commercia! energy of any form. Basic energy is often derived from heat generated t)y the burning of coal, wood, or other items. Although developing cour;tries curren!!y comprise 77 percent of the world's population, they use only a qua'ter of the J J mg aka l. I Aa/m;wirl world's energy This dispanTV, of course,is rapidly Ib/vnn mik Ib./f ai changing it is anticipated that electricity Will fuel fI, fIl,,',,',$,,$ much of the developing world's energy demand for r Mrmal5un.a.IA IW Ibid m

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'lhe lieuclits tu our Cu-tomers More than anything. Our customers create our future opportunities. Their needs affirm the efforts we make on their behalf.                                                                                                     ,

In the United States, we are proactive in our efforts to help bring about full deregulation, thus enabkng our current and potential customers to , choose their energy suppliers The challenge ahead ggg f i for power producers in the U.S and other industria!' ' h 90 91 92 93 94 95 % 97 ized nations is to navigate through deregulation and gm more competitive pricing structures while satisfying 297.000 297.000 customer demands for increased services and envi- 2s7 om ronmental stewardship. We bekeve that customers 3#% gag will look to suppliers who are not only reliable but 132W 3 415.000 who also offer competitive prices and a full range of services. Because of our successful experience H i st o n s c A t. G nowin IN j as a supplier of both electncity and gas in the U K.. N u u s t.n o r Cu sio u t n s Ca! Energy already has the processes in place to uaa cam,- , ,u< ma am ,11,n mn se qwan<m . serve customers optimally in a competitive market. o./.at *4as.un ,4anarnd*>r prader.4 i4u  ; Q3-numau am, mauau m umra+neuema I WNurn ntiat ik a,three of rrient clatnn J,anar> adcyad.Jganmavner ba,e i r'"**

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A carpet manufacturer ut: Ices a portion of the steam from Yama s viaturalgas mgeneratton facillf> danny its OrtreSSong Of nylon Inr0 Ca7M?? fsDers 1 l I

c 777 in the United Kingdom, our customers are, i for the most part, end users of the electricity and . gas we provide. Whether these customers are g , industrial or residentral users, we are committed to providing them with premium products and service d options, low prices, and responsive customer service. j Northem Elecinc has fnmvfd creative alhances and

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pnetan> information technology and customer bilkng services network to better meet its customers' needs and to serve them promptly and accurately. . As a result. Northem Electnc enjoys a reputation for rehabihtv and integrity k Neac tne caseenannycroe

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4. At our Casecnan facikty in the Phikppines, for 3 ;-

[ . E example, excess water diverted from the Casecnan and Denip Rivers will be used to irngate nce fields A 11 is projected that the annual impact will be approxi-mately one bilhon pounds of add tional paddy rice per

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year, a production increase that will help the country S{ '

                             .                                        achieve its goal of self suthciency in nce production.
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                                                                      %clienefis to OurSharehoklers Satisfeedcustomers ou: side one of Norrnem Decruc5 rerarisees                             We are committed to maximeing the rate of retum for our shareholders We do that by demanding excel-lence in every aspect of our core business the supply in other parts of the world, we continue        and distribution of electricity and gas, the provision to be committed to completing construction of our    of top-quakty related services; and the development, projects on time and within budget. 0ur facihties in  construction, ownership and operation of power gen-the Phihppines have already added 500 net MW of       eration facihties We continuously strive to serve our generating capacity for the country. and will add an  current customers better and attract new customers additional 150 net MW of much-needed electricity      in the wholesale and retail environment, to increase and water for irrigation in the future Our presence   our power generating performance and lower operat-in developing markets provides benefits beyond        ing costs at our generating facihties. and in genera!.

those reahzed by our pnmary customers Not only do to develop new. innovative processes and services we become a sustaining force in the local economy, that will ahow our Company to expand successfully

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We apply this same level of diligence to every We beheve in promoting from within whenever endeavor that supports our core business activities possible and providing our employees with additional CalEnergy is known for its ability to assemble training and educational expenence to equip them innovative, well-structured financir'g packages for promotional opportunities. We provide tuition that enable us to reduce risk. We have obtained reimbursement assistance and reimbursement more than $7 bilhon in financing since 1991, and for obtaining professional certifications. have completed project financings for major Thesafetyof ouremployeesisalsoof toppnority. intemational projects utilizing a varietyof sources Safety, wellness and productivity workshops are including capital markets. commercial banks. and consistently conducted at each of our facilities multilateral and export credit agencies such as the worldwide. We believe itis our dutyto send our Overseas Private Investment Corporation and the employees home in the same mannerin which Export Import Bank of the U S. theycome to work-safe andhealthy. As we stnve to be one of thelowest cost independent power providers. CalEnergy aenerates 'the liepefis to Our Communities attractive rates of retum on our invested capital. The success of the communities near our facik-We have also achieved much better than average ties is important to us for many reasons, but primanly growth in Northern Electnc's gas supp!y business because they are the homes of our customers and Our expenence with.Northem is testament to our employees Weareproudof thevolunteerefforts ,. - abikty to act on strategic acquisition opportunities of our employees, who tirelessly donate their time O and once completed, reahze operating enhance- to many chantable organizations around the world. ments and cost saving measures to allow our As an organization. we strongly believe it is the Company to grow and our shareholders to prosper. obligation of our Company to give something back to the people of the communities that sustain us

 'the llenclit- to Our Dnplo,we .                       In that regard, we hire f rom the local workforce.

The working environment at Cal Energy is one support the arts and community chanties, and actively of professionaksm and commitment to integnty in participate in educational organizations. community everything we do. The hours are long and the work safetyprograms andenvironmentalactivities is challenging and complex, yet an atmosphere of camaradene and teamwork exists that moves us f orward. Without the competence. knowledge. G ?n . . and fortitude of cur employees and the wilkngness of many to travel and immerse themselves in new cultures, our Company would have been unprepared

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[ , for the rapid growth and expansion we have experi- [ _, . .; I [h -j ..'c.__.- 4 ., , 4{L . enced over the last five years CalEnergy employees G,.C 5~y W truly are the dnving force behind the success of our ' _[ _.) Company and we applaud their dedication, dihgence 6 5- , _ , _ g and hard work We provide competitive compensa-tion packages. medical and dental programs. kfe insurance programs, accidental death ano disabikty F.surance plans, and many opportunities for l incentive compensation. Ytdea!ners pow!projet!p%res electrciry 50% from natarah ocalmng geor@rmalSteam near the Stron Sea Known Geothermal Resaarce Area rn Saarvn cshtamia s tmpenawatin

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_ ((( r; 5 As can of Ca: Energy s CommunMe,anons Prog'am mo<e man 13500 edJCabanal renr !)ookS and SClence IGr5 We cohecred and shvced to scnoo:5 anc icres ce tv is;and ofIem e rne Primnes for use ty locai school chken in the commun; ties in emerging nations where orgar. rations Nearly all of out facihties have many of our projects are located. there is a need programs in place to partner w:th area schools. to for non-traditional assistance We help by providing support school activities, r'th! etic and scholarship support in the f arm of medica!. nutntional. educa- pmgrams. provide financial and equpment donations. tional.andothertypesof aid Wehaveassistedin arid volunteer time to help educate students about the butiding of roads. Schools, and medical facihties. career opportunities and environmental issues and by providing f cod, potable water. agncultural and As one example of how Ca! Energy emp:oyees transportation equipment. and other basic supphes f rom different areas iiteract and suppon one in the United States, Cal Energy supports anoiner. CNEnergy corporate staff members worked chantable and civic organ:2ations, the ans. and closely with Ca'E ris Leyte Operations in the educational and environmental activities ccross Pnikppines in 195 e pogram to provide text the nation Many of the Company's facihties are the books to schools . libranes an the is!and of Leyte largest supporters in their communities of organize- in the Phikppines Itie Ca! Energy staff in the U S tions hke tne United Way Company employees joined w:th the Omaha Pubhc Schools. Team Air donate their time and resources to organizations Express, and the Filipino- Amentan Youth Organization including the Cystic Fibrosis Foundation. the to collect and ship more than 13,600 educational Muscular Dystrophy Association, area Chambers of text books and science kits to the schools on Leyte Commerce. the Boy and G:rl Scouts of Arnenca. 4H. It s a 'ticipated that this successful and grat@ing local blood banks. liomeless shelters safe ha', ens pragram will continue for years to torne for abused women and children and drug prevention

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l In 1997, our Imperial Valley employees were Additionally, Northern Electric employees donate recognized by the U S Fish and Wildlife Service to appr oximate!y 40 local organizations and charities for helping to construct and provide electrical y/ iring in northeast Eng'and each year through its Chantable for a medical and surgical hospital unit, used for the Payroll Giving Program, which collects funds through treatment of ill and injured pelicans, cranes, and payroll deductions elected by employees and retired other birds. staff. These funds are then distributed to worthy inotherenvironmentalefforts CalEnergywas organizations in October, the Charity Association a major sponsor of " Earth & Us," a public television presented a check to the Northumberland Cancer outreach alliance project. The commun:ty educationa! Support Group, which offers support and advice to project, initiated in 1997, spans 12-18 months and cancer sufferers and their families throughout the focuses on water quality in the watersheds of Lake area in November, the staff donated state-of-the-Champlain and the upper St Lawrence River Valley, art exercise equipment to the Cariac Rehabilitation near our Saranac facility where we maintain a Unit of South Shields District General Hospital in signifcantwetlandsacreage Elementsof theproject South Tyneside which will help cardiac patients include workshops for educators, the distribution with their rehabilitation after ilinesses or of information about how residents can work to surgicalprocedures. affect and improve water quality, and a series of community events - In the United Kingdom Ca! Energy's subsidiary, * ' Northem Electric. is one of northeast England's largest chantable contributors, sponsoring and supporting a ' k wide range of agencies, chanties, voluntary groups. E g , causes,andcommunityprograms NorthemElectric

                                                                                                                     .y     ,

N 9-]. . 3 .,! has put a special emphasis on education and training, , p 4 d new enterprise, and opportunities for people with special needs. Northern Electnc helps bnng the Royal l., N% T~ ', A

                                                                                                                            ' k[g .               j

[/] k.'[ g,,, g~ g Shakespeare Company to northeast England every ' year, and also supports home-grown artistic and . j j athletic development through its sponsorship of  ;, f,' ,

                                                                                                                                                   .       ,   l the annual Northem Electric Arts Awards and                        *                                                                '

the Northern Electac Foundation for Sport. in partnership with the conservation chanty ' as k.' g3 : j) 3 ' if,

                                                                                                                    'k{M,g '

• Tusk Force, a group known for its protection  :

g'P 3 J0 , a cf endangered species, the Northern Eleunc - Conservation Awards program was launched in M , Y..M b.

• October 1997. The program is open to young people .

                                                                                                                             )      .
                                                                                                                                       '?                ,

between the ages of five and 16, and is intended

                                                                                                                                               ~

t0increaseconservationawareness Participants In e cert re increase conservaron awarenessmormern must complete five conservation challenges by May $','((f'[k'$5,#7M ",'O"g'(('j'm of 1998 More than 2.000 schools in the region have been invited to participate in the program

T, i ,_ In the Philippines, we have been involved in Indonesia, on the island of Bali, CalEnergy in many cultural, educational, and environmental initiated a recychng program in 1997 in the villages activities. Near our Casecnan project, we have been of Desa Candikuning and Desa Pancasari in the actively involved in improving the standard of living Bedugul area The program wi!! help the villages of the Bugkalots, indigenous people who kve in begin recychng and managing sokd waste, and the surrounding area We have established a Civic educate and involve local students in the recycling Action Plan to provide for a shuttle bus and the effort. In addition to building a recycling center, building of a road to enable them to travel from their CalEnergy provided trash bins for the communities homes and through the mountains to a nearby village. and the schools, donated a pickup truck to haul We have also provided agricu tural training and edu- the recyc!ing material and trash, and is making cational programs, and have established a scholarship donaticns to support recychng education and a program to help further educational opportunities. trash clean-up program invoiving the village schools Also in the Phikppmes, CalEnergy helped to We also provided trash containers for the Kebun fund the " Presidential Derby '98," an event orga- Raya tounst area to help control htter. naed by the Harvard KSG Foundation to promote the democratic process and educate voters about 'lhe llenefit=. In Our l'mimnment candidates in the presidential election a be held Past industry-wide power generation practices

                   ,                                                    in March of 1998 Eight hundred people including        have accounted for nearly one-third of global emis-D                                                        pohticians, business leaders, and media representa-    sions of carbon dioxide, which is believed to be the tives attended the forum to hear five of the top eight principal ' greenhouse gas.' These past practices presidential candidates respond to questions on        have also been blamed for producing nearly two-pertinent issues The event was widely reported         thirds of the sulfur dioxide that is a major culpot in in the newspapers of the Philippines and through-      air pollution. Additionally, the power industry has
                                                                                                                                                                                         )

out Southeast Asia, and was the subject of a been imphtated in other environmental problems

                                                                                                                                                                                         ]

nationaltelecast. ranging from heat emissions into air and water l suppliestotheemissionof toxicwastes Therefore, it is cntical that participants in the energy ndustry become better stewards of the environment and c- , J [ , , impose safeguards to prevent and reduce

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                                                                                               ,- ,                            harmful emissions.

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Ca! Energy has continued to focus on providing clean, renewable energy since its f ounding in 1971.

                                                                      ~

4 Dunng the past 26 years, we have employed the [. t , . , c A[x;,,,,

                                                                                                               ^

1.. most up-to-date technology at our facihties to w: , y 4 j "Y J. ensure a minimahmpact on the environment.

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The prima'y fuel sources utiieed by CalEnergy-4-  ? geothermal, natural gas, and hydroelectric-de

• are advantageous in this regard.

A recycungpop am emelopedsy cacerg, Geothermal energy it clean, reliable, renewable on trie,sundo rBoon toaones,a txuSes o" and indigenous. Natural gas is one of the cleanest educarmg schoolchdwen on t*1e imtw'ance atrecycung ana managmg wre fossil fuel sources in the world - plentiful, economical and highlyefficient Hydroelectnc power produced from the energy of flowing water, is also from a renewable, dependable. clean source when oronerlyimplemented

[ , , 1 em-=rar,mi _ t ..i sa aL t . . . is f i es l I I l l

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                                                                                                                                    } i                                              ll l                                                f                                   i 7                                         f caktomia                          cahfomia                              Cahtomia                               Cabforma                                  Cahfomia 235 31                               0 54                                  0 83                                   0 04                                  750.065 PG&E                               PG&E                                 PG&E                                    PG&E                                       PG&E 159 16                               0 41                                  0 40                                     0 02                                   65 686 SCE                               scE                                   Scf                                      SCE                                       SCE 281 55                               C 63                                  1 03                                     0 05                                  3 % 395 LADWP                              LADWP                                LADWP                                    LADWP                                     LADWP 353 08                               0 80                                   1 72                                       0 08                             2.052 048 sDG&E                               SDO&E                                 SDG&E                                      sDG&E                                   sDG&E 248 92                                0 38                                   0 39                                       0 03                              297.179 ca!Ere<g<                           ca! Energy                            ca:Enrgy                                    CalEnergy                              calEnergy 82 10                                0 14                                   0 02                                     0 001                                   13 591 l

Crusow \in TOTAL Sutrun Ossut nit uoc t N Oxfot PARTicet Att Aim l E st i s s i o w s A t a E st i s s i o N s Ain EutssioNs E st a s h i o N s I N vi no N sit NT A L l

                                //~C.W rar                     //~5(A .hr4r                         /4-VA hear                                 liPA1.h eJr                          ConTINoEx CALi OnN:A ELtcTnic AL 5urrL ExC GENiR ATION 5Y %TI M h:                                                                                 gj, ,,,,         j,,epdh. sik.nior anddi TOTA Aia EMt % %!ONP AND ENYlRONMLNT A L CO5Th~                                                                                          sar< sudairr eiw<.e /-r naysu aan /mdad                              j i

cahfuncia: Ysrh aueras jud ma su rin $sst et cabinruts ErltlwitleClisimteCliange .. the effects of pollution and global warming. P6&L h, aft Gs, & Unin. Ca! Energy remains committed to scE 5wre- csh w ,LA ~ In 1997, Ca! Energy became involved with the Intergoverr tental Panel on Chmate Charye

• reducing and, whereverpossible, 1.4W'Ph%do IVsnmar et usis & ts.u,r flPCC1, which includes 2.500 climate experts eh. .minating environmentalimpacts svG&t.: san pie Gs, & unin.

                                                                                  ~ re-usingandrecyclingmaterials,                                                                                                        l from around the wodd The ni onof theIPCCis                                                                                                                             Call.nery: Cs!rney tempant in, to promote chmate change pohties that will provide                                 whereverpossible                                                                    ico+ im/ms/ sollo. tuer e.s>

incentives to reduce greenhouse emissions and other a promeDng energy conservation and efficiency threatstoourglobalclimate CalEnergycontinues

• improvingpublic awarenessof to be an active proponent of emissiori-1uttions. environmentalissues ,,s c a cats,sm.a As indicated by the chart above, mai.,r findings - ensuring full compliance with legis.'ation cata,J& GatardIarx ro,mne

                                                                                                                                                                           '"""'"""'"S'*d"G"'t'"

illustrate !. hat there are significant differences andregu bn ist the major California electricalsuppliers.

• refining ourenvironmental CalEnergy compares very Iaverabty with other manage msystem 'lii",G' , i'"', ,, '" j', ,[,, l l drt n u m m !"~h u!

l supp'iersbecause' na lowimpactsofairemis.

• broader, sur efforts to meetincreasing I' *d U"'" 'I 5"PP h "'

sions andlow totalenvironmentalcost index. energy demands by utihzing clean, reliable, c."usan,n 5, em unpar aen As world population continues to increase at andeconomicalfuelsources ..,,, uni , spa.a,.an is,a

                                                                                                                                                                           """"""d""

a rapid pace, st becomes even more Important

• employing environmentallyresponsible pe m<y,cu art dasn, """

to preserve our natural resources and reduce technology i J

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                                   'loba Portfblio Fuel   Net MW Net MW Owned UniteCStates-A Ort a 4T ross:

Anzona: I Nma Gas ---50 50 Cahtornia' ' Coso Geothernai 254 127 Nani.Na4 H BLM impenaf Vohes Geotherrr.al 258 268

                                  $tton Sea l I! la IV Vulcan.Hoch Elmore teathers Nevada:

deArt Peak Te65 mat 10 10 Fuel Net MW Net MW New York: 0*"*d Sa'anac Gas 243 180 Me_dKingdom: _ Pennsylvania-A OVn u A snoss: NorCon Gas 80 64 Teessde Gas 1 E75 289 Texas.- A C o s s i n t'c i s o s : Power Resostes V.iong Gas 50 25 uas 230 200 Utah II"""I Exeter Power Gas 50 25 Roosece:t Hot Spongs Geo:hermal 23 al A Di vii oe u a si: 1.95 2 Cahtornia-Teiephone Rat Geotr Trre 30 33 f tnerats Extract.on Get.nermal 49 49 Total 1.214 995 s .r. I :n.a n a n , ., , . n ,J- ., - e . m.

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[L " Frenchise area 14.400 sq. km. f, Residers population 3.2 mdhon ~,. p_ g,, Customers supphed 1.5 mdhon j'*'

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Distnbution network 17.179 km of overhead knes lhwAlablao 26,118 km of underground cables . /EIN 24.575 transformers 16.820 MVA transforming capacity , System maximum demand 2.877 MW Units of electncity distnbuted 15.714 GWh i . , . . Enits of electncity supphed 14.389 GWh . Gas supphed 74.5 mdhen therms .g

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Bali ' Gingin Fuel Net MW Net MW Shac of Current Percentage I Owned Remaining Reserve. Scf Working interest Philippines: 2 P R o o t' c i s c G A s fin tos: Windermere 15 0 20% A ()en R A t io s s: Uope' Mahiao Mor 12 1 5% Geotnermal 119 119 Schooner 11 1 2% Mahtorg Geothermai 216 216 Manaragdong Geothermal 165 149

                                                                                                                                                                      $6,, g,,                Current Percentage A Co ss1xec1 os:                                                                                                                                                                     Workinginterest Castcnan                          HyTo             150                         105 h          i Di s ii o ui s1:

A D t v i t o r st i N T : Gingin Concessen 2 960 9% Atofeak Geothermal 70 70 Pua Concession 13 000 100 % Indonesia: A C o N s i k t' c r i o N : Dieng Un:t i Dieng Unit 11 Geotnerrna! 55 52 'Ihral Net \lW . 3.100 Geothermal 80 75 Patuha unit i Geothermal 80 70  !-(IIH! \PI \! OWilW! 1- 0bl A D a v t 1 o P Nt 1 N T : Dieng Phare ll Geothermat 265 249 a CokPok^11 III ^ D u U ^ kl i R s Patuha Phase 11 Geotnermal 320 282 A oeiaAiioss Bah Geotherma! 00 240 A Cosuan1ios Total 1,920 1,627 2 9 5 y i t o e si i s i 3 G As EX rl oR AiloN

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r,. e. 1 Ca:Ene<ge s Nan ligeothermaiprojectp?ovcoet mva:tres to the U S Depa1mentof the Nanandislocated on t% Nava:As stea,xns Station un the Mo; ave Desen at China iake. Cantomia m i Since 1991, our global reach has grown A look at Our Project.- tremendously In 1997. CalEnergy expanded in in the United States.. several fundamental respects-geographically in Overall performance at our U S facilities in 1997 net megawatts of capacit,. in experience and skill was outstanding. CalEnergy operates 17 geothermal base We reached agreements to develop projects and natural gas-fired togeneration facilities in the in Poland and Austraha, respectively We increased U S The Company continues to upgrade these pro-our operating capacity as we completed construc-

                                                                               }ects and all of tts facchties worldwide to maintain tron on projects of approximately 300 MW cf new our position as a low-cost. rehable power provider geothermal generating capacity in the Phd1 pines                       in the cumpetitive marketplace in the U S . two projects continuod in their develop-ment phase and our existing operating facihties maintained production at record levels

• 4 These events come on the heels of an active 1996 during w uch we began power plant operations

{['. ,. j outside the U.S Today. through our expenence with I Northern Electnc in the U K . we have eamed a -

                                                                                                                         ,                  g leading position among companies in competitive                                                    .                             18'   j_

power markets in all regions of the world .

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s hA Consolidating imoena! Vatiev s control room operatons enatues tne one?aro ; to e%ent:y morutor seve a) geoinerma' power pajects at one t.me

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                              ]f M'                                      Natural gas is one of the world's most economica!.

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ai plentiful, thermally efficient and cleaa fossil fuel

                                                            * 'gI ey , .,,,,,,,,, ', .                                           sources. CalEnergy's cogeneration facilities use g                  '- 5'!E /                            p            natura! gas to fuel the turbines that produce energy U      in both electric and thermal (steam) form in simple cycle facilities, waste heat from the turbines is n$Ne$afsalebE er              A nerals dissipated into the atmosphere At Ca!Energyy hrraction project in re l'opersal VaheY cogeneration facihties, however, this exhaust is recycled in a heat recovery process in which high-Fessmeass po&cedo M de steam GeothermalProjects:

ne gmerad pomome steam den Geothermal steam is an environmentally preferred extracted and dekvered to a thermal host-a nea by e'nergy source because it is reliable, renewable,

                                                                     . ustnakompany that uses the steam fomocessing clean, and economical. Geothermal production wells tap into these superheated systems thousands of feet wa ns orcoMngAneMnpe apagng oWamaW @gWe beneath the earth's surf ace to releasa tremendous
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pressure caused by the hot water flash;ng to stearn . include: Saranac, a 240 net MW project located in A. the surface, the steam is separated from the fluids 25 Plattsbrrgh, New York, Power Ret.aurces, s 200 net , and used to drive turbines that generate electricity i MW project near Big Spring. Text s; NorCon, an 80 Our U.S geothermal facilities all performed well ne 7 je n . as dennsWania,and in 1997. They include Coso, a 264 net MW project Yuma. a 50 net MW project in Yuma, Arizona. located near Ridgecrest. Cakfornia. Impen.a l Valley. a 268 net MW project near Calipatria. Cahfomia. Desert Peak, a 10 net MW project near Reno, Nevada. and Roosevelt Het Springs. a 23 net MW project in Utah. j At our Imperial Valley location. Ca! Energy is  ; continuing to develop its Minerals Extraction project This technology invo!ves the use of ion exchange, solvent extraction, and electrowinning to extract and plate minerals from geothermal bnne that is brought to the surface during the geothermal power production ,n'"

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process We anticipate that this will be a successful " add, tion to our current operations at this site. At our Telephone Flat project in northern ,

                                                                                                       ,     4                              I     .

Califomia. our environmental permstting process I g rM ~ continues The 30 net MW geotherma! project - is located in Siskiyou County. California [ g g . j Y ' dm The Saranac gas 4rea cogenera:ronpic;ect located on Ptar:sburgh New York setts esectric:ty to a utiis and aco natu a: gas through the Company s Wrth Couniry Gas Apehne

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in the United Kingdom... $ N Our acquisition of Northem Electnc. on December 24,1996, is perhaps the most significant move by our Company to date We are extremely ' pleased by the performance of Northern Electnc. as an electncity supply and distribut.on company serving - - nearly 1.8 milhon customers in a!! 14 pubhc electricity supply areas of England. Scotland and Wales Northem is also emerging as a leading gas supplier I in the competitive gas market Effective in 1998. our purchase of the add:tional 30 percent stake in A-rated Northem Electnc from KDG adds to our portfolio. The acquisition of Northem Electric is consistent with our growth strategy and is important for several reasons First, we acquired Northem at an extremely attractivepnce-oreof thelowestpncespaidfor a U K Regional Electricity Company This fact, along hiymem Becrnc opetes an extensa mcoseve with Northem Electnc s exceptiona! performance cc,,,myn,c,7,ny nyt,yu norr3,,sf pyyy in 1997, has positively impacted our financial results Finally, the acquisition has positioned us for growth by providing an expenence base from which to com- Known for dependabihty and competitive pricing. pete in other deregulated electnc and gas markets. Northem offers its customers a diverse menu of com-Distribution and Supply-Northem Electnc Distribution is responsible in 1989, efforts began to liberahze the U K. for managing the d:stnbution (wires) network. i electricity industry and in 1998 full competition is 1 Northem Electric Supply supphes customers expected to commence in both electncity and gas supply it is significant that Northem Electnc oper- ehW W t rthern Elecinc Generation has ownership inter. ates in a deregulated environment, and this fact was em#ibn fundamental to our decision to move forward with Northern Utihty Services is an engineenng divi-the acouisition. In addition to building a profitable sion responsible for maintaining the distribution business in the U K, we are building a foundation network and providing related services to third of expertise that will prove invaluable in the U S party markets. and other markets worldwide as deregulation Northem Metering Services supphes and main-occurs Norihem has considerable expener.ce and a sohd reputation as a dependable energy suppher Nonhem Electric Retail currently owns and with excel lent distnbution abihties operates 41 shops and superstores selkng general kitchen related apphances, home-entertainment products. computers. electnc heating and other small apphances, and extended warranties Additional service companres provide internal and some external customers with real estate, transportation. training, telecommunications, and information services

l Over the last six months of 1997, Northern Natural Gas / Cogeneration Projects: expanded its supply customer base by 20 percent by During 1997, construction began at the 50 net attracting nearly 300.000 new gas customers. A suc- MW natural gas-fired Viking Power Station at Seal cessful Dual Fuel marketing program has been intro- Sands on Teesside, which is owned 50 percent by duced to offer customers cost savings for combined Northem Electric and 50 percent by Rolls-Royce electricity and gas services in addition, annual cost Power Ventures The facility is to be connected sa ings of approximatelyf17 million(U S. $27.2 directly into the Northem Electnc distribution system million) have been reahzed with the successful and has a long-term gas supply / electricity offtake integration of Northem Electrk into our operation. contract with Northern Electric. During 1998, deregu stion is expected to be com- Additionally, Northern Electnc has a 15 4 pleted and competition extended to the remainder of percent ownership interest in Teesside Power the energy market in the U K. Approximately 26 million Limited, which operates a 1.875 net MW combined electricity consumers and 20 million gas users will be cyclegas firedpowerstationatWi!!an Northern free to choose their supphers ' This should result in Electnc purchases 400 MW of electricity from the lower potes and higher sewice standards in addition plant under a 15-year contract to aggress' t-cutting measures, Northem Elecinc Northern Electoc also operates a 5 net MW hasimplem key strategies to satisfycustomer diesel power generating plant in Northallerton, expectaticra n existing customers, arid attract North Yorkshire. -- new customers in this compet;tive environment. t 27 These include unque information technology systems that will allow Northem to handle a large number of customers and provide premium service in bill assess-ment and collection, power outace procedures, and changes in customers. I

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L . .. ..<, ,..,...,, - Gas Field Development in order to increase our business opportunities p;o further, CalEnergy seeks to produce not only electricity HI5TORICAL but also gas f0r its Customers I0 achieve this, the GaorTn Company's subsidiary Ca! Energy Gas (U.K.) Ltd. is SEiLLs M has developed a diversified portfolio of exploraten. d velopment, and production assets in the U t Geothermal Exploration & portion of the Southem Gas Basin in the North Sea. C'"*'" Current production comes from the Company's pp-- interests in the Victor. Schooner, and Windermere Geothermal Gas gas fields, with remaining reserves of approximately Ex o " '" ene aton 38 billion cubic feet ("bcf")of gas. In Poland.. Poland's electnc power sector is in the process Hydro Electric of restructunng into three subsystems: generation, Generation Supply transmission, and distribution. Most power plants c there bum coal, and more than half are combined T heat and power plants. Currently. Poland's needs relate pnmarily to improving energy efficiency and competitiveness, and addressing environmental Supp j P ]c n concems. Natural gas is the preferred substitute for 4 coal, and by 2010 Poland plans to generate at least 10 percent of its electricity with natural gas. as com-pared with approximately three percent currently ' Electnc Distnbution A Electne Services Gas Field Development y Ca! Energy Gas has reached an agreement with the Polish Ministry of Natural Resources for exclu-sive gas exploration and development rights to a 13.000 square , meter area in the Central Polish r w .- . - .r... - - Trough of norti 'stemPoland Thearea,known as the Pila concession, is situated within the geological province of the northwest European Permian Basin. The agreement represents an excellent opportunity for the Company in view of Pila's potentia! undeveloped gas reserves. O Ihf ro.nt ,1[wp

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The hrst Ca E reg PMaune poner ogect to rectre revenu e nas the Uwer Maniao peorher" a; pro;ect ioca:ed oil r4 istand ofievte in the Philippines.. The Pheppines possesses significant geothermal Although Asia asawhole.isexpenencing capacity, and the hydroelectnc power potential in economic uncertainties. Ca! Energy's projects the country is ako vast. Ca; Energy's current projects in the Phihopines remarn unaffected in the Phikppines consist ofthree geothermal power Since 1990. when ine Pnmppine govemment facmties and one combined imgation and hydroelec-began enacting Budd-Own- Operate-Transfer tnc power generation project The country s major rBOOT~) laws to encourage increased povate invest. long-term goal is to d versify its power generation ment in the country's power sector, opportunities for mix by encouraging the development of new and independent power producers in that country have renewable energy sources, such as those emp!0yed been very a* tractive Each of Ca' Energy's projects in by Ca' Energy the Phihppineos structured as a BOOT project, with A+ter the National Power Corporation FNapocor~) ownership transfernng to the Pnikppine government completed its transmission kne interconnections to after an ag'eed upon penod of time Cebu. Repubhc of the Phihppines President hdel V Currently, about 65 percent of the Pnsppines Ramos and members of his cabinet conducted a sqe

s electnfied and energy demand is increasing tour of Ca' Energy's Upper Mahiao geotnermal plant Between 1993 and 1999, approximately 6.000 MW H:s inspinng message dunng this tour under-of add:tional power generating capacity Wdi be scored the importance of the completion of th(

added in the Phsppines through BOOT contracts BOOT projects and his commitment to increasing The current Power Development Program foresees tne efectncalinfrastructure of the Phihppines using total capacity additions of 13.000 MW from 1996 its own environmentally fnendly natural resources to 2005. 32.660 MW from 2006 to 2015 and 46.500 President Ramos cited the fact that operation of MW through 2025 Currently. about two-In:rds of the Leyte geothermal c! ants displaced the need Phdippine electnc generation capacity is od or coa l. to import 9 4 mdhon barrels of oil per year, result ng w:th the remainder based on geothermal and in a saangs to the Repubhc of the Phthppines of hydroelectnc sources ' approximate!y $142 mdhon per year Ia/

s . , . - . . . . .. ,. e. . i s The Pres; dent also noted that the development The project will provide up to 150 net MW of new. and operation of the plants was an excellent example installed hydroelectric capacity to the important of the type of private sector and govemment coopera- Luzon electrical grid as well as much-needed tion that the BOOT program was intended to fostet water for agricultural use in the Luzon Valley. GeothermalProjects: In indonesia,. The construction of CalEnergy's Malitbog Units ll The situation in Indonesia has created some and lit and Mahanagdong geothermal projects were significant challenges for the Company. requiring deemed complete in July 1997. The Malitbog project us to record an $87 million non recurring charge is a three-unit. 216 net MW facility on the Tongonan in the fourth quarter of 1997. We are proceeding Geothermal Resentation on the island of Leyte. Our cautiously and are actively pursuing the resolution Mahanagdong project is a 165 net MW geothermal facility a!so located on Leyte. Both facilities sell 100

• 8"* " "9 " "* "#

orderto protect our shareholders. economic interests percent of their capacity to the Philippine National Oil Company-EDC("PNOC-EDC"). During its 6rst year of operation our Upper Mahiao project. a 119 net MW geothermal power project, performed exceedingly well. The project fg was deemed complete ;n June,1996. Combined b rigat;on/ Hydroelectric Project Construction is progressing at the Casecnan pro- - ject site. The project is the result of an agreement 94

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between CalEnergy and the Philippine National .

                                                                                                                              . A4 - - - -                ,. 3 Irrigation Administration to develop a combined                             '                                    '

irrigation and hydroelectnc power generation project nr-that wiii driert excess water from the Casecnan and Denip Rivers in Northem lu20n through an approxi- C#"D'#'nJu/v W Mahanagd ng SireBurkes envamnmentally responS!biegeothe"ndiid6IloSUQpIV mately 23-kilometer tunnel ta the generating plant. pow to the Ptuhppme Alat,ona'0J Company

e. .==.c -n - ,-m. -- t.uw a Pn -iden: I tanio- cited the fact that operation of the 1 cyte geothennal plants di-placed the need to iniport 4.-; niillion barrel, of oil per y ear. nsulting in a sm ing-to the llepublic of the Philippines of approxiinately '142 inil! ion per y car.

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the UCDt*! Ma%10 fi?CthGl'W D' le:r 10Cated Ofa rnC !SQad Of L eyre l l inthe Philippines.. The Phikppines possesses significant geotherma! N Although Asa as a whole. is expenencing capacity and the hydroelectric power potential in economic uncertainties. Ca! Energy's projects the country is also vast Ca! Energy's current projects an the Phikppines remain unaffected in the Phikppines consist of three geothermal power Since 1990 when the Phihppine government facihties and one comb!ned irngahon and hydroelec-began enacting Budd-Own-Operate-Transfer inc power generation project The country's major FBOOT~) laws to encourage increased pnvate invest. long-term goal is to divers @ its power generation rnent in the country's power sector, opportun$es for mix by encouraging the develo; ment of new and independent power producers in that country have renewable energy sources. Such as tnose employed been very attractive Each of Ca: Energy's projects in by Cal Energy the Phikppines is structured as a BOOT project. witn A+ter the National Power Corporation FNapocor") ownership transfernng to the Phthopine government completed its transmission kne interconnections to a'ter an agreed upon penod of time Cebu. Repubhc of the Phihppines President Fdel V Curtently. about 65 percent of the Phihppines Ramos and members of his cabinet conducted a site is electnf;ed and energy demand is increasing tour of Ca!Er.ergy's Upper Mahiao geothermal plant Between 1993 and 1999. approximately 6.000 MW H s inspinng message dunng this tour under. of addttional power generating capacity will be scoredtheimponanceof thecompletionof the added in the Phibppines through BOOT contracts BOOT projects and his comrntiment to increasing The current Power Development Program foresees the electncal inf rastructure of the Phikppines using total capacity additions of 13,000 MW from 1996 its own environmentally fnendly natural resources to 2005. 32.660 MW from 2006 to 2015. and 46.500 President Ramos cited the fact that operation of MW through 2025 Currently about two-th'rds of the Leyte geothermal plants dtsp! aced the need Ph;hppine electnc generation capacity is oil or coal, to import 9 4 mJhon barrels of oil per year. resu ting with the remainder based on geotnermal and in a savings to the Repubhc of the Phikppines of hydroelectnc sources approximately $142 mdhon per year in..i

The President also noted that the development The project will provide up to 150 net MW of new, and operation of the plants was an excellent example installed hydroelectric capacity to the important of the type of private sector and govemment coopera- Luzon electrical grid as well as much-needed tion that the BOOT program was intended to foster. water f or agricultural use in the Luzon Valley, GeothermalProjects: . In indonesia.. The construction of CalEnergy's Malitbog Units il The situation in Indonesia has created some and ill and Mahanagdong geothermal projects were significant chdienges for the Company. requiring deemed complete in July 1997. The Malitbog project us to record an $87 million non-recurring charge is a three-unit,216 net MW facility on the Tongonan in the fourth quarter of 1997. We are proceeding Geothermal Reservation on the island of Leyte. 0ur cautiously and are actr'vely pursuing the resolution Mahanagdong project is a 165 net MW geothermal facility also located on Leyte Both facihties sell 100 ssuesoMng oWonesian projectsin order to protect our shareholders, economic interests. percent of their capacity to the Philippine National Oil Company-EDC {~PNOC EDC"). During its first year of operation our Upper Mahiao project, a 119 net MW geothermal power project. performed exceedingly well. The project g was deemed complete in June,1996 Combined Irrigation / Hydroelectric Project Construction is progressing at the Casecnan pro- y. - jectsite Theprojectistheresultof anagreement . c wcn.y

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between Ca!Enet;;v and the Philippine Nationa! . .. f , Imgation Admnstration to develop a combined g - gy..s irrigation and hydroelectric power generation project that will divert excess water from the Casecnan and 4qh  ;~ A Denip Rivers in Northern Luzon through an approxi. CON'#IP#'"JulV 897 M8*'39dO'9S'reBvrues enmnmentativesoons:tne geotwmal fuel to supp'y mately 234ilometer tunnel to the generating plant, power ro tv Frutunne tVanona/ Os company Pnsidein Ihuno- cited the fact that openition of the I cyte geothennal plants di-placed the need to iniport

   %; niillion barrel- of oil per y ear. nsulting in a sm ine-to ihe Republic ofIhe Philippines of approximately '14?

mil! ion per y car. m _ _ , , .

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• ess itisimportantto note thatless  ?

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      )ercent of the Company's total assots are                  d            '

[Q [ n indonesia and that we inted to continue L_  ; [ ,,, . .n - % 3 actions necessary to ensure our contracts '.' f % ,, f.d ~ ' \ ed by the Govemment of Indonesia. - & ' ' Consman is proceeding on me Traitrace facch.m ar the I anally, realizing that one component of

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     /s overall strate 9Y is the development of  tocareain Norttem twon on me PMwanes n emerging countries, it should be under-t these economies typical!y experience f success and penods of setback.With        in Australia...
    ;nd. and because it is impossible to predict      in Australia, the national govemment's deregula-1 economic cycles, CalEnergy's projects      tion of the natural gas sector has spurred pnvatization ing regions have been and will contiaue      and construction of natural gas pipelines These Jctured to minimize risk to our Company      efforts are helping to create an interstate gas grid fect.we have consistently obtrined           that will further competition in the gas sector.
   'isk insurance for our investments and Gas Field Development n guarantees for our projects in Indonesia.

Western Austraha, in particular, is a region that

   )n, our payments in accordance with our
                                                                                                                            ~

s.are in U S dollars and therefare are . . gas in the west is supphed from the northwestem

   ;tly affected by local currency fluctuations shelf and transported by pipeline nearly 1.500 km dso important to note that our global expan-                                            .

to Perth in the southwest There is considerable of Ichant on one economy for growth as we heavy industry in the soutnwest based on the area's ersified our overseas investment portfoho numerous iron ore mines, gold mines, aluminum i the Phih.ppines, rapid economic growth in refineries. nickel smelters, and bauxite mines ears has increased the demand for electncity Inanticipationof the openingof thecompevive

a currently has the fourth largest population gas market in Austreha. CalEnergy has signed an

he world, with more than 200 million people.

agreement with Empire Oil & Gas of Austraha to Fy the increased demand and help stabikze eam-in to a concession in the Onshore Perin Basin

osts. It is important that electricity in of Westem Austraha The concession contains the i a be developed from sources that are rek-i old Gingir" vered in 196a., which pro-1ewable, clean, mdigenous, and economical, duced gas o . ; ,e ast bass: in tne early 1970s nesia has a wealth of geothermally active The field is estimated to contain from 200 bcf to 1d has identified a geothermal powergener-470 bcf of gas, which at a rninimum could supply atential of 16.000 MW. As in the Phihppines, a 250 MW plant for 20 years Add,tionally. because ects in Indonesia are structured as BOOT the site is cioser to the soumwest than the north-

 ; whereby, after an agreed upon period of westem shelt, the potential exists to provide gas vnership will transfer from Ca! Energy and to tne area at competitive prices due to reduced lets to the Indonesian govemment.

transportation Costs. CalEnergyis pleased with the progress ofits projects in development and construction, and with the exceptionalperformance ofits operat-ing projects during the put year. Because of the hard work and diligence of our employees, our Ccmpany experienced record results in 1997. < l

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DIV E R SI FIC ATIO N IIN P!I EMERGING AND

   '                                                                          Acquisition and O F R E V 'E N U E B A S E                                                                                       -     M ATURE M ARKET lhwlopment A N D 'f U E L SO U RC E S                                                      ggmg         ,                         OPPORTUNITIES f

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                         .___ ______._ _ _ _____              _ _ . _ _ _                                                                                 l

i r f 5 DiscipinedAcquisitions andNewProjectDevelopments

              'I'll!1stigli (li-cijplille(l iu-(ltsi-ilion- agul inin l)rojeel (leselojnlleill . we llave lInla(lelletl oltr Ix),ition a, a lea < ling glolial energv s niec3 colnliain.

1 l tit Hliullelltal lo lllat n >le i3 otiritl >ility to -eek onl.cgillitille.itlHlitel utiol>l x n111 lilje Ili;il ilot olily illerca-e otir it--el lp;t-e ant l -ollree- of res etnie. l>til a! o jinnitle fisel 30terec (liscr-iliention tupl otller in 1l x Mlal11 l 111-ilit 53 svileigit 5 j l}v g;ijlljj gg VillIlal>leeXlx fliweilicolllj)leIllelitittys gIIIe 313o[tjge niarket-a well as in inarkel- of 4 ari n- -inue - ofinaturits -we liate fire l>an <l our Coin l> ant for continne<l success.

_ r *:-~m o i n.n . . , . . ,, , . ,. , i, Milestones and Significant v Events of 1997 if1" Continued to implement our Strategic Plan CalEnergy's strategic plan is to effect growth increased competition to benefit customers through through focused acquisitions and resource-based lower rates and better service. In the U K . where development It is a strategy that has served us deregulation is well underwy, we are working to well and will be increasingly important to our future. improve service and give customers more choices. The events of 1997 have proven the importance of And in the developing world, our mission is to provide our global reach and the necessity of our constant electricity to people who have never expenenced the attention tn detail and risk awareness As we reflect full benefits that electncity provides. on 1997 we can see that adherence to our plan has Our efforts to effect change and to satisfy the enabled CalEnergy to emerge as a leading provider needs of our customers in both mature and emerging of energy supply, distnbution, generation, and markets are increasingly important now as world related services power markets embrace privatization and fulbscale Our commitment to our strategy does not mean, competition.Thederegulationof the'.IS energy however. that we are infiexible or unable to adapt industry is becoming a reality. and with CalEnergy's to industry change. On the contrary. CalEnergy has long-term business strategies. we plan to gain our always been an advocate for changes that benefit share of the new. competrtive market. In those our customers in the U.S., we want to bring about countries where we have competec r and won a share of rapidly expanding energy markets, we are demonstrating the positive effects of industry 4v privatization Being on the ' ground floor'in these countnes provides us with a wealth of expenence I and expanded capabilities in generation. supply. and distnbution. Our presence in these emerging economies, where electricity is in great demand. provides us wrth tremendous opportunities for growth.

                                                   ,                MilNone ofIW7 Our focused efforts have enabled us to reach several milestones this year To mention just a few of CalEnergy's successes in 1997, we first note that we attracted nearly 300,000 new gas customers through Northem Electnc's Dual Fuel offering. a i   g                                  marketing program that offers customers a reduced rr                                 rate on their combined electricity ard gas bills We hm 90 91 92 93 94 95 % 91 also acquired projects in diverse Ibi D ns such as 20                                        Poland and Austraha, completed construction on 79, an                                two geothermal projects in the Philippines, and
                                      $ ssi                         maintained our commitment to excellence at 2m m                  each of our operational facihties.

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                                                               'lhe Kiewit 'lnuNiction 3                                                               in January 1998. CalEnergy acquired Kiewit             '
          ,                                                   Diversified Group's FKDG")30 percent interest y                            in A-rated Northern Electnc, ther interest in power piojects in the Phthppines and inoonesia. as well as the approximate 30 percent of Ca! Energy stock ownedby KDG.

The transaction with KDG was the next logical

            . . ~ . . , . -
                                            *m      -

step to broaden our position as a leading globa! energy An ergwr wstrs a srnbuntelectron sasw:cnin services company. and is a clear demonstration of our Nrsrhumbertad fngaeeere N7them E'ectncsurves rebame eiectren to :rs rurm customers Companis abshty to make opportune and discipiined strate 9it acquisitans. The transaction is beneficial to Ca1 Energy in many ways. Dunng 1998 it will i

     'ihe inge;:nisinn ofNorthern Electric                -

immediatelyincrease revenue andearnings The most significant accomplishment of 1997 - signdicantly broaden ourshareholder base however. and the one with the most far-reaching

• meet ourthreshcidafter-tax rates un retum benefets to our Company. was our assimdation provide greater flexibilityforstrategic of Northern Electnc. Since 1990, the electncity panneringastheexpansionofthe industry in the U K. has been pnvateed and markets aroundtheworldcontinues (g

                                                                                                                     +

restructured Emerging victonously from those developments is Northem Electoc, which enjoys Ibitiontwlfor alie Fururv a strong performance record and reoutaSon as A key element to our success in the g!obal a dependable energy supplier with excellent marketplace, and one that positrons us for the future. distribut:on assets and abilities Through its is out abihty to adapt to market trends and satisfy subsidiary tampanies. Northem Electnc delivers the needs of customers it is important to note as customers electacity and gas and offers a diverse increased competition forces the industry to become menu of complementa yenergy services more efficient. profit margins will decrease It is By the end of 1997, Northem Electric had tnerefore entically important that we have all the atiracted nearly 300.000 new gas customers andpieces in place to ensure that we provide the best expanded its customer base by 20 percentenergy through options and services at the lowest possible its Dual Fuel markehng strategy, a pragrr.n that prites whde maintaining a supenor level of invest-i ment retums CalEnergy's expenence with Northem offers customers a reduced rate on their combined electric:ty and gas bills Northern Electnc's successElectnc dunng the last year has prepared us well I in this regard is a testament to the recognition it to compete in the povateed and deregulated global  ! en oys as a suppher of quahty products and markets of the futu'e Our hands on expenence with supenorcustomerservice diverse fuel sources-such as geothermal. natural gas. and hydroelectric-and our knowledge of distnbution and supply gained from our facihties in both mature and emerging markets worldwide. provides Ca1 Energy with an unequated skill base

z U Si::nificana I:wnt- or l*c Dunng 1997. Ca! Energy reaWed many accomphshments h just one year. Our revenues have increased

                 =

nearly 300 percent We have assembled the finest team of employees in the industry and our management team rema;ns focused on creating shareholder value Ca:Ene:gy is we4 prepared for a leadersh:p position

    -                      as we continue to put our skdis to use in the U S . the U K and throughout the world The add:tional successes of our Company in 1997 wm help pos: tion us for the future They include Construction was oee nedcomplete
                                 'I )!'l IIII' ' Wereceim cre tras',9 on the secondand thiru un!!s of our Ma!itbog up'o'ades on our senior deDt and convertible project, a three-unit 216 net MW fac,h'y at preferredseCunbes f*om StanaardS                                         -

rne Iongonan deathermat Resenanon on Poors Corporation . tbe is!andofIevte m tne Pulipomes The

                           .\ \Ell\,\\ l          Ca:Energa sutsdag:

tacas sehs 100 percent of as capacita to the PNOC-EDC CE Electnc. comoieted the acouis: tion Ca:Energhsubsid:aa Ca: Energy Gas

                                                                                                                                ~

of Nonnem Electacs ord:na, shares

          ~

(UK)Ltd reachedan agreement with the

                         . l l l l t ' Ca'Energd CEindonesia funding i     :ni tw ! tur ! Resources for ewlu wega not r tion nddewtopment

_ Corp closed a 5400 milhon revo!ang creda factiak Wnch is nonrecourse to Ca!Energvl to finance the development andconstruction of U' "U U"U" I'~ the Company s geotherma' power facilibes at

                                                                                                ! ,d         rai .tu ted mthintne
                                    .heD:eng PatJHa andBahseesinIndonesia                   U"#"d "' "" ' 'h' ""***'

Northem Electnc recewedinvestment I"*'" " " N '" grade ratings from Standa'd S Poors

                                                                                     . \ l l 2 i l M, Ca!Enerad subsidiary Corporanon Mooddineestors Servce.

Ca:Ene'gv Gas 1UK)I td signed an ag?eement l andDuH S Poe'os Crest Rating Co , min Empire Od & Gas of AJstra!ia to ca'onn

              ~
                        .    \          Constnict:on nas deemedcomp.ete                   to c ncessi nintheOnsh rePenhBasinof on our Mahanagoongproject, a 165 net UW
                                                                                                  #"^"'         """"*"'"'*

geotherma! faal@ on the is!and ofieyte in

                                                                                            '           "?'" 9 #!       *'U'A'"'000 ine Ptw<ppines The fac:l@ seils 100 percent                  "'" U'" "" U        '""""#d''*
        -                          of as caoact, to the PNGC-EDC
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j we I u nv i x >-iii< n in I our O n ni n u iy fi >r financial suen .,s. l 1 \\i an known li>r our al>ility to assenilile

               .. m          e        .
                                               ;n. ;...w - tliai enalile n-to n < luce risk.1iir enunple. in 1902. CalEnergy coniplete<lilie fir 1 cur capital niarkets financing eeun <ll ey a i x x >l ofoj n nitinga , set 3.       1    Tinuugli Coso Fuinling Corporation. tiie Company raise <l over '500 niillion.               1       Again. in 1995. tlie           l Coinpany rai e<l '475 inillion tlnungli ilie Salton                     i i

beli fillHlitig( A')l]x)nitioll.  ! i PrudentFinancial andRiskManagement Ili olir Collll) lilly ellCli l)lUjeCl of serIPs of relille(1 l)lujects ill olle of 011r IHisiliess liliil== I * -ll*lleilll'ef! nial financell -eparately with -iaini-alone. non-reconr-e projeci financina. 1 Tlii,

           'rit i2-li iled l' -101icil f re ellsil!Ps 11:211 aliylivlxilllelica}

liegillIVe l x IdI)riitallee by olie plUjeCl I i lililikely to signilinuiily affi ci slie Coinpany as a wliole. 1

           \\i con tantly mid to ai J iliscr-ify oiir pniject 1 w in folio il uungli new an inisitions al u l developn ients.

aini togeilier. iliese initiative , have allowed our , Conipany to acliieve iinpre--ise ::rouib aini l financial perliennance.

g 4 4 a 4 4 I E 4 gg r a g l%t CalEnergv m. A Forreforthe Future CalEnergy has learned its lessons well and is of econom!c setbacks that our discipkne and atten-poisedtotakeadvantageof theopportunitiesof the tion to detail offers rewards We have specifically future. We have assembled a proven management structured our Company with a diversified project team and a dedicated, knowledgeable group of portfcho to avoid undue dependence on the econ-employees We have honed our core business omy of one country or region. Ca! Energy is truly a expertise and are able to recognize and seize global organization-our Company as a whole is opportunities, often before others know they exist. much greater than the sum of our individual parts These are the attributes of success in any industry. We will continue to keep a watchful eye on develop-In our industry, in particular, they are most definitely ments in Asia and will work closely with our partners the mark of companies that will prevail in the future duringthese trying times. The accomplishments desenbed within this In conclusion, the future of our industry report represent steps taken in a ddigent pursst holds more opportunity than at any time in history of our strategic plan and mission-to be a leaoing Deregulation and pnvatization of the electricity global provider of a full range of energy services sector worldwide is constantly increasing the size Our strategy has served us well and will be of our rnar ketplace. With Ca! Energy's diverse fuel increasingly important to our future Events of operating expertise, natural gas and geothermal 1997 have proven the importance of our global resource development capabilities, and electricity reach and the necessity of our constant attention and gas distnbution and supply expertise-combined to detail and risk awareness with our unparalleled information technology The recent unprecedented Asian currency resources-we have the tools in place to capitalize problems have put grect strain on many of the on these many opportunities and truly become Asian economies and confusion in the world's a force for the future. capital markets. It is during these inevitable times ( :n!Energ '3 mis-ion: to become a leadine dobal provider of a full range of energ 3ervicer.

r ? CalEneravConn1 o. ann inc. . l l 1997 Financial Report , l l t l l l l l l l l l l I i i i l l l l I i I i i i i Gs v 1. I t l FIN ANCI A L SUM M ARY 42 SELECTED FIN ANCI AL DAT A 44

  .Ni AN AGEMLNT's Discussion AND AN ALYsts oE flN ANCI AL CONDITION AND REsults or OrtRArtoNs                                                                                     - 45                     I CoNsollDATED BALANCE SHIETs                                                                                     58 CoNsollDATED STATEMI NTs of OPERAT!oNs                                                                          $9

_____ _ ,_ . . . . . . - - - ~ _ . _ _ . . . . CowsoliDArtD STATEMtNTs oF SToCrnoLDrns' EquiTV 60 CoNsot: DATED ST ATE'aENTs of CASH Flows 61 NOTES To CoNsotroATED FIN ANCI AL STATE MENTs 62 INDEPENDE NT Af1DIToRs' REPORT 93 CoRPOR ATE INFORM ATioN' 94 l'

                                                    , m L

FinancialSummaiv j L j Over the last three years ended December 31, KDG's ownership interest in CalEnergy l ' ,1997, CalEnergy Company, Inc. ("CalEnergy"comprised 20,231,065 shares ofcommon or the " Company") has experienced significant stock (assuming exercise by KDG ofone

                        - growth. Revenues have risen at a compound       . million options to purchase CalEnergy shares),
                        - annual rate of 130% from approximately            the 30% interest in Northern Electric plc
                          $186 million in 1994 to approximately -         ' (" Northern"), as well as the following
                          $2,271 millionin 1997 and netincome               minority project interests: Mahanagdong available to common stockholders excluding        (45%), Casecnan (35%), Dieng (47%), .

non-recurring and extraordinary items has Patuha(44%)and Bali (30%)and other

                ;         risen at a compound annual rate of609E            interests in international development
          'l              from approximately $33.8 rnillion in 1994         stage projects.

to approximatel, S 138.8 million in 1997. I This significant growth has been achieved nerSY P 3PPrasately $1,15Mm

                -                                                           for the KDG Acquisition and final closing through: (i) acquisitions that complement l-                                                           of the transaction occurred inJanuary 1998.

and diversify the Company's existing business, -

                                                                          ~ CalEnergy funded this acquisition with broaden the geographic locations ofits assets available cash and the net proceeds of the and enhance its competitive capabihties; (ii) l-         enhancement of the fmancial and technical         *9" *I ""  ' " ' '        #'  8' ' * '

Q. 't l performance ofexisting and acquired pro.jects; in October 1997. [

             ~

and (iii) development and construction of On December 24,1996, CE Electricplc new plants. ("CE Electric"), which in 1997 was 70%

                                                                    .      owned indirectly by the Company and 30%

On September 11,1997, the Company signed

                                                          . .              owned indirectly by PKS, acquired majority a defmitive agreement with Kiewit Diversified               .

wnership of the outstanding ordinary share -

                       - Group ("KDG"), a wholly owned subsidiary capital f Northern pursuant to a tender offer of Peter Kiewit Sons', Inc. ("PKS"), for the (the "Nortnern Tender Offer") commenced m i           . Company to purchase KDG.s ownership the United Kingdom on November 5,1996.

interest in varius project partnerships and As of March 18,1997, CE Electric effectively

            ,            CalEnergy common shares (the"KDG Acquisition ). Accordingly, common stock o         00M'oh'mdiq> h and options subject to redemption have been reclassified in the consolidated balance sheet.

e

           )

l l G..

( e 4 l k , D t. , t . ,a y g 4 , l % i In the last three years, the Company has The Company has substantially completed consummated threeothersigni6 cant constructing the Dieng Unit I, 55 net MW acquisitions, in addition to the acquisition geothermal project in Indonesia, which is of Northem. in January 1995, the Company the first unit of 400 MW under contract at acquired Magma Power Company (" Magma"), Dieng. In 1997, the Company 6nanced and a publicly-traded United States independent commenced construction of two other projects;  ; power producer with 228 megawatts ("MW") the Dieng Unit 1180 MW project as well of aggregate net operating capacity and 154 as the Patuha Unit i 80 MW project, which MW of aggregate net ownership capacity, for is the first unit of400 MW under contract approximately $958 million. In April 1996, at Patuha. Additionally, the Company has the Company completed the buy-out for conducted infrastructure construction and approximately $70 million ofits partner's drilling activities for the 400 MW Bali project. interests (" Partnership Interest") in four Although the Company intends to er. force electric generating plants in Southem its contractual rights with the Indonesian Califomia, resulting in sole ownership of the government, the ultimate outcome of the Imperial Valley Project. In August 1996, the current uncertain situation in Indonesia with Company acquired Falcon Seaboard Resources. respect to the possible abrogation by the Inc. (" Falcon Seaboard") for approximately

 $226 million, thereby acquiring signi6 cant Indonesian govemment of the Dieng, Patuha and Bali contracts adds significant risk to the g'

ownership in 520 MW of natural gas-6ted completion of those projects and resulted in electric production facilities located in New the Company recording an asset impairment York, Texas and Pennsylvania and a related charge in the fourth quarter of 1997.This pas transmission pipeline. S87 mdlion charge includes all reasonably estimated asset valuation irrpairments associated with the Company's assets in Indonesia and gives effect to the political i risk insurance on such investment. j l l 1 l

( .s....,,, t. , ur... i< Selected FinancialData W m %und, Exupo Ver %n Asano Har En&d Mmber 3 I. 1997 1996' 1995: 1994 1993 Income Staternent Data: Operating revenue 1 2,166,338 5 518,934 5 335,630 $ 154,562 5 142,059 Total revenue 2,270,911 5 6,195 398,723 185,854 149,253 j Expenses 2.074.051 435.791 301,672 130,018 87,995 i income before provision for income taxes 196,860 ' 140,404 97,051 55,836 61,258 Minonry mterest 45,993 6,122 3,005 - - income before change in accounting pnnaple and extraordinary item 51,823' 92.461 63,415 38,834 43.074 Cumulanve effect of change in l accountmg pnnciple - - - - 4.100 i Extraordmary item (135,850) - - (2,007) -

   !      Net mcome (kss)                                    (84,027F       92,461          64,4l5        36,827       47,l'4

Preferred dividends - - 1,080 5,010 4,630 I

Net income (loss) available i to common srockholders (84,02')

• 92,461 62,335 31,817 42,544

   ,      locome per share trfore change m accounnog pnnciple and extraordinary item                    0 77'          1 69            1.32          1 02         1 08
   ,      Cumulanve etTect ofchange in accounung pnnciple per share                                   -              -               -             -

0.12

   ;      Extraordinary item per share ,                       (2.0h             -               -

(0.06) - Net income (loss) per share (l.25)' l.69 1.32 0 96 1.20 l Balance Sheet Data: Total assets 7,487.626 5,630,156 2.654,038 1,131,145 715.984 l

   ;      Total habihnes                                  5,282,162     4,181.052       2,084,474       867,703      425,393 Company-obbgated mandaronly l

redeemable convernble preferred secunties of subsidiary trusts 553,9\0 103,930 - - -

  !       Preferred secunnes of subsidiary                    56,I8I      I36.065               -              -           -

Minority interest 134A54 299,252 - - - Redeemable preferred stuck - - - 63,600 58.8(X) Stockholders

• eque '65,326 880.'90 543,532 l'9,991 211.503 I Relar ik.qumumi d%riken fal,vn 5,aiwrdandik Panwh:p Intma n mdpr apon ol k w Sa Mac 4 to skjnasut aauww 2 Re% sk squmunn of Leru mmdpr a portwn 4 sk y.ar 3 Inu is $r.wn $129per bara en n.smnuur mporwar1,vgs l

i l l l i 1

i m... l I Management's Discussion and . Analysis o!Bnancial Condition  ! I and Nesuks of Operations l 8Ml.evs Pash andSh rm in Thawsh. twpt Per%r Ammes l The following is management's dimssion Valley Project. In August 1996, the Company , and analysis ofcertain s gni6 cant factors acquired Falcon Seaboard Resources,Inc. which have affected the Company's 6nancial (" Falcon Seaboard") for approximately rondition and resuhs ofoperations during $226,000, thereby acquir;ng significant j the periods included in the accompanying ownership in 520 MW of natural gas.6ted j statements ofoperations. The Company's electric production facilities located in New  ! , actual results in the future could differ York, Texas and Pennsylvania and a related j j signi6cantly from the Company's gas transmission pipeline. , ) I historical results. Pouer Generatw.n Pn>jects i Acquis///ons For purposes of consistency in 6nancial , l On December 24,1996, CE Electric plc presentation, plant capacity factors for j ("CE Electric"), which in 1997 was 70% Navy 1, Navy 11, and BLM plants (collectively owned indirectly by the Company and 30W the "Coso Project"L are based upon a nominal j awned indirectly by Peter Kiewit Sons', Inc. capacity amount of 80 net MW for each , g ("PKS"), acquired majority ownership of the plant. Plant capacity factors for Vulcan, j outstanding ordinary share capital of Northern Hoch (Del Ranchh Elmore, Leathers plants l Electric plc ("Northem") pursuant to a (collectively the " Partnership Project"), are j tender offer (the " Northern Tender OrTer") based on nominal capacity amounts of 34, , commencedin the United Kingdom on 38,38, and 38 net MW, respectively, and for l November 5,1996. As ofMarch 18,1997, Salton Sea 1, Salton Sea II, Salton Sea Ill and i G Electric effectively owned 100% of Salton Sea IV plants (collectively the "Salton Northern's ordinary shares. Sea Project"), are based on nominal capacity amounts of 10,20,49.8 and 39.6 net MW, in the last three years, the Company respectively (the Partnership Project and the has consummated three other signi6 cant Salton Sea Project are couectively referred to as  ! acquisitions, in addmon to the acquisition g ,. y, ,p p . or Northern. InJanuary 1995, the Company factors for Saranac, Power Resoc ces. acquired Magma Power Company (" Magma,,), NorCon and Yuma plants (collectively the a publicly-traded United States independent ,, , ,, Gas Plants ) are based on capacity amounts l power producer wa. h 228 megawatts ("MW..) of 240,200,80 and 50 net MW respectively. of aggregate net operating capacity and 154 l Each plant possesses an operating margin l MW of aggregate net ownership capacity, gg  ; g l for approximately $958,000. In April 1996, g ,, ;g 7 the Company completed the buy-out for operating margin is band up, a variety of approximately 570,000 ofits panner's

                                                     . factors and can be expeced to vag throughout interests ("Partnershipinterest )in fourelectnc
                        .                               the year under normal operating conditions.

generating plants m Southern Californ.ia, I resulting in sole ownership of the Imperial 5"^*"'4"h""'""'"'#'"""""""* l n.p.i guin ->r.a.n L

l Results of0perations Three Mars The following operating data represents the EndedDecember 31,1997, aggregate capacity and electricity production

       ;    1996and1993                                       of the domestic geothermal projects:

Operating revenues increased to $2,166,338 Iw? iw6 l Iw5 in the year ended December 31,1997, from overau capory facmr 101.4w 104 4 % 104.89 5518,934 in the year ended December 31, LTh produced 1996, a 317.5% increase. This growth was un thousands) 4,507,500 4,502,200 4.296.010 primarily due to the acquisitions of Northen, Capaary NMW(amage) 507.4 491 D* 4618 i Falcon Seaboard, and the Partnership Intsrest mw y+ ,& -, &o.w ,& < i as well as the commencement ofearnings at 5* 5'" " ' "

• Salton Sea IV Upper Mahiao and Malitbog. The capacity frctor was 100.4W in the fourth The increase in operating revenues in quarter of 1997 compared to 102.6%,99.6W 1996 to $$ 18,934 from S335,630 in 1995 and 103.1 % for the third, second and first was primarily due to the acquisitions of the quarters of 1997, respectively. The capacity Partnership Interest, Falcon Seaboard ,md factor decreased in 1997 from 1996 due to Northern, the deemed completion and marginally decreasing production at the Coso

_ commencement ofreceipt of revenues from Project and a scheduled turbine overhaul at d Upper Mahiao and Unit I of the Malithog Bl.M in April 1997. Project in the Philippines, the completion The following operating data represents the

    ;      and commencement of commercial operation aggregate capacity and electricity productio.i

of Salton Sea IV and an increase in the Coso of the Gas Plants:

    ,      Project's electricity revenues.

1997 1996 1995 The following data represents the supply overan capory fuwr 8439 n2w 88.s7 and distribution operations at Northern: LWh produced un thousands) 4.211.030 4.216.800 4A34300 Installed capery NMT 5'O 5'O 5'O Supply tGWh) 14 % 9 14,185 14.25; Darribunon (GWh> 15,714 15.656 15.2,0 The capacity factor of the Gas Plants reflects the Gas Therrns Supply etTect of certain contractual curtailments. The un thousands: 74 5 50 0 35 3 capacity factor'. adjusted for these contractuai The increase in units supplied and distributed curtailments are 95.7W,93.2W and 96.89 in 1997 from 1996 primarily retlects increased f r 1997,1996 and 1995, respectively activity in the local economy. The increase in therms supplied in 1997 from 1996 retlects the increased volume as the pas business in the U.K. begins to open up to compc.ition as a result of regulatory changes.

Electric sale price per kWh for the Cc o Overall, the Company's expr .es increased Project, Partnership Project and Salton Sea in 1997 due to the full year at operations Project varies seasonally in accordance with of Northern, Falcon Seaboard. Partnership the rate schedule referenced in the 504 Interest, Salton Sea r/ Project, Upper Mahiao agreements and power purchase agreements. Project and Unit I of the Malitbog Project and The Coso Project's, Partnership Project's and the deemrd completion of Units 11 and 111 of Salton Sea Project's average electricity prices the Malitbog Project inJuly 1997. per kWh received in 1997,1996 and 1995 Cost ofsales increased to $1,055,195 in we c mprised of(in cents): 1997 from $31,840 in 1996. This increase l Coso Pmica Energy Capacin- Total is a result of ter. cting a full year of Northern's :

                                *S"                operations. Cost of sales represents Northern's Average 6 scal 199'      12.56     1 91      14 -17 costs of electricity and appliances during the Average 6xal IW6         12.61     1.82      14 43 period of the Company's Controlling interest Average 6xal 1995        i1.8i     lc        13.6 since December 24,1996.

Partnership Projea Energy Capacity Total

                                & Bonus            Operating expense increased to $345,833 Average 6 scal 1997      10 96     2.18      13.14  in 1997 from $132,655 in 1996, an increase          !

Average 6 scal tw6 Average 6 scal IWS 10.02 1U4 2.12 2.10 12.14 13.24 of 160.79. This increase is a result of the i g acquisitions of Northern, Falcon Seaboard  ! Salton Sea Project Energy Capacity Total and the Partnership Interest as well as the

                                & B ""'            commencement of rec ipt of revenue at               '

Average 6 scal 199' 8 66 1.9' 10 63 Salton Sea IV, Upper Mahiao and Malitbog. i Average 6 scal 1996 8 84 2.29 11.13 Operating expense increased to $132,655 in ' Average 6 scal 1995 9 50 2 33 11M 1996 from S 103,602 in 1995, an increase of Interest and other income increased in 28.0%. The increase is a result o the Falcon 1997 to 5104,573 from 557,261 in 1996, Seaboard and the Partnership Interest an 82.6% increase. This increase was due acquisitions, and the commencement of primarily to interest earned by Northern, operations of the Salton Sea IV Project. equity earnings from Saranac and .. . General and admirustration costs increased Mahanagdong, and increased interest to 552,705 in 1997 from S21,451 in 1996, an income on the proceeds of the equity and . increase of 145.7 .This increase is primarily senior note offerings in October 1997. a result of the addition of Northem. General Interest and other income decreased m. . and administration costs decreased to 521,451 1996 to $57,261 from $63,093 in 1995, in 1996 from 523,376 :n 1995, a decrease of 8.295. This decrease is a result of the Company's continued efforts to reduce costs and retlects the elimination of redundant functions subsequent to the acquisition ofMagma.

Depreciation and amortization increased to political risk insurance on such investments.

            $276,041 in 1997 from S 118,586 in 1996, an                   The estimate assumes there will be no tax i      increase of 132.8L This increase is a result of               benefits associated with the asset valuation j     the acquisitions of Nonhern, Falcon Seaboard                   impairment.

I and the Partnership Interest as well as the The provision for income taxes increased j commencement af the receipt of revenue at i Salton Sea IV, Upper hiahiao and 51alitbog. 599Mi 199 83 in 1996 Depreciation and amonization increased m. and $30,631 in 1995. After adjusting for 1996 to S 118,586 from 572,249 in 1995, * ' " " ##'"" "# ' *'E' ' *#* " * " i impairment and the dividends on convertible a M.1 W increase. This increase is primarily , preierred securities, the effective tax rate was due to the Magma, Partnership Interest and Falcon Seaboard acquisitions, and the 38.092,30.89E, and 31.6% in 1997,1996, and 1995, respectively. The increase from commencement of the receipt of revenue at Salton Sea IV, Upper Mahiao and Malitbog. 1996 to 1997 is due primarily to larger energy ' tax credits and depletion deductions in 1996. Loss on equity investment in the Casecnan Minority interest increased to 545,993 Project reflects the Company.s share of . m 1997 from 56,122 in 1996, an increase interest expense in excess of capitalized of 651.3E Minority interest consists of interest and interest income at the Casecnan dividends on convertible preferred securities Project, which is currently in construction. . of subsidiary trusts and the Company,s partial Interest expense, less amounts capitalized, owne ship in Northern. This increase is a increasedin 1997 to S251,305 from result ofissuance of the S 180,000 of Trust 11 5126,038 in 1996, a 99.491 increase, Securities in February 1997 and $270,000 of and increased to S126,038 in 1996 from Trust 111 Securities in August 1997 and a full S102,083 in 1995, a 23.5W increase. Hipher year ofoperations from Nonhern. Minority interest expense is primarily due to a larger interest in 1995 reflects the Company's partial portfolio of facilities and their associated debt ow nership in Magma for the period from partially offser by the increase in capitalized January 10,1995 to February 24,1995. interest on the Company's international and domestic projects. lacome before extraordinary item was 551,823 or 50.77 per common share in The non-recurring charge of 587 000 1997 compared to $92,461 or $1.69 per represents an asset valuation impairment common share in 1996 and $62,335 or under Financial Accounting Standard No. $ 1.32 per common share in 1995. Excluding 121, " Accounting for the Impairment of the S87,000,51.29 per share, non-recurring Long-Lived Assets", relating to Ca.lEnergy's charge, income before extraordinary item assets in Indonesia. The charge includes would have been 5138,823 in 1997. all reasonably estimated asset valuation impairments associa. d with the Company's assets in indonesia and gives effect to the

m ,- OnJuly 31,1997, the Finance Act in the The Company repurchased 1,622 common United Kingdom was passed by Parliament shares during 1997 for the aggregate amount and included the introduction of a one time of 555,505. The Company repurchased

• so-called " windfall tax" equal to 23% of 472 shares of common stock in 1996 at the difference between the price paid for an aggregate amount of $12,008. As of Northern upua privatization and the Labour December 31,1997 the Company held l

govenanent's assessed "value" of Northern 1,658 shares of treasury stock at a cost of as calculated by reference to a formula set S56,525 to provide shares for is3uance under I forth in theJuly budget. This amounted to the Company's employee stock option an! S 135,850, net of minority interest, which was share purchase plan and other outstanding recorded as an extraordinary item. The 6rst convertible securities The repurchase plan  ! installment was paid on December 1,1997 minimizes the ddutive etTect of the additional and the second installment is payable on shares issued under these plans. December 1,1998. ' On September 11,1997, the Company signed liquidityandCapitalResources a de6nitive agreement with Kiewit Diversified Cash and short-term investments were Group ("KDG"), a wholly cwned subsidiary

 $1,446,620 at December 31,1997 as              of PKS, for the Company to purchase KDG's compared to 5429,421 at L)ecember 31,          ownership interest in various project partner-  . 69'-
                                                                                                      ~

1996. In addition, the Company's share of ships and CalEnergy common shares (the joint venture cash and investments retained "KDG Acquisition 1 l in project control accounts was 56,072 and KDG's ownership mterest in CalEnergy S47,7M at December 31,1997 and 1996,

                                   .            comprised approximately 20,231 shares of        i respectively. Distributions out of the project common stock wuming exercise by KDG control accounts are made monthly to the ofone million options to purchase CalE.c rgy Company for operation and maintenance shares), the 30W interest in Northern Electric, and capital costs and semiannually to each as well as the following minority project Coso Project partner for profit sharing under interests: Mahanagdong (459 ), Casecnan a prescribed calculation subject to mutual (359 ), Dieng (47% ), Patuha (44% ) and Bali agreement by the partners. In addition, the (301 ) and other interests in international Company recorded separately restricted cash development projects.

of 5223,636 and S106,968 at December 31, 1997 and 1996, respectivek The restricted cash balances are comprised primari!y of amounts deposited in restricted accounts from which the Company will fund construction of Dieng Unit 11 and Patuha Unit 1; the Power Resources Project, the Upper Mahiao Project and the Malitbog Project cash reserves for the debt service reserve funds; and the l Coso Project royalty payment.  !

               ...      .. .     .....,, i,.

i i CalEnergy paid $1,159,215 for the KDG On August 12,1997, a subsidiary of the

          ,    Acquisition and final closing of the transaction  Company completed a private placement j    occurred inJanuary 1998. CalEnergy funded        (with certain shelf registration rights) of
          !    this acquisition with available cash and the      $225,000 aggregate amount of61/2R proceeds of the equity and senior note oEerings  Trust Convertible Preferred Securities (the completed in October 1997.                         61/2R Trust Securities"). In addition, an l                                          .          option to purchase an additional 900 of the On December 15,1997, CE Electnc UK I                                                     61/2% Trust Securities, or 545,000 aggregate I

Funding Company, an indirect subsidiary amount, was exercised by the m.ma . . l purchasers of the Company (the " Funding Company"),

               .                                                to cover overallotments in connection with issued $125,000 of 6.8539 senior notes the placement. Each 61/2% Trust Security due 2004, and $237,000 of 6.995% senic r                       .                     .
                                           .                 . has a h.qmdation preference of fifty dollars notes due 2007 (collectively, the "CE Electnc and is convertible at any time at the option UK Funding Company Senior Notes"), and
                                                                      "          # "        * "'            *I#"I 1200,000 of 7.25% Sterling Bonds duc 2022.

Common Stock (equivalent to a conversion On November 26,1997, tne Company price of $47.75 per common share) subject amended and increased its S100,000 to adjustments in certain circumstances. revolving credit facility to S400,000. The - so ! v . On August 5,1997, the Company and facih.ty is unsecured and is available to fund certain adiliated capital funding crusts filej working capital requirements and fmance with the Securities and Exchange Commission future business expansion opportunities. . . . . a shelt registranon statement covenng up j On October 17,1997, the Company to 51,500,000 of common stock, preferred completed the public offering of 17.1 million stock and debt securities which may be sold shares ofits common stock (" Common Stock") from time to time for various purposes. The at S37 7/8 per share (the "Public Offering"1 Company completed the Public Offering in addition,2 milhon shares of Common Stock and the Senior Note Offering under the were purchased irom CalEnergy in a direct sale shelf registration statement. by a trust afilliated with Walter Scott,Jr., the On February 26,1997, a subsidiary of the Chairman and Chief Executive OtTicer of PKS Company completed a private placement (the " Direct Sale"), contemporaneously with (with certain shelf registration rights) of the clo. ing of the Public Offering. S150,000 aggregate amount of 61/4W On October 28,1997, the Company Trust Convertible Preferred Securities (" Trust completed the sale of $350.000 aggregate Securities"). In addition, an option to purchase principal amount ofits 7.63W Senior Notes an additional 600 Trust Securities, or $30,000 due 2007 (the " Senior Note OtTering"). aggregate amount, was exercised by the initial purchasers to cover over-allotments in connection with the placement. Each Trust Security has a liquidation preference of fifty dollars and is convertible at any nme at the option of the hc! der into 1.1655 shares of Company Common Stock (equivalent to a conversion price of $42.90 per common share) subject to adjustments in certain circumstances.

                                                                    ,,,i-lt. vember 1(Tv$, the Compan/ closed           being conducted by a consortium consisting the financing and commenced construction         of Cooperativa Muratori Cementisti CMC of the Casecnan Project,        nbinedirrigation di Ravenna and impressa Pizzarottie & C. Spa, and 150 net MW hydroelectric power               working together with Siemens A.G., Sulzer       j generation project (the "Casecnan Project")       Hydro Ltd., Black & Vearch and Colenco           l located in the central part of the island of      Power Engineering Ltd. (collectively, the      !

Luzon in the Republic of the Philippines. " Replacement Contractor"). l t CE Casecnan Water and Energy Company, In connection with the Hanho Contract j inc., a Philippine Corporation ("U Casecnan") termination, CE Casecnan tendered a which is approximately 70% indirectly owned certificate of drawing to Korea First - by the Company (after the KDG Acquisition), Bank ("KFB") on May 7,1997, under the is developing the Casecnan Project. E irrevocable standby letter of credit issued Casecnan fmanced a portion of the costs of by KFB as security under the Hanbo Contract the Casecnan Project through the issuance to pay for certain transition costs and other ofS125,000ofits 11.459 SeniorSecured presently ascertainable damages under the Series A Notes due 2005 and S171,500 of Hanbo Contract. As a result of KFB's its 11.95% Senior Secured Series B Bonds wrongful dishonor of the draw request, CE due 2010 and $75,000 ofits Secured Floating Rate Notes due 2002, pursuant Casecnan filed an action in New York State Court. That Court granted E Casecnan's to an indenture dated as of November 27, request for a temporary restraining order 1995, as amended to date. requiring KFB to deposit $79,329, the j amount of the requested draw, in an interest l The Casecnan Project was being constructed bearing account with an m. dependent financial pursuant to a fixed-price, date-certain, ' institution in the United States. KFB appealed tumkey construction contract (the "Hanbo . .

                                       .         this order, but the appellate court denied Contract J on a joint and several basis by KFB's appeal and on May 19,1997, KFB Hanbo Corporation ("Hanbo") and Hanbo transferred funds in the amount of $79,329 Engineering and Construction Co., Ltd.

to a segregated New York bank account ("HECC"), both of which are South Korean pursuant to the Court order. corporations. As ofMay 7,1997, G Caseenan terminated the Hanbo Contract On August 6,1997,CE Casecnan announced due to defaults by Hanbo and HECC that it had issued a notice to proceed to the including the insolvency ofeach such Replacement Contractor.The Replacement company. On May 7,1997, CE Casecnan Contractor thereafter fully mobilized and entered into a new turnkey engineering, commenced engineering, procurement and procurement and construction contract to construction work on the Caseenan Project. complete the construction of the Casecnan Project (the " Replacement Contract"). The , work under the Replacement Contract is

m

           ..ru....,        ev .,.,,    n<

l 1 l i l On August 27,1997, CE Casecnan announced and CE Casecnan intends to pursue vigorously that it had received a favorable summary its claims against Hanbo, HECC and KFB in i judgment ruling in New York State Court the proceedings described above. I against KFB. The judgment, which has been InJune 1997, the Company.sm . special-i . direct appealed by the bank, requires KFB to honor . purpose subsidiary, CE Indonesia Funding i the $79,329 d: awing by CE Casecnan on a j Corp., entered into a 5400,000 revolving

$ 117,850 irrevocable standby letter of credit. .

l credit facility (which is nonrecourse to the l On September 29,1997, CE Casecnan Company) to 6 nance the development and tendered a second certi6cate of drawing construction of the Company's geothermal i for $10,828 to KFB and on December 30, power facilities in Indonesia. 1997 CE Casecnan tendered a third certificate . On September 20,199,/, a Presidential ofdrawing for $2,920 to KFB. KFB also . Decree (the Decree )wasissuedinIndonesia, wrongfully dishonored these draws, but

                                                       . providing for government action to the pursuant to a stipulation agreed to deposit                   .

etTect that, in order to address certain recent the draw amounts in an interest bearing

                                     .                     tluctuations in the value of tl e Indonesian accoun: with the same independent 6nancial
                                                  .        currency, the start-up dates f ar a number of institution in the United States pending
-                   . _                                 private power projects woul.f be:(i) continued

-sp resolution of the appeal regarding the 6rst according to their initial schedule (because draw and agreed to expedite the appeal. construction was underway);(u) postponed The receipt of the letter of credit funds from as to their start-up dates (because they are not KFB remains essential and CE Casecnan yet in construction) util economic conditions will continue to press KFB to honor its clear have recovered; or (iii) reviewed with a view obligations under the letter ofcredit and to to being montinued, postponed or rescheduled, pursue Hanbo and KFB for any additional depending on the status of those projects. damages arising out of their actions to date. In the Decree, Dieng Units 1,2 and 3 are if KFB were to fail to honor its obligations approved to continue according to their initial under the Casecnan letter ofcredit, such schedule; Patuha Unit 1 and Bali Units 1 and action could have a material adverse efiect 2 are to receive further review to determine on the Casecnan Project and CE Casecnan. whether or not they should be continued in accordance with their initial schedule; On September 2,1997, Han% and HECC

            -                                              and Bali Units 3 and 4 Patuba Units 2,3 bled a Request for Arbitration before the and 4 and Dieng Unit 4 are to be postponed Intemational Chamber of Commerce ("lCC').                                          .

for an unspeci6ed period. In this regard. The Request for Arbitration asserts various the Company notes that its contracts and claims by Hanho and HECC, against CE - government undertakings f or the Diene, Casecnan relating to the terminated Hanho .'

                                 .                         Patuba and Bali projects do not by their Contract and seeking damages. On October terms permit such categorization or delays 10,1997, CE Casecnan served its answer                                      .

by the government and tnat the Company and defenses m. response to the Request has obtained political risk insurance coverage for Arbitration as well as counterclaims for its Dieng and Patuha projects. Moreover, against Hanbo and HECC r.orbreaches the Company intends to continue to take

      ,    of the Hanbo Contrm. The arbitration actions to attempt to reqt. ire the government proceedings before the ICC are ongoing

7 ofIndonesia to honor its contractual structured with subsidiaries of the Company obligations; however, subsequent actions by holding an approximate 94% interest the Government ofIndonesia and continued (including certain assignments of dividend economic problems inIndonesia have rights representing an economic interest of created further uncertainty as to whether the 4 % ), and PT. HEA holding a 6% interest in contracts for such projects will be abrogated the Dieng Project. Financial closing and first  ; by theIndonesian govemment and disbursement ofconstruction loan funds accordingly have created signi6 cant risks occurred on October 3,1996. Construction I to the completion of these projects. As a of Dieng Unit I is expected to be completed , I result, the Company recorded a SFAS 121 in March 1998. asset valuation impairment charge of $87,000 l Pursuant to the DiengJOC and ESL,, in the fourth quarter of 1997. This charge Pertamina has granted to HCE the includes all reasonably estimated asset

             .     .               .             geothermal field and the wells and other valuan.on impairments associated with facih. .ues presently located thereon and HCE the Company's assets in Indones.ta and may build, own and operate power production gives effect to the political risk insurance                                                       t units with an aggregate capacity of up to on such investments.

400 MW HCE will accept the field operation  ! On December 2,1994, a subsidiary of the responsibility for developing and supplying ,

                                                                                                     '       ($-

Company. Himpurna California Energy Ltd. the geothermal steam and fluids required ("HCE") executed a joint operation contract to operate the plant.The DiengJOC is l (the "Dieng JOC") for the development of structured as a build own operate transfer  ; the geothermal steam field and geothermal agreement and will expire (subject to extension  ; powcr facilities at the Dieng geothermal field, by mutual agreementi on the date which is the I located in CentralJava (the "Dieng Project") later of(i) 42 years following effectiveness of the , with Peruschaan Pe tambangan Minyak DiengJOC and (ii) 30 years following the date i Dan Gas Bumi Negara ("Pertamina"), of commencement of commercial generation the Indonesian national oil company, and of the final unit. Upon the expiration of the executed a "take-or-pay" energy sales contract proposed DiengJOC, all facihties will be (the "Dieng ESC") with both Pertamina and transferred to Pertamina at no cost. PT. PLN (Persero) ("PLN"), the Indonesian national electric utility. HCE was formed pursuant to a joint development agreement i with PT. Himpurna Enersindo Abadi ("PT. HEA"), its Indonesian partner, which is a subsidiary of Himpuma, whereby the Company and PT. HEA have agreed to work together on an exclusive basis to develop the Dieng Project (the "Diengjoint Venture"). Subsequent to theJanuary 1998 KDG acquisition, the DiengJoint Venture is l

                                                                                                       ,         I 1

i (

                                     , i, i

1 1 l HCE began well testing in the fouith quaner Patuha Power, Ltd. ("Patuha Power")is of 1995 and issued a notice to proceed for developing a geothr-mal power plant in the l the construction and supply ofan initial 55 Patuha geothermal 6 eld inJava, Indonesia l net MW unit ("Dieng Unit I")in the 6rst (the "Patuha Project"). On December 2, l quarter of 1996. PT Kiewit/ Holt Indonesia, 1994, Patuha Power executed both a joint a consortium including Kiewit Construction operation contract and an energy sales

      !    Group, Inc., a subsidiary of PKS ("KCG"),       contract, each of which contains terms is constructing Dieng Unit I pursuant to a      substantially similar to those described fixed price, date cenain, tumkey construction   above for the Dieng Project. Patuha Power contract (" Construction Contract"). Affiliates began well testing and exploration in the
     ;     of KCG are providing the engineered supply      fourth quarter of 1995 and in the third with respect to Dieng Unit I pursuant to a      quarter of 1997, issued a notice to proceed 6xed price, date certain, turnkey supply        for the construction and supply of the Patuha j     contract (" Supply Contract"1 The Construction  Unit I 80 net MW project. The same Contract and Supply Contract are sometimes      construction consortium as described referred to herein as the "Dieng EPC"           above foi Dieng Unit I has contracted to and KCG and their affiliates pany to the        construct Patuha Unit I under similar terms.

n Construction Contract and Supply Contract The Company has contributed the necessary l are sometimes referred to herein, collectively, equity for the completion of Patuha Unit I as the " Construction Consortium " The and the construction loan of $ 150,000 was l obligations of the Construction Consortium arranged under theJune 1997 CE Indonesia l under the Construction and Supply Contracts Funding Corp. facility. However, pending

     ;     are supported by a guaranty of KCG. KCG         resolution of the current uncertainties is the kaimember of the Construction            associated with Indonesia, construction l     Consortium, with a 609f interest. HCE will      activities on this project have been be responsible for operating and managing       significantly reduced.

the Dieng Project. The Company and PT Panutan Group, in the fourth quarter of 1997, HCE issued an Indonesian consortium of energy, oil, a notice to proceed for the construction and gas and mining companies, have formed supply of the Dieng Unit 1180 net MW a joint venture to pursue the development project. The same construction consortium ofgeothermal resources in Bali (the " Bali

     ,     as described above for Dieng Unit I has         Project"). The PT Panutan Group is entitled contracted to construct Dieng Unit 11 under     to contribute up to 40% of the total equity similar terms. The Company has contributed      and obtain up to 40% of the net pro 6t of the the necessary equity for the completion of      Bali Project. The project company developing l           Dieng Unit 11 and the construction loan         the Bali Project, Bali Energy Ltd. (" Bali of S109,000 t 2 arranged under theJune          Energy"), has executed both a joint operation 1997 CE Indonesia Funding Ccep. facility.      contract and an energy sales contract with However, pending resolution of the current      terms similar to those at Dieng and Patuha.

uncertainties associated with Indonesia, However, pending resolution of the current t construction activities on this project have uncertainties associated with Indonesia, ! been signi6cantly reduced. infrastructure construction and drilling I activities on this project have been signincantly reduced.

i The Company developed and owns the ("SDG&E") and Paci6c Gas and Electric f rights to a proprietary process for the Company. Of this amount,275 MW was extraction of minerals from elements in set aside for bidding by independent power solution in the geothermal brine and fluids producers (such as Magma) utilizing renewable j utilized at its Imperial %11ey plants (the resources. Pursuant to an order of the CPUC l "Salton Sea Extraction Project") as well as datedJune 22,1994 (confirmed on December , the production of power to be used in the 21,1994), Magma was awarded 163 net MW j extraction process. The initial phase of the for sale to Edison and SDG&E, with in-service ) project would require delivery of 49 net MW dates in 1997 and 1998. On February 23,1995 i ofpower. A pilot plant has successfully the Federal Energy Regulatory Commission produced commercial quality zinc at the ("FERC") issued an order finding that the l Company's Imperial Wiley Project. Zinc is CPUCs BRPU program violated the Public  ! primarily used in galvanizing steel for use Utilities Regulatory Policies Act ("PURPA")  ; in the automobile industry. The Company and FERCsimplementing regulations intends to sequentially develop manganese, and recommended negotiated settlements.  ; silver, gold, lead, boron, lithium and other in response, the CPUC issued an Assigned , products as it further develops the extraction Commissionets Ruling encouraging settle- l technology. The Company is also investigating ments between the 6nal winning bidders g producing silica from the solids precipitated and the utilities. The utilities are expected to , v aut of the geothermal power process. Silica continue to challenge the BRPU and, in light i i is used as a 611er for such products as paint, of the regulatory uncertainty, there can be l plastics and high temperature cement. no assurance that power sales contracts will  ;  : If successfully developed, the mineral be executed or that any such projects will be 1 extraction process willprovide an completed. In light of these developments, i environmentally responsible and low the Company agreed to execute an agreement cost minerals recovery methodology. with Edison on March 16,1995, providing

          ..                                    that in certain circumstances it would withdraw Subsidianes of Magma, a subsidiary of the
                                                .ts Edison BRPU bid in consideration for the Company, sought new long-term 6nal SO4
                                  .             payment of certain sums. In December 1996, power purchase agreements in the Salton Sea the Company entered into a con 6dential cash area through the bidding process adopted by
                                         .. buyout agreement with SDG&E.These the Caliform.a Public Utihties C,ommission         -
                     .                          agreements are subject to CPUC approval.

("CPUC") under its 1992 Biennial Resource Plan Update ("BRPC"). In its BRPU, the CPUC cited the need for an additional 9,600 MW ofpower production through 1999 among California's three investor-owned l utilities, Southem California Edison Company l (" Edison"), San Diego Gas and Electric I l 4

I Within the United Kingdom there was The Company has various projects under continued investment to extend and construction outside the United States, a improve the electricity dntribution network. number ofprojects under award outside the Expenditures in the year were approximately United States and a number ofoperating j $102,000 although customers directly projects doing business outside the United I contributed approximately $33,000 to the States. The operation, 6nancing, construction j add:tional costs incurred in expanding the and development ofprojects outside the l system to meet their speci6c requirements. United States entail signi6 cant political and i 6nancial risks (including, without limitation, t The Company is actively seeking to develop, l construct, own and operate new energy uncertainties associated with 6rst time projects, both domesa. cally and internationally, pnvanzanon ettorts m the countries involved, i the completion of any of which is subject to '""'"'I **' #"E' '*" ",, substannal risk. Development can require repatriation restrictions,law changes or m."""'"'I the Company to expend signi6 cant sums regulation, changes in government policy, pomcalinstabih.tv, avil unrest, contract for preliminary engineering, permitting, fuel - supply, resource exploration, legal and other abmption and expropriation) and other expenses in preparation for competitive bids risk! structuring issues that have the potential -so

-                   which the Company may not win or before to cause substannal delays or material impairment of the value of the project being it can be determmed whether a project is                                                              -

reasible, economically attractive or capable developed, which the Company may not of being 6nanced. Successful development be fully capable ofinsuring against. The uncertainty of the legal environment in cenain and construction is contingent upon, among . other things, negotiation on terms satisfactory foreign countries in which the Company is to the Company ofengineering, construction' developine and may develop or acquire projects fuel supply and power sales contracts with could make it more ddicuh for the Company other project participants, receipt of required to enforce its rights under agreements relating governmental permits and consents and to such projects. In addnion, the laws and timely implementation ofconstruction. regulations of cenain countries may limit There can be no assurance that development the abih.ty of the Company to hold a majority

     ,             efforts on any particular project, or the           interest in some of the projects that it Company,s development efforts generally.            may develop or acquire. The Company,s will be successful.                                 meernanonal projects may, in certain cases, be delayed, suspended or terminated by the applicable government or may be subject to risks ofcontract abrogation or other uncertainties relating to changes in government policy or personnel or changes f

I in general economic conditions affecting the country. Projects in operation, construction and development are subject to a number of uncenainties, more specifically described in the Company's Form 8-K dated March 6, 1998, fded with the Securities and Exchange Commission andincorporated herein by reference. Inflation har not had a substantial impact on the Company's operating revenues and costs; energy payments for electricity for the Coso Project, Pannership Project, Salton Sea 11 Project and Salton Sea Ill Project will continue to be based upon scheduled rates and -re not adjusted for inflation through the initial ten year period after the d.ttes of firm operation under each power pun base agreement. j The Company has cc nmenced,for allof its information systems, a year 2000 date conversion project to address all nesessary code changes, testing and implementation. The " Year 2000 Computer Problem" creates  ; risk for the Company from unforeseen problems in its own computer systems and j from third parties with whom the Company l deals on financial transactions worldwide. l Such failures of the Company's and/or third i parties' computer systems could have a j j material impact on the Company's ability i I I to conduct its business, and especially to  ! process and account for the transfer of funds I electronically. Management believes that the year 2000 implementation costs and related , l

                                                        !    1 potential effect should not have a material financialimpact on the Company.                           !

i l i i t i

                                          ,         .........e....              ..

i i

Consolidated Balance Sheets J AqfDnemirrJJ.199Ned/996 D4m medNm in Laweds. Empt hr Wer Armaats Assets 1997 1996 Cash and cash equivalents (Note 3) $ 1,445,338 $ 424,500 Joint venture cash and investments 6,072 47,764 Restricted cuh. 223,636 106,968 Short-terminvestments 1,282 4,921 -

Accounts receivable 376,74) 342,307 Properties, plants, contracts and equipment, net 3,528,910 3,225,496 Excess ofcost over fair value of net assets acquired, net 1,312,788 790,920 Equity investments - 238,025 238,856 Deferred charges and other assets 354,830 448,424 Total assets $ - 7,487,626 $ 5,630,156 Uabilities aosd $tockholders' Equity Liabilities: Accounts payable 173,610 218,164 - Other accruedliabilities 1,106,641 668,613 Parent company debt 1,303,845 1,146,685

                  . Subsidiary and project debt                                                           2,189,007         1,678,392 Deferred income taxes '                                                                  509,059        . 469,199 Totalliabihties h                           5,282,162 <       4,181,052 Deferredincoine
                                                                                \                             40,837            29,067 Commitments and contingencies (Notes 3,18,19 and 20)

Company-obligated mandaronly redeemable

                                                                                   \ s convertible preferred securities of subsidiary trusts g                   $53,930          103,930
                " Preferred secunnes ofsubsidiary                                                             56,181          136,065-Minority interest                                                                         134,454          299,252 Common stock and options subject to redemption                                           654,736                 -

Stockholders' equity: Preferred stock-authonzed 2,000 shares, no par value

                                                                                               *(  lo]e             -               -

Common stock.-par value $.0675 per share, authonzed 180,000 shares, issued 82,980 s\

and 63,747 shares, outstanding 81.322 and -

63,448 shares, respectively- 5/A)2 4,303 Additional paid in capital - 1,261,081 563,567 Retamed earnings 213,493 297,520

                ' Cumulative effect of foreign currency translation adjustment                                 (3,589)         29,658 Common stock and options subject to redemption                                           (654,736)                -

Treasury stock- 1,658 and 299 ccmmon shares at cost (56,525) (8,787)

               -: Unearned compensation - restricted stock                                                            -         (5,4711 3

Total stockholders' equity -

• lC ab1.b 765,326 -

880,790 Total habilities and stockholders' equity 5 7,487,626 $ 5,630,156 Tk aranpoe>rns norwr on onergr.Jpa r ofihnepiaanaalaaraments g h

_ i .. . ...... . . Conso idated Statements of Opemtions ktk Th %n Esl<JEMmeer3L IW DJi.en al%m a ThamL Lx.rpt Per %n Amstt: 1997 1996 1995 Revenue: Operating revenue 5 2,166,338 3 518,934 5 335,630 Interest and other income 104,573 57,261 63,093 Total revenues 2.270,911 576,195 398.723 Costs and expenses: Cost of sales 1,055,195 31,840 - Operating expense 345,833 132,655 103,602 General and admimstration 52,705 21,451 23,376 Depreciation and amortuation 2'6,041 118,586 72,249 Loss on equity investment in Casecnan 5,972 5,221 362 Interest expense 296,364 165,900 134,637 Less interest capitalaed (45,059) (39,862) (32,554) Non-recurnng charge-asset valuation impairment 87,000 - - Total costs and expenses 2,074,051 h n 435,79135(,$ 301,672 , J 4(, Income before provision for income taxes 196,86(' 140,404 97,051 Provision for income taxes 99,044 41,821 30,631 locome before minority interest 97.816 98,583 66,420 g, Minonry mterest 45,993 6.122 3,005 - Income before extraordinary item 51,823 92,461 63,415 Extraordinary item, net of minonry interest of $ 58,222 (135,850) - - Net income (loss) (84,027) 92,461 63,415 Preferred dividends - - 1,080 Net income (loss) available to common stockhoklers 5 (84.027) 5 92,461 5 62,335 income per share before extraordinary item $ 0.7? 5 1.69 5 1.32 Extraordinary item 5 (2.02) 5 - 5 - Net income (loss) per share 5 (l.25) $ 1.69 5 1.32 income per share before extraordinary item-dtluted 5 0.75 5 1.54 5 1.22 Extraordinary item-diluted 5 (197) 5 - 5 - Net income (km)per share-dduced 3 (1.22) 5 1.54 5 1.22 Tiw a.mpna t wem an sertralperiskpautu,armen

                           ,      ....... .       m......           ...

Consolic atec Statements o 'Stoeao c ers' Equity Eveik Thow %n EnJJthe w 31 lW DJlan ad%m an Thou,and, Common Stock Outstanding Additional Foreign & Options Common Common Paid-in Retained Curreng Subject to Treasury Unearned Shares Stock Capital Earnings Adiust. Redemption Stock Compensation Total Balance December 31,1994 31,849 $ 2,407 $ 100,421 $ 142,937 $ -$ - $ :65,774)$ - $ 179,991 Equiry otTering 18,170 1,004 240,825 56,801

                                                                                       -           -            -                         -      298,630 Restricted stock                      500            -

848 8,652 (9,500) - Exercise of stock optioru and other eqwty transactions 176 10 446 - - - 563 2,494 3,513 Purchase of treasury stock (102) - - (1,590) (1,590) Preferred stock dividends, Series C, including cash distribunon of $43 - - - (1,293) - - - - (1,293) Tax bene 6t from stock plan - - 866 - - - - - 866 Net income before preferred dividends - - 63,415

                                                                                                 -            -               -         -         63,415 Balance December 31,1995 50,593               3,421        343,406 205,059                 -             -        (1,348)   (7,006) 543,532 Exercise ofstock options and other eqwry transactions 5,263           337          53,030                                                4,569 1,535          59,47i Purchase of treasury stock         (472)           -

(12,008)

                                                                         -           -          -            -                         -         (12,008)
 @)  Conversion of debt                8,064         545        IM,912               -

165,457 Y Tax benent from stock plan - - 2,219 - - - - - 2,219 Foreign currency translation adi ustment - - - 29,658

                                                                                                            -               -         -          29,658 Net mcome                               -          -                -     92,461           -            -                -        -          92,461 Balance December 31,1996 63,448                4.303        563,567      297,520      29.658            -

(8,787) (5,471) 880,790 Equity orienng 19,100 1,289 697.315 - - - -

                                                                                                                                      - 698,604 Exercise of stock options and other egwry transactions 396                 10        (2,757)                                               7,767     5,471 10,491 Purchase of treasury stock        (1.622)          -

(55,505) (55,505) Common stock and options subject to redemption - - -

                                                                                              - (654,736)
                                                                                                                                     - (654,736)

Tax bene 6e from stock plan - - 2.956 - - - - - 2,956 Foreign currency ranslation adjustment - - (33,247) (33,247) Net loss - - - (84,027) - - - - (84,027) Balance December 31,1997 81,322 5 5,602 $1,261,081 $ 213,493 $ (3,589)$ 1654,736) $ (56,525)$ - 5 765,326 Tiu,munner ac a, a , ruarraipn as pan.sal u.amenn

L 4 1 Eh & S .. , i U ,, P A b , 4% g Consolic ateci Statements of Casa F oms le nu The %n EslalDnumisc 3I. I997 D&n m Tkm.6 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ (84,027) $ 92,461 $ 63,415 Adjustments to reconcile net cash flow from operating aethities: Non-recurring charge-asset valuation impairment 87,000 - - Depreciation and amortization 239,234 109,447 65,244 Amornzation of excess of cost over fair value of net assets acquired 36,807 9,139 7,00? Amortization of originalissue discount 2,160 50,194 45,409 Amortization of deferred financing costs 26,161 9,677 8,979 Amortization of unearned compensation 5,471 1,535 2,494 Provision for deferred income taxes 55,584 12,252 13,983 loss Oncome)on equity investments (16,068) (910) 362 income (loss) appbcable to minority interest (35,387) 1,431 3,005 Changes in other items: Accounts receivable (34,146) (l3,936) 213 Accounts payable, accrued liabiheies and deferred income 29,799 2,093 12,103 Net cash flows from operating activities 312,588 273,383 222.212 Cash flows from investing acchities: Purchase of Northern, Fakon Seaboard, Partnership interest and Magma, ner of cash acquired (632,014) (474,443) (907,614) Distributions from equity investments 23.960 8,222 - Capital expenditures relating to operatinF projects (194,224) (27,334) (24,821) (167,160) (27,120) (289,655) g C Phihppine construction Indonesian and other development (155,963) (81,068) (8,973) 1 Salton Sca IV construction - 163,772) (62,4 30> Pacific Northwest, Nevada, and Utah exploration costs (3,128) (4,585) (10,445) Decrease in short-term investments 2,880 33,998 80,565 Decrease (increase)in restricted cash (116,668) 63,175 (17,452) Other 60,390 (2,910) 11,514 Investment in Casecnan - - (61,177) Net cash flows from invesung activities (1,042,101) (713,664 (l.292,787) Cash flows from financing activities: Proceeds from sale of common and treasury stock and exercise of stock options 703,624 54,935 299,649 Proc.eeds from convertible preferred secunties of subsidiary trusts 450,000 103/' ') - Proceeds from issuance of parent company debt 350,000 324,136 200,000 Repayment of parent company debt (100,000) - - Net proceeds f.om revolver (95,000) 95,000 - 1 Proceeds from subsidiary and project debt 795,658 428,134 654,695

Repayments of subsidiary and project debt (271,618) (210,892) (176,664) l Deferred charges relariag to debt 6nancing (48,395) (36,010) (34,733)

Purchase of creasury stock (55,50 ) (12,008) (1,590) Other 13,142 10,756 (29,169) Net cash flows from financing activities 1,741,906 75?,981 912,188 EtTect of exchange rate changes (33,247) 4,860 - Net increase (decrease)in cash and investments 979,146 322,560 (158,387) Cash and cash equivalents at beginrung of year 472,264 149,704 308,091 Cash and cash equivalents at end of year $ 1,451,410 $ 472,264 $ 149,704 Supplemental Disclosures: Interest paid (net of amounts capitalaed) $ 316,060 $ 92,829 $ 50.840 income taxes paid 5 44,483 $ 23,211 $ 14,812

Notes to Consolic ated Fmancial Statements n m u tajun. w Ddiar: Pod ad %m ie %ad. Lupt he %n.%w

             ;       1. Business                                     in 1995,the Company acquired Magma CalEnergy Company, Inc. (the " Company")         Power Company (" Magma"). Magma's
            !       is a United States-based global power company   operating assets included four projects referred i      which generates, distributes and supplies         to as the Partnership Project in which Magma electricity to utilities, government entities,   had a 50% interest, and three projects referred retad customers a.id other customers located     to as the Salton Sea Project of which Magma throughout the wodd. The Company was             owned 100%. A fourth project included in i       founded in 1971 and through its subsidiaries     the Salton Sea Project was constructed after
          !        is primarily engaged in the development,         the acquisition ofMagma and commenced I

ownership and operation ofenvironmentally operations in June 1996. In addition, in April i responsible independent power production 1996, the Company acquired the remaining i facilities worldwide utilizing geothermal, 509 interest in the Partnership Project. In natural gas, hydroelectric and other energy August 1996, the Company acquired Falcon t sources. In addition, the Company is engaged Seaboard Resources, Inc. (" Falcon Seaboard") in the distribution and supply of electricity to which includes significant interests in three appronmately 1,5 million customers pnmarily operating gas-fired cogeneration facilities and in northeast England as well as the generation a related natural gas pipeline. On December g and supply ofelectricity (together with 24,1996, CE Electric UK plc ("CE Electric"), other related business activities) throughout w hich in 1997 was 70% owned indirectly by l England and Wales. The Company is also the Company and 30W owned indirectly by l active in supplying gas and has applications Peter Kiewit Sons', Inc. ("PKS"), acquired for over 400,000 customers in those areas majority ownership of the outstanding of England, Wales and Scotland where retail ordinary share capital of Northern Electric pas competition has been introduced. plc CNorthern") pursuant to a tender offer (" Tender Otter"). As of March I8,1997, The Company has organized several CE Electric effectively owned 100% of partnerships and joint ventures (herem. , g g , referred to as the "Cosojoint Ventures") in order to develop geothermal energy at Northern is one of the twelve regional the China Lake Naval Air Weapons Station, electricity companies (" RECS") which came Coso Hot Springs, China Lake, Cahfornia. into existence as a result of the restructuring Collectively, the projects undertaken by and subsequent privatization of the electricity these Cosojoint Ventures are referred to industry in the United Kingdom in 1990. as the Coso Project. In 1992, the Company Northern is primarily engaged in the distrib-entered into the natural gas-fired electrical ution and supply of electricity. Northern was generation market through the purchase of panted a Public Electricity Supply (" PES") a development opportunity in Yuma, Arizona license under the Electricity Act to supply which commenced commercial operation in electricity in Northem's Authorized Area May 1994. In 1993, the Company started FAuthorized Area"). Northern's Authorized I developing a number ofinternational po wer l project opportunities where private power generating programs have been initiated,  !

    ,            including the Philippines and Indonesia.                                                                               l

7

                                                                              ~ , . - - - - - - - -

V e ): l !- Area covers approximately 14,400 square Investroents other than restricted cash are I kilometers with a population of approximately primarily commercial paper and money market

3.2 million people and indudes the counties securities. The restricted cash balance indudes of Northumberland, Tyne and Wear, Durham, such securities and mongage backed securities, Cleveland and Nonh Yorkshire. Nonhem and is mainly composed of amounts deposited supplies electricity outside its' Authorized in restricted accounts from which the Company Area pursuant to second tier licenses. will source its equity contributions and debt Northern also is involved in ncn-regulated service reserve regmrements relating to the

!- - activities, induding the supply of gas within projects. These funds are restricted by their England, Wales and Scotland, the generation respective project debt agreements to be of electricity, electrical appliance retailing used only forthe related project. and gas exploration and production. At December 31,1997, all of the Company's

2. SummaryofSign@icant investments are dassi6ed as held-to-maturity AccountingPblicies and are accounted for at their amonized cost The consolidated fmancial statements indude basis. The carrying amount of the investments the accounts of the Company, its wholly-owned approximates the fair value based on quoted l

subsidiaries, and its proponionate share of the market prices as provided by the 6nancial J partnerships and joint ventures in which it institution which holds the investments. @ has an undivided interest in the assets and is I Properties, Plants, Contracts, proportionally liable for its share ofliabilities. EquipmentandDepreciation l i Other investments and corporate pmt ventures The cost of major additions and betterments where the Company has the ability to exercise are capitalized, while replacements, mainte- ' significant influence are accounted for under nance,'and repairs that do not improve

      ; the equity method of accounting. Investments'      or extend the lives of the respective assets where the Company's ability to influence           are expensed.

is limited, are accounted for under the cost method of accounting. All significant inter. Depreciation of the operating power plant L j- enterprise transactions and accounts have costs, net of salvage value, is computed on the been eliminated. The results of operations straight line method over the estimated useful l of the Companyindade the Company's lives, between 10 and 30 years. Depreciation proponionate share of results of operations of furniture, fixtures and equipment which are of entities acquired as of the date of each recorded at cost, is computed on the straight line method over the estimated useful lives j acquisition.l-of the related assets, which range from three Cash Equitalents,lmestments to ten years.

      . andRestrictedCash The Company considers allinvestment                                                                      j instruments purchased with an original                                                                   j i

merurity of three rnanths or less to be cash . ea;uivalents: Restricted cash is not considered a cash equivalent. i l t .. -

r , im I 1 The Northern, Falcon Seaboard, Partnership Trell, Resource Derclopment Interes: and Magma acquisitions by the andExploration Costs Company have been accounted for as purchase The Company follows the full cost method business combinations. Allidentifiable assets of acwunting for costs incurred in connection acquired and liabilities assumed were assigned with the exploration and development of a portion of the cost of acquiring the respective geothermal and natural gas resources. All companies equal to their fair values at the date such costs, which include dry hole costs and of the acquisition and include the following: the cost of drilling and equipping prodaction Property and equipment of Northern is wells and directly attributable administrative depreciated using a systematic method, and interest costs, are capitalized and amortized which approximates the straight h.ne over their estimated useful lives when produc-i . method over the estimated useful h.ves tion commences. The estimated useful h.ves of the related assets which range from of production wells are ten to twenty years-3-40 years. depending on the characteristics of the underlying resource; exploration costs Power sales agreements are amortized and development costs, other than produc-separately over (1) the remaining portion tion wells, are generally amortized over n

1. of the scheduled priceperiods of the the weighted average remaining term power sales agreements and(2)for of the Company's power and steam l the PartnershipInterest and Magma purchase contracts.

I acquisitions the 20 year avoided cost g, , . periods of the power sales agreements g, g , g using the straight hne method. values assigned to the net assets acquired i Capitalized costs for gas reserves, other than are amortized over a 40 year period for the costs ofunevaluated exploration projects and Northem and Magma acquisitions and a 25 j projects awaiting development consent, are year period for the Falcon Seaboard acquisition,

      ;         depleted using the unit of production method.        both using the straight line method Depletion is calculated based on hydrocarbon j

Impairment ofLong-livedAssets reserves of properties in the evaluated pool estimated to be commercially recoverable hsI lived assets and and indude anticipated future development cenain identifiable intangibles for impairment costs in respect of those reserves. whenever events or changes in circumstances

                                                                    ;g.          g             ,;      gg           ,

Expenditures on majorinformation may not be recoverable. An impairment loss j technology systems are capitalized and would be recognized whenever esidence exists

   !           depreciated on a straight line basis over            that the carrying value is not recoverable.

l the useful hfe of the developed systems which range from 3-10 years. i l

l l l l I Deferred HillandReuvrk Costs Fair ialues ofFinancial1nstruments Well rework costs are deferred and amortized The following methods and assumptions were over the estimated period between reworks. used by the Company in estimating fair values  ; These deferred costs, net of accumulated of 6nancialinstruments as discussed herein. amortization, are $5,421 and $8,371 at Fair values have been estimated based on December 31,1997 and 1996, respectively, quoted market prices for debt issues listed and are included in other assets. on exchanges. Fair values of 6nancialinstru-ments that are not actively traded are based Revenue Recognition on market prices ofsimd.ar instruments Revenues are recorded based upon sem. ce and/or valuation techniques using market rendered and electricity and steam deh.vered, . distributed or supplied to the end of the 255umPtens. month. Where there is an overrecovery of The Company assumes that the carrying supply or distribution business revenues against amount ofshort-term 6nancialinstruments the maximum regulated amount, revenues approximates their fair value. For these are deferred equivaknt to the overrecovered purposes, short-term is defmed as any item amount. The deferred amount is deducted from that matures, reprices, or represents a cash revenue and included in other liabilities. Where transaction between willing panies within l there is an underrecovery, no anticipation of six months or less of the measurement date.  ! - any potential future recovery is made. Pensions ' f Capitalization ofInterest Northern contributes to the Electricity 1 andDefimdfinancing Costs Supply Pension Scheme and contributions Prior to the commencement of operations, to the scheme are charged to the income interest is capitalized on the costs of the plants statement. The capital cost of ex gratia and i and geothermal resource development to the supplementary pensions are normally charged { extent incurred. Capitalized interest and other to the income statement in the period in which  ; deferred charges are amortized over the lives they are granted. Variations in pension cost, l i of the related assets. which are identifid as a result of actuarial  ! I i valuations / reviews, am amortized over the l Deferred financing costs are amortized over  ! j average expected remaining workm.glives  ! , the term of the related fmancing using the .

                                                                                                                  )

of employees in proportion to their expected  ; effective interest method. , l payroll costs. DitTerences between the amounts 1 i DeferredIncome Taxes funded and the amounts charged to the pro 6t  : The Company recognizes deferred tax assets and loss account are treated as either provisions l and liabilities based on the difference between or prepayments in the balance sheet. i the 6nancial statement and tax bases of assets  !

                    .       .                .       Netincomeper Common Share and liabih. .aes usme estimated tax rates m                                   .     .          .

l

In February 1997, the Financial Accounting effect for the year in which the differences Standards Bon ("FASB,,) adopted Statement i are expected to reverse. The Company intends I of Enancial Accounting Standards ("SFAS")

to repatriate earnings of foreign subsidiaries ' No.128, " Earnings per Share " SFAS 128 m the foreseeable future. As a result, deferred l replaced primary and fully diluted earnings income taxes are provided for retained per share with basic and diluted earnings earnings ofinternational subsidiaries and per share, respectively. corporate joint ventures which are intended i en be remitted. l

                  -   t si a a .          6 o ... . .

t. ise l

i i

               !      Basic and diluted eamines per common share                         dilutive, and the exercise of all dilutive stock are based on the weighted average number                           options outstanding at their option prices, ofcommon shares outstanding during the                             with the option exercise proceeds and tax period. Diluted eamings per common share                           benefits used to repurchase shares of common also assumes the conversion of the convertible                    stock at the average market price using the preferred securities of subsidiary tmsts, when                    treasury stock method.

A reconciliation of basic earnings per share before extraordinary item to diluted eamings per share f beforeextraordinaryitem follows:

              !                                                  !?97                             1996                     1995 l

l Per-Share Per-Share hr-Share i Income Shares Arnount income Shares Amount income Shares Amount Bauc earnings per share b4re

            !          extracrdinary nern             5 51.823    6',268      $ O'? $ 92,461       54,'39 $ 1.69 $ 62,335 47,249 $ 132 I

Effect of dJutne secunnes

            !          Stutk opnora                         -      1,418                    -       1,881                -     1,688 Convemble preferred secunnes i             o(subsidiary trusts '

f - - 2,840 2,517 - - v Convernble debt - - 4.968 5,935 6.038 ',258 Ddured earnings per share before extraordinarv aem $ 51,823 68,686 5 0.75 $100 269 65.072 $ 1.54 $ 68.373 56,195 $ 1.22 m %wtsk preMwme ndade rnm wrsesulawm sn IVr Reclassifcation NewAccounting Prranouncements Certain amounts in the 6 scal 1996 and 1995 InJune 1997, the FASB adopted SFAS No. fmancial statements and supporting footnote 130, " Reporting Comprehensive income", disclosures have besa reclassihed to conform and No.131," Disclosures about Segments to the fiscal 1997 presentation. Such reclas- of an Enterprise and Related Information" sification did not impact previously reported SFAS 130 establishes stand 2ds for reporting net income or retamed earnings. and display of comprehensive income and its components in a full set of general purpose

        -           Use ofEstimates fmancial statements. SFAS 131 redefmes The preparation of fmancial statements m how operarinpegments are determined and conformity with generally accepted accounting                                                .   . .        .

requires disclosure of certam tmancial and principles requires management to make

                                                               -       ,               descriptive information about a company's estimates and assumptions that attect tne operating segments. Both statements will reported amounts of assets and liabilities and i

be effective for the Company beginning disclosure of contingent assets and liabilities January 1,1998. The Company has not yet at the date of the fmancial statements and the . determined the impact of these statements reported amounts of revenues and expenses

      '                                                                                on current disclosures.

during the reporting period. Actual results j could differ from those estimates. k

                                                                     ..,, ? """"""""""'"""""""

i I i j

3. KDG Acquisition 4. Acquisitions l On September 11,1997, the Company signed Northern I

e definitive agreement with Kiewit Diversified On December 24,1996, CE Electric UK Group ("KDG"), a wholly owned subsidiary plc ("CE Electric"), which in 1997 was 70% i of PKS, for the Company to purchase KDG's owned indirectly by the Company and 30% l ownership interest in various project partner- owned indirectly by PKS, acquired majority l ships and CalEnergy common shares (the ownership of the outstanding ordinary share l "KDG Acquisition"). Accordingly, common capital of Northern Electric plc (" Northern") stock and options subject to redemption pursuant to a tender offer (the " Northern have been reclassified in the consolidated Tender Offer") commenced in the United l balance sheet. Kingdom on November 5,1996. As ofMarch  ! 18,1997, CE Electric effectively acquired the . KDG,s ownership interest in CalEnergy  : remaining ordinary shares and owned 100%  ! comprised approximately 20,231 shares of . of Northern,s ordinary shares. common stock (assuming exercise by KDG , of one million options to purchase CalEnergy The Company and PKS contributed to l shares), the 30% interest in Northern Electric, CE Electric approximately $410,000 and i as well as the following minority project $ 176,000 respectively, of the approximately l interests: Mahanagdong (459 ), Casecnan $1,200,000 required to acquire all of . W (35 %), Dieng (47 % ), Patuha (44%) and Bali Northern's ordinary and preference shares (30%) and other interests in international in connection with the Tender Offer. The  ! development stage projects. Company obtained such funds from cash on l

                                                        '      **** **          E "      "

• E' CalEnergy paid $1,159,215 for the KDG  !

       ...                                    . of approximately $100,000 under a Credit Acquisition and final closing of the transaction Agreement entered into with Credit Suisse              .

occurred inJanuary 1998. CalEnergy funded  ! on October 28,1996 (the "CalEnergy Credit i this acquisition with available cash and the net . Facility 't The Company has repaid the entire t proceeds of the equity offering and the debt g 1 7 g7 offering completed in October 1997. proceeds of the Trust Securities offering. The remaining funds necessary to consummate the Tender Offer were provided from a 1560,000  ; Term loan and Revolving Facility Agreement, j dated October 28,1996 (the "U.K. Credit Facility"). CE Electric has repaid the entire U.K. , ! Credit Facility through the use of proceeds of j , the senior note and sterbng bond offerings of  ! l CE Electric UK Funding Company.

I The Northern acquisition has been accounted Fakon Seaboard for as a purchase business combination. All On August 7,1996 the Company completed identifiable assets acquired and liabilities the acquisition of Falcon Seaboard for a cash assumed were assigned a portion of the cost price of $229,500 including acquisition costs. of acquiring Northern, equal to their fair Through the acquisition, the Company values at the date of the acquisition. Minority indirectly acquired significant ownership interest was recorded at historical cost. interests in three operating gas-fired In 1993, Northern entered into a contract cogeneration facilities and a related natural-gas pipeline. The plants are located in Texas, relating to the purchase of 400 MW of Pennsylvania and New York and total 520 capacity from a 15Mc owned related party, Teesside Power Limited ("Teesside"), for a

                                                                    , " '*E*' 'Y' period of 15 years beginning April 1,1993.        The Falcon Seaboard acquisition has been
       ;    The contract sets escalating purchase prices at    accounted for as a purchase business combin-l    predetermined levels. Currently the escalating    ation. Allidentifiable assets acquired and contract prices exceed those paid by the          liabilities assumed were assigned a portion l    Company to the electricity pool (the " Pool")     of the cost of acquiring Falcon Seaboard, equal which is operated by the National Grid            to their fair values at the date of the acquisition.

Qj Group. However, under current price cap Edison Afission Energ's Partnersbip Interest regulation expected to expire m 1998 the Company is able to recover these costs. For On April 17,1996 the Company completed the acquisition of Edison Mission Energy,s

     ,     the period after the price cap regulation ends,                             .
     !                                                        Partnership Interests in four geothermal I

the Company has established a liabuity for operating facihties in California for a cash the estimated loss as a result of this contract. 1 purchase price of$71,000 including Northern utilizes contracts for differences acquisition costs. The four projects, Vulcan, ("CFDs") to mitigate its exposure to volatility Hoch (Del Ranch), Leathers and Elmore,

    ,      in the prices of electricity purchased through    are located in the Imperial Valley of California.

the Pool. Such contracts allow the Company Prior to this transaction, the Company was to etTxtively convert the majority ofits a 50% owner of these facilities. anticipated Pool purchases from market to fixed prices. As of December 31,1997, CFDs The Partnership Interest acquisition has been accounted for as a purchase business combm.- were in place to hedge a portion of electricity ation. Allidentifiable assets acquired and purchases of approximately 55,000 GWh through the year 2008. liabilities assumed were assigned a portion of the cost of acquiring the Partnership Interest, equal to their fair values at the date of the acquisition. I i t l

i l r <......., <.... , ... , I I i Unaudited pro forma combined revenue, Coso Project OperatingIbcilities income and basic earnings per share before The Coso Project operating facilities comprise extraordinary item of the Company, Northem, the Company's proportionate share of the Falcon Seaboard, and the Partnership Interest assets of three ofits Cosojoint Ventures: for the twelve months ended December 31, Coso Finance Panners(" Navy 1 Joint 1997 and 1996, as if the acquisitions had Venture"), Coso Energy Developers ("BBf occurred at the beginning of 1996 after giving ~ Joint Wnture"), and Coso Power Developers effect to certain pro forma adjustments related (" Navy 11 Joint Venture"). The Navy I power to the acquisitions were $2,270,911, $52,430, plant is located on land owned by and leased and $0.78 compared to $2,162,381, $64,811 from the U.S. Navy to December 2009, with and $ 1.18, respectively. Exduding the - a 10 year extension at the option of the Navy.

      $87,000, $1.29 per share, non-recurring                    Under terms of the Navy 1 Joint %nture, charge, pro forma income before extraordinary              current profits and losses are allocated 46.4%

item would have been $139,430 in 1997. to the Company. The BDipowerplantis situated on lands leased from the U.S. Bureau 5; Prsperties, Plants, Contracts ofI.and Management under a geothermal an@ipment lease agreement that exteads until October

   - Properties, plants, contracts and equipment 31,2035.Thelease may be extended to comprise the following at December 31:

2075 at the option of the But. Under the g r 1997 1996 , terms of the BOIjoint Venture agreement,

   . Operating project costs:                                    the Company's share of profits and losses is
   . Distnbution systern -          3 1.237,743 3 928.575        48%.Under terms of the Navy 11 Joint

Pbwer plants 1.4f>1,885 1,277,663 Venture, all profits, losses and capital Wells and resourcedeveloprnent 395,314 377.731 contributions for Navy 11 are divided Pbwer sales agreernents 227,535 227,535 Other assets 254.973 176.483 Totaloperating assets 3,580.450 2,987.987 The amount ofroyalties paid by Navy I to im accurnulued deprecanon the U.S. Navy to develop geothermal energy and unoruzaion (497.832) - (271.2163 for Navy I, Unit 1 on the lands owned by the w operacing usen 3.082.618 2.716.771 Navy comprises (i) a fee payable during the Mineral and gu reserves, net - 297.048 270,851 term of the contract based on the difference

     """i " i" Pmgress:

between the amounts paid by the Navy to 140,1$ Edison for specified quantities of electricity n nesia , other developrnent 9.072 3,588 and the price as determined under the Tata s 3.528.910 $ 3.225A96 contract (which currently approximates I 73% of that paid by the Navy to Edison), and (ii) 525,000 payable in December 2009, ofwhich the Company's share is $11,600. The $25,000 payment is secured by funds placed on deposit monthly, which funds, plus accrued interest, will aggregate l $25,000. The monthly deposit is currently i- $50. As'of December 31,1997, the balance of funds deposited approximated $6,337, which amount is included in restricted cash. n ,

    ;                <...... ,.......,             im l

l i I i

             \

f Units 2 and 3 ofNavyI and the Navy 11 The Partnership Project pays royalties based j power plants are on Navy lands, for which the on both energy revenues and total electricity Navy receives a royalty based on electric sales revenues. Hoch (Del Ranch) and Leathers revenue at the initial rate of4% escalating to pay royalties of approximately 5% of energy 22% by the end of the contract in December revenues and 1% of total electricity rew mm 2019. The B131 is paid a royalty of 10% of the Elmore pays royalties of approximately 5% value of steam produced by the geothermal ofenergy revenues. Vulcan pays royalties resource supplying the B131 Plant. of 4.167% ofenergy revenues. The CosoJoint Ventures had royalty expense The Salton Sea Project's weighted average included in operating expenses of $ 13,458, royalty expense in 1997 was approximately

                    $13,412 and $13,623 in the years ended            6.19. The royalties are paid to numerous
           ;        December 31,1997,1996 and 1995,                   recipients based on varying percentages respectively.                                     ofelectrical revenue or steam production i                                                    . multiplied by publishedindices.
           ;       imperial Giley kject Operating Facilities The Company currently operates eight              The Imperial Valley Projects had royalty I        geothermal power plants in the Imperial           expense included in operating expenses of n                Valley in Califomia. The Partnership Project       $14,343, $10,228 and $10,398 in the years T                 consists of the Vulcan, Hoch (Del Ranch),         ended December 31,1997,1996 and 1995,
          !        Elmore, and Leathers Partnerships. The            respectively.

remaining four plants which comprise f g. g , i the Salton Sea Project are indirect wholly .. All of the Company.s sales ofelectncity from 1 owned subsidiaries of the Company. These the Coso Project and Imperial Valley Project, geothermal power plants consist of Salton which comprise approximately 20% of 199., Sea 1, Salton Sea II, Salton Sea 111 and Salton operating revenue, are to Southern Califorml j Sea IV The Partnership Project and the Salton . ,,

                                            .                        Edison Company (" Edison ) and are under Sea Project are collectively referred to as the long-term power purchase contracts.

Imperial Valley Project. The Imperial Valley Project commencement dates and nominal The Coso Proh ct and the Partnership Project capacities are as follows: sell all electricity generated by the respective Impenal valle.s commencemeni sminal plants pursuart to seven long-term SO4 Plann Date Capacity Agreements between the projects and Edison. vulan Februar> 10.1986 34 M w These 504 Agreements provide for capacity l Wh (Del Ranch) January 2.1989 38 Mw payments, capacity bonus payments and l Elmore Januan1.1989 38 M w energy payments. Edison makes exed annual Itathen janaan 1,1990 38 uw capacity and capacity bonus payments to the Salton Se2 l July 1.1987 10 MW projects to the extent that capacity factors

       ,          halton Sea !!           Apn! 5.1990         20 Mw exceed certain benchmarks. The price for sahon sea 111           Februan.15,198v wsMw sahan sea IV            May 24.1996       39 6 Mw  capacity and capacity bonus payments is fixed
      !                                                              for the life of the SO4 Agreements. Energy is sold at increasing scheduled rates for the first ten years after firm operation and thereafter at Edison's Avoided Cost of Energy.

L

{ l l l f The scheduled energy price periods of the Salton Sea 11 and Salton Sea H1 sell electricity Coso Project SO4 Agreements extended to Edison pursuant to 30-year modified i until at least August 1997 for each of the SO4 Agreements that provide for capacity  ! units operated by the Navy 1 Partnership and payments, capacity bonus payments and i extend until at least March 1999 andJanuary energy payments. The price for contract  ! 2000 for es.ch of the units operated by the capacity and contract capacity bonus pay-  ! Bl.M and i Tavy 11 Partnerships, respectively. ments is fixed for the life of the modified SO4 l l The Company's share of aggregate annual Agreements. The energy payments for the first l l capacity payments is approximately $ 17,000 ten year period, which period expires in April  ! I and its share of aggregate bonus payments 2000 and February 1999 are levelized at a time l is approximately $3,000, I period weighted average of 10.6c per kWh l

• 8# E'# ' 0* U "" '"

The scheduled energy price periods of the  ! l a Hl. mPeaively3emafter, tk montNy i Partnership Project 504 Agreements extended energy paymems w son's AvoMed i until February 1996 for the Vulcan Partnership Cost of Energy. For Salton Sea 11 only, Edison is ; i and extend until December 1998, December em t ed to receive, at no cost, W of aH energy  ; 1998, and Decetr ber 1999 for each of the

                                                    *      **'***                "'*" '*E"   #I Hoch (Del Ranch), Elmore and leathers                                                             !

through September 30,2004. The annual j - ' Partnerships, respectively. The annual capacity > m-v capacity and bonus payments for Salton Sea 11 1 payments are approximately $24,500 and the

                                                 ""       '     " " "'""EP'         ^'*     '

bonus payments are approximately $4,400

                                                 *       '    '"E*" *b in aggregate for the four plants.

The Salton Sea IV Project sells electricity Excluding Navy I and Vulcan, which are

                                                 *          "E"""*****

• receiving Edison's Avoided Cost of Energy, the Company's SO4 Agreements provide "E'*#***
• E* ** ' ' " ' * " j CaPaaty Payments on 34 MW ofcapacity for energy rates ranging from 12.8c per at tw emm ram based on the mpeake kWh in 1997 to 15.6c per kWhin 1999

                                                 '"'*"'*E"'"'***                *** "'" #

• The weighted average energy rate for all the original Salton Sea PPA option (20 MW) of the Company,s SO4 Agreements was g g p;, p g, 12.0c per kWh in 1997.

The capacity payment price for the 20 MW Salton Sea I sells electricity to Edison portion adjusts quarterly based upon specified pursuant to a 30-year negotiated power indices and the capacity payment price for the < purchase agreement, as amended (the "Salton 14 MW portion is a ftxed levelized rate. The Sea I PPA"), which provides for capacity and energy payment (for deliveries up to a rate of energy payments. The energy payment is 39.6 MW)is at a ftxed price for 55.6% of the calculated using a Base Price which is subject total energy delivered by Salton Sea IV and to quarterly adjustments based on a basket is based on an energy payment schedule for

ofindices. The time period weighted average 44.4% of the total energy delivered by Salton  ;

! energy payment for Salton Sea I was 5.3c Sea lV The contract has a 30-year term but  ; per kWh during 1997. As the Salton Sea 1 Edison is not required to purchase the 20 MW PPA is not an 504 Agreement, the energy ofcapacity and energy originally attributable payments do not revert to Edison's Avoided to the Salton Sea l PPA option after September Cost of Energy. The capacity payment is 30,2017, the original termination date of the l I appmximately $1,100 per annum. Salton Sea 1 PPA.

g i <me...., <.......m i

     )

L. For the year ended December 31,1997, PNOC-EDC is obligated to pay for electric

               . and 1996 Edison's average Avoided Cost               capacity that is nominated each year by CE

ofEnergy was 3.3c and 2.5 c, respectiveh Cebu, irrespective ofwhether PNOC-EDC 1: per kWh which is substantially below the is willing or able to accept delivery ofsuch contract energy prices eamed for the year capacity. PNOC-EDCpays to CE Cebu a ended December 31,1997. Estimates of . fee (the

• Capacity Fee") based on the plant Edison's future Avoided Cost of Energy vary capacity nominated to PNOC-EDC in any substantiaUy from year to year. The Company year (which, at the plant's design capacity, cannot predict the likely level ofAvoided Cost - is approximately 95% of total contract of Energy prices under the SO4 Agreements - revenues) and a fee (the " Energy Fee")

and the modified SO4 Agreements at the based on the electricity actually delivered expiration of the scheduled payment periods. to PNOC-EDC(approximately 5% oftotal The revenues generated by each of the contract revenues). Payments under the projects operating under SO4 Agreements Upper Mahiao ECA are denomir.atedin could decline significantly after the expiration U.S. Dollars, or computed in U.S. dollars and of the respective scheduled payment periods. paid in Philippine pesos at ,he then-current

                    'W"          ##                                 exchange rate, except for the Energy Fee.

g

I The Upper Mahiao Project was deemed C mP lete mJune 1996 and began receiving Significant portions of the Capacity Fee and Energy Fee are indexed to U.S. and Philippine inflation rates, respective 4 PNOC-EDC's l capacity payments pursuant to the Upper Mahiao Energy Conversion Agreement j;

l obligations under the Upper Mahiao ("ECA"), inJuly of 1996. The project is structured as a ten year build-own-operate- *##'"EE "# I** "#***"* f the Philippines through a performance transfer project (" BOOT"), in which the

                                                                    "     #"     S' Company's subsidiary CE Cebu Geothermal Pbwer Company,Inc.("CE Cebu"), the                  Unit I of the Malitbog Project (the "Majitbog

l. project company, is responsible for providing Project") was deemed complete inJuly 1996 operations and maintenance during the ten and Units 11 and IllinJuly 1997 at which year BOOT period. The electricity generated times such units commenced receiving

            ' by the Upper Mahiao geothermal power                . capxity payments under the Malitbog ECA.

plant is sold to PNOC-Energy Development The Malitbog Project is owned and operated Corporation ("PNOC-EDC"), which is also by Visayas GeothermalPower Company l responsible for supplying the facility with - ("VGPC"), a Philippine general partnership

            - the geothermal steam. After the ten year             that is whouy own'ed, indirectly, by the cooperation period, and the recovery by            Company. Under its contract, VGPC is to sell the Company ofits capital investment                100% ofits output on substantiaUy the same plus incremental return, the plant will            basis as described above for the Upper Mahiao be transferred to PNOC-EDCat no st.                 Proj<-

• PNOC-EDC, which willin turn sell the i ver to the National Power Corporation of the Philippines ("NPC"). However, VGPC receives 100% ofits revenues from such sales 3- in the form ofcapacity payments. As with the Upper Mahiao Project, the Malitbog Project J

T t 4 E= I l l I is structured as a ten year BOOT, in which Gas Projects l the Company is responsible for providing The Saranac Project sells electricity to New l operations and maintenance for the ten year Wrk State Ekctric & Gas pursuant to a 15 l BOOT perk)d. After a ten year cooperation year negotiated power purchase agreement period, and the recovery by the Company of (the "Saranac PPA"), which provides for its capital investment plus incremental return, capacity and energy payments. Capxity the plant will be transferred to PNOC-EDC payments, which in 1997 total 2.2c per kWh, at no cost. are received for electricity produced during

                                                     " peak hours" as defmed in the Saranac PPA The Mahanagdong Project (the
                                                     *    #'*****PE**'"#**'I              ""
    "Mahanagdong Project") was deemed                                                              I complete inJuly 1997 and accordingly,
                                                        *         "8 "        ' ""* 98Y     ;

payments, which average 6.6c per kWh m . the Mahanagdong Project began receiving l 1997, escalate at approximately 4.4% annually , capacity payments pursuant to the for the remaining term of the Saranac PPA.  ! Mahanagdong ECA in August of b97. l The Saranac PPA expires inJune of 2009. The Mahanagdong Proj.ect is owned and operated by CE Luzon Geothermal Power The Power Resources Project sells electricity f J' Company, Inc., a Philippine corporation, to Texas Utilities Electric Company ("TUEC") , that is expected to be indirectly owned by the pursuant to a 15 year negotiated p,wer Company (after the KDG Acquisition) subject purchase agreement (the "Pbwer Pesources l to a minority partner participation. The PPA"), which provides for capacity and energy i electricity generated by the Mahanagdong payments. Capacity payments and energy Project will be sold to PNOC.EDC on a payments, which in 1997 are $3,032 per  ;  ;

   "take or pay" basis, which is also responsible   month and 2.96c per kWh, respectively, for supplying the facility with the geothermal    escalate at 3.5% annually for the remaining steam. The terms of the Mahanagdong               term of the Power Resources PPA. The Power        j ECA are substantially shnilar to those of the     Resources PPA expires in September 2003.          ;

Upper Mahiao ECA. All of PNOC-EDC's  ! The NorCon Project sells electricity to  ! obligations under the Mahanagdong ECA Niagara Mohawk Power Corporation are supported by the Government of the

                                                            ,,,..) pursuant to a 25 year negotiated   !

Philippines through a performance undertak-ing. The capacity fees are expected to be power purchase agreement (the .NorCon j ppg; . ides for energy payments > approximately 97% of total revenues at calculated pursuant to an adjusting formula the design capacir>; levels and the energy based on Niagara's ongoing Tariff Avoided fees are expected to be spproxim:tely 3% Cost and the contractual Long-Run Avoided of such total revenues. Cost. The NurCon PPA term extends through December 2017. The Company and Niagara are currently engaged in discussions regarding l a potentid restructuring or buyout and i termination of the NorCon PPA. i

        ,   """""""""""..                      m 1

t I' I The Yuma Project sells electricitj to SOG&E zinc at the Company's Imperial %11ey under an existing 30-year pow er purchase Project. The Company is also investigating contract. The energy is sold at SDG&E's producing other minerals and silica from - Avoided Cost of Energy and the capacity is the solids precipitated out of the geothermal sold to SDG&E at a fixed price for the life power process. of the power purchase contract. The contract 7 g

                . term extends through May 2024.

Under a Bonneville Power Administration Nerada andUtah Pmperties ("BPA") geothermal pilot program, the Roose dt Hot Springs. The Company operates Company has been developing a 30 net MW and owns an approximately 70% interest net geothermal project which was originally in a geothermal steam field widch supplies located in the Newberry Known Ge ::hermal geothermal steam to a'23 net VW power Resource Area in Deschutes County, Oregon plant owned by Utah Pbwer & Light Company (the " Telephone Fiat Project"). Pursuant to an ("UP&I") located on the Roosevelt Hot Springs amended power sales contract the project has property under a 30-year steam sales contract. been relocated to Telephone Flat and BPA has

                                      .                         agreed to purchase 30 MW from the project The Company obtained appmximately                                                         .

with an option to purchase up to an additional 520,317 cash under a pre-sale agreement 4d with UP&L whereby UP&Lpaid m advance 100 MW The movement of the project te

                                                                *8*
                                                                         * * * " ' 'ati n and BPA.s purchase fonhe steam produced by the steam field. The obb. gat '** ionect     are    subj.a fmal toobrammg
               . Company must make certain penalty payments                                        g
                                                                    ;          g to UP&L if the steam produced does not meet                    .        .

to the new site location. Completion of this - certain quantity and quality requirements. . . project is subject to a number of sigmficant Desert Peal The Company is the owner and uncertainties and cannot be assured.

           . operator of a geothermal plant at Desert Peak,              .

l ' Nevada that is currently selling electricity to

6. EquityInrestments At December 31,1997, the Company had I Sierra Pacific Power Company (" Sierra") at l anindirect wnership of approximately 35%

Sierra's Avoided Cost. Subsequent to year end, in the Casecnan Project, a combmed irngation an indirect subsidiary of the Company entered and 150 net MW hydroelectric power into a lease agreement whereby they will lease

          '                                                     Fenerati n Project located on the island of the facility to another power producer and Luz n m the Philippines. The Company is receive rental payments.

expected to indirectly own approximately

           ;     Salton SeaMinerals Extraction                  70% of the Casecnan Project after the l     The Company developed and owns the             KDG Acquisition.

i rights to a proprietary process for :he .

           '                                                    The Corr.pany had an indirect owriership of extraction of minerals from elements in 50% in the Mahanagdong Project, subject to
           !     solution in the Feothermal brine and fluids 8 min rity Partner participation. The Company
           !      utilized at it> Imperial Wiley plants (.he w indirectly own 100% of the Mahanagdong
                 '"Salton Sea Extraction Project") as well Project after the KDG Acquisition.

as the production of power to be used in the extraction process. A pilot plant has

           !      successfully produced commercial quality I'

l

r s.. .... ...., ,, l l I l The Company has an approximate 45% The Senior Discount Notes are redeemable at economic interest in Saranac Power Partners, any time on or afterJanuary 15,1999 initially LP and a 20% economic interest in NorCon at a redemption price of 105.125% declining ,

                                                                                                                )

I Power Partners, LP as part of the Falcon to 100% onJanuary 15,2002 phw accrued Seaboard acquisition. interest to the date of redemption. The Senior

                                     .                   Discount Notes are unsecured senior            .

Summary fmancial information for these  ! obligations of the Company.  ; equh investments follows:  : The Senior Discount Notes prohibit payment c - nan scanac .wrcon Mah,udong 0 " I As of and for the year ended December 31,1997: Aum 5 482,5r 5 315.6'l 5 118.4M $ N.250 ratios are met and unless the divi hnds do not LAlmes 384.%9 211.299 115.48' 19 .5'5 exceed 50% of the Company's ac.umulated i Nu income adjusted consolidated net income as defmed, (kw (11.26h 43.09' 4.o'2 14.996 subsequent to April 1,1994, plus the As of and for the par ended December 31.1996: proceeds of any stock issuance. Aaers 492.166 325 I'4 125,956 240.222 Lalain wo'u 213.326 121.223 168.512 9.5% SeniorNotes Net wome On September 20,1996, the Company issued , doso v i i.20, aooo5 64 N '^ 5225,000 of 9.5% Senior Notes (the "9.5 W ' Seni r Notes")due 2006 Interest on the i &

7. ParentCompanyDebt 9.59 Seni r Not' is payable semiannually , j Parent company debt comprises the following n March 15 and September 15 of each year, at December 31:  ;

commencing March 15,1997. The 9.5% 1997 1996 Senior Notes are redeemable at any time senior duount noen s 529m0 s Sr.535 on or after .ieptember 15,2001 initially at 9 $4 wruar norn 224.205 2.R150 a redemption price of 104.75% declining to

   'm wnior noen                    450a00            -

100% on September 15,2004 plus accrued bmaed recourse unior interest to the date of redemption. The 9.59 secured norn+ 2 mum 200am Cdnergy creda fudey - 100 000 Senior Notes are unsecured senior obligations ruolwng creda fuday - 95ao of the Company. s 130uc s i.iem gg gjg,

   %- p.%m a g,m su r% u"                                On October 28,1997, the Company issued Senior Discount Note,                                  $350.000 of 7.63W Senior Notes (the in March 1994,the Companyissued                      763W Senior Notes") due 2007. Interest on the 7.63W Senior Notes wdl be payable 5400,000of101/4W Senior Discount semiannually on April 15 c.nd October 15 Notes which accrete to an aggregate principal of each year, commencing April 15.1998.

amount of 5529,640 at maturity in 2004. The 7.63W Senior Notes are unsecured The original issue discount was amortized senior obligations of the Company. from the issue date through January 15,1997, during which time no cash interest was paid on the Senior Discount Notes. Cash interest on the Senior Discount Notes is payable semiannually onJanuary 15 andJuly 15 of each year, commencing July 15,1997.

 >J   i      <..i..... <.....,            .m         ;

b Limited Recourse Senior Secured Notes Resolving Credt Facility OnJuly 21,1995,the Companyissued OnJuly 8,1996, the Company obtained a

             $200,000of97/8% Limi:ed Recourse                $100,000 three year revolving credit facility.
           < SeniorSecured Notes Due 2003(the                On November 26,1997, the credit facility
             " Notes"). Interest on the Notes is payable   - was amended and increased to $400,000 and onJune 30 and December 30 ofeach year,          extended to Nosember 2000. The facility is commencing December 1995.The Notes              unsecured and is available to fund working are secured by an assignment and pledge          capital requirements trid finance future of 100% of the outstanding capital stock of      business expansion opportunities.

Magma and are recourse only to such Magma AnnualRepayments ofPannt Company Debt capital stock, the Comp.my s interest in a g ,

                                                                                                ,9 secured Magma note and general assets of company debt due for the next fwe years.

the Company equal to the Restncted Payment Recourse Amount, as defmed in the Note 8. SubsidiaryandProjedDebt: Indenture (" Note Indenture'), which was Project loans held by subsidiaries and projects

            $0 at December 31,1997,                         which are non recourse to the Company C mPrise the following at December 31:

At any time or from time to time on or prior

 $.         toJune 30,1998, the Company may, at its                                        1997       1996 l         option, use all or a portion of the net cash    Salton Sea Notes and Bonds $ 448,754 8 538s82 proceeds of a Company equity offering (as       Northern eurobonds             427,732    439.192 U K-  fil'ry                 -

128.423 defmed in the Note Indenture) and shall at any time use all of the net cash proceeds of ,"8, 33,,3, _ any Magma equity offering (as defmed in ct gi,c,,;< cg p,,an, the NoteIndenture)to redeem up to an company s<eans Bonds 322,534 - aggregate of 35% of the principal amount Ibwer Rnources proint debe 1033 34 114.571 [' of the Notes originally issued at a redemption CasoFun&ngCorp prvicctloans 106.616 148346 price equal to 109.875% of the principal consuucnonloans 41& m 300ssi

                                                              *"                             ss62        7s27 amount thereofplus accrued interest to the redemption date. On or afterJune 30,2000,                                  s 2.18w s 198392 the Notes are redeemable at the option of the   Each of the Company's direct or indirect Company, in whole or in part, initially at a    subsidiaries is organized as a legal entity redemption price of 104.9375 % declining to     separate and apart from the Company and 100% onJune 30,2002 and thereafter, plus .      its other subsidiaries. Pursuant to separate accrued interest to the date of redemption. project fmancing agreements, the assets of each subsidiary are pledged or encumbered CalEnergy Credit Facility t Support or otherwise provide the security On October 28,1996, the Company obtained a $ 100,000 credit facility (the "CalEnergy f r their own project or subsidiary debt. It Credit Facility") of which the Company had      should not be assumed that any asset of any drawn $100,000 as of December 31,1996.          such subsidiary will be available to satisfy the The Company has repaid the entire balance bligations of the Company or any ofits other such subsidiaries; provided, however, that of the Ca! Energy Credit Facility.

i ~

I l ( l I l l  ! I unrestricted cash or other assets which are of CalEnergy's direct or indirect subs 7 s available for distribution may, subject to (1) owning interests in the Coso, L ..a j applicable law and the terms of fmancing Valley, Saranac, NorCon, Fbwer Resources, j errangements of such par-ies, be advanced, Mahanagdong, Malitbog, Upper Mahiao, l loaned, paid as dividends or otherwise Casecnan, Dieng and Patuha projects or (2) j distributed or contributed to the Company owning interests in the subsidiaries that l or affiliates thereof. ~Subsic'iaries~ means all own intercsts in the foregoing projects. l Salton Sea NotesandBonds The Salton Sea Funding Corporation, a wholly owned subsidiary of the Company,(the " Funding j Corporation") debt securities are as follows: Senior Final Secured Marunty Decernher 31 December 31, Series Date Rare 1997 1996 Jah21,1995 A Notes May 30,2000 6691 s 9',354 s 161,732  ; July 21,1995 B Bonds May 30,2005 137 % 133,000 133,000 j Jah21.1995 C Bonds May 30,2010 7849 109,250 109.250 l June 20.1996 D Notes May 30,2000 702T 44,150 '0,000 { @g. June 20,1996 E Bonds May 30,2011 8304 65.000 65,000 l 1 448.'54 s $38,982 i Principal and interest payments are made Northern Eurohonds  ! in semi-annual installments. The Salton The Northern debt includes a debenture due  ! Sea Notes and Bonds are secured by the in 1999, which bears a fixed interest rate of 3 Company's four existing Salton Sea plants 12.661 W . The debt also includes bearer bonds l as well as an assignment of the right to repayable in 2005 and 2020, bearing fixed  : receive various royalties payable to Magma interest rates of 8.625W and 8.8759, in connection with its Imperial Valley respectively. properties and distr;butions from the The balance at December 31,1997 and 1996  ! Partnership Project, The Salmn Sea Notes . , consists of the following: and Bonds are nonrecourse to the Company. 1997 19 % Pursuant to a depository agreement, Funding s 97,530 Debentare due 1999 s 99.924 Corporation established a debt service reserve Bearer bonds due 2005 165.236 l'1,130 < j fund in the form of a letter ofcredit in the Bearer bonds aue 2020 164,966 168,138 , l amount of $70A30 from which scheduled s 4r, 32 s 439.192 i l interest and principal payments can be made. l 1 l l

   -                                                                                                                                   I J

1 ( i I U.K. Credit Facility 2022. The CE Electric UK Funding Company On October 28,1996, CE Holdings, an Senior Notes and Sterling Bonds prohibit indirect subsidiary of the Company, obtained distributions to any ofits shareholders a 1560,000 five year term loan and revolving unless certain fmancial ratios are met credit facility (the "U.K. Credit Facility"). by the Funding Company. The Company did not guarantee, nor was Puu er Resources kject Financing Debt it otherwise subject to recourse for, amounts borrowed under the U.K. Credit Facility. owned subsidiary, has project fmancing The agreement placed restrictions on

                                                             .               debt consisting of a term loan payable distributions from CE Electric to any ofits                                    .                .
         ,                                            .          .           to a consornum of banks with interest and i    shareholders based on certain fmancial ratios.                     . .

i . . pnncipal due quarterly through October

         . CE Electnc has repaid the entire U.K. Credit 2003. The debt carries fixed interest rates l    Facility through the use of proceeds from of 10.385% and 10.625%.

l the senior note and sterling bond offerings l of CE Electric UK Funding Company Coso FundingCorp. Nject Loans j described below. The Coso Funding Corp. project loans are I fr Coso fun &ng Com, a single-pumose CE Electric UK Funding Cornpany si)

      ;      Senior NotesandSterling Bonds
                                                                             ' T '* " '

account and act as an agent on behalf of the

       . On December 15,1997, CE Electnc UK                                                          -

Coso Proj.ect. The Coso Funding Corp. project Funding Company, an indirect subsidiary loans carry a fixed interest rate with weighted j of the Company (the " Funding Company"), average interest rates of 8.65% and 8.46% at issued $ 125,000 of 6.853% senior notes due December 31,1997 and 1996, respectively. 20N, and $237,000 of 6.995% senior notes

                                  .                     .                    Theloans have scheduled repayments due 2007 (collectively, the "CE Electnc j                                                                       through December 2001. The Coso Project UK Funding Company Senior Notes"),                                                                               .

has established irrevocable letters of credit and 1200,000 of 7.25% Sterling Bonds due of $67,850 as a debt service reserve fund. t l A nnual Repayrnents ofSubsidiary and Priect Debt l. The annual repayments of the subsidiary and project debt, excluding construction loans. l for the years beginning January 1,1998 and thereafter are as follows: l CE Ekstric f L:K Funding

     ;                                                                Gunpany                                                          !

Salam Sea Senior hes Gaw h esand Northern and Sterling Ibwer Funding Bonds Furutmis ikmds Resources Corp. Chher 'linal l i 1998 $ 106,938 $ - $ -$ 12.805 3 38.912 $ 1,544 5 160.199 l 1999 5',836 9' 530 - 14.268 31.717 1.297 202,648 i l 2000 25.0'2 - - 16.0C 4.080 1.051 46.290 I 2001 22.376 - - 18.119 3190' 838 73.240 I l l 2002 24.298 - - 20.312 - 1.232 45,842 hereafter 212.234 330.202 679,865 21.743 - - 1.244,044 f 3 448.'54 3 42',32 3 6'9.865 $ 103.334 $ 106.616 3 5.962 $ 1.772,26;

r I ) Construction Loans have provided the construction and term loan The Company's allocable share of non-recourse facilities at variable interest rates (weighted j project construction loans comprise the average of 8.48% and 8.15% at December  ! fotbwing at December 31: 31,1997 and 1996, respectively). The j international bank portion of the debt will 1997 1996 be insured by OPIC against political risks and tirrer h 5 150.628 s 150.628 the Company's equity contribution to Ytsayas blebog 176.657 137,881 CE Irxionesa Fundmg Corp 89.459 12,442 Geothermal Power Company ("VGPC") is s 416,744 s 300.951 covered by political risk insurance from the MultilateralInvestment Guarantee Agency The Upper Mahiao and Malithog and OPIC. The construction loan is expected I construction loans are scheduled to be to be converted to a term loan promptly after replaced by non-recourse term project NPC completes the full capacity transmission f financing upon completion ofconstructmn line, which is currently expected in 1998. 1 and commencement of commercial operations. CE Indonesia Funding Corp. Upperblahiao Construction Loan InJune 1997, the Company's indirect special-Draws on the construction loan for the purpose subsidiary, CE Indonesia Funding , Upper Mahiao geothermal power project Corp., entered into a $400,000 revolving  ! 69 at December 31,1997 totaled $150,628. credit facility (which is nonrecourse to the { A consortium ofinternational banks provided I Company) to fmance the development and ' the construction financing with variable construction of the Company's geothermal ' interest rates based on LIBOR or " Prime" power facilities in Indonesia. This credit with interest payments due every quarter facility was used in part to replace the original i and at LIBOR maturity. The weighted average project financing for Himpurna California interest rate at December 31,1997 and 1996 is approximately 8.43% and 8.01W , respectively. Eneq[v's 1997 the Company'sDieng share Unit 1. At December 31, of the credit The Export-Import Bank of the U.S. ("Ex-Im facility relating to Dieng Unit I was $50,481 , Bank")is providing political risk insurance t and carried a variable interest rate (weighted commercial banks on the construction loan. average of 7.44% at December 31,1997). The construction loan is expected to be l On November 18,1997, Himpurna converted to a term loan promptly after California Energy announced the funding NPC completes the full capacity transmission of the Dieng Unit 11 project pursuant to the i line, which is currently expected in 1998. The CE Indonesia Funding Corp. facility arrarwed largest portion of the term loan for the project inJune 1997. At December 31,1997, the will also be provided by Ex-Im Bank. The term Company's share of the credit facility relating l fmancing for the Ex-Im Bank loan will be at a fixed interest rate of 5.95%. to Dieng Unit 11 was $11,211 and carried a

                                                                                                                          )

variable interest rate (weighted average of blalithog Construction Loan 7.48% at Ddember 31,1997). Draws on the construction loan for the On September 2,1997 Patuha Power Malitbog geothermal power project at announced the funding of the Patuha Urut 1 December 31,1997 totaled 5176,657. project pursuant to the CE Indonesia Funding International banks and the Overseas Private Investment Corporation ("OPIC") Corp.facihty arranged inJune 1997. l

l I i i [ l t I l At December 31,1997, the G)mpany's Deferred tax liabihties (assets) are comprised share of the credit facility relating to Patuha of the following at December 31: l

                !     was $27,767 and carried a variable interest 1997        iw6
                ;     rate (weighted average of 7.44% at December Lepreciation and 31'1997)'                                                                               5 202,215 $ 725,366
               }                                                                  amorazauon. ner g ggg , g.g                                              Fensx>ns                            19,441      22.883
                             ..                                                Unremitted foreign carnings         10,781       2,857 Provision for inco.ne taxes is comprised other                                3.324       3.262 of the following at December 31:

835,761 'u,368 1997 1996 1995 Deferred contract costs (193,996) (128.745) Currendy payable: Deferred income (12,690) (9.2981 l 5 tate $ 5.084 $ 7,520 $ 5.510 Energy and investment ru credits (42.(M9) (55,931)

              ;      Federal                     33,114    19,873    11,138   Advance corporation tax                  -     (20,205)

Foreign 5.262 2,l6 - Alternauve mirurnum tax credits (39,402) (50.819) 43,460 Accn25 n t cunently deductible 29,569 16 M8 Deferred f ' '#* E"'I""' # 3I'50I) II3372) State (2M) 1,619 921 Federal 14,579 13,062 (326.702) (285,169) 9.209 5 509.059 $ 469,199 g, l Foreigr. 41.269 1,424 - Net deferred u.xes 55.584 12.252 13,983 The Company has unused investment and Total $ 99n44 5 41,821 $ 30.631 l geothermal energy tu credit carryforwards A reconciliation of the federal statutory t.a rate f approximately $42,049 expiring between to the effective tax rate applicable to income 2004 and 2012. The Company also has before provision for income taxes follows: approximately $39,402 of alternative minirurn tax credit carryforwards which l

                                                 '"'      I*        '*        have ao expiration date.

Federal statutory rate 35 00% 35 00'I M 009 Percentage depleton in excess of cost depleuon f 3 7) (6 12) F.W Investment and energy tax credits LM) (8 34) ( l .80) State taes, net of federal tax criect 1 59 4 ;8 4.09 G<niwill amortizarnin 2.06 2.51 2 53 Non-deductible expense 1.33 A4 1 10 Lease investment - -- (21s> Dividends on convertible preferred secunnes of subsidiary trusts * (4 12) (1 l') - Tax etiect of foreign income 2 64 2.54 - Asset valuatuin impairment 15 4' - - Other '5 15 .20 lifectne tax rate 50 319 29 7W 31 56'i

• Dn &mb on awsetibh p vredmenm nl>rsuJun tu ,m aMJ m anmtunteest

m m .. , m.~., ...  ; I i i

10. Campany-ObligatedAfandatorily restated declarations of trusts (collectively, the RedeemableComertiblePreferred

• Declarations"). On April 12,1996, February SecuritiesofSubsidiary Trusts : 26,1997 and August 12,1997, the Company, The Company has organized special purpose through these Trusts, issued Company-Delaware business trusts (" Trust I", " Trust 11" obligated mandatorily redeemable convertible and " Trust III" or collectively, the " Trusts") Preferred securities (collectively. the " Trust pursuant to their respective amende ,a Securities")as follows:

1ssuer Issue Date Race Amount Conversion Rate CdEnergy CapitalTrust i Apn!12,1996 6.259 3 103,930 1.6728 CdEnergy Capta! Trust !! . h bruary 26,1997 6.25 % $ 180,000 1.1655 CdEnergy Capta! Trust Ill August 12,1997 6.50 % $ 270,000 1.047 The Company owns allof the common accrue from the date ofinitial issuance and i securities of the Trusts. The Trust Securities are payable quartedy in arrears. TheJunior have a liquidation preference of fifty dollars Debentures are subordinated in right of , each and represent undivided beneficial . payment to all senior indebtedness of the g l

    . ownership interests in each of the Trusts.                 Company and theJunior Debentures are                       I The assets of the Trusts consist solely of                 subject to cenain covenants, events ofdefault the Company's Convenible Subordinated                      and optional and mandatory redemption

Debentures due March 10,2016, February provisions, all as described in theJunior j

    . 25,2012 and September 1,2027, respec-                     Debenture indentures.                                      !

tively, in outstanding aggregate principal

   ' amounts of $103,930, $180,000 and                           Pursuant to Preferred Securities Guarantee Agreements (collectively, the . Guarantees ),
      $270,000, respectively (collectively, the                                                                            r
                              , , .                      .      between the Company and a preferred -
     . Junior Debentures ) issued pursuant to their                                                                      .
                                                   .            guarantee trustee, the Company has agreed                  i respective indentures. The m. dentures mclude irrevocably to pay to the holders of the Trust           !

agreements by the Company to pay expenses snd obligations incurred by the Trusts' M o haeTm I has funds available to make such payments, l, Each Trust Secunty with a par value of $50 . quarterly distributions, redemption payments  ! is convenible at the option of the holder at . i and h.quidation payments on the Trust 2 any time into shares ofCalEnergy Common Securities. Considered together, the undenak- l; Sterk bued on the conversion rate and subject

                                    .                           ings contained in the Declarations,Juru. or              i to customary anti-dilution adjustments.

Debentures, Indentures and Guarantees [ Until convene

• into the Company's Common constitute full and unconditional guarantees  !

Sterk, the Truss tecurities will have no voting by the Company of the Trusts' obligations

   . rights with respect to the Company and,                    under the Trust Securities.                                j except under cenain limited circumstances,

{ will have no voting rights with resnect to the Trusts. Distributions on the Trust Securities - j

   ; (andJunior Debentures) are cumulative,                                                                              j l

                                    ,1.

i i

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

exercisable until ten days after a person or in addition, the Company had issued group acquires or has the right to acquire, approximately 138 optione. to consultants beneficial ownership of 20% er more of the on terms similar to those issued under the Company's common stock or announces a 1996 Plan. The non-1996 plan options are tender or exchange otter for 30W or more primarily options granted to Kiewit. of the Company's common stock. Each

           .                                             The Company granted 500 shares of nght entitles the holder to purchase one restricted common stock with an aggregate one-hundredth of a share of Series A junior                               .

market value of $9,500 in exchange for the t preferred stock for $52. The rights may be i relinquishment of 500 stock options which redeemed by the Board of Directors up to ten were canceled by the Company. The shares

  ;      days after an event trigge ing the distribution have all rights of a shareholder, subject to of certificates for the rigats. The rights wdl certain restrictions on transferability and gi expire, unless previously redeemed or exercised, on November 30,1998.The risk of forfeiture. Unearned compensation equivalent to the market value of the rights are automatically attached to, and
  ;                                                      shares at the date ofissuance was charged trade with, each share of common stock.                               .
  ;                                                      to stockholders. equity. Such uneamed

12. Stock Options and RestrictedStock compensation was amortized over the vesting The Company has issued various stock period of which 125 shares were immediately options. As of December 31,1997, a total vested and the remaining 375 shares vested of 6,949 shares are reserved for stock options, throughJanuary 1,1998. Accordingly, of which 6,780 shares have been granted $5,471, $1,535 and $2,494 of unearned I and remain outstanding at prices of $3.74 compensation was charged to general and to $40.81 per share. administrative expense in 1997,1996 and The Company has stock option plans under which shares were reserved for grant as incentive or non quali6ed stock options, as determined by the Board of Directors. The plans allow options to be granted at 85% of their fair market value at the date of grant.

Generally, options are issued at 100% of fair market value at the date of grant. Options granted under the 1996 Plan become exercisable over a period of two to five years f and expire it not exercised within ten years i

                                                                                       <., ... , <.. .. ,                 i, l

l l Transactionsin Stock Options Opcions Outstanding Shares Available for Grant Under Option Price Weighted Avg 19%yn Plan Shares Per Shares Option Price Total j Balance December ll,1994 86 9R)1 5 3.00- $ 19.00 $ 12 84 $ 123,277 l Opnons granted (396 396 15.81 - 19 00 18 15 7,188  ! Opuons terminated 571 (571) 14 88 - 19 00 18 69 (10,6731 l Opnons exercsed - (135) 3.00 - 15 94 3.41 (4 ') l Balance December 31,1995 I 261 9,291 3.00 - 19 00 12.84 119,2 I Opnons panted (1,157) 1,157 25.06 - 3038 28 17 32,590 Opnons termmated 468 (468) 3 00 - 19.00 1".96 (8,406) Opnons exercsed - (5203) 3 00 - 21 68 11.13 (57,931) { Additumal shares reserved under 1996 Opnon Plan 739 - - - _ Balance December 31,1996 311 4,7'? 3 00 - 30 38 l' 92 85,585 Opnons granted (2,307) 2,513 29.06 - 40 81 34 80 87,457 Opnons terminated 165 (1656 3 00 - 29 06 20 04 (3,30') Opuuns exercaed - (345i 3.74 - 29 06 1328 (4,583) ' Adloor:al shares reserved under 1996 Opnen Plan 2,000 - - - - i v Balance December 31,199' 169 6,780 $ 3 '4- $ 40 81 $ 2436 $ 165,152 { Opnons exerusable at: December 31,1995 8.229 5 3 00- $ 19 00 $ 12.26 $ 100,886 - December 31,1996 3,0'l 5 3 00- $ 30 38 $ 14 25 5 43,770 Deccmber 41,1997 3fi65 $ 3."4 - $ 4019 5 1812 5 66A25 l l l The foUowing table summarizes information about stock options outstanding and exercisable as of December 31,1997: Options Outstanding Options Exercisable Weighted Weighted Weighted Range of Number Average Average Remaining Number Averne Exercise Prices Outstanding Exercise Pric e Contractual Life Exercisable Exercise Price

  $ 3.74 $ 11.99                     1.161             $ 11.22               3 yean                1,161           $ 11.22                  l 12.00      21.99                 2,020                 16 90              6 yea s               1,739              16 82 221)0      31 99                  1,092                28 10              8 yean                  311             28 25 321X)      40 81                 2,507                 34 83              9 years                 454              34 12 6,80             5 2436                7yean                 3R5             $ 1812 i

f I l l I

i t. t ..., t -.... m t The Company applies the intrinsic value Simuhaneous with the acquisition ofthe based method of accounting for its stock- remaining equity interest ofMagma on based employee compen>ation plans. If the February 24,1995, the Company completed fair value based method had been applieLor a public offeringthe *0tTering") of 18,170 1997, non-cash compensation expense and shat.s ofcommon stock, which amount the effect on net income available to common included a direct sale by the Company to stockholders and earnings per share would Kiewit of 1,500 shares and the exercise of

                   ' nave been approximately $3,600, or $0.05        underwriter over-allotment options for 1,500 per share. If the fair value based method had shares, at a price of $ 17.00 per share. The been applied for 1996 and 1995, non-cash        Company received proceeds of $300,388
           ,       compensation expense and the effect on net       from the Offering.

l income available to common stockholders

           !       and earnings per share would have been i

irematerial. The fair value for stock options impairment Charge wa estimated using the Black-Scholes option The non-recurring charge of$87,000 pricing model with assumptions for the risk- represents an asset valuation impairment free interest rate of 5.50% in 1997 and 6.00%chnge under Financial Accounting Standard in 1996 and 1995, expected volatility of 25% No.121, " Accounting for the Impairment of in 1997 and 22% in 1996 and 1995, expected kngued Assets," relating t CalEnergy's life of approximately 3.7 years in 1997 and assets in Indonesia. Moreover, the Company 4.5 years in 1996 and 1995, and no expected 'ntends to continue to take actions to attempt dividends. The weighted average fair value t require the govemment ofIndonesia to i ofoptions granted during 1997,1996 and honor its contractual obligations; however, 1995 was $9.55, $8.62 and $5.72 per the ultimate outcome of the current uncertain l option,respectively. situati ninlnd nesia with respect t the ' possible abrogation by the Indonesian [ 13. Common Stock Sales government of the Dieng, Patuha and

       ;                 & RelatedOptions                         Bali contracts adds significant risk to the
       !         On October 17,1997, the Company                  completion of those projects. Consequently,
     !           completed the public offering of 17,100
      '                                                           the charge of $87,00t) represents the amount
               . shares ofits common stock (" Common              by which the carrying amount ofsuch assets
     '                                                                                                            f Stock") at $37 7/8 per share (the "Public exceed the fair value ofthe assets determined j           Offering"). In addition,2,000 shares of          by discounting the expecto lture net cash Common Stock were purchased from                 flowsoftheIndonesiaprojec , uming
     }          CalEnergy in a direct sale by a trust afHliated   proceeds from political risk insura. 'and l          with Walter Scott,Jr., the Chairman and           no tax bene 6ts.

I Chief Executive OfHcer of PKS (the " Direct

     +

Sale"), contemporaneously with the closing ofthe Public OtTering. Proceeds from the

    !           Public Offering and the Direct Sale were j            approximately $699,920.

f i 1

   !                                                                                                              i 1
                                                                                                                   ]

I

c i j 1 c...... . ......, ...  : i L lr

15. ExtraonlinaryItem willing parties, other than in a forced sale or OnJuly 31,1997, the Finance Act in the . liquidation. Although management uses its

United Kingdom was passed by Parliament best judgment in estimating the fair value of and included the introduction of a one time these fmancial instruments, there are inherent so-called " windfall tax" equal co 23% of limitations in any estimation technique.

the difference between the price paid for Therefore, the fair value estimates presented Northern upon privatization and the Labour . herein are not necessarily indicative of the government's assessed "value" of Northern amounts which the Company could realize as calculated by reference to a formula set in a current transaction. forth in theJuly budget. This amounted The methods and assumptions used to $ 135,850, net ofminority interest of . to estimate fair value are as follows:

          $58,222, which was recorded as an extraor.

dinary item. The first installment was paid Debt instruments-The fair value of all December 1,1997 and the second installment debt issues listed on exchanges has been is payable on December 1,1998. . estimated based on the quoted market prices.

16. Fair Valueof lOther fmancialinstruments- All other FinancialInstrument, fmancial instruments of a material nature The fair value of a financial instrument is fall into the definition of short-term and fair value is estimated as the carrying amount.

l

        - the amount at which the instrument could be exchanged in a current transaction between The carrying amounts in the table below are included under the indicated captions in Notes 7,8 and 10.             ,

1997 1996 Estimated ' Estimated Carrying Fair Carrying Fair Value Value . Value Value Senordscouninores . $ 529/>40 ' 3 569,148 $ 527335 5 556,971 9,59t 5enor rotes 224.205 243.615 224,150 229,866 7,63W Seruor notes 350,000 ?352,857 - - l 1.umred recourse setuor secured notes 200,000 217,829 200,000 212,560 Ca! Energy creat faciLry - - 100,000 100,000 Revolving hne dcredt - - 95,000 95,000 Salton Sea notes and bonds 448,754 463,720 $38,982 531,807 Northern eurobonds 427,732 482,oM - 439,192 445,830

        . Construccon loans'                                              416,744        416,744   300,951       300,951 Coso Funang Corp prunt loans                                  .106.616         112,932    148,346      153,650 CE Electnc UK Funang Cornpany Senior Notes        <

357,331 357331 - - CE Electne UK Fun &ng Company Sterling Bonds 322,534 333.25' 1%er Resources proptt debt 103,334 103334 114371 114.571 U K. c' reit fac&ry ' - - 128.423 128,423 Other' 5,962 5.962 7,927 7,927 Convert 61e preferred secunnes d subsi&ary trusts - 553,930 514373 103.930 128354

  ' """""""'"""""'                        ,i.

I t i I

       ;        17. Interest RateSwap Agreements                 previousJuly to December period and xd On December 15,1997,CE Electric UK                is set at 3%. The formula also takes account l        Funding Company entered into certain             of the changes in system electrical losses, j         mterest rate swap agreements for the CE          the number of customers connected and the Electnc UK Funding Company denior                 voltage at which customers receive the units Notes with two large multi-national fmancial      of electricity distributed.

institutions. The swap agreements effectively in the supply business the current formula convert the U.S. dollar fixed interest rate t applies only to customers with demands a fixed rate in Sterling. For the $ 125,000 of below 100kW Under the current formula i 6.853% senior notes, the agreements extend the purchase cost of electricity and the cost until December 30,2004 and convert the of transmission, distribution and the fossil fuel U.S. dollar interest rate to a fixed Sterling levy are passed through to customers in full. rate of 7.744%. For the $237,000 of 6.995% That part of the formula governing Northern's senior notes, the agreements extend until December 30,2007 and convert the U.S. own supply business costs requires that this element of the permitted income falls by 2% l dollar interest rate to a fixed Sterling rate

   '                                                           per annum in real terms. The current formula of 7.737%. The estimated fair value of these is due to be replaced from April 1,1998 with gv             swap agreements is approximately $4,929 a new formula which will require Northem to based on quotes from the counter party t reduce prices to those customers protected by these instruments and represents the the new price control from the level prevailing estimated amount that the Company would at August 1,1997 by about 4.2% (minus expect to pay to terminate these agreements.

inflation) with effect from April 1,1998 and It is the Company's intention to hold the a further 3% (minus inflation) with effect swap agreements to their intended maturity' from April 1,1999.

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

customers with demands over IMW was Price control formulas for the supply and opened to competition in 1990. In 1994 distribution businesses are enforced by the this limit was reduced to 0.1MW In 1998, Office of Electricity Regulation COFFER"). liberalization of the entire market is due In che distribution business the current price to commence in stages with complete control is expected to last until 2000. The libera!ization achieved byJune 1999, formula was revievied with effect from Apri 19 Pension Connnilments 1,1995 and April 1,1996 which resulted Notrhern participates in the Electricity Supply in one-time reductions in allowed income Pemion Scheme, which provides pension and per unit distributed of about 17% and 13% other related de6ned bene 6ts, based on fmal respectively, with continuing real reductions t pensionable pay, to substantially all employees i.i cach of the subsequent three years ',997/98 throughout the Electricity Supply Industry in to 1999/2000. The current tormula requires the United Kingdom. that each year regulated distribution income per unit is increased or decreased by PPl xd where RPI retlects the average of the twe:ve month inflation rates recorded for the

I j

  O

( l <-,,..., ......, i, The actuarial computation for December 31, 20. Commitments andContingencies i 1997 and 1996 assumed interest rates of Casecnan 6.75% and 7.75%, respectively, an expected In November 1995, the Company closed the l' return on plan assets of 7.25% and 8.25%, fmancing and commenced construction of the  : respectively, and annual compensation Casecnan Project, a combined irrigation and increases of 4.75% and 5.75%, respectively, 150 net MW hydroelectric power generation l over the remaining service lives ofemployees project (the "Casecnan Project") located in j covered under the plan. Amounts funded to the central part of the island of Luzon in the j the pension are primarily invested in equity Republic of the Philippines. l and fixed income securities. Northern's i CE Casecnan Water and Energy Company, i funding policy for the plan is to contnbute i

                                    . .                            Inc., a Philippine Corporation ("CE Casecnan )

annually at a rate that is intended to remain which is expected to be app oximately 70% a level percentage of compensation for the . indirectly owned by the Company (after the covered employees. ' KDG Acquisition),is developing the Caseenan The following table details the funded status Project. CE Casecnan fmanced a portion of and the amount recognized in the balance the costs of the Casecnan Project through the sheet of the Company as of December 31, issuance of $ 125,000 ofits 11.45% Senior 1997 and 1996. Secured Series A Notes due 2005 and (87 j S171,500 ofits 11.95% Senior Secured Series Anuarial present value of benent obbguions: B Bonds due 2010 and $75,000 ofits Secured 1997 1996  ! Floatir.g Rate Notes due 2002, pursuant to i Vested bene 6ts $ 847.694 $ 797.932 . i an indenture dated as of h,ovember 27,1995,  !' , sonvested se6t, _ _ as amended to date. Accumulated bene 6e obliganon 847,694 797,932 , l 15ect of future increase in The Casecnan Project was being constructed cornpensanon 40398 58.218 pursuant to a fixed-price, date-certain, Pruiected bene 6: obliganon 888,592 856,150 turnkey construction contract (the "Hanbo Fair value of plan assets 1.012401 919,163 Contract") on a joint and several basis by Assers in excess of projected Hanbo Corporation ("Hanbo") and Hanbo benc6t ,.bliganon 12.i.009 63,013 l'nrecogruzed net pain 61.265 - ("HECC"), both of which are South Korean ' Pre %KIpenuon asset $ 62? 44 $ 63'013 . corporations. As of May 7,1997, CE Net periodic pension cost for 1997 included Casecnan terminated the Hanbo Contract the following components (the components due to defaults by Hanbo and HECC for the period from the acquisition date of including the insolvency ofeach such Northern to December 31,1996 are not company. On May 7,1997 CE Casecnan meaningful): entered into a new turnkey engineering, p u U o f sen we cost -benefus earned dunny the penod $ 12.600 62,300 complete the construction of the Casecnan interest cost on prorcted bene 6r obbganon Actual return on plan assets (71,30th Project (the " Replacement Contract"). The work under the Replacement Contract Net penedx pension cost s 3.600 is being conducted by a consortium consisting i

p~ i """""""""""* , , , , . i i l

                  -                                                                                                          I i

I l I t of Cooperativa Muratori Cementisti CMC On September 29,1997, G Casecnan di Ravenna and Impressa Pizzarottie & C. tendered a second certi6cate ofdrawing for Spa working together with Siemens A.G., $10,828 to KFB and on December 30,1997, Sulzer Hydro Ltd., Black & Vearch and G Casecnan tendered a third certi6cate Colenco Power Engineering Lti (collectively, ofdrawing for $2,920 to KFB. KFB also the " Replacement Contractor"). wrongfully dishonored these draws, but pursuant to a stipulatior, agreed a deposit the in connection with the Hanbo Contract termination, G Casecnan tendered a draw amounts in an interest bearing ar aunt certi6cate ofdrawing to h,orea First Bank with thesamem. dependentnnancialinstitution ("VFB") on May 7,1997 under the irrevocable in the Uru.ted States pending resolution ofthe standby letter ofcredit issued by KFB as appeal regarding the first draw and agreed to j expedite the appeal. security under the Hanbo Contract to pay for certain transition costs and other presently The receipt of the letter ofcredit funds from j ascertainable damages under the Hanbo KFB remains eventialand CE Casecnan

              !          Contract. As a result of KFB's wrongful            will continue to press KFB to honor its clear dishonor of the draw request, G Casecnan f                                                             obligations under the letter ofcredit and to j           filed an action in New York State Court.           pursue Hanbo and KFB for any additional gi)        l          That Court granted CE Casecnan's request           damages arising out of their actions to date.
             ,            for a temporary restraining order requiring       If KFB were to fail to honor its ob!igations l          KFB to deposit $79,329, the amount of the          under the Casecnan letter ofcredit, such
             !          requested draw,in an interest bearing xcount       action could have a material adverse effect j           with an independent 6nancial institution in        on the Casecnan Project and CE Casecnan.

the United States. KFB appealed this order'

           ,                                                               On September 2,1997, Hanbo and HECC but the appellate court denied KFB s appeal i

and on May 19,1997, KFB transferred funds 6 led a Request for Arbitration before the International Chamber of Commerce ("ICC,,). m the amount of $79,329 to a segregated The Request for Arbitration asserts various j New York bank account pursuant to the

         ,             Court order.                                        claims by Hanbo and HECC against CE Casecnan relating to the terminated Hanbo j             On August 6,1997, CE Casecnan announced             Contract and seeking damages. On October that it had issued a notice to proceed to the       10,1997, CE Casecnan served its answer Replacement Contractor. The Replacement            and defenses in response to the Request i

Contractor was already on site and thereafter for Arbitration as well as counterclaims 3 fully mobilized and commenced engineering, against Hanbo and HECC for breaches

        !            procurement and construction work on the of the Hanbo Contract. The arbitration I            Casecnan Project.

proceedings before the ICC are ongoing and On August 27,1997.CE Casecnan announced CE Casecnan intends to pursue vigorously its claims against Hanbo, HECC and KFB m. that it had received a favorable summary the proceedings descn. bed above.

       ;             judgment ruling in New York State Court against KFB. The judgment, which has been appealed by the bank, requires KFB to honor
      !              the $79,329 drawing by CE Casecnan on the I
                     $ 117,850 irrevocable standby letter of credit.

i ,

r

                                                                     ;       c.is...    ,  ione... sai     i i

i l Indonesia of these projects. As a result, the Company On September 20,1997, a Presidential recorded a SFAS 121 asset valuation Decree (the " Decree") was issued in Indonesia, impairment charge of $87,000in the providing for govemment action to the effect fourth quaner of 1997. This charge includes that, in order to address certain recent ad reasonably estimated asset valuation fluctuations in the value of the Indonesian impairments associated with the Company's currency, the start-up dates for a number of assets in Indonesia and gives effect to the private power projects would be: (i) continued political risk insurance on such investments. according to their initial schedule (because . Edison construction was underway),(ii) postponed OnJune 9,1997, Edison filed a complaint as to their stan-up dates (because they are not yet in construction) until economic conditions alleging breach of the power purchase have recovered; or (iii) reviewed with a view agreements ("SO4 Agreements )between Edison and the Cosojoint Ventures as a to being continued, postponed or rescheduled, result of alleged improper venting ofcertain depending on the status of those projects. noncondensible gases at the Coso geothermal in the Decree, Dieng Units 1,2 and 3 are

                                               . . . . energy    project. In the complaint Edison seeks approved to continue according to their trunal              -

schedule; Patuha Unit I and Bali Units 1 and unspecified damages, .mclui.ng the refund of certain amounts previously paid under the 2 are to receive funher review to determine SO4 Agreements, and termination of the Lw whether or not they should be continued m.  !

                           . . . .                      SO4 Agreements. In September 1997, the accordance with their trutial schedule; and CosoJoint Ventures and the Company filed Bali Units 3 and 4, Patuha Units 2,3 and 4                                                     .

a cross-complaint against Edison and its and Dieng Unit 4 are to be postponed for affiliates, The Mission Group and Mission an unspecified period. In this regard, the Power Engineering Company alleging, among Company notes that its contracts and other things, that Edison's lawsuit violates government undertakings for the Dieng, the 1993 settlement agreement which settled Patuha and Bali projects do not by their certain litigation arising from the construction terms permit such categorization or delays by the government and that the Company of i Coso Arrnal p@ by Edison affiliates. In addition, the Coso  ! has obtained pohtical risk insurance coverage I joint Ventures filed a separate complaint for its Dieng and Patuha projects. Moreover, against Edison alleging breach of the SO4 the Company intends to contmue to take Agreements, unfair business practices, slander actions to attempt to require the Government and various other ton and contract claims. ofIndonesia to honor its contractual The actions were effectively consolidated obligations; however, subsequent actions by in December 1997. As a result of certain the Government ofIndonesia and continued procedural actions by the parties and a economic problems m Indonesia have created Novembercoun order, Edison filed an funher uncenainty as to whether the contracts amended complaint on December 16,1997 for such projects will be abrogated by the and the CosoJoint Wntures amended their Indonesian government and accordingly have cross-complaint. The litigation is in its early created significant nsks to the completion proceduralstages and the pleadings l

i"""""""""""',. , i have not been settled. The CosoJoint review onJuly 28,1995. On October 30, Ventures believe that their claims and defenses 1996, all parties fded fmal briefs and the are meritorious and that they will prevail if Coun ofAppeals heard oral arguments on the matter is ultimately heard on its merits. December 2,1996. OnJuly 11,1997, the The CosoJoint Ventures intend to vigorously Court ofAppeals dismissed NYSEG's appeal Afend this action and prosecute all available from FERC's denial of the petition on counterciaims against Edison. jurisdictional grounds. NYSEG On August 7,1997, NYSEG filed a On February 14,1995, NYSEG filed with complaint in the U.S. District Coun for the the FERC a Pbtition for a Declaratory Order, Northern District ofNew York against the Complaint, and Request for Modification of FERC, the PSC (and t' he Chairman, Deputy Ratesin Power Purchase Agreements Chairman and the Commissioners of the Imposed Pursuant to the Public Utility PSC as individuals in their official capacity), Regulatory Policies Act of 1978 (" Petition") the Saranac Pannership and lockport Energy seeking FERC(i) to declare that the rates Associates, LP ("lockport") concerning NYSEG pays under the Saranac PPA, which the power purchase agreements that was approved by the New York Public Service NYSEG enteredinto with Saranac

 -@)     Commission (the "PSC") were in excess of            Parcners and lockpon.

l the level permitted under PURPA and (ii) to NYSEG's suit assens that the PSC and the authorize the PSC to reform the Saranac PPA. .

                                                        . FERC u.nproperly implemented PURPA m.

On March 14,1995, the Saranac Partnership

                                                 ..          authorizing the pricing terms that NYSEG, mtervened in opposition to the Pbrition the Saranac Pannership and lockpon agreed assening, inter alia, that the Saranac PPA fully complied with PURPA, that NYSEG's action was untimely and that the FERClacked                      "P#""

• FERCinits April andJuly 1995 orden.

authon.ty to modify the Saranac PPA. On . NYSEG in addition asks for retroactive March 15,1995, the Company m.tervened alsoin opposition to the Petinon and assened reformation of the contracts as of the date of commercial operation and seeks a refund similar arguments. On April 12,1995, the FERC by a unanimous (5 0) dmsion issued of $281 million from the Saranac Partnership. Saranac and other parties have fded motions an order denying the various forms of relief

                                                                  ***'*"            "#E"*#""    " * "#

requested by NYSEG and fmding that the motions were heard on March 2,1998. rates required under the Saranac PPA were , consistent with PURPA and the FERCs "5# regulations. On May 11,1995, NYSEG in the FERCs orders. requested rehearing of the order and, by order issuedJuly 19,1995, the FERC unanimously (5-0) denied NYSEG's request. OnJune 14, 1995, NYSEG petitioned the United States I Court of Appeals for the District of Columbia

     ! Circuit (the "Coun of Appeals") for review of FERCs April 12,1995 order. FERC moved to dismiss NYSEG's petition for

i <...... . m...,, ... g q 1

                                                                                                                                     )

Imes 21. GeographicInformation l Certain retail facilities, buildings and The Comp =y operatesin one principal equipment are leased. The leases e:pire in industry segment: the generation, distribution periods ranging from one to 75 years and and supply of electricity to customers located some provide for renewal options. throughout the world. Europe consists At December 31,1997, the Company's future P'E^'.ily f Northern. The Company's peratons by geographic area are as fo! lows: minimum rental payments with respect to non-cancelable operating leases were as 1997 1996 1995 follows: Revenue Arnerras $ 570,587 $ 486.189 $ 386,833 Asia 102,960 33,282 - Europe 1,566,442 39,191 -- Corporate / Ocher 30,922 17,533 11,890

                                                                                 $ 2,270,9113 576,195 $ 398.723 2002                                         4IA3 Therafter                                   53,905 Operating incorne

• g ,g,495 Arnerras $ 301,589 $ 259/45 $ 209,872 Asia 61,131 16,766 -

Europe 191.299 6,163 - Corporate /Other (12,682) (10,931) (10,376) 91b

                                                                                 $ 541,137 $ 271/43 $ 199,4%                          )

1

• optrdring I&nnar mlaula th $1l1 on sqhtly Insc!qrtlIn cMIr1Lss, l net intemt exprme,sadik u.enverng degt 1997 1996 identi6able assets )

Americas 3 2.268,629 $ 2,364,448 l Asia 835,616 649,053 Europe 2,937/e6 2,3M,789 Corporate / Ocher 1,445,695 231,8(4

                                                                                           $ 7,487,626 $ 5,630,156 1

l

                                                                                                                                      )

l 1 1 l l l i J

E

             ...s....,

J i < . . . . . . . . . i l

. J l

l-

22. Quarterly FinamialData (Unaudited)

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

• 1997:* March 31 June 30 September 30 December 31 Operating revenue $ 542,589 8 505,922 $ 527,896 - 8 589,931 Toca! revenue .565,976' 524,994 551,893 628,048 Totalcosts and expenses 506,104 460,184 467,900- 639,863 Income (loss)beforcincome taxes 59,872 64,810 83,993 (11,815)

Provision forincorne taxes 22.249 24.342 27,929 24,524 income (kas)before mmonry meerest 31,623 40,468 56,064 (36,339; Minonty internt 10,175 9,579 9,656 16,583 Income (loss) before extraoranary item 27,448 30,889 46,408 -(52,922) Extraordmary item - - (135,850) - Income (kas) attributable to common stockholders 27,448 30,889 (89,442) (52,922) Income (kos)per share before extraordmary item $ .43 $ .49 $ .73 $ (.67)

Extraordinary item - -

(2.14) - l ' 93 Net income (loss)per share $ .43 $ .49 $ (1.41) $ (.67)

i. Income (loss)per share before extraordinary item-diluted 3 .42 3 ,46 . 67 $ (.67)

Extraordinary item-dduced - - (1.80) - ( Netincome(kssiper share-diluted $- .42 $ .46 8 (1.13) $ (.67) Three Months Ended

• 1996:* March 31 June 30 September 30 . December 31 Operating revenue $ 75,944 8 104,735 8 165,487 $ 172,768 Totalrevenue '90,356 115,794 179,M8 190,997 Total costs and expenses 69,398- 86,039 121,545 158,809 Income before ancome taxes 20.958 29,755 57,503 32,188 Provmon for income taxes 6,497 9,NO 18.325 7,959 income before mmanry interest 14.461 20,715 39,178 24,229 -

Mmonty mterest - 1,443 1,624 3,055 Net income artnbutable to common $ 14,461 $ 19,272 8 37,554 3 21,174 stockholders

          ' Net incarne per share                               $        .28  $        .37     $        .71     5          34 Net income per share-ddured                         $-         27 8         34      $        .61    $          33

• Thr Cenpaw>'s aparatum m amonda natm lib Redue apuusem afMrskre, fam 5sniwdsmisk Pa*rwrJ>sp two ut

Independent Auditors' Report BoardofDirectorsandSbarrbolders CalEnergy Comparty,Inc. Omaha, Nebraska We have audited the accompanying consolidated balance sheets of CalEnergy Company, Inc. and subsidiaries as of December 31,1997 and 1996, and the related consolidated statements ofoperations, stockholders

• equity and cash flows for each of the three yea e in the period ended December 31,1997. These 6nancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Enancial statements based on our audits.

M 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 fmancial statements are free of material misstatement, An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fmancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 6nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated 6nancial statements present fairly, in all material respects, the ,} fmancial position ofCalEnergy Company, Inc. and subsidiaries at December 31,1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1997,in conformity with generally accepted accounting principles, sbrN l dw Deloitte & TouchellP Omaha, Nebraska Twbruary 12,1998 I 4 H

r ......... _ . . . . . _ , _ , Comorate hifbrmation GonmAnilutntARuns CalEnergy Company, Inc, GARY L Hood BardofDirectors CdEnergy Company,Inc. Gemal Managn, 302 S. 36th Street,Sune 400 SeniorManagement: DAwD L Sohot NorCon Gas Operanons Omaha, NE 68131-3845 DAVID L SOEOL Chairman dthe Board and Telephone: 402-341-4500 WanR G. KEEm' *# # ""' Gaaman dthe Board and Dwector, Human Resources

         . Fax:402-345-9318                             Chief Executive OGcer                                                        "8Y      P'"% I*-

wwwcanngy.com GREGORY E. ABEL D SON

                                                                                                        !       , Ge ration, Penident and QuefOperaung OtTrer     Northern Electn' New Yod NY STOCKTRANSfER AGEvr                         SmTN A.MCARmuR

• KENNEns R.Iruts AND REGisntAR Execunve Vue Prnalent. }UDrni E' AYRES Gennal M " * " ""'

GueMelkm Shareholder Servkes GeneralCourneland Secretary her Resourcn Gu Operamns I Fr nco 2323 BryanStreet,Sune 2300 CRAJG M. HAwwETT Dalla, Texas 752012656 KEN UNGE Senior VKe Preudent and . RICHARD K. DAwDsON 800 435-9270 QuefFinanaalOffrer anman, Una Paafu Cwpwanon. Oversen callcollect at ElectI Dallas, TX 2124 13-7427 SmTN G. BON 5 DAVID H. dew 11URsT DouGras L ANDERSON Proicct Manager, Caecnan Chairman and Chief Executive Officer, Austam GeneralGumel TuoMAs R. mason AL'DimRS Falcon Seaboard Hokhngs,LP, and AssutantSeuetary President, CdEnugy Hasmn, TX

                 ".("                                  DAvlo A. BAuwtN ren ralManagn,PhiLppnes Opnaung Company RJCHARD R.JARos Omeha.NE 68102                                                                   FREDERICK L MANCEL                 Present (recued), Kiewir Divers fied EDSARD F. BAZEMoRE                   Vice Preudent and Ch ef            Group,Inc., Omaha, NE Vre President. Human Resources       Operatmg O$cer, Ana SmrA USTING5                                                                                                        DAVID R. MoRR!$

RonERT 5. BECK Former Chairman, k Exc ange PATTIJ.MCATU (' *S E Dwector,informanon Systems DONAu)C. BIAony Duector,Corprate Communranons NElt W MIDGuy Northem Electrr plc, Newcastle upm Tyne, UK Pacifx Snak Exaange Symbol: CE Gennal Managa, Coso Managmg Duector, BERNARD W REZNICEK GeochermalOperatxms Northern Metenng Servges Nanonal Director Utihry Markenng, I M41roix G.CHANDuR DONAu) M. O'SHu,JR. CentralStates indemrury Company -i 94 Dnector, Northern Electnc and domaha, Omaha. NE G.mRang S. Auen RnamN5 Preudent, CalEnergy Managma Deector, Supply Development Company WALER SCOTT,JR. ne pan R ERIC CONNOR DAVID PEAR 5ON Proent and Cha rman dthe Board, 302 5. 36th Street,Sune 40G Direct r, Northern Dectric and . Daector, Markenng and Sales, Peter Krwit Sons',Inc., Omaha, NE

       ' Omcha,NE68131-3845                            Managmg Daector, Utihty Services     Nonhern Electra                   JOHN R. SHINER 1clephone: 402 231 1673                      DAVE CROMPTON                        Smt RAINE                         Partner,Morrson & Foerster, Fax: 402-231 1578                           Managing Daertor,                     Managmg Drector,                  lm Angeles,CA E-meil:                                     Norrhnn Dettnc Retail                 Northern Informanon Systans       S't NEuur TRorrER crag. allen (acalenergy.com                 RIGIARD B. DALTON                     and Northem Electra-Tehom         Memberof Parhament# enred),

General Manager, tryte . R DAN RORABAUGH Unned Kingdom House of Commom FcQM 10-K AND 8-g Gaxhennal Opnatm Gncral Managn, DAv1D E.Wir RCapep Anena/Rert es AIAN DICK $oN _ Saranac Gas Opnatm Quef Executive Offner. laigwar, lrr., Frme MKafildusthik kun,, Tax Manager, Northern Dectnc JOHN A. SCHRrruN New York, NY stdfu6sepCesemiuson Fernict;is J. DOUGl.AS DfVINE Gerrra! Manager, sprratius. casururum seddredpwit Vre Presalent, Protect Devekipment Yuma Gas Operarm BEN HOLT (ExtRin'0 arealyar se, enskrofnwarraistm, DAwD A. FAULKNTR JAMESJ. StuMR Founder and Chairman tretaed)

          """/m/hd8)drohdie &                       Drecent, finontrl and Corporate       Dwector Tasatum                   CE Nlt Company G9 en Fene 8-K. 4.adAf,ms 6.                 Affain, Northern Dectnc               RostRT 5. SnEERMAN                (formerly The ben Holt Co )

Nfddu tb45.macand Senor VKe President, Pasadena, CA 0"'"""" I#" 0""f"") - JOHN L FEAmERSTONE GeneralManager, Mmerals Adminstranon ESTRITr B. LAYBoCRNt, Esq. f

      ? , m/nAhr. mik hew 10-K G
                                   $                  VINCExr R. FEsMIRE Vre Prnadent, Gmstructam JsxEs D. STAu_MMR General Coumel. Nonhem Electnc (EMERfW5)

Anomey at Law avd6f,,suhd.p,prerer af, and Engmeenng DAVID SW AN la Angeles.CA

     ' fe,qu.duik G,rparp naum.ddr                    JAMES A. FEoREs                       Duector, Nonhan Darr.c and        B4RTON W SHACKFUoRD aprem refurnukeg ese ahibra.                 Vse Prnalent, Protect Fmance          Managmg Dwector, Dstnbuton        (EMERrrUs)

{ P/n,ur diraryar rartres requess

• ADRIAN M. Forfy 111 jet. TURNER Proidendraud J

Vice Presxlent, Markenng General Manager,Impenal Paafx Gas & UcctrK Gnnpany ' CR41G S. Au1N cy nahennalOpuate M T*"" d DR. JOHN M. FRANCE investor Relatums Manager Regulatum Duector, Northern Decenc DAVID A. WARR$

                                                                                                                                  ,y CelEnergy Company,Inc.                       GNAuRif Gtus                          M*"*8*8D**-

302 5 36th Street, Sune 400 Northern Utihty Services h. e Annual Meenng dthe Shareholders 1 Company Secretary, Northem ElectrK Omeha, NE 681313845 JoNAniAN M. WEisGA11 PAulCKJAODum, a m kxaltune atJodyn An Museum, Vre President, legislative and Vre Prnmient,Quef Accountag Whnspoon Oxen He m O$cer and Omtroller E'8"I*'"#"" Dudge Street, Omaha, Nebraska DRLAN K. HANKEL PETIR YOUNGS Managing Daector, Ve Prnident and Trecurer Gas Explorarxin and Developmeru pg.ARDJ HuxRiot

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Fromleft to right Evere:!B Laewame Esa Emer tas hierwer Attorney at Laa les A,geres CA EdgarD Aiorsson P esce,: ECAC0 Inc New tc4 N> Das:dE M*: Ch+'Ewc he 0"cer Logica Ir,c. hea Yorn NY JohnR 5%rrer Pan re*, hice': son S foe ster ios Angeles CA DancR My<!s formerC~r? nan NonnemEiecincpic hmrast:euxn ivn e vir aa!!e' Scc *r Jr PTsceatandCormanc?:neBord Pe'e'rww:tSons'inc Or':ca ti! Jud TH E Ares P'Tra I'w Ervronmen:n Group. Sr F aocisco CA H.chr3 R Jyos P escentt'enred!. A+M DwersAed Group Inc. 0:na'u N! Dawai Soias Chrma c':.'e Boa donaCn,e* Esecutne 0"<cer Ca E,e<gs Compa,-' tre , Sir kewiie 7?otten Mer~te c' Pa'!. ament tretr'ed! Urr.te:A:ogaar~ no se of Commons Bemed W Pencei %3nona:Daector U!.12 Ltenerng Ce~t r 5:3tesi,dernam Cor nn of Omana Omra %E Dasdh Dew *urst Curma"a'rJCme'Ewcut+c 0"<ce' farcon Seancar:Ho:Jmps i P. Houston I% ben Ho!! E"wr??.;s hfe"1tte founcerancCha,'? an:vbrem CEHm:Comcany:romerr it e Ben Hx Cc ) PasaJena CA Notpictured Richtak Davisy Cna r"'a". Un.cr Pxac Cur; var i on E!S!as IX Eror? W S1xke!! : Eme' ts ?.lemtvr P'escent trewem Pack Gas & ! ectoc Co"ws Sr Francisco CA [ellior Miulagelllel11 > .. y CalEnergy Company, uc. . framlett ro ngnt- . S' eve" A htMy Ewt.in.e Vtce *es:Je-t Genera'Casnse'anaSec'c:JT .

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Mitiditiericall FINANCIAL HIGHLIGHTS V .nemer 3 Consolidated Data iny jgw; Operating revenues (000) $1,922,281 $1,872.612 Net income (000) $ 135,104 $ 131,046 Earnings per average common share .$ 1,38 $ 1.30 Average common shares outstanding (000) 98,058 100,752 Cash flows from operating aethities (000) $ 392,245 $ 321,387 f(etura on average common equity 10.8% 10.6% Total assets (000) $4,278,091 $4,521,848 Utility Operations ts; 1996 Operating revenues (000) $1,662,606 $1,635,761 Electric sales (millions of kWh) 22,653 22,000 Summer peak load (net MW) 3,548 3,537  ; Natural gas throughput (000 MMI3tu) 152,629 155,003  : e Utility construction expenditures (000) $ 166,932 $ 154,198  ; i b dy's Standard  ; Bond Rating Data investors Senice & Poor's - a Mortgage Bonds A2 AA-g Unsecured Medium Term Notes A3 A  ; Preferred Stocks a3 A $ Commercial Paper P1 A1 h 1 2 I TOT AL SH AREHOLDER RETURN

               $TOCK PRICE APPRICIATl0N                                                     (Dmdends + Price Appreciation)

Jart 1.1997 through Dec 31.1997 MidAmercan Performance Vs Value Line Elecinc t;tilities Jan 1.1997 theough Dec 31.1997 I

   $22                                                                     kg                                                                     7 71 MidAmerican 20                                                                  ' 60%                                                          48.3 %

50 % I 40%

 ' 18                                                                      30 %

20 % 17 10 % 16 Jan Feb March Apr May June July Aug Sept Oct Nov Dec

                                                                                         <           owny ad her >

Weekty Closing Stock PrKe

share repurchase program, TO OUR SHAREHOLDERS we have acquired 5 million - Miemerican's stwL shares of the Company's price appreciated by common stock at a total cost 39 percent for the 3 ear. from of $89.2 million.The program ur focus this past year was on $ 15.8_, a.on Dec. 31,1996 to is expected to be completed

                                                                           $22 at year +nd 1997. we        by year-end 1998. we believe building a strong foundation, both 0 f,manc,ially and opera upon which to realize our vision believe a growing under-standing of our strategy to become the leading regional provider of energy and the share repurchase program continues to be one of the best investments for our available cash. The of becoming the leading regional                                  compiementary senices,          program contributes to and the progress we have        decreases in our dividend provider of energy and complementary                              made in . implementing that     outlays and results m strategy, have contributed to   ira;,rovement in earnings services.To meet the substantial the improsement.                per share and a lower divi-challenges of the future competitive                                  in concert with our deci-  dend payout ratio.

sion t fxus n thnegional We ahed top quas E marketplace, we believe it is essential strategy, MidAmerican has performance in total share-

that the necessary elements be in divested a number of holder return in 1997, as

 ,                                                                         nonregulated interests that     compared to the electric 2

place m order to achieve success in were not aligned with that utilities followed by Value strategy. During 1997, these Line. Total shareholder

the iong term.

I divestitures generated return reflects the return Financial Performance reductions, which were approximately $302 million earned on the value of the in cash. Most recently,in shareholders' investments, f 1997 was a year of strong possible as a result of cost combining stock price I financial performance for reductions achieved in the December the Company MidAmerican Energy.1997 1992 merger that formed completed the sale of appreciation and dhidends earnings are $135.1 million MidAmerican.The 1997 l'NITRAIN, Inc., a railcar paid. MidAmerican had a 5 1 or $1.38 per share, compared earnings also reflect higher management company, and total shareholder return of with $131.0 million or utility operating expenses Cornhusker Railcar Senices, 48.3 percent for 1997, f Inc., a railcar maintenance substantially above the i $1.30 per share for 1996, an associated with the increase of 6.2 percent in Company's strategic imest- and repair shop operator, for median electric utility earnings per share. Income ments to develop the a total of $23.1 million.The company total return of from continuing operations enhanced marketing and divestiture process, and the 30.3 percent for the year. for 1997 is $139.3 million or sales and customer senice favorable market perfor-

           $1.42 per common share,          capabilities needed to posi-     mance of our investment in       Other Highlights compared with $143.8             tion the Company for             McLeodl:SA, have provided        trnplementation of new utikty million or $1.43 per share      success in competitive           us with additional financial     business umt structure.

for 1996. markets. These transition flexibility. Some of the Throughout 1997, we worked The 1997 results were costs, and those required to proceeds from the sale of on the development of a affected by the electric increase the Company's these nonregulated assets business unit model that is pricing settlements achieved information technokt'y . were used to reduce debt aligned with our expectation in 1996 and 1997 in Iowa resources, are an essential and to fund the $200 million that a deregulated competi-and Illinois.The settlements part of MidAmerican's trans- share repurchase program tive market emironment included provisions for price formation to become a announced in March 1997. will require separation of strong competitor in the Since announcing our the various businesses that years ahead. i

I have comprised our histor-ital vertically integrated gas and electric utility business. under legislation enacted in Effective Jan.1,1998, four lows a number of years ago. business units- energy Thest costs wil; be recovered delivery, transmission, over the next four years.. generation and retail-were Timely recovery is important established asindhidual because the costs might profit centers. otherwise he difficult to - < j recover in a competitive . Approval of our pricing plan emironment. 4 j by low 6 regulators.

  ?Ald3merican designed this      Passage of lilinois restruc-4 ,.
            .                                                      p.            '

[ ' innovative plan and was turing legislation. ' g successfulin getting its MidAmerican took an active

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4 approval with all essential role in the development and ;e - , elements intact. The plan legislative consideration of '4a. N [  ; { j gives MidAmerkan unique the landmark electric *

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{ flexibility in pricing. The industry restructuring bill - plan also allows us the recently adopted in Illinois. y ,  ; opportunity to earn returns Signed into law in December, -4 5 i above those that we would the legislation outlines a - 4 l { be likely to achieve under nine-year transition to full , , _. g j traditional rate base rate of competition. Custome:8 will . 4 Above, Stan Bright, chirraan, president and chief executive c l return regulation to be given choice in energy - i officer, vaits with shareholders prior to an October share- ' i compensate for the added suppliers in phases begin-holder meeting in Council Bluffs, Iowa. risk the Company is ning in 1999. MidAmerican  ; assuming as we mov- was supportive of the bill MidAmerican Energy has expanded its regional shareholder  ! 1(rvard competitive market because it properly meeting schedule,!ast year hosting meetings in h conditions. The plan elimi- addresr,ed our key interests. Des Moines, Sioux City, Council Bluffs, Davenport and  ; nates the energy adjustment MidAmerican wal continue Waterloo. Iowa. I clause in customer billing to take a lead role in shaping Because MidAmerican believes it is important to keep and moves us toward more the discussion of restrue-shareholders informed of the changing energy marketplace uniform electric prices for turing in Iowa. and what MidAmerican is doing to prepare, the Company our residential customers will host meetings in those locations again in 1998, and will cross the state, Development of a strong add meetings in Cedar Rapids, lown, and Minneapolis, Minn. brand name. Aethities taking initiating energy eff ciency Shareholder meetings are just one way MidAmerican place thmughout the(ompany cost recovery. In October, are coming togethe; under communicates with shareholders. Guarterly reports,the MidAmerican began acceler- Company's Web site (http://www.midamerican.com), and our branding strategy. A new our toll-free shareholder service number (1-800-247-5711), ated recovery of costs asso- .mrtising and public rela-are .her ways shareholders can get information about ciated with the mandated tions campaign will be MidAmerican Energy. energy efficiency programs unveiled during the first that have been prmided i

Our management team is committed - part of 1998.The goalis to to the successful transformation concerns ana needs. They e " i"

• diffe"'atiate"ur of MidAmerican Energy from a "in be amiening a siority company in the marketplace to the need to personally in a way ihai win appeai to regulated utility into a leading communicate with our customers. Our branding employees about the effort will reflect the war we customer- riven compet tor.

Company's objectives, w hy think, feel and act as a our existing core business demonstrates the value of the attainment of those company. We know that base, the retail business being proactive. objectives is critical, and what successful brand advertising unit has a wide range of MidAmerican has taken a each employee can do to efforts must be backed by product and service ideas at lead role in designing and help meet those objectives strong performance, and we various stages of develop- Luilding support for a prop-are committed to meeting ment, which represent erty tax reform proposal Building customer Loyalty this challenge. Wu will read growth opportunities. As an that is important to the As you will read in the next more about our branding example, our new e.ppliance success of industry restrue- few pages, building stronger plans in the next few pages. warranty product, launched turing in Iowa. This customer loyalty is recching in late 1996, already has proposal, which is being major emphasis at {

 ; Strategic Business Objectives  almost 10,000 customers.       discussed by the Iowa legis-  MidAmerican. We believe
 ; As we kok to the future, our                                  lature, would preserve and    this effort and the achieve-
 ; effnets in 1998 and beyond     Co:,: reduchons We are         stabilize local government    ment of our business objec-5 will be guided by four         continuing to reduce costs     and school tax revenues and   lives are intertwined. The j strategic business objectives: in order to reinvest in        ensure that out of-state      foregoing strategic business
      = To achieve higher levels  customer senice improve-       energy co:npanies that do     oyectives - growth, cost O
 . of business growth             ments. Our investment in a     not own propertyin Iowa       reduction, management of

{ = To achieve continued new customer information would not have an unfair the external emironment l cost reductions system is an example of this. advantage against the and transformation - l = To improve the effective- The new technologies we Company in a competitive reflect what we are doing to j ness of the management of are putting in the hands of market situation. shape what the customer

 ; our external emironment        our field senice employees,                                  sees. As we succeed in
      = To complete the trans-      uch as mobile data termi-    T:etunnsnor Our manage-       achieving these objectives,
 }

2 formation of MidAmerican nals, which you will read ment team is committed to the customer will see major l from a regula'ed company to about later in the report, the successful transformation improvements in price, a strong competitive are an additional example. of MidAmerican Energy senice and reliability and provider from a regulated utility into willidentify with a strong u.ingum:m v m earne a leading customer.dri en MidAmerican Energy brand. Crwth We will pursue t.n.unna n: The effective competitor. Iterognizing the We believe the achievemem growth opportunitles management of our external enormous challe,nge this of our strategic objectives Ihrough the addition of emironment requires that transformation presents, will result in increased products and senices that MidAmerican take a strong senior managers have begun customer loyalty and I complement our core utility leadership role in legislative to spend significantly more improved returns for our offerings. Although the focus and regulatory aethities time with our customers and shareholders. of our retail organization that impact the Company. our employees who are close l during the past year has Our success in developing to customers in order to Making it Happen been on the need to secure and securing approval of our ensure that we maintain a The changes the energy lowa electric pricing plan full awareness of our industry will experience in customers' evohing l

. from the time of the merger the next decade will be that formed the Company on defining. The changes .luly 1,199.~> until his retire. MidAmerican Energy must ment on May 31,1997. I was make are equally significant. pleased to work closely with The Company's success in lluss from the time we nego-making these changes will tiated the merger in mid-be the direct result of our 1994 until his retirement employees' continued strong last year. His many contribu-contributions. I want to tions to the merger process recognize our employees for and to helping deal uitb 'he * ' their achievements and complex issues that had to 10 - - - -

                                                                                                             -.              w their hard work on the          he ad'iressed in the new                          ., .-                 T                   'n q

Company's behalf during Company's formati'e stages ~ d$$8ia e 1997. I deeply appreciate were much appreciated. . L, - their contributions. Russ continues to serve on . g . _ A personal goal of mine the board of directors and

                                                                                                 ,     i
                                                                              ,       s               .. . f, /.- .    .,                _

for the last year was to as a member of the execu- - ' = I improve communications tive committee of the board. . f with employees about our As we approach the year ( h* N  ; mission, our vision ar.d the major challenges we face. I 2000 and anticipate the competitive market condi-

                                                                                                         )          /

8 g and other members of the tions in which our business " { senior officer group spent a will be conducted in the 21st / great deal of fime traveling g century,it is appropriate to STANLEY J. BfilGHT I our senice area, visiting our take note of the very signifi-facilities and sharing this [ cant contributions that are f information with employees. being made by the Imard of We view this communication directors. The demands on -

                                                                                                                                           =

efTort as a commitmeat to our board continue 1o  : be met on a continuing increase.Their advice and  : basis in 1998 and the years counsel are welcomed and L ahead and a key part of the highly valued. work we need Io do to prepare our employees for the new world. Our commit- -

                                               '/

ment to developing 44 employees is reflected in k the expansion of our new company wide education Stanley J. Bright and development program. Chairman, president and The program pnnides timely Chief Executive Officer and purposeful learning as we work to transform the way we do business. Russ Christiansen sened. as chairman of MidAmerican

O aui cing slarelo c er value

'ui cinc customer oya ty JUi Cing a OUnC ation

(._ - -

As we focus on building a foundation to compete successfully in a competitive market-l place, the link between building customer loyalty I and building shareholder value becomes increasingly apparent.  ; i i

                                                                                                       - I E

e he essence of a with contributing to the were most important to 5 I competitive environ- realization of our vision to them. Our research identi- { ment in any industry become the leading regional fied key factors that " drive" g is customer choice. provider of energy and our customers' loyalty. From - Our challenge will be complementary senices. these loyalty drivers we { to provide customers with Customer loyalty is the determined that it is imper- " compelling reasons to select essentialingedient in our ative that our business tmits MidAmerican Energy prod- formula to campete success- perform even better in these j ucts and senices. We are fully. We def'me customer four areas:  ; taking major steps to meet loyalty not as a " blind" = Reliability 1 that challenge now, loyalty, but as a solid confi- = Senice i MidAmerican took a dence in MidAmerican that a PriceNalue major step on Jan.1,1998, is earned by our actions. = Ilrand Identity by structuring itself into MidAmerican Energy will four business units: genera- build that loyalty not by tion, transmission, energy simply meeting customers' delivery and retail. Each expectations, but by was established as an indi- exceeding them - time and ... SO, What are we d0ing? l vidual profit center, charged time again. In 199", we. asked our customers what characteris-tics of an energy prmider

m. w RELIABILITY SERVICE .

PRICE /VALUE BR AND IDENTITY MidAmerican, accounting for an estimated 24 percent of all outages.The outages occur when animals bridge power lines and disrupt the gap between trans- senice. Tests have demon- i init.ative in this area is a hen customers formers and the power lines strated that the guards can tree-trimming program with

                ;         flip a switch, they         overhead.These ouages,               prevent up to 90 percent of      a three-year cycle. In addi-expect the lights           which typically result in the        these apes of ot;tages.          tion, tree-planting guide-to go on.                   deatL of the animals when                                            lines have been developed MidAmerican                 they make contact with the           Lightning Arrestors. Lightning  and distributed to land-Energy has an excellent                electric equipment,inconve-          strikes cause 19 percent of     scapers, nurseries and
  ,            record of providing our                nience customers and result          all senice disruptions. To      homeowners.

customers with that type of in significant senice address this problem,line {

  ;           senice, with reliability in             restoration costs.                   crews are installing low cost   improving Operations excess of 99.9 percent.                                                                                      Processes
  ;           Nonetheless, the Company

• MidAmerican Energy MidAmerican has initiated a 5 is committed to building on enhances the reliability review of processes within

 ;            this record - first, by a

ofits electrical system g the energy delivery business

  ~                                                                                                                   :

preventing interruptions of by installing spider- unit to identify steps to O _

  ,          senice and second, by                       like " critter control"                                          improve response times a            restoring senice as soon as                  devices atop trans-                                            during electric outages and i,          possible when interruptions                    formers to prevent

• at the report of gas leaks.

2 do occur. outages caused by squirrels and other animals. Here, Line Crew The electric outage { Foreman Larry Palmer installs an animal guard in Des Moines. process redesign team

 ;           Preventing Electric Outages                                                                                  developed and is already 2           To prevent electric outages,                To thwart these incidents,       lightning arrestors, which      implementing nearly three 5           MidAmerican is addressing               last fall MidAmerican line           protect sensitive electric      dozen action recommenda-three factors that account              crews began installing a             equipment and maintain          tions, including:

for half of the outages we do protective metallic guard, senice. = Adding an electric experience. with " spider-like" legs. The system switching console to l low cost desice delivers a Tree Tnmming.'IYees are also reduce switching times and Animal Guards. Squirrels mild shock to the animals a source of outages speed outage restoration. may be small, but they and before they contact the U percent of the tatal) = Using technology to other small animals are a through contact with both improve access to technical big problem for overhead and underground lines. MidAmerican's mWor

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4 data for coordinators in our distribution operations center. e Creating a tracking to ruptured gas lines by 1,ystem to identify problem dispatching both senice trends in the restoration and distribution trucks process and identify simultaneous 4 opportunities for further _ improvements. Looking for ways to prevent Likewise, the gas leak outages and improve senice  ; response team developed a is an ongoing process. Even '

• number of recommenda- so, some senice interrup- l tions. IIere, too, some of the tions are unavoidable. I suggestions wera quickly Communication is important

{ translated into action. to maintaining customer O

      = Prmiding pagers and       loyalty during these infre-                                                                      ,

cellular phones to gas quent occurrences. [ senicemen for greater flexi- MidAmerican has a number i bility a."d speed in ofinitiatives under way to , responding to emergencies improve the quality of our j and for direct customer communication with  ; I contact. customers during periods ) [ e Making programming when outages exist. We see 2 changes to ensure flawless them as a key step to the system routing for all eme:- next imperative, gency gas leak orders.

      . Ensuring consistency                                                                                                           l in response and quick repair l

7 RELIABILITY SERVICE BusinessAdvantage PRICE /VALUE BRAND IDENTITY resulted from market h h redW b need Io supply more exten-customer sanice represen- site senice to tbese larger tatives so that inquirien an readers, field crew volume customers. The be handled faster and more employees and others). program was announced to accurately. Each of these employees is, genetal business customers For quicker information in effect, an ambassador through a communications after regular hours, the who can influence customer program with the message, enice, a natural corol- Company set up an on-call loyalty. "When your business has an lary to reliability,is customer senice represen- To serve as an umbrella energy need, help isjust a being taken to new tative program. When large for all training efforts, the call away." levels at Midterican system outages occur, these Company has created Typical calls involve: Energy. The Company representatives are charged MidAmerican Learning answering billing and rate is making major steps to with quickly staffing the Systems, a new program questions, ordering routine prmide state of-the-art Davenport center. One of that provides training in senice work, prmiding senice to all ofits customers. the goals is a 100 percent areas critical to the energy-saving adsice and {

   ;                                                                                                                  prmidmg information on
   ;        Customer Call Response                             ~ - 5                             MidAmerican          MidAmerican products and l        Central to the efforts is the extends a new        senices. The senice repre-l        consolidation of our call y,gk1'tatlDn                      service to gas       sentatives ham a goal of j        centers into a single call                                ,

a transportation handling 95 percent of the center in Davenport, Iowa, p M4 customers with calls themselves, referring O

   ,        employingleading edge                                  ;- :         ~.:              its pioneering       customers to the appro-f        telecom nunications and E              -

Internet site. priate corporate resource computer technology.The for the remaining 5 percent. l new call center will be fully On anather front, early

   }        operational by the summer           .----~-w-..."~es,,,m..~,-

wew-c-e %

                                                                                 .-. ~- :~e                           last year MidAmerican
   ;        of1998 and allof the                                                                                      launched what we believe I

supporting computer tech- call-back to customers who Company's success and was the industry's first 2 nology will be online by the have reported outages to let shares best practices Internet site through which fall of 1998. them know when power througiwut the organization. business customers can MidAmerican has already restoration will occur. arrange for the transporta-implemented significant Customer specialists and Serving Business Customers tion of natural gas they senice improvements, as a on-call representatives To better meet the needs purchase on the open response to sun'eys that undergo special training, ofits general business cus- market. Customers also can showed customers wanted and MidAmerican's '.omers, MidAmerican Energy monitor their gas shipments better communications from expanded training efforts has introduced a dedicated and usage, current weather the Company. MidAmerican extend into other senice business senice center. conditions and much more has hired customer care areas as well. Called BusinessMvantage*, through this interactive site. specialists to get up-to-date For example, during the the senice prmides a lleveloped internally, this information from crews to first quarter of 1998, the unique toll-free phone innovative system simplifies Company is conducting number for business the process of monitoring

                                                " ambassador" training for               custamers to call specially   the transportation of natural    l all field employees (meter              trained customer senice representatives about their energy needs.                                                  ;

                                                                                                     <     4 t  u

• I gas, putting MidAmerican at .

l the forefront of gas trans-portation senice. MidAmerican also has work, track the progress of taken a new approach to jobs and eliminate paper , economic development. forms (see sid6ar). Traditionally, MidAmerican Until the terminals are - has supported economic installed on a broad-scale , development etTorts to ad6 basis, MidAmerican Energy to its customer base and is using pagers, cellular # improve the vitality of the phones, laptop computers ,- . g . communities it serves. In and hand-held radios in 7 N' > 6' 1997, these effons became senice vehicles to improve < j-more project oriented, response time. Such - e including supporting the communicatioes equipment { , development ofindividual is projected to reduce the N \ i businesses, industries and total thae to respond to 4 , { entrepreneurs. With this customer emergency calls  % - N - new approach, not only does by 1,300 hours annually. .. . . ,, , MidAmerican help commu- Other field technology " b [ ,, # . J4 - nities and add customers, improvement projects under /  ; but it also builds relation- way include: Mobile 0.sta 15cn;nals 't i I e j ? - s ships with businesses for S

                                     = Automated Information                                                                                                ,

Mobile data terminals tMDT) are portable computers, senular u, the future. and Mapping System - ,  ;  ; This system is loaded on i - ' and passengdr front sests. Tise easts decrease response tune , 2 Field Operations improvernents laptops and used by field - l and aise prevede for more efficient schedtaling al work. MidAmerican's commitment personnel to quickly and

                                                               ,,,,,,,,,,,,,9,,,,,,,,,,,,,g,,,,,,,,,,,,,

to customer senice accurately locate and iden- 2 en erster. improvement extends to tify gas valves, electric MDTs c with MidAmerican's infekstion  ! system switches, and of her > field operations. Integral to - l systems and replace answering sad legging service esits by . this effort are several facilities. l redse. paper and pen. Wsth a compte of strekes using a technology-based applica- = ElectricalOutage tions that will allow field Management System - usenster mcoming messages, fill est service terms and send personnel to better and When complete, this system , more quickly respond to will track electric outages ,, customer needs, from the time they are , _ MidAmerican has placed reported through , ,4 g ,,, more than 100 state-of the- dispatchin;and restoration. art mobile data terminals in 4 ,, ,, ,

                                                               ,                     ,                           ga gas department senice vehi-cles and more are on the way.The terminals schedule u

     . - . - . ~ -

RELIABILITY SERVICE PRICE /VALUE BR AND 10ENTi(Y a lowa residential customers received annual customers. Within the limits price reductions of established in the plan several opportunities for $23.5 millicn, including a proposal,Ihe Market Access improvement. Significant $5 million reduction 1o be Senice project will allow savings are pmjected by the made on June 1,1998. these customers to select end of 2001. e llalf of all earnings their electric supplier, with More than 35 specific between 12 and 14 percent electricity delivered through actions to increase efE- return on equity can be MidAmerican's nstem. The rice and value are ciency and reduce costs retained by shareholders. program will olTer a learning were identified and are now a $10 million is available experience for the Company Pextremelyimportant to customers and are often the determining factor in selection being implemented. Pricing Initiatives for lowa business customers for innovative contracts, pilot programs er base rate and customers alike on doing business in a competi-tive energy market. among competing senice A number of customer reductions by June 1,1998. Although initial participa-providers. MidAmerican pricing initiatives will also e Elimination of the tion is limited,it is expected

  }                   Energy is in an emiable               help prepare for the                energy adjustment clause in    the project will be expanded
  ;                   position as a low-cost energv                                                                            in the future. The program.
  ,5                  pnnider. Even so, the                      MidAmerican's pricing initiative wit!                         which reflects a cooperative
  !                   Company is working to bring                decrease and stabilize                                        effort between MidAmerican
  ;.                  down costs even more.                      electricity costs for                                         Energy and major
                                                                                                                ~-

lowa customers customers, requires O Supply Chain Review m

  ,                                                             through the                    i' " w" W ~'                    approval by the IUB and the

{' During 1997, the Company in.tlated a review ofits year 2000. $

                                                                                                       $~            ..        Federal Energv Regulatory Commission (FERC).
  ~

supply cha.m with the dual WN -a,.,x-d! El6' Y purpose of reducing costs Reducing Generation Costs f and increasing inventory approaching competitive customer billing. While the The generation business

  ;                   turnover.The numbers                 climate.                             elimination of this clause     unit is on the leading edge 5                   involved are significant:                In June, the Iowa Utilities      subjects the Cotopany to the   of Midbnerican's corporate-

' MidAmerican's average Board (10B) closely impact of any cost wide commitment to reduce spending on materials and reviewed and approsed an increases,it also creates costs. Generation is looking senices, excluding coal, electric pricing settlement opportunities for to reduce unit costs, or totals nearly $450 million that was designed to Midhnerican to manage generation costs per annually, with more than decrease and stabilize these costs and benefit from megawatt-hour, by 25

                      $50 million in inventory at           prices for low / customers           the savings created.          percent by 2001.                 I any time in 38 energy                 through the yea ?000.The                in connection with the        As discussed earlier, delivery k> cations and four          settlement encompasses all          settlement and approval of     MidAmerican's generation generating facilities.                the major elements of an             MidAmerican's pricing plan,   costs are lower than most The study identified               innovative plan MidAmerican         the Company also filed with    ofits regional competitors.

proposed to the ICB in 1996. the IUB in 1997 for permis- On a national scale, Specific elements follow; sion to conduct a pilot MidAmerican's electric competition program for generation production costs large industrial and commercial electric i

 .                                                                              == M-==      1Eur e .'                f ,,

ew 4-

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• ranked eighth lowest among Ihe 100 largest investor- ~

h]N;' -

                                                                                                                                           ~..--....-...

owned utilities, according to

                                                                                                                                      ]~N the most recent available          There were emiron-                )h FEllC data. And, a 1997 Utility  mental developments in i

Data Institute report placed 1997 that may have a signifi- ,, five of MidAmerican's steam cant effect on the future of T c- ' generating units among the ourindustry and - 1 country's 25 lowest cost MidAmerican. First, the f.- fossil-fueled facilities out of Emironmental Protection '1 ( j 'a a total of 777 units. Agency issued new air- 1. - -g The generation business quality standards on partie- ', N unit is continuing to look for ulate matter and ozone. ways to bring down its unit While Iowa is better post- s i . , _

                                                                                      'I costs. One innovative step was to construct a 6.25 mile tioned with respect to the combined impact of these s

b j? jg. $

                                                                   ,,-               ,    6.                          ,
                                                                                                                      .,            .5,M . g. 9.w* W      ,,y    h railline into MidAmerican's      standards than states to the fj, .. p                                                                           7_           ;

Council Bluffs Energy east, the standards may '"$ h.D ' "

f. > w .:

Center.The additional rail impact the emissions at our *?",ddb [ Y - 7. route brought competition generating units and will ri* k ,,,.< ~ . in rail services to the facility, lowering fuel costs likely affect future market prices for electricity. h/.h NSF l { h 34 MidAmencan Energy's generattaa huseness unst has significantly (see sidebar). Second, the global warming } Fuel costs represented 74 harnessed the ppwer of canpeuteen to drive down fuel  : summit in Kyoto, Japan x transportatten costs. la sa innovative approach. percent of our generating resulted in a commitment , plants' 1997 production by the Clinton driving in the tonal spoke at Council Bluffs. lowa. last " costs. 0ther atenues to Administration to reduce reduce fuel costs are being emissions attributed w;th * { By crestsag niettspie rasl access. the Campsey has been  ; pursued. For instance, causing global warming- ' currently alxiut 45 percent primarily carbon dioxide. We able to ehtaan more lav.orable rail pricingp dehvenes of l of MidAmerican's coal will be carefully watching . sessly g.eststying the envestment in the protect. The rastway purchases are covered by actisities in the emiron-

• long-term contracts expiring mental area and taking between 1998 and 2tol. necessary steps to protect manei industry.

Since pnces under these the Company's interests. . contracts are above spot coal prices, additional - savings should be achiev- ' able. Some contracts have = l already been successfully renegotiated.

                                                                                                             . e

RE LI A BILITY SERVICE  ! l PRICE /VALUE BRAND IDENTITY would find important and complementary to energy. During 1997. MidAmerican The initial offerings in the placed emphasis on begin- MidAmerican listens to its Company's operating terri-ning to develop a brand customers to best provide tory are appliance identity that will differen- exceptional value in warranties and security price /value and tiate the Companyin a exceeding their expectations systems, While reliability, senice are the three operational imperatives that competitive marketplace. A series of newspaper ads and television commercials for energy and other essential needs. The Company has MidAmerican began marketing appliance warranties in the Sioux MidAmerican Energy must in 1997 focused on relia- distilled this positioning Falls, South Dakota area achieve, a fourth is needed bility and value, since these into the following simple and has expanded the to solidify our position in elements are important to overall promise to serviae to Cedar Itapids, the market. customers. Adswillcontinue customers: Sioux City, Iowa City, Fort

  ,                                        to stress these points in the           We're satisfied only when  Dodge, Ottumwa and j      Mve'em.,                          future; however,MidAmerican         you are.                       Des Moines, Iowa; and the
  ;      Thisimperative is brand                                                                              Quad Cities area ofIowa
  ;      identity, which must answer                                                      MidAmerican         and Illinois. Response has
  ;      this question:liow will g                 extends its brand   been solid, with nevly 5

MidAmerican differentiate itself from its competition, d\M%m , identity through complementary 10,000 warranties in force at the end of 1997. Further 1 and howwillthe Company F ' services such as expansion is planned during O[

  ,      communicate this difference                          5   g f

Extended Service 1998. Participating { to customers? , Protection - ESP customers paying a modest i liighly regulated indus- - an appliance monthly fee raceive protec-l tries usually do not have the warranty program. Here, a serviceman prepares tion against costly and same impetus tolaunch to check an air conditioning unit. unavoidable appliance {

 ';      branding campaigns that                                                                              repairs. And,theylike 1      marketers of soft drinks,         helieves that exceptional               This promise will be the   dea!ing with a company that 5      coffee, cereal and deter-         senice will ultimately differ-      focal point of a totally inte- they trust.

gents do. But that, too, is entiate the Company from grated marketing communi- MidAmerican also has changing. The telecommuni- other providers. cations program that will secured a mWor ownership cations industry, which is MidAmerican willfocus on play an important role in position in AAA Security, ahead of the electric utility enhancing its ability to achieving the Company's one of the leading providers industry on the restruc- satisfy customer needs vision.This initiative will of home security systems in turing path, has long been better than anyone else in be unveiled in the first part the Midwest. AAA Security aggressively marketing long- the marketplace. of 1998. recently expanded into the , distance and cellular phone Our desirerbrand posi- Quad Cities and Cedar l senices. It is a prime tion can be sta e i as Complementary Services Rapids areas. Its Quad example of how building a follows: Since part of MidAmerican's Cities operation was strong brand impacts a brand identity deals with enhanced when company's success, essential senices, the Company took concrete steps in 1997 to offer customers senices they i

With the theme " Power of MidAmerican acquired Focus," the program was liettendorf Lock and implemented through Security Senices, the area's several venues, including largest lock company. direct mail to 400 key in December of 1997, investment professionals, MidAmerican extended its group presentations in reach into this attractive major financial markets, field with the acquisition of and scores of one-on one Omaha-based A/C Seemity, meetings with financial . one of the fastest growing analyse and institutional . security companies in the investors throughout the Midwest. In addition to United States. Omaha, A/C Security also The " Power of Focus" k operates in Sioux City, Iowa, program was well-received h and throughout Nebraska by analysts and institu- . and South Dakota. In total, tional investors, with over- .  ; more than 15,000 homes whelmingly positive p . . , . g p and businesses receive feedback. As the year . .

                                                                                                                                ] ;
                                                                                  -,                                              e security senices through        unfolded, the Company's                     - .                                                I ~

a MidAmerican security common stock attracted 9 MidAnnoncan Energy chasistently sinves to be a good e operation. more attention. = MidAmerican plans to MidAmerican s stock price

                                                           ,     corporate cetiren en the coenmunsties en which it eyes'ates.
                                                                                                                                  ; i Reflecting that comunnenent, dunne the latter part al 1951 the     '

offer other complementary rose 39 percent for the ful! ' senices to capitalize on year. That stock apprecia-Cesnygny l===chpl a new educatsee program ; called [ Energy im Educatsen --- for elenientary and secondary " market needs. tion, plus the dhidend yield, d allowed the Company to scheels througboat its service area. Above. school children en the Quad-Cities area learn abo 6t energy and safety using  ; Power of Focus reach its goal of being in the

                        ,                                        insterials provided by MidAniencan.

MidAmerir an also is differ- top quartile of returns to Free programs and intennation enclude after-school work-entiating itself m the invest- shareholders of publicly

                                                        ..       shops ter teachers en energy The instaal wakshop, rs a ment community as a part of     held utilities, itecognizing Wsred1Merfd provides tourth- through sixth-grade teachers its efforts to build share. the need to continue efl,ee-with information about electnc covents and electnc safety holder value. This type of      the communication with rules thremph expenments. In additsen. sets el natural gas
 " branding" was Imtiated m. mvestors, an intensive
                                            .                    hoeklets. posters and videos. targeted at vaneus grade March 1994, as                  commumcat. ions program levels. are anned trhe to kmengarian students threagh MidAmerican undertook an        with investors and the effort to effectisely commu-                                    hesh scheel   semers.
                      '          financial media will

• On-sne activstees are aise included For instance, tours of nicate its vision and strate- continue in If,98.

trve el die Cesiipany's generating osations aff available to gies to the investment

            ,                                                    students from grades seven and above.

commumty. 4 b

                                                                                                                                       -  1 MIDAMERICAN AT A GLANCE                                                                                                               I i

E ARNINGS PER DIVIDENDS M ARKET VALUE AND YE AR END BOOK V ALUE III IAAU COMMON SHARE DECLARED is . ...i M! A! A 4! O! q! Mj q s i s i s ;l M sls!M si si n; si n $24 2 " N'*

                                                                                                                ~!'Oi"!NIN i                                                           i 22 i                                       !                      j      !

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 $                                                                      10 93 94 95 96 97                 93 94 95 96 97               93 94 95 % 97                   93 94 95 96 97 x

5 Market Range and Close a Retail l == Book Value a Sales for Resale Y l

 ~

5 >

 >          1997 earnings totaled         MidAmerican's indicated     MidAmerican's stock price         1997 electric retail sales
           $135.1 million or f, M per     annual dividend is $1.20. appreciated by 39 percent         increased 2.6 percent, share. Hedeployn nt of         MidAmerican, together with  during 1997, compared with        compared with 1990. Modest MidArnerican's t ,nregu.       its predecessor companies,  the Value Line Utilities          customer growth and a more lated assets contributed to    has paid a dhidend continu. Index appreciation of             favorable coolir.g season an increase in earnings per     ously since 1950.           22 percent.                       contributed to the increase.

share. Utility income was reduced in part due to rate reductions implemented during late 1996 and 1997, and due to increases in operations expenses - incurred as the Company continues its strategic initiatives.

l ( 0EBT AS A COMMON SH ARES CONST R UCTION ' C A$ THROUGHPUT pgNCENT AGE OF TOT AL immensof MM8tui EXPENDtiuRES i C AP1T AtiZ ATIO N imanans ce s he'eut amnWene. i j E)3)il5l5

          -:        -:      i-s!ki$!$
                                         ..; sis- $   .
                                                                $   5!!!! !!b                       E!

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                                                                                                                              =

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                                            =    2 ._                 _

e 93 94 95 96 97 93 94 95 96 97 94 95 96 97 98 Dec MaoJune sept Dec ". E Retail N Electnc a Gas 96 97 97 97 97 s Transport * = **= *'a ' usen doong ranwucwl

• y I t I  ;

1 C Retail natural gas sales in Two main factors have led to 1997 utility capital expendi- Since announcing a share i 1997 decreased 7.1 percent, a reduction in MidAmerican's tures totaled $167 million. repurchase program in compared with 1996 retail cabt ratio compared to prior The increase in expendi- March 1997, MidAmerican sales, due mainly to warmer years. MidAmerican Energy tures from 1996 is due to has reacquired roughly 5 i conditions during the first lioldings reduced long-term the significant capital million shares, or 5 percent and fourth quarter heating debt (excluding current investments MidAmerican is ofits outstanding common I seasons of 1997. portion) by $361 million in making to employ state-of- stock. Reacquired shares i 1997. Also, MidAmerican the-art information and are retired, benefiting I recorded its investment in communications technok)- shareholders by increasing McLeodUSA, a regional gies. We believe these tech- earnings per share and telecommunications nologies will be critical to reducing dhidend costs, g provider, at market value our al+ty to be competitive while maintaining the indi-a resulting in an increase of in the future. cated annual dhidend.

                               $138.3 million in common equity.

EARNINGS OVERVIED The condensedfinancialstatanentspresented in this Illinois, MidAmerican reduced its Illinois electric senice summary annual rq> ort are derived /mm the auditedfinan- prices by $13.1 million annually on November 3,1996, and cialstatements of the Company A copy of the Company's $2.4 million annually on June 1,1997. Also in June 1997, the consolidatedfinancial statements with the report of the Iowa Utilities Board (It'B) approved a settlement agreement indq>endent accountants is included in AppendirA in the regarding MidAmerican's lowa electric senice prices. 1993 Pmry Slatement. forward-looking statements Accordingly, prices for lowa residential customers were contained in this Summary AunualReport are qualified by reduced by $8.5 million annually beginning November 1,1996, the cautionary language included in AppendirA in the 1998 and $10 million annually effective July 11,1997. Residential Pm:ry Statement. Thefollowing discussion is an overcier 9/ prices will be reduced an additional $5 million annually the more signi/icant items in 1997 and prior years. beginning. lune 1,1998. Prices for commercial and industrial customers will be reduced $10 million annually by June 1, 1997 Eamings 1998, in part through pilot projects and negotiated price Earnings per share for 1997 totaled $1.38. The 8 cent increase reductions. over the $1.30 per share reported for 1996 was due primarily Modest customer growth and a hotter summer in 1997 than

-          to continued redeployment of our nonregulated business            in 1996 (though cooler than normal) resulted in a 3 percent f          investments. In 1997, the Company's nonregulated subsidiaries     increase in electric retail sales. The number of natural gas contributed 20 cents per share to continuing operations, an       customers also increased in 1997; however, the impact of
;          increase of 31 cents per share compared to 1996. Ar discussed     milder heating seasons in 1997 than in 1996 resulted in a below, the 1996 earnings of nonregulated subsidiaries incloded     7 percent decrease in retail sales of natural gas. Overall, the

{= write-downs of certain energy-related investments which impact of customer growth and weather increased 1997 { reduced earnings for that year. Utility earnings decreased in earnings by 5 cents per share compared to 1996. j 1997 due in part to electric price reductions implemented in Beginning September 29,1997, revenues included an

1996 and 1997. Additionally, utility operating expenses increase for additional recovuy of costs related to the

 ,        increased as we continued strategic realignment of the Company   Company's energy efficiency programs. On that date, the IUB 5         and focused on preparing for a competitive emironment.             issued an order allowing MidAmerican to begin collecting d l              In 1997, the Company sold assets of its railcar leasing and  remaining energy efficiency costs related to prior years as

[ repair businesses, recognizing an after-tax gain of 6 cents per well as the ongoing costs of those programs. Based on the ? share. An additional gain of 5 cents per share resulted from current level of such costs, MidAmerican will collect approxi-h the sale of a portion of the Company's investment in the mately $49 million annually in additional revenues over the common stock of McLeodUSA Incorporated. The transfer of shares of MetalUSA stock to the Company's tax exempt COOLING DEGREE D AYS HE ATING DEGREE D AYS foundation contributed 3 cents per share to 1997 earnings. Based on a tiase tempe'atce Basee m a tiase temperawe of 65 oegrees Fabrenheit of 65aegreesFahrenhe:t Also, the Company used a portion of the cash proceeds from

                                                                                                     .                  l the January 1997 sale of its oil and gas exp! oration and devel-                      !2i'
                                                                                                                               <              :Ei opment business to retire long term debt, significantly reducing interest costs for the nonregulated subsidiaries.

Reductions in MidAmerican's prices for basic electric l , senices reduced earnings per share by approximately 7 cents compared to 1996. As a result of a negotiated settlement in l

                                                                                                                                                   .i _

93 94 95 96 97 l 93 94 95 96 97 , t E Actual = Normar l 5 Actual = Normar i

• Mrma' changes once each decade and when senace temtory changes I

j

1 1 four-year period that began September 29,1997. During that Electric retail sales in 1996 increased approximately same period, other operating expenses will include an addi- 2 percent compared to 1995 sales. Modest customer growth, a tional $42 million annually as the related costs are charged favorable heating seas <m and an increase in sales that are less to expense. dependent on weather all contributed to the improvement. I Continued restructuring of the Company in preparation for The impact of these factors was partially offset by the effect a competitive utility industry has resulted in additional costs. of cooler than-normal weather conditions during the summer MidAmerican has increr. sed its emphasis in marketing-related of 1996. efforts, as well as customer senice operations, resulting in Hetail sales of natural gas in 1906 improved approximately increases in consulting costs, advertising and other related 3 percent compared to 1995 due to a colder than-normal expenses. Utility operating expenses for 1997 also reflect heating season and customer growth. Compared to normal, costs for the partial year effect of the increase in energy effi- the net effect of weather on electric and gas sales reduced I ciency expenses. The Company incurred $2 million in mainte- 1996 earnings by an estimated 4 cents per share. nance expenses related to a damaging snowstorm that hit the Earnings for 1996 were also influenced by changes in elec-service territory in October 1997. tric and gas prices during 1996 and 1995. Electric and gas J in September 1997, MidAmerican received a $15 million sales in 1996 reflect a full-year's effect ofincreases imple- l cash payment from Nebraska Public Power District (NPPD) mented in mid-1995. The benefit of these increases was offset  ; I as settlement for a lawsuit filed by MidAmerican against by the price reductions in the last half of 1996.  ; NPPD. Approximately $12 million was refunded to The Company's gas utility operations sold certain storage  ; MidAmerican's customers. The remaining amount was gas supplies for a gain in 1996 and also received an award for { retained by MidAmerican for recovery oflitigation costs success achieved under the Company's incentive gas procure-

• incurred in 1997 and prior years, ment program. Together these transactions added 3 cents per {

As in 1996, MidAmerican received awards for r ul share to 1996 earnings. f performance under its incentive gas procurement p.wam. In August 1996, the Company proposed a merger with IES  ; The awards contributed 3 cents per share to 1997 earnings. Industries Inc. (lES). The Company discontinued its attempt Discontinued operations for 1997 include an additional loss to merge with IES after the IES board of directors and I for the sale of a subsidiary which developed and operated a holders of a majority of IES common stock rejected the  ! computerized information system for real time exchange of proposal in favor of a pending merger with two other utility [ power in the electric industry. The Company disposed of the companies. Costs incurred in the effort reduced 1996 earnings j investment in October 1997. Discontinued operations reduced by 5 cents per share. 5 1997 earnings by 4 cents per share.

                                                                            " " #    'I' * *                     ""*"I'

1996 Earnings SALES BY S AL18 BY The Company's earnings per share were $1.30 for 1996, an JuaiSoIci10N JUR1SD1CTION i improvement of 8 cents from the $1.22 reported for 1995. *'""""'" ***"'"* l Income from continuing operations for 1996 increased 24 cents per share to $1.43. The increase in earnings reflects the realization in 1996 of savings from the merger that created l MidAmerican, as well as the absence of the costs which were l incurred in 1995 to complete the merger and achieve , j the sarmgs. usa-Soutti Dakota 1% Nebrasks 1%

E ARNINGS OVERVIEffl During 1996, the Company redeployed certain of its nonreg- 1995 Earnings ulated investmenta as part of its strategy of becoming the Earnings for 1995 totaled $1.22 per share. Temperatures in leadmg regional pnnider of energy and complementary the summer were hotter than normal, which resulted in senices. The Company decided to sell several subsidiaries higher retail sales of electricity and a positive impact on that were not meeting earnings expectations or that no longer earnings of approximately 15 cents per share. The benefit of aligned with the Company's objectives. The Company's finan. this increase was othet by costs related to the Company's cial statements reflect these operations as discontinued. 1995 merger. In December, the Company sold a portion of its nonregu- During 1995, the Company incurred merger related costs lated operations to KCS Energy Inc. for warrants ta purchase which reduced 1995 earnings by 24 cents per share. Other KCS common stock and (210 million in cash. The sale, which operating expenses for 1995 include $33.4 mi' lion for costs of was completed in January 1997, included the oil and gas a restructuring plan Ihat included a work force reduction. exploration and development operations of the Company. The Costs to complete the merger totaled $4.6 millior and are Company's 1996 earnings reflect a loss of 7 cents per share for included in Other, Net in the Consolidated Statements of the transaction. Income. in addition, the Company recorded in 1996 an anticipated Write downs of certain investments of the nonregulated 7

loss of 4 cents per share for disposal of the computerized subsidiaries reduced 1995 earninga by approximately 10 cents

information system subsidiary sold in October 1997, per share. The investments were primarily alternative energy

in October 1996, the Company received $15.3 million in projects. Earnings for 1995 also reflect 5 cents per share for cash as final settlement for the sale of a former coal mining gains on the sales of a partnership interest in a gas marketing

{ a subsidiary reflected as discontinued operations in 1982 by one organization and a telecommunications subsidiary. The pre- { of the Company's predecessors. The final settlement included tax amount of the write-downs ($18.0 million) and the gains reacquisition by the buyer of its preferred equity issued to the on sales ($8.5 million) are included in Other, Net in the f

Company and settlement of reclamation reserves.The Consolidated Statements ofIncome.

Company's 1996 earnings reflect a loss of 3 cents per share. I Purther evaluation of nonregulated investments resulted in !v write-downs of certain assets, primarily alternative energy

;        projects. These write-downs, totaling $15.6 million before                          Common Stock Dividends and Prices j        taxes, reduced earnings by 9 cents per share.
                                                                                                                                          /wcr Range
?                                                                                                                Declared       Ihgh          low        Case 1997 I            rust mix,                                                                4th Quarter       $ 0.30       $ 22 5/8    $ 17        $ 22 1N$T Attt0                                 ~UEi M'K-                     ;Ird Quarter        0.30         17 5/8       10 5/16    17 1/4 C AP ACITY.                            G E N E R A110 N ' *              ,

l 1st Quarter 0.30 17 7/8 15 1/2 17 1/8 I Dil/ Gas 1% l l l 1996 ) 4th Quarter $0.30 $ 161/4 $ 14 3/4 $ 15 7/8 l l 3rd Quarter 0.30 17 3/4 15 3/8 15 7/8 l

                                                      !                                          2nd Quarter        0.30         17 7/8      16 1/4      17 1/4   l l

l lst Quarter 0.30 18 7/8 16 1/4 17 7/8 l l l

        *Neear eujudes a eml> owned piant and output pucased uNet a lorg term power puthase contrxt tam anomer taohty Coal at OGas are owneo or enny owrmd tacmes
       " As a pecerrt of 1997 generaton

e

  .                                                                    CONSOLIDATED STATEMENTS OF INCOME (h thousands, e,rcept per share anwants) hars Ended hvember31                                           1991           1996           1995 Operating Revenues Electric utility                                      $1,126.300      $1,099,008    $1,094,647 Gas utility                                                536,306         536,753       459,588 Nonregulated                                               259,675         236,851         95,106 1,922,281       1,872,612     1,649,341 Operating Expenses Utility:

Cost of fuel, energy and capacity 235,760 234,317 2' '61 Cost of gas sold 346,016 345,014 2hr,025 Other operating expenses 429,794 350,174 399,648 Maintenance 98,090 88,621 85,363 Depreciation and amortization 170,540 164,592 158,950 Property and other taxes 101,317 92,630 96,350 1,381,517 1,275,348 1,249,597 Nonregulated: Cost of sales 240,182 218,256 70,209  ; Other 30,076 35,370 37,181  ; 270,258 253,626 107,390  ;

        - Total operating expenses                            1,651,775,s40    1 ,528,974,pti 1,356,987 , gg. j Operating lacome 270,506          343,638       202,354      j Non-Operating lacome Interest income                                               5,318          4,012          4,485     2 Dividend income -                                           13,792          16,985         16,954     I Realized gains and losses on securities, net                  7,798          1,895            688    9 Other, net                                                  22.111          (4,020)      (10,467)     ;

49,019 18,872 11,660 h Fixed Charges Interest on long-term debt 89,898 102,909 105,550 Otherinterest expense 10,034 10,941 0,449  % Preferred dividends of subsidiaries 14,468 10,689 8,059 Allowance for borrowed funds (2,597) (4,212) (5,552) l 111,803 120,327 117,506 l Inconee From Continuing Operations Before income Taxes 207,722 242,183 186,508 lacome Taxes 68,390 98,422 66,803 12come From Continuing Operations 139,332 143,761 119,705 Discontinued Operations income (loss) from operations (net of income taxes) (118) 2,117 3,059 J

    . Loss on disposal (net ofincome taxes)                        (4,110)       (14,832)               -

(4,228) (12,715) 3,059 1 1

                                                             $ 135,104

[ Net income ' 98,058

                                                                             $ 131,046     $ 122,764 Average Common Shares Outstanding                                          100,752        1(K),401 Earnings Per Common Share Continuing operations -                                $        1.42   8       1,43  $        1.19        )

Discontinued operations (0.04) (0.13) 013 l

                                                             $        1.38   $       1.30  $        1.22 f-Dividends Declared Per Share                           $        1.20   $       1.20  $         1 18 l

T-CO*J SOLIDATED BALANCE SHEETS Un themsands) As iftwember 31 1997 1996 ASSETS Utility Plant Electric $4,084,920 $4,010,847 Gas 756.874 723,491 4,841,794 4,734,338 Less accumulated depreciation and amortization 2,275,099-2,153,058 2,566,695 2,581,280 Construction work in progress 55,418 49,305 2,622,113 2,630,585 Power Purchase Contract 173,107 100,897 Investment in Discontinued Operations - 166,320 Current Assets Cash and cash equivalents 10.468 - 97,749 Receivables 207,471 312,015

    -         Inventories                                                     86,091            90,864 Other,

{ 18,452 11,031

    ;                                                                       322,482           511,659
   ;          Investments                                                   799,524           622,972 l          Other Assets                                                 360,865            399,415 l
   ;          Total Asseta                                            $4,278,091          $4,521,848 O>

CAPITALIZATION AND LI ABILITIES T Capitalization

                                                                  'tc 1

Common shareholders' equity Preferred securities Y\ $1,239,946

• 1si,tos 181,769 Long4erm debt (excluding current portion) 1,034,211 1,395,103 2,517,260 2,816,818 5 Current Liabilities I, Notes payable 138,054 161,990 s Current portion oflong term debt 144,558 79,598 Current portion of power purchase contract 14,361 13,718 Accounts payable 145,855 169,800 Taxes accrued 92,629 82,254 Interest accrued 22,355 28,513 Other- 38,766 22,830 596,578 558,709 Other Liabilities Power purchase contract 83,143 97,504 Deferred income taxes 761,795 722,300 investment tax credit 83,127 88,842 Other 236,188 237,675 1,164,253 1,146,321 Total Capitalization and Liabilities ) $4,li21,848

1 e , CONSOLIDATED STATECENTS OF CASH FLOWS (h tuusands) krs Ended Decernber 31 1991 1996 1995 Net Cash Flows from Operating Actidties Netincome $ 135,104 $ 131,046 $ 122,764 Adjustments to reconcile net income to net cash provided: Depreciation and amortization 197,454 190,511 181,636 Net increase (decrease) in deferred income taxes and investment tax credit, net (71,191) (7,894) (961) Amortization of other assets 33,761 20,541 19,630 Cash proceeds from accounts receivable sale 70,000 - - Capitalized cost of real estate sold 1,859 3.568 1,744 Loss (income) from discontinued operations 4,228 12,715 (3,059) Gain on sale of securities, assets and other investments (9,996) (10,132) (1,050) Other-than-temporary decline in value ofinvestments 3,795 15,566 17,971 Impact of changes in working capital, net of effects from

         . discontinued operations                                     28,098       (53,752)       (21,024)

Other (867) 19,218 19,369 Net cash provided 392,245 321,387 337,020 Net Cash Flows From Investing Activities Utility construction expenditures (166,932) (154,108) (190,771) . Quad Cities Nuclear Power Station decommissioning trust fund (9,819) (8,607) (8,636) Deferred energy efficiency expenditures (12,258) (20,390) (35,841) Nonregulated capital expenditures { (14,066) (55,788) (12,881) i Purchase of securities (159,770) (198,947) (164,521) l Proceeds from sale of securities 180,890 243,290 94,493 - Proceeds from sale of assets and other investments 57,433 33,285 34,263 investment in discontinued operations 181,321 { (5,984) (9,752) g Other investing activities, net (1,360) 8,308 6,946 , Net cash provided (used) 55,439 (159,031) (286,700) E N;t Cash Flows From Financing Activities

• Common dividends paid (117,605) (120,770) (118,828) l Issuance of long-term debt, net of issuance cost -

99,500 12,750  ! I Retirement oflong-term debt, including reacquisition cost (122,300) (136,616) (110,351) 1 l Reacquisition of preferred shares (6) (58,176) (10) Reacquisition of common shares (96,618) - - S lssuance of preferred shares, net of issuance cost - 96,850 - 8 i increase (decrease) in Mid/enerican Capital Company l unsecured revolving credit facility - (174,500) 44,500 95,000 i Issuance of common shares - - 15,083 i Net increase (decrease) in notes payable (23,936) (22,810) 60,300 l Net cash used (534,965) (97,522) (46,056) l N t increase (Decrease) in Cash and Cash Equivalents (87,281) 64,834 4,264 Cash and Cash Equivalents at Beginning of Year 97,749 32,915 28,651 Cash and Cash Equivalents at End of Year $ 10,468 $ 97,749 $ 32,915 i Additional Cash Flow Information: pterest paid, net of amounts capitalized S 96,805 $ 107,179 $ 116,843 Income taxes paid 5 130,521 $ 63,894 $ 69,319 l

h ACCOUNTANT $' AND fdANAGEMECT'S REPORTS Report ofindependent Accountants Report of Management To the Shareholders of MidAmerican Energy Management is responsible for the preparation of all informa-lloldings Company: tion contained in this summary annual report, including the We have audited, in accordance with generally accepted condensed financial statements. The statements and related auditing standards, the consolidated balance sheets and Anancialinformation have been prepared in conformity with statements of capitalization of MidAmerican Energy lloldings generally accepted accounting principles. In the opinion of Company and subsidiaries as of December 31,1997 and 1996, management, the financial position, results of operation and the related consolidated statements of income, retained and cash flows of the Company are reflected fairly in the

          . earnings, and cash flows for each of the three years in the      condensed statements. The consolidated financial statements, period ended December 31,1997, appearing in Appendix A           from which the information contained herein was derived, to the proxy statement for the 1998 Annual Meeting of            have been audited by the Company's independent public Shareholders of MidAmerican Energy lloldings Company (not        accountants, Coopers & L3trand LLP.

presented herein). In our report dated January 23,1998, also The Company maintains a system ofinternal controls 7 appearing in that proxy statement, we expressed an unquali- which is designed to pmvide reasonable assurance, on a cost-g fled opinion on those consolidated financial statements. effective basis, that transactions are executed in accordance In our opinion, the information set forth in the accompa- with management's authorization, the financial statements

  ;        nying condensed consolidated financial statements is fairly      are reliable and the Company's assets are properly accounted

{ stated,in all material respects,in relation to the consolidated for and safeguarded. The Company's internal auditors contin-financial statements from which it has been derived,

 ]                                                                          ually evaluate and test the system ofinternal controls and
 ;                                                                         actions are taken when opportunities for improvement are U                            w              J6Mg                          idensed. Managemenomliews mat me s3mm of iernal
  ,                                                                        controls is effecth'e.

The Audit Committee of the Board of Directors, the I Coopers & Lybrand LLP. members of which are directors who are not employees of I Kansas City, Missouri the Company, meets regularly with management, the internal f s January 23,1998 auditors and Coopers & Lybrand LLP. to discuss accounting, auditing, internal control and financial reporting matters. o The Company's independent public accountants are appointed annually by the Board of Directors on recommendation of the Audit Committee. The internal auditors and Cooters & Lybrand LLP. each have full access to the Audit Committee, without management representatives present. I

                                                                                     \

Stanley J. Bright Alan L Wells Chairman, President and Senior Vice President-Chief Executive Officer Finance snd Chief Financia10fficer E .

e

  .                                                                           UNAUDITED UTILITY HVE YEAR ELECTRIC STAT 13 TICS krs L&ilkmodwr Sl                                  1991            1996            1995          1994            199.1 Revenues (In thousands)

Residential . $ 417,845 8 415,954 $ 434,105 8 400,346 $ 386,047 Small general senice 246,927 237,466 252,427 253,703 242,205 Large general senice 249,444 241,172 219,075 - 204,481 193,616 Other sales . 62,261 60,476 60,160 57,731 56,198 Scies for resale 124,741 121,452 105,472 84,260 104,461 Total from electric sales 1,101,218 1,076,520 1,071,239 1,000,521 . 982,527 Other electric revenue 25,082 22,488 23,408 21,139 20,443

                                                  $ 1,126,300     $ 1,099,008     8 1,094,647    8 1,021,660    $ 1,002,970 Sales (hTh in thousands)

Residential 4,740,688 4.652,031 4,767,608 4,500,265 4,475,883 Small general senice 3,725,873 3,565,459 3,920,792 4,062,993 3,937,360

      ' Large general senice                        6,204,087       6,067,325       5,351,933      5,091,685      4,851,493 Other                                          91K,,295        988,022         957,463       938,620         930,117 Sales for resale                            6,987,268       6,727,326       5,509,161      3,605,092      5,566,208 22,653,211      22,000,163      20,506,957     18,198,655     19,761,061 Revenues From Sales as a % of Total                                                                                     5 Residential                                        37.9            38.6           40.5           40.0            39.3   i Small generalsenice                                22.4            22.1           23.6           25.4            24.7 Large generalsenice                                22.7            22.4           20.5           20.4            19.7   7 Other                                                5.7            5.6              5.6           5.8            5.7   ?

Sales for resale 11.3 11.3 9.8 8.4 10.6  !

100.0 100.0 100.0 100.0 100.0  ; I Sales as a % of Total Residential 20.9 21.1 23.2 24.7 22.7 4 Small general senice 16.5 16.2 19.1 22.3 10.9 5 Large general senice 27.4 27.6 26.1 28.0 24.5 1 Other 4.4 4.5 4.7 5.2 4.7 i Sales for resale 30.8 30.6 26.9 19.8 28.2  ; 100.0 100.0 100.0 100.0 100.0 Retall Electric Sales by Jurisdiction (%) s lowa 88.6 88.7 88.4 88.6 88.7  ; lilinois 10.7 10.6 11.0 10.9 16.0  ; South Dakota 0.7 0.7 0.6 0.5 0.4 100.0 100.0 100.0 100.0 100.0 Customers (End of year) Residential 563,189 . 557,637 551,384 548,106 541,220 Small general senice 73,488 73,022 72,616 69,905 68,829 Large general senice 1,000 982 945 743 744 Other 10.047 9,937 9,744 9,518 0,572 Sales for resale 47 55 55 59 63 647,771 641,633 634,744 628,331 620,428 Annual Average Per Residential Customer Revenue per kWh (Cents) 8.81 8.94 9.11 8.90 8.62 KWh sales 8,463 8,392 8,670 8,265 8,310 Cooling Degree Days Actual 883 788 1,112 912 813 Percent warmer (colder) than normal (7.5) (17.5) 14.1 (6.5) (16.4) Electric Peak Demand (Net MW) 3.548 ' 3,537 3,553 3,226 3,284 Summer Net Accredited Capability (MW) 4,293 4,301 4,311 4,145 4,072 i- -

e DN AUDITED UTILITY FIVE-YE All C AS STATISTICS , leers EndedIkerrnher 31 1997 1996 1993 1994 1993 Revenues (in thousands) Residential $339,924 $338,605 $279,819 $287,171 $319,359 Small generalsenice 152,661. 153,616 128,501 142,894 150,913 Large general senice 15,201 17,670 23,280 36,729 37,761 Sales for resale and other 2,914 2,050 5,303 5,514 10,376 Total revenue from gas sales 510,700 ' 511,941 436,903 472,308 518.409 Gas transported 20,443 20,155 16,677 12,842 13,457 Other gas nwenues 5,163 4,657 6,008 6,865 7,123

                                                                    $536,306      5536,753      $459,588     $492,015      $538,989 Throughput (MMBtu in thousands)

Sales ' Residential 57,039 61,732 57,153 54,732 60,612 Small general senice 31,066 33,642 32,786 32,677 34,504 Large general senice 3,920 4,634 6,222 8,253 0,681 Sales for resale and other 1,800 977 3,582 3,231 4,305 Total sales 93,825 100,985 99,743 98,893 109,102 Gas transported 58,804 54,618 50,695 { 43,293 39,570 152,629 155,003 150,438 142,186 148,672

        $        Revenues From Throughput as a % of Total l        Residential                                              64.0          63.6         61.7          59.2         60.0 l<        Smali generalsenice                                     28.7           28.9         28.3          29.4         28.4 Large general senice                                      2.9           3.3           5.1           7.6          7.1
      ;          Sales for resale and other                                0.5           0.4           1.2            1.1         2.0

Gas transported 3.9 3.8 3.7 2.7 2.5 100.0 100.0 100.0 100.0 100.0 l Sales as a % of Total (Excludes gas transported)

      ;          Residential                                             60.8          61.1          57.3          55.3         55.6 Smallgeneral senice                                      33.1          33.3          32.9          33.0         31.6 l          Large general senice                                      4.2           4.6           6.2           8.4          8.9 Sales for resale and other                                1.9

{ 1.0 3.6 3.3 3.9

      ;                                                                100.0         100.0         100.0        100.0         100.0
     $           Retail Gas Sales by Jurisdiction (%)

a lowa 79.1 78.0 77.1 76.6 74.5 filinois 10.4 11.0 11.6 11.9 11.4 South Dakota 9.8 10.3 10.6 10.8 5.4 Other 0.7 0.7 0.7 0.7 8.7 l 100.0 100.0 100.0 100.0 100.0 Customers (Endofyear) Residential 558,501 550,786 541.732 535,301 526,863 Small general senice 58,739 58,059 57,207 55,855 54,972 Large general senice 767 821 830 876 868 Gas transported and other 569 504 1,128 171 128 618,576 610,170 600,897 592,203 582,831 Annual Averages Per Residential Customer Revenue per MMBtu $ 5.96 $ 5.49 $ 4.90 $ 5.25 $ 5.27 MMBtu sales 103 113 106 103 111 Heating Degree Days Actual 6,872 7,445 6,841 6,565 7,097 Percent colder (warmer) than normal 1.6 10.1 0.9 3.2 (3.5) Cost per MMBtu 5 3.69 $ 3.42 $ 2.80 $ 3.30 $ 3.36

6 UN AUDITED FIVE YEAR FIN ANCIAL STATISTICS Vrs Endedikemtwr 31 1997 1996 1995 1994 1993 Earnlags Statistics Earnings per average common share Continuing operations: Utility operations $ 1.22 8 1.54 $ 1.24 8 1.12 8 1.29 Nonregulated aethities 020 (0.11) (0.05) 0.13 0.09 Discontinued operations (0.04) (0.13) 0.03 (0.03) 0.01

                                                       $ 1.38    $ 1.30      $ 1.22       $ 1.22       $ 1.39 Average shares of common stock outstanding (In thousands)                       98,058   100,752     100,401       98,531       97,762 Return on average common equity (%)                   10.8       10.6       10.1          10.1        11.6 Cash dividends declared per common share          $ 1.20    $ 1.20      $ 1.18       $ 1.17       8 1.17 Common dhidend payout ratio (%)                         87         92          97           96           84
   ' Ratio of earnings to fixed charges lloidings                                           3.0        3.2         2.8          2.8          2.8 MidAmerican                                         3.1        4.1         3.4          3.3          3.4 Ratio of earnings to fixed charges and Cooper                                                                   ;

Nuclear Strtion debt service o , IIoldin0 2.9 3.1 2.7 2.7 2.8 1 MidA cerican 3.0 4.0 3.3 3.2 3.3 [ Quarterly earnings per average common share 2 outstanding i ist quarter $ 0.34 8 0.51 8 0.35 $ 0.45 $ 0.44 l 2nd quarter 0.25 0.29 0.25 0.22 0.22  ; 3rd quarter 0.48 0.22 0.36 0.36 0.52  : l 4th quarter 0.31 0.28 0.27 0.19 0.20 g Balance Sheet Statistics h

     'Ibtal assets (in millions)                       $ 4,278   . 4,522     $ 4,470      $ 4,389      $ 4,352       ;

l Capitalization (in mi!! ions) Common shareholders' equity 5 1,301 8 1,240 $ 1,226 $ 1,204 $ 1,181 l Preferred shares, not subject to t mandatory redemption 32 32 90 90 110 1 Preferred shares, subject to 3 mandatory redemption 150 150 50 50 50 1,034 1,341

• Long-term debt (excluding current portion) 1,395 1,403 1,398 Capitalization ratios (%)

Common shareholders' equity 51.7 44.0 44.3 43.9 44.0 Preferred shares, not subject to mandatory redemption 12 1.1 3.2 3.3 4.1 Preferred shares, subject to l mandatory redemption 6.0 5.4 1.8 1.8 1.9 Long-term debt (excluding current portion) 41.1 49.5 50.7 51.0 50.0 Book value per common share at year-end 5 13.65 $ 12.31 $ 12.17 8 12.08 8 12.07 Utility construction expenditures (In thousands) $166,932 $154,198 $190,771 $211,669 $215,081  ! Other Net cash from utility operations less dhidends as a Lof construction 153 127 108 99 86 l Number of full-time employees Utility 3,467 3,370 3,331 4,077 4,196 Nonregulated 163 236 271 274 347

DIRECTORS John W. Aalfs John W. Colloton Nolden Gentry Nancy L Seifert Sioux City, Iowa lowa City, Iowa Des Moines, Iowa Cedar Rapids, Iowa President, Aalfs Vice President, Statewide Partner, Law Firm of Brick, Executive Vice President, Manufacturing,Inc. { Ilealth Services, Gentry, Bowers, Swartz, James F.Seifer; & Sons (57/9) University ofIowa Stoltze, Schuling & leis, L.L.C. (67/5) P.C. (68/12) Stanley J. Bright (60/14) Des Moines, Iowa Frank S. Cottrell W. Scott Tinsman Chairman, President Moline, Illinois James M. Hook, Jr. Davenport, Iowa and CEO, Vice President, General Dallas, Texas Co-ownerand Vice President, MidAmerican Energy Counsel and Secretary, Chairman, Twin-State Engineering and lloldings Company Deere & Company lioak Capital Corp. ChemicalCompany (57/11) (55/5) (54/14) (65/9)

  ..         Ross D. Christensen        Jack W. Eugster               Richeid L Lawson             Leonard L Woodruff

[ Waterloo, Iowa Minneapolis, Minnesota Washington, D.C. Fort Dodge, Iowa

  ;          Orthodontist in Private   Chairman, President and        President and CEO,           President, Woodruff'
  ;          Practice                  CEO, Musicland Stores         NationalMining Association    Construction
  ?.         (57/15)                   Corp.

and General USAP (Ret.) (69/25) 5 (52/10) (6&/9) { Russell E. Christiansen Dakota Dunes, South Dakota Mel Foster, Jr. Robe,t L Peterson

  ;         Retired Chairman,          Dawnport, Iowa                Dakota City, Nebraska

MidAmerican Energy Chairman, Mel Foster Co.,Inc. Chairman, President i iloidings Company (70/25) and CEO,IBP, Inc.

  !         (62/38)                                                  (65/7) 2 1

3 h (age / years of service)

            ~

, OFFICER $ WIT H APPlit CI AT108f Stanley J. Bright Jack L Alexander Chairman, President Vice President-MedAmerican Energy would 6ske to recognise the and CEO Iluman Resources

                                                   ,                 (57/11)                     (50/25) encellent leadership pseveded by Robert A Sternett, who retered trem the board of derectors en 1997 sfter '                                      James Averweg Ronald W. Stepien 14 years of service to the Company                               Executive Vice President-Transmission and several key executeves also recesetty rotered trem                                        Operations Support Ene@' Niiv(>y the Company Jean Sult. vice pressdent gesperateen.               (51/l)                      (51/27)

Phil Le@ senser vece pressdent and chest financial Brent E. Gale Wayne D. Smith efficer. Steve shelten. senser vice peesident-genere- Vice President-NMive Vice President- R(,gulator). Law. taen. and Lynn Verbrich. executive vice pressdent. Generation gyyj) made extraordenary centributeens to MedKlheterda (  ; Energy during their many years of combined servece. . Ronald J. Giaier  ; John J. Cappello Vice President and Treasurer  ; Each of these outstanding endeveduals well be messed Senior Vice President-(49/l)  ; greatly, but their cont 4butens will be teh im many N"lE5I (51/2) years to come Vice President-  ; Corporate Communications David J. Levy (4W22)

                             ,                                      Senior Vice President-                                           ;

Technology and Customer 1 Stephen E. Hollonbeck Senice V ce President (43/21) (ggg) { John A. Rasmussen, Jr. James J. Howard s Senior Vice President and Vice President- [ General Counsel Regulatory Affairs (52/11) (55/33) Alan L Wells

                                                                                                   ""    *U*"h Vice President and Senior Vice President-Corporate Secretary                    ;

Finance and Chief Financial Officer (44/IO) (#) J. Sue Rozema Vice President-Beverly A.Wharton Financial Senices i Senior Vice President

                                                 '                                              (g3g)

(44/21) Larry M. Smith 1 Vice President and Controller  ; (42/12)

lL , SH AREHOLDER INFOR:::ATinN 1997 Annual Meeting Common Stock Listing Stock Bought or Sold Close to Replacement of Dividend I ( Thisyear's annual meeting Common stock of Record Date Check will be April 29, beginning MidAmerican Energy Stock is sor..etimes bought ifyou do not receive a dhi-at 10 a.m. at the Polk lioldings Companyis traded or sold soon before a record dend check, please notify County Convention Complex on the New York Stock date, but the transaction is Shareholder Senices in j in downtown Des Moines, Exchange under the ticker not transferred by the writing so that pay.aent on Iowa. Shareholders of symbol MEC. Daily newspa- broker in thra for the divi- your check can be stopped. record Feb. 20,1998, will be pers carry quotes on the dend check to be issued to When the bank confirms the eligible to vote on matters stock. the new owner. Ifyou are stop order, a replacement to be addressed at the the new owner,your broker check will be issued. annual meeting. Dividend Reinvestment and willclaim the payment from Stock Purchase the previous owner foryou. Transferring Stock Duplicate AnnualReports The Company's Shareholder To transfer stock, endorse Duplicate mailings of annual Options Plan provides indi- Safekeeping the certificate or Stock _ reports occur when the viduals with a convenient Safekeepingis a convenient Power Form exactlyas the h names on your stock certifi- method for purchasing addi- feature of the Shareholder name appears on the face of j}}