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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File No. 1-9874
MIDAMERICAN ENERGY HOLDINGS COMPANY
(the successor in interest to CalEnergy Company, Inc.)
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 242-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
Common Stock, No New York Stock Exchange
par value ("Common Stock") Pacific Stock Exchange
London Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days:
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Based on the closing sales price of Common Stock on the New York
Stock Exchange on March 29, 1999 the aggregate market value of the
Common Stock held by non-affiliates of the Company was $1,644,091,283.
58,848,905 shares of Common Stock were outstanding on March 29,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into this Form 10-K, in response to Item 3
Part I, Items 6 through 8 of Part II and Items 10 through 13 of Part
III, are the portions indicated herein of (i) the annual report of
CalEnergy Company, Inc. (the "Company") to security holders for the
fiscal year ended December 31, 1998 (the "Annual Report"), and (ii) the
Company's proxy statement dated on or about April 3, 1999 for the
annual meeting of stockholders to be held on May 20, 1999 (the "Proxy
Statement").
TABLE OF CONTENTS
PART I 1
ITEM 1. BUSINESS 1
GENERAL 2
RECENT ACQUISITIONS 2
STRATEGY 3
THE GLOBAL ENERGY MARKET 6
THE UNITED STATES 6
THE UNITED KINGDOM 8
THE COMPANY'S DISTRIBUTION AND SUPPLY BUSINESS 10
MIDAMERICAN ENERGY COMPANY 10
NORTHERN ELECTRIC 13
PROJECTS IN OPERATION 17
UNITED STATES POWER GENERATION 17
MIDAMERICAN ENERGY GENERATION FACILITIES 17
CE GENERATION GAS FACILITIES 19
OTHER U.S. GEOTHERMAL INTERESTS 21
UNITED KINGDOM POWER GENERATION 21
THE PHILIPPINES POWER GENERATION 21
PROJECTS IN CONSTRUCTION 24
UNITED STATES 24
PHILIPPINES 24
INDONESIA 26
PROJECTS IN DEVELOPMENT 26
UNITED STATES 26
UNITED KINGDOM 27
PRODUCING GAS FIELD OPERATIONS AND FIELDS IN DEVELOPMENT 27
THE COMPANY'S PRODUCING GAS FIELD OPERATIONS AND FIELDS IN
DEVELOPMENT 28
PROJECTS FIELDS IN DEVELOPMENT 29
REGULATORY, ENERGY AND ENVIRONMENTAL MATTERS 29
UNITED STATES 30
UNITED KINGDOM 31
EMPLOYEES 32
ITEM 2.PROPERTIES 32
ITEM 3. LEGAL PROCEEDINGS 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
PART II 34
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER'S MATTERS 34
ITEM 6. SELECTED FINANCIAL DATA 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 36
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 36
PART III 37
MANAGEMENT 37
ITEM 10. DIRECTORS, EXECUTIVE AND OTHER OFFICERS OF THE COMPANY
AND SIGNIFICANT SUBSIDIARIES 37
PART IV 44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 44
SIGNATURES 46
EXHIBIT INDEX 48
PART I
Item 1. Business
General
MidAmerican Energy Holdings Company, the successor in
interest to CalEnergy Company, Inc. (the "Company" or "MEHC"), is
a fast-growing global energy company with an increasingly
diversified portfolio of regulated and non-regulated assets. The
focus of the Company has evolved over time from development and
acquisition activities in the domestic and international power
generation markets to strategic electric and gas utility
acquisitions, with a particular emphasis on investment-grade
countries such as the United States, the United Kingdom,
Australia, Canada, New Zealand and certain of the countries of
Western Europe. This focus has provided the Company with
increased scale, skill, revenue diversity, credit quality,
quality of cash flows and growth opportunities associated with
each of the acquired businesses. The Company was founded in 1971
and, through its subsidiaries, manages and owns interests in over
10,000 megawatts ("MW") in 33 power generation facilities in
operation, construction and development worldwide. In addition,
through its subsidiaries, MidAmerican Energy Company
("MidAmerican Energy" or "MEC") and Northern Electric plc
("Northern"), the Company currently serves more than 3.37 million
customers worldwide (2.15 million electricity customers and 1.22
million natural gas customers) following the completion of the
MidAmerican Merger in March, 1999. For additional information on
MidAmerican Energy, see its Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 1-11505. The Company has
achieved significant growth in earnings and assets over the past
five years through: (i) acquisitions that complement and
diversify the Company's existing business, broaden the geographic
locations of and fuel sources used by its projects and enhance
its competitive capabilities; (ii) enhancement of the financial
and technical performance of existing and acquired projects; and
(iii) development and construction of new plants and facilities
("greenfield development"). The Company's Senior unsecured
obligations have received investment grade ratings of Baa3, BBB-
and BBB- from Moody's Investor Services Inc. ("Moody's"),
Standard & Poors Ratings Services (S&P) and Duff & Phelps Credit
Rating Company (DCR). The Company's utility subsidiaries are
also investment grade rated by Moody's, S&P and DCR: MidAmerican
Energy (A3, A- and A+) and Northern (A3, A- and A).
The market capitalization of the Company has risen at a
compound annual rate of 33% from approximately $498 million in
December 1994 to approximately $1.644 billion in March 1999, the
revenues of the Company have risen at a compound annual rate of
95% from approximately $186 million in 1994 to approximately $2.7
billion in 1998 and net income available to common stockholders
excluding extraordinary item and the cumulative effect of a
change in accounting principle has risen at a compound annual
rate of 42% from approximately $34 million in 1994 to
approximately $138 million in 1998. From 1994 through 1998, the
Company's EBITDA and total assets have increased by a compound
annual growth rate of 65% and 68%, respectively. EBITDA for the
year ended December 31, 1998 was $953 million. "EBITDA" means
the Company's earnings, before interest, taxes, depreciation and
amortization. Information concerning EBITDA is presented here
not as a measure of operating results, but rather as a measure of
the Company's ability to service debt. EBITDA should not be
construed as an alternative to either (i) operating income
(determined in accordance with Generally Accepted Accounting
Principles ("GAAP")) or (ii) cash flow from operating activities
(determined in accordance with GAAP). In this Annual Report,
references to "U.S. dollars," "dollars," "US $," "$" or "cents"
are to the currency of the United States and references to
"pounds sterling", "pounds," "sterling," "pence" or "p" are to
the currency of the United Kingdom.
The Company's Common Stock is traded on the New York
(trading symbol: MEC), Pacific and London Stock Exchanges. The
principal executive offices of the Company are located at 666
Grand Avenue, Des Moines, Iowa 50309 and its telephone number is
(515) 242-4300. The Company was initially incorporated in 1971
under the laws of the State of Delaware. The Company was
reincorporated in 1999 in Iowa in connection with the recent
MidAmerican Merger described below.
Recent Acquisitions
Beginning in 1995, the Company has consummated several
significant acquisitions, which have been integrated and
immediately accretive to earnings. In January 1995, the Company
acquired Magma Power Company ("Magma"), a publicly-traded United
States independent power producer with 228 net MW of operating
capacity and 154 net MW of ownership capacity, for approximately
$958 million. The Magma acquisition, combined with the Company's
previously existing assets, made the Company at that time the
world's largest independent geothermal power producer (based on
the Company's estimate of aggregate MW of electric generating
capacity in operation and construction).
In April 1996, the Company completed the purchase for
approximately $70 million of its partner's interests in four
electric generating plants in Southern California, resulting in
sole ownership of the Imperial Valley Projects' 228 net MW of
aggregate operating capacity.
In August 1996, the Company acquired Falcon Seaboard
Resources, Inc. ("Falcon Seaboard") for approximately $226
million, thereby acquiring significant ownership in 520 net MW of
natural gas-fired electric production facilities located in New
York, Texas and Pennsylvania and a related gas transmission
pipeline.
In December 1996, the Company acquired a majority of the
common shares of Northern. Northern is one of the twelve regional
electricity companies (each, a "REC") which came into existence
as a result of the restructuring and subsequent privatization of
the electricity industry in the United Kingdom ("U.K.") in 1990.
Northern distributes electricity in its authorized area located
in northeast England which covers approximately 14,400 square
kilometers and has a population of approximately 3.2 million
people. Northern also supplies electricity and gas inside and
outside its authorized area and currently owns interests in four
producing gas field operations in the North Sea.
On January 2, 1998, the Company completed the purchase of
Kiewit Diversified Group's ("KDG") ownership interest in various
project partnerships and common shares of the Company (the "KDG
Acquisition") for a cash price of approximately $1,160 million,
including transaction costs. KDG's ownership interest in the
Company comprised 20,231,065 shares of common stock (assuming
exercise by KDG of one million options to purchase the Company's
shares), a 30% interest in Northern Electric plc ("Northern"), as
well as the following minority project interests: Mahanagdong
(45%), Casecnan (35%), Dieng (47%), Patuha (44%), Bali (30%) and
other interests in international development stage projects.
On August 11, 1998, the Company entered into an Agreement
and Plan of Merger with MidAmerican Energy Holdings Company
("MidAmerican"). The MidAmerican Merger closed on March 12, 1999
and the Company paid $27.15 in cash for each outstanding share of
MidAmerican common stock for a total of approximately $2.42
billion in a merger, pursuant to which MidAmerican became an
indirect wholly owned subsidiary of the Company. Additionally,
the Company reincorporated in the State of Iowa, was renamed
MidAmerican Energy Holdings Company and upon closing became an
exempt public utility holding company.
The consummation of the MidAmerican Merger was conditioned
upon receipt of a number of regulatory and shareholder approvals
and the disposition of partial interests in certain of the
Company's power generating facilities in order to maintain the
qualifying facilities status of such independent power generating
facilities. On February 26, 1999, the Company closed the sale of
all of its ownership interests in the Coso Joint Ventures to
Caithness Energy LLC. The price includes $205 million in cash
and $5 million in contingent payments plus the assumption of
approximately $67.7 million in debt. On February 8, 1999, the
Company created a new subsidiary, CE Generation LLC ("CE
Generation") and subsequently transferred its interest in the
Imperial Valley Projects and Gas Projects (both as defined
herein) to CE Generation. On March 2, 1999, CE Generation closed
the sale of $400 million aggregate principal amount of its 7.416%
Senior Secured Bonds due 2018. On March 3, 1999, the Company
closed the sale of 50% of its ownership interests in CE
Generation to an affiliate of El Paso Energy Corporation for
approximately $247 million in cash, $6.5 million in contingent
payments and $23.5 million in equity commitments. Including the
gross proceeds from the CE Generation debt offering, the
aggregate consideration was approximately $677 million.
Strategy
The Company's growth strategy remains focused on taking
advantage of the investment opportunities created by the
continuing restructuring and privatization in energy sectors
throughout the world. In order to effectively execute its growth
strategy, the Company has organized its operations into a
functional structure. The functional alignment is believed to
allow for greater efficiencies in operations and better
coordination and asset utilization in developing the Company's
business.
The Company's strategy is comprised of the following key
elements:
* Growth through International and Domestic Acquisitions. The
Company has successfully completed six acquisitions in the past
four years, each of which was accretive to earnings. The Company
believes several of these acquisitions provided it with
specialized skills and experience that enhance its competitive
position in the areas it has targeted for future growth. For
example, the Company's acquisition of Northern, a U.K. regional
electricity company engaged in electricity distribution and
supply and gas supply and related businesses, was the first step
in its planned expansion into those sectors in the U.S. and
elsewhere throughout the world. In addition, since the U.K.
progressively deregulated its electricity and gas supply sectors,
the Company believes that its Northern management team has the
knowledge and skills to compete in a competitive supply market.
By virtue of its ownership of Northern, the Company also
possesses the sophisticated billing and proprietary information
systems that are believed by the Company to be critically
important components of the skill and technology base necessary
to compete effectively in a restructured environment. More
recently, the Company completed the acquisition of MidAmerican
Energy, a leading regional provider of energy and related
services in Iowa and three neighboring states.
The Company believes that the electricity industry
in the U.S. will also progressively restructure over the
next three to five years and will largely follow the
regulatory model established in the U.K. (with incentive
based rates or price caps). As currently regulated U.S.
electricity distributors and electricity and gas
suppliers attempt to rationalize their businesses to
maintain profitability in a price competitive market, the
Company believes that opportunities will become available
to low cost and reliable providers of energy services to
gain market share in energy supply and provide additional
services to competitors (such as utility line
construction and maintenance services, metering, customer
billing and information systems services). As a result,
the Company believes that by acquiring a U.S. utility
operation such as MidAmerican Energy and transferring the
knowledge, skills and systems gained at Northern, it can
create a platform from which a U.S. energy distribution
and supply business can be profitably established and
expanded in a competitive market.
* Growth through Greenfield Development of Energy Projects.
As part of the recent acquisition of MidAmerican, the Company has
commenced development of a 500 MW natural gas fired generation
facility which would sell power on a partial contract and partial
merchant basis. The facility is expected be located near the
Quad Cities in Illinois and Iowa on the border of two electric
reliability districts, the Mid-Continent Area Power Pool and the
Mid-America Interconnection Network. In addition, the Company
continues to view the international power generation sector as an
attractive market for the development of new greenfield energy
opportunities, an area in which it has demonstrated substantial
expertise. In the past four years, the Company has developed and
financed four new Philippine power projects, three of which are
now operating and the fourth of which is under construction and
on schedule and within budget. With CalEnergy Gas UK, a wholly
owned subsidiary of Northern, the Company has expanded its
development strategy to include integrated generation and
upstream natural gas operations. The addition of gas exploration,
production and technical storage capabilities allows the Company
to expand its number of target markets throughout the world. In
addition, utilization of its geotechnical expertise in this
manner allows early entrance with limited upfront capital
expenditures into markets in which the Company might not
otherwise have power development opportunities. The integration
of power generation plants with the upstream gas sources in
competitive energy markets will also produce market arbitrage
opportunities to sell either gas or electricity depending upon
market conditions at the time. The Company continues to develop
two upstream gas projects, one in Western Australia at the Gingin
field in the Perth Basin and one in Poland at the large Pila
Concession.
* Profit Enhancement through Operating Efficiencies while
Maintaining Quality and Reliability of Service. The Company
aggressively pursues profitability improvements through
efficiency and productivity gains at existing operations. The
cost of production per kWh at the Imperial Valley Projects (as
defined herein) has declined from 5.3 cents/kWh in 1994 to 2.8
cents/kWh in 1998. The Company has achieved these efficiencies
while maintaining high reliability and safety in its operation.
Through continuing advancements in drilling technology, reservoir
modeling and well maintenance techniques, the production capacity
of new and existing wells has been improved or maintained and, as
a result, the useful output of the various geothermal resources
has been improved or maintained.
* Continued Diversification of Revenue Base and Fuel
Sources. The Company believes that following the MidAmerican
Merger it has a diversified revenue base, distributed among its
ownership of two operating electricity and gas utilities, its
ownership of interests in thirty-three projects with 10,000 net
MW in operation, under construction or in development and its
ownership of producing gas fields (all as described in more
detail below). In addition to the revenues of MidAmerican Energy
and Northern, which are largely derived from their electricity
distribution and electricity and gas supply activities, a
significant portion of the Company's revenues will be from its
50% equity ownership interest in CE Generation, the project
subsidiaries of which have long-term contracts with seven large
U.S. utility companies, and the Company's subsidiaries' long-term
contracts with the Government of the Philippines (sovereign
ratings of Ba1/BB+). The Company intends to seek continued
diversification of its revenue base and fuel sources through
acquisitions and greenfield development.
* Maintenance of Prudent Financial and Risk Management
Practices. The Company has consistently maintained, and intends
in the future to maintain what it believes to be prudent
financial and risk management practices. A primary objective of
the Company is to structure project financings for development
projects which can be rated investment grade by Moody's, DCR and
S&P. The Company's senior unsecured obligations are rated Baa3,
BBB- and BBB-. Its MidAmerican Energy subsidiary is rated A3, A+
and A-; Salton Sea Funding Corp. is rated Baa2/BBB; CE Generation
LLC is rated Baa3, BBB and BBB-; its Northern Electric subsidiary
is rated A3, A and A-, and its CE Electric UK Funding Company
subsidiary's senior notes are rated Baa1, A- and A-. The debt
ratings reflected above have been published by Moody's, DCR (for
all except Salton Sea Funding) and S&P, respectively, in respect
of certain senior indebtedness of the respective issuers shown.
These ratings may be changed from time to time by the ratings
agencies. The project financing structures utilized to date by
the Company include as a fundamental protection for the Company's
other assets the requirement that (with certain minimal
exceptions) the funds borrowed and other obligations for the
purpose of financing or operating a project are to be primarily
or entirely under loan agreements, project agreements and related
documents which provide that the obligations and loans are to be
performed or repaid solely by the project and from the project's
revenues and that the security granted to secure the loan and
other obligations be limited to the capital stock, assets,
contracts and cash flow of the project or the project holding
company. Under this type of structure, the lenders and other
project contracting parties cannot seek recourse against the
Company or its other subsidiaries or projects. The Company
intends to continue to structure future projects in a manner
which minimizes the exposure of the Company's other assets
through appropriate non-recourse project structures.
* Continued Adherence to Strict Project Evaluation
Criteria. The Company intends to operate only in those countries
where economic fundamentals are believed to be attractive and
risks can be contractually mitigated or adequately covered by
insurance. The Company's international investment criteria
generally includes giving due consideration, where appropriate,
to the following:
/ Sovereign guarantees;
/ Significant demand for new power generating
facilities;
/ An established legal system providing for
enforceability of contracts and regulations;
/ "Take or Pay" contracts with utilities, governments
or other parties with acceptable creditworthiness
which provide for primarily US$-denominated payments
and certain contractual protections regarding
currency convertibility and transferability;
/ Fixed-price date-certain, turnkey construction
contracts with liquidated damages and performance
security provisions; and
/ Availability of political risk insurance.
The Company intends to continue to focus primarily upon
those development opportunities where it is permitted,
directly or indirectly, to acquire a majority ownership
interest and exercise operational control over the newly
developed or acquired projects.
The Global Energy Market
The opportunity for independent power generation and energy
distribution and supply has expanded from a United States market
to a global competitive market as many foreign countries have
initiated restructuring and privatization policies that encourage
the development of independent power generation and independent
distribution and supply of energy. Internationally, large amounts
of new electric power generating capacity are required in
developing countries. The movement toward privatization in some
developing countries has created significant new markets outside
the United States. The need for rapid economic expansion has
caused many countries to select private power development as
their only practical alternative and to restructure their
legislative and regulatory systems to facilitate such
development. The Company believes that the significant need for
power in developing markets has created strong local support for
private power projects in many foreign countries and has
increased the availability of attractive long-term power
contracts. The Company intends to take advantage of opportunities
in these markets and to develop, construct and acquire power
generation, distribution and supply and related energy projects
meeting its strategic criteria outside the United States.
In addition, as privatization, deregulation and
restructuring initiatives are enacted in various countries and
states, the Company has identified a number of promising
opportunities to acquire power generation, distribution and
supply assets, as well as other energy related infrastructure
assets. These opportunities include bidding opportunities in
connection with privatization initiatives in the electricity and
gas distribution and supply sectors in various regions and
countries, including principally Europe, South America, Australia
and New Zealand. The Company expects to see more of such
acquisition opportunities in additional markets in the future.
In pursuing its strategy, the Company presently intends to
focus upon development and acquisition opportunities in countries
possessing characteristics which meet the Company's general
investment criteria. At the present time, the Company is active
in the United States, the Philippines and the United Kingdom and
is pursuing development opportunities in Australia, Canada,
Europe, New Zealand and South America. Set forth below is certain
general information concerning the present status of the energy
markets in those countries in which the Company currently has
significant operations.
The United States
In the United States, the independent power industry
expanded rapidly in the 1980s, facilitated by the enactment of
the Public Utilities Regulatory Policies Act ("PURPA"). PURPA was
enacted to encourage the production of electricity by non-utility
companies (frequently referred to as independent power companies)
as well as to lessen reliance on imported fuels. According to the
Utility Data Institute, independent power producers were
responsible for the installation of approximately 30,000 MW of
capacity, or 50%, of the United States electric generation
capacity that has been placed in service since 1988. However, as
the size of the United States independent power market increased,
available domestic power capacity and competition in the industry
also significantly increased and the need for new generating
capacity has been reduced.
During the last few years, many states began to accelerate
the movement toward more competition in many aspects of the
electric power market, including generation, transmission,
distribution and supply. Extensive federal and state legislative
and regulatory reviews are presently underway in an effort to
further such competition. In particular, the state of California
has adopted a bill to restructure the electric industry by
providing for a phased-in competitive power generation industry,
with a power exchange and independent system operator, and for
direct access to generation for all power purchasers outside the
power exchange under certain circumstances. The bill provides
that existing qualifying facility power sales agreements will be
honored. Other states have or are expected to take similar steps
aimed at increasing competition by restructuring the electric
industry, allowing retail competition and deregulating most
electric rates. In addition, recent federal legislation has been
proposed which would repeal PURPA and the Public Utility Holding
Company Act of 1935, as amended, respectively. The Company cannot
predict the final form or timing of the proposed industry
restructuring or the impact on its operations. However, the
Company believes that the impending changes in the regulation of
the United States power markets will reflect many aspects of the
United Kingdom model (discussed below) for competitive
generation, transmission, distribution and supply of energy. The
Company further expects that the current effort to introduce
broader wholesale and retail competition in the United States
will result in a continuation and acceleration of the recent
trend toward consolidation among domestic utilities and
independent power producers and an increase in the trend toward
disaggregation (or unbundling) of vertically integrated utilities
into separate generation, transmission and distribution
businesses.
MidAmerican Energy is subject to comprehensive regulation by
several utility regulatory agencies which significantly
influences the operating environment and the recoverability of
costs from utility customers. That regulatory environment has to
date, in general, given MidAmerican Energy an exclusive right to
serve electricity customers within its service territory and, in
turn, the obligation to provide electric service to those
customers.
In Illinois, the electric retail business is opening up to
competition and will be phased in between October 1999 and May
2002.
In Iowa, if MidAmerican Energy's annual electric
jurisdictional return on common equity exceeds 12%, then an equal
sharing between customers and shareholders of earnings above the
12% level begins; if it exceeds 14%, then two-thirds of
MidAmerican's share of those earnings will be used for
accelerated recovery of certain regulatory assets. MidAmerican
Energy is precluded from filing for increased rates prior to 2001
unless the return on common equity falls below 9%. Other parties
signing the agreement are prohibited from filing for reduced
rates prior to 2001 unless the return on common equity, after
reflecting credits to customers, exceeds 14%.
Prior to July 11, 1997, MidAmerican Energy recouped its fuel
costs for electricity generation from its Iowa customers on a
current basis through the Iowa energy adjustment clause, and
thus, fuel costs had little impact on net income. Since then,
base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. However, to the extent actual
fuel costs vary from that factor within a defined range, earnings
are impacted.
MidAmerican Energy provides gas service at retail pursuant
to non-exclusive municipal franchises. The cost of gas is
recovered from customers through a Purchased Fuel Adjustment
Clause.
In connection with the recent approval by the Iowa Utilities
Board of the MidAmerican Merger, MidAmerican Energy agreed, among
other things, to use all commercially reasonable efforts to
maintain an investment grade credit rating for MidAmerican Energy
and its long-term debt and to seek the approval of the Iowa
Utilities Board of a reasonable utility capital structure if
MidAmerican Energy's common equity level decreases below
specified levels (42% and 39%, respectively, of total
capitalization) under certain circumstances.
Statement of Financial Accounting Standards (SFAS) No. 71
sets forth accounting principles for operations that are
regulated and meet certain criteria. For operations that meet
the criteria, SFAS 71 allows, among other things, the deferral of
costs that would otherwise be expensed when incurred. A possible
consequence of the changes in the utility industry is the
discontinued applicability of SFAS 71. The majority of
MidAmerican Energy's electric and gas utility operations
currently meet the criteria of SFAS 71, but its applicability is
periodically reexamined. If utility operations no longer meet
the criteria of SFAS 71, MidAmerican Energy would be required to
write off the related regulatory assets and liabilities from its
balance sheet and thus, a material adjustment to earnings in that
period could result.
The United Kingdom
The electricity industry in the United Kingdom has seen the
privatization of electric supply and distribution, and gradual
phase-in of competition in supply, since 1990. The Electricity
Act of 1989 established an industry structure that permitted this
phased-in competition to occur. Since that time, in England and
Wales, electricity is produced by generators, the largest of
which are National Power, PowerGen and British Energy.
Electricity is transmitted through the national grid transmission
system by The National Grid Company plc ("NGC") and distributed
to customers by the twelve regional electric companies ("RECs")
in their respective authorized areas. Most customers currently
are supplied with electricity by their local REC, although there
are other suppliers holding second tier supply licenses,
including other generators and RECs, who can compete to supply
customers in that REC's authorized area. During the fourth
quarter of 1998, the market for supplying electricity began to be
opened to competition, and all customers are expected to
eventually be free to choose their electricity supplier. This
phased-in program, which is proceeding by geographic areas, is
expected to be completed by the summer of 1999.
Virtually all electricity generated in England and Wales is
sold by generators and bought by suppliers through the Pool
described below. A generator that is a Pool member and also a
licensed supplier must nevertheless sell all the electricity it
generates into the Pool, and purchase all the electricity that it
supplies from the Pool. Because Pool prices fluctuate, generators
and suppliers may enter into bilateral arrangements, such as
contracts for differences ("CFDs"), to provide a degree of
protection against such fluctuations.
Distribution. Each of the RECs is required to offer terms
for connection to its distribution system to any person, and for
use of its distribution system to any authorized electricity
operator, in each case located in its franchise area. In
providing use of its distribution system, a REC must not
discriminate between its own supply business and that of any
other authorized electricity operator, or between those of other
authorized electricity operators; nor may its charges differ
except where justified by differences in cost.
Most revenue of the distribution business is controlled by a
distribution price control formula. The Retail Price Index
("RPI") used in this formula reflects the average of the 12 month
inflation rates recorded for each month in the previous July to
December period. The distribution price control formula also
reflects an XD factor which was established by the Regulator
following review and is set at 3% from April 1, 1997. This
formula determines the maximum average price per unit of
electricity distributed (in pence per kilowatt hour) which a REC
is entitled to charge. The distribution price control formula
permits RECs to receive additional revenues due to increased
distribution of units and a predetermined increase in customer
numbers. The price control does not seek to constrain the profits
of a REC from year to year. It is a control on income which
operates independently of the REC's costs. During the lifetime of
the price control additional cost savings therefore contribute
directly to profit. The distribution prices allowable under the
current distribution price control formula are expected to be
reviewed by the Regulator at the expiration of the formula's
scheduled five-year duration, effective as of April 1, 2000. The
formula may be further reviewed at other times in the discretion
of the Regulator.
With effect from April 1, 1998, domestic and smaller
commercial customers' prices became subject to a price cap which
required reductions of 4.2% (less inflation) compared to the
prices prevailing at August 1, 1997. A further reduction of 3%
(less inflation) will be required on April 1, 1999.
Supply. Subject to minor exceptions, all electricity
customers in the United Kingdom must be supplied by a licensed
supplier. Licensed suppliers purchase electricity and make use of
the transmission and distribution networks to achieve delivery to
customers' premises.
There are two types of licensed suppliers: PES (or "first
tier") suppliers and second tier suppliers. PESs are the RECs,
Scottish Power and Hydro-Electric, each supplying in its
respective authorized area. Second tier suppliers include
National Power, PowerGen, British Energy, Scottish Power,
Hydro-Electric and other PESs supplying outside their respective
authorized areas. There are also a number of independent second
tier suppliers.
The Pool. The Pool was established at the time of
privatization for bulk trading of electricity in England and
Wales between generators and suppliers. The Pool reflects two
principal characteristics of the physical generation and supply
of electricity from a particular generator to a particular
supplier. First, it is not possible to trace electricity from a
particular generator to a particular supplier. Second, it is not
practicable to store electricity in significant quantities,
creating the need for a constant matching of supply and demand.
Subject to certain exceptions, all electricity generated in
England and Wales must be sold and purchased through the Pool.
All licensed generators and suppliers must become and remain
signatories to the Pooling and Settlement Agreement, which
governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers.
The Pool also provides centralized settlement of accounts and
clearing. The Pool does not itself buy or sell electricity.
Prices for electricity are set by the Pool daily for each
one-half hour of the following day based on the bids of the
generators and a complex set of calculations matching supply and
demand and taking account of system stability, security and other
costs. A settlement system is used to calculate prices and to
process metered, operational and other data and to carry out the
other procedures necessary to calculate the payments due under
the Pool trading arrangements. The settlement system is
administered on a day-to-day basis by Energy Settlements and
Information Services, Limited, a subsidiary of NGC, as settlement
system administrator.
The price control regulations which govern the authorized
area supply market permit the pass-through to customers of
certain permitted costs, which include the cost of arrangements
such as CFDs to hedge against Pool price volatility. Generally,
CFDs are contracts between generators and suppliers that have the
effect of fixing the price of electricity for a contracted
quantity of electricity over a specific time period. Differences
between the actual price set by the Pool and the agreed prices
give rise to difference payments between the parties to the
particular CFD. At any time, Northern's forecast supply market
demand is substantially hedged through various types of
agreements including CFDs.
Northern's supply business generally involves entering into
fixed price contracts to supply electricity to its customers.
Northern obtains the electricity to satisfy its obligations under
such contracts primarily by purchases from the Pool. Because the
price of electricity purchased from the Pool, Northern is exposed
to risk arising from differences between the fixed price at which
it sells and the fluctuating prices at which it purchases
electricity, unless it can effectively hedge such exposure. In
addition, the United Kingdom government has announced plans to
reform the wholesale trading market for electricity by
eliminating the Pool and creating a bilateral wholesale trading
market. The announced date for elimination of the Pool is April,
2000. Elimination of the Pool will create risks of a mismatch
between the prices at which Northern purchases electricity from
wholesale suppliers and the price at which it has, or will,
contract to sell electricity to its customers. Northern's
ability to manage such risks at acceptable levels will depend, in
part, on the specifics of the supply contracts that Northern
enters into, Northern's ability to implement and manage an
appropriate contracting and hedging strategy, and the development
of an adequate market for hedging instruments.
The Company's Distribution and Supply Business
MidAmerican Energy Company
MidAmerican Energy is the largest energy company
headquartered in Iowa, with assets and operating revenues for the
year ended December 31, 1998 totaling $3.6 billion and $1.7
billion, respectively. Its strategy is to become the leading
regional provider of energy and complementary services.
MidAmerican is primarily engaged in the business of generating,
transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican
distributes electric energy at retail in Council Bluffs, Des
Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa, the
Quad Cities (Davenport and Bettendorf, Iowa and Rock Island,
Moline and East Moline, Illinois) and a number of adjacent
communities and areas. It also distributes natural gas at retail
in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City
and Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota;
and a number of adjacent communities and areas. As of December
31, 1998, MidAmerican had 652,900 retail electric customers and
621,500 retail natural gas customers.
In addition to retail sales, MidAmerican Energy delivers
electricity to other utilities and municipalities who distribute
it to end-use customers (sales for resale) and MidAmerican Energy
transports natural gas, for a fee, through its distribution
system for certain large customers who have independently secured
their own supply of natural gas.
MidAmerican Energy's electric and gas operations are
conducted under franchises, certificates, permits and licenses
obtained from state and local authorities. The franchises, with
various expiration dates, are typically for 25-year terms.
MidAmerican Energy has a residential, agricultural,
commercial and diversified industrial customer group, in which no
single industry or customer accounted for more than 3% (food and
kindred products industry) of its total 1998 electric operating
revenues or 3% (food and kindred products industry) of its total
1998 gas operating margin. Among the primary industries served by
MidAmerican Energy are those which are concerned with the
manufacturing, processing and fabrication of primary metals, real
estate, food products, farm and other non-electrical machinery,
and cement and gypsum products.
During 1998, MidAmerican Energy increased its emphasis on
wholesale gas trading and marketing activity, some of which was
previously managed by one of MidAmerican's nonregulated
subsidiaries.
For the year ended December 31, 1998, MidAmerican derived
approximately 69% of its gross operating revenues from its
regulated electric business, and 25% from its regulated gas
business and 6% from its nonregulated business activities. For
1997 and 1996, the corresponding percentages were 65% electric
and 31% gas and 4% nonregulated; and 66% electric and 32% gas and
2% nonregulated, respectively.
The electric utility industry is in the midst of significant
regulatory change. Traditionally, prices charged by electric
utility companies have been regulated by federal and state
commissions and have been based on cost of service. In recent
years, changes have occurred, and are expected to continue to
occur, that move the electric utility industry toward a more
competitive, market-based pricing environment. These changes
will have a significant impact on the way MidAmerican Energy does
business.
A substantial majority of MidAmerican's business still
operates in a rate-regulated environment and, accordingly, many
decisions for obtaining and using resources are evaluated from an
electric and gas regulated business perspective. However,
beginning January 1, 1998, MidAmerican Energy also manages its
operations as four distinct business units: generation,
transmission, energy distribution and retail. With these four
business units, MidAmerican Energy is able to focus on the
specific needs and anticipated risks and opportunities of its
major businesses. Certain administrative functions are handled
by a corporate services group which supports all of the business
units.
Although specific functions may be changed as future
circumstances warrant, the focus of each business unit has been
established. Presently, significant functions of the generation
business unit include the production of electricity, the purchase
of electricity and natural gas, and the sale of wholesale
electricity and natural gas. The transmission business unit
coordinates all activities related to MidAmerican Energy's
electric transmission facilities, including monitoring access to
and assuring the reliability of the transmission system. The
energy distribution business unit distributes electricity and
natural gas to end-users and conducts related activities. Retail
includes marketing, customer service and related functions for
core and complementary products and services.
Total Electric Sales of MidAmerican Energy By Customer Class
1998 1997 1996
Residential 22.2% 20.9% 21.1%
Small General Service 17.5 16.5 16.2
Large General Service 28.1 27.4 27.6
Other 4.4 4.4 4.5
Sales for Resale 27.8 30.8 30.6
_____ _____ _____
Total 100.0% 100.0% 100.0%
Retail Electric Sales of MidAmerican Energy By State
1998 1997 1996
Iowa 88.4% 88.6% 88.7%
Illinois 10.9 10.7 10.6
South Dakota 0.7 0.7 0.7
____ _____ _____
Total 100.0%100.0% 100.0%
In an Iowa pricing settlement approved in 1997 by the Iowa
Utilities Board, MidAmerican Energy was given permission to
negotiate individual contracts with its industrial and commercial
electric customers. The negotiated contracts have differing terms
and conditions as well as prices. The contracts range in length
from five to ten years, and some have price renegotiation and
early termination provisions exercisable by either party. A vast
majority of the contracts are for terms of seven years or less,
although some large customers have agreed to 10-year contracts.
Prices are set as fixed prices; however, many contracts allow for
potential price adjustments with respect to environmental costs,
government imposed public purpose programs, tax changes, and
transition costs. While the contract prices are fixed (except for
the potential adjustment elements), the costs MidAmerican Energy
incurs to fulfill these contracts will vary. MidAmerican Energy
presently intends to manage this risk through hedging and other
similar arrangements. On an aggregate basis, the annual revenues
under these contracts are approximately $155 million.
In addition, MidAmerican Energy is precluded by the 1997
settlement agreement from filing for an increase in its Iowa
electric rates prior to 2001, unless its annual return on common
equity falls below 9%. Likewise, the other parties to the
agreement, including the Office of the Consumer Advocate, are
prohibited from seeking a reduction in MidAmerican Energy's
electric rates prior to 2001, unless the return on common equity,
adjusted for the equal sharing between shareholders and customers
of earnings above a 12% return on common equity, exceeds 14%.
In Illinois beginning October 1, 1999, larger non-
residential customers and 33% of the remaining non-residential
customers will be allowed to select their provider of electric
supply services. All other non-residential customers will have
supplier choice starting December 31, 2000. Residential
customers all receive the opportunity to select their electric
supplier on May 1, 2002.
Historical gas sales, excluding transportation throughput,
by customer class as a percent of total gas sales and by state as
a percent of total retail gas sales are shown below:
Total Gas Sales of MidAmerican Energy By Customer Class
1998 1997 1996
Residential 59.9% 60.8% 61.1%
Small General Service 32.1 33.1 33.3
Large General Service 3.7 4.2 4.6
Sales for Resale and Other 4.3 1.9 1.0
______ ______ ______
Total 100.0% 100.0% 100.0%
Retail Gas Sales of MidAmerican Energy By State
1998 1997 1996
Iowa 79.0% 79.1% 78.0%
Illinois 10.2 10.4 11.0
South Dakota 10.1 9.8 10.3
Nebraska 0.7 0.7 0.7
______ ______ ______
Total 100.0% 100.0% 100.0%
There are seasonal variations in MidAmerican Energy's
electric and gas businesses which are principally related to the
use of energy for air conditioning and heating. In 1998, 40% of
MidAmerican Energy's electric revenues were reported in the
months of June, July, August and September, reflecting the use of
electricity for cooling, and 54% of MidAmerican Energy's gas
revenues were reported in the months of January, February, March
and December, reflecting the use of gas for heating.
The annual hourly peak demand on MidAmerican Energy's
electric system occurs principally as a result of air
conditioning use during the cooling season. In July 1998,
MidAmerican Energy recorded an hourly peak demand of 3,643 MW,
which is 90 MW more than MidAmerican Energy's previous record
hourly peak of 3,553 MW set in 1995.
MidAmerican Energy's accredited net generating capability in
the summer of 1998 was 4,425 MW. Accredited net generating
capability represents the amount of generation available to meet
the requirements on MidAmerican Energy's energy system, net of
the effect of participation purchases and sales and consists of
Company-owned generation and power purchased under a long-term
power purchase contract. The net generating capability at any
time may be less due to regulatory restrictions, fuel
restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications.
MidAmerican Energy is interconnected with certain Iowa and
neighboring utilities and is involved in an electric power
pooling agreement known as MAPP. MAPP is a voluntary association
of electric utilities doing business in Iowa, Minnesota, Nebraska
and North Dakota and portions of Illinois, Missouri, Montana,
South Dakota and Wisconsin and the Canadian provinces of
Saskatchewan and Manitoba. Its membership also includes power
marketers, regulatory agencies and independent power producers.
MAPP facilitates operation of the transmission system, serves as
a power and energy market clearing house and is responsible for
the safety and reliability of the bulk electric system.
Each MAPP participant is required to maintain for emergency
purposes a net generating capability reserve of at least 15%
above its system peak demand. If a participant's capability
reserve falls below the 15% minimum, significant penalties could
be contractually imposed by MAPP. MidAmerican Energy's reserve
margin for 1998 was approximately 20%.
In an effort that began in 1996, MidAmerican is continuing
to redeploy investments and to invest in other lines of business
that support its strategy. For example, MidAmerican Realty
Services, with over 4,500 independent sales representatives and
approximately 1,150 employees, offers integrated real estate
services in seven states including residential brokerage,
relocation, title, abstract and mortgage services. On a
consolidated basis, the real estate brokerage operations are the
second largest in the nation, and the Company believes these
operations will provide a strategically important customer access
point and an advertising and "branding" vehicle as energy markets
deregulate, in addition to being profitable businesses on a
stand-alone basis.
Northern Electric
Northern Electric Distribution Limited ("Northern
Distribution"), a subsidiary of Northern, receives electricity
from the national grid transmission system and distributes
electricity to each of its franchise area customer's premises
using Northern's network of transformers, switchgear and cables.
Substantially all of the customers in Northern's authorized area
are connected to Northern's network and electricity can only be
delivered to them through the Northern distribution system,
regardless of whether the electricity is supplied by Northern's
supply business or by other suppliers, thus providing Northern
with distribution volume that is stable from year to year.
Northern Distribution serves approximately 1.5 million customers
in Northern's area and charges its customers access fees for the
use of the distribution system.
At December 31, 1998, Northern's electricity distribution
network (excluding service connections to consumers) included
approximately 17,000 kilometers of overhead lines and
approximately 26,000 kilometers of underground cables.
Substantially all substations are owned in freehold, and most of
the balance are held on leases which will not expire within 10
years. In addition to the circuits referred to above, Northern's
distribution facilities also include approximately 24,000
transformers and approximately 24,000 substations.
Northern Electric Supply Limited ("Northern Supply") focuses
on Northern's supply business and is responsible for marketing,
tariff setting, contracts and customer service in connection with
the supply of both electricity and gas. Northern's supply
business involves the bulk purchase of electricity, primarily
from the Pool, and subsequent sale to individual customers.
Under the terms of its public electricity supply ("PES") or
"first tier" license, Northern currently holds the right to
supply approximately 1.5 million supply customers within
Northern's authorized area. In addition to competing for supply
customers in its authorized area, Northern holds a second tier
license to compete with the RECs and other suppliers to provide
electricity to supply customers outside its authorized area.
Northern is one of the largest suppliers in the competitive and
open electricity market in the United Kingdom and supplies
customers in all 15 PES areas in Great Britain and Northern
Ireland.
Northern Supply also competes to supply gas inside and
outside its authorized area. Over the last six months of 1998,
Northern expanded its supply customer base by 20% by attracting
nearly 300,000 new gas customers in part through the Dual Fuel
marketing program.
Northern Utility Services Limited ("Northern Utility") is an
engineering company whose role is to adapt, maintain and restore
the distribution network of Northern and to sell related services
to third parties. Northern Utility has been able to make
significant cost reductions for Northern during the past year by
working with suppliers in order to improve core processes, close
selected depot locations, increase staff productivity and reduce
material and plant costs. Northern Utility has pioneered
techniques using innovative diagnostic testing equipment which
reduces the need for intrusive maintenance. The equipment can
identify some of the causes of potential systems failures before
breakdown and subsequent loss of supply occurs. Also, the
continued development in the use of trenchless technology has
brought both financial and environmental benefits to Northern and
its customers. While Northern Utility's largest customer is
Northern Distribution, it currently sells an average of
approximately 14% of its services to third parties. Northern
Utility is Northern's largest employer.
Northern Electric Retail Limited ("Northern Retail"), a
subsidiary of Northern, sells electrical and gas appliances and
provides account collection and customer services for Northern's
other businesses.
Northern Metering Services Limited ("Northern Metering"), a
subsidiary of Northern, provides meter supply, installation,
refurbishment and certification services as well as meter
operator and data collection services. Northern Metering has
developed an energy profiling system which helps businesses
reduce costs through the more efficient use of all fuels, not
just electricity.
The Company's Power Generation Project Portfolio
Following the MidAmerican Merger in March 1999, the Company
has ownership interests in generating facilities with an
aggregate of (i) 9,517 net MW in projects in operation
representing an aggregate net capacity owned of 5,197 net MW of
electric generating capacity, (ii) 209 net MW in three projects
under construction representing an aggregate net capacity of 135
net MW of electric generating capacity and (iii) 594 net MW in
three projects in advanced development stages with signed power
sales agreements or under award representing an aggregate net
capacity owned of 569 net MW of electric generating capacity.
The following tables set out certain information concerning
various Company projects in operation, under construction and in
development pursuant to signed power sales agreements or awarded
mandates.
Project1,2 Facility Net MW Fuel Location Commercial U.S. $ Power Political
Net MW Owned3 Operation Payments Purchaser4 Risk
Insurance
Projects in
Operation
Council Bluffs
Energy Center
units 1 & 2 131 131 Coal Iowa 1954,1958 Yes MEC No
Council Bluffs
Energy Center
units 3 675 534 Coal Iowa 1978 Yes MEC No
Louisa Generation
Station 700 616 Coal Iowa 1983 Yes MEC No
Neal Generation
Station units
1 & 2 435 435 Coal Iowa 1964,1972 Yes MEC No
Neal Generation
Station unit 3 515 371 Coal Iowa 1975 Yes MEC No
Neal Generation
Station unit 4 624 253 Coal Iowa 1979 Yes MEC No
Ottumwa Generation
Station 716 372 Coal Iowa 1981 Yes MEC No
Quad-Cities
Power Station 1,529 383 Nuclear Illinois 1972 Yes MEC No
Riverside
Generation
Station 135 135 Coal Iowa 1925-61 Yes MEC No
Combustion
Turbins 758 758 Gas Iowa 1969-95 Yes MEC No
Moline Water
Power 3 3 Hydro Illinois 1970 Yes MEC No
Imperial Valley 268 134 Geo Calif. 1986-96 Yes Edison No
Saranac 240 90 Gas N.Y. 1994 Yes NYSEG No
Power Resources 200 100 Gas Texas 1988 Yes TUEC No
NorCon 80 32 Gas Penn. 1992 Yes NIMO No
Yuma 50 25 Gas Arizona 1994 Yes SDG&E No
Roosevelt Hot
Springs 23 17 Geo Utah 1984 Yes UP&L No
Desert Peak 10 10 Geo Nevada 1985 Yes N/A No
Mahanagdong 165 149 Geo Philippine 1997 Yes PNOC-EDC Yes
EDC GOP
Malitbog 216 216 Geo Philippine 1996-97 Yes PNOC-EDC Yes
GOP
Upper Mahiao 119 119 Geo Philippine 1996 Yes PNOC-EDC Yes
GOP
Teesside
Power Ltd. 1,875 289 Gas England 1993 No Various No
Viking 50 25 Gas England 1998 No Northern No
Total Projects
in Operation 9,517 5,197
Projects Under
Construction
Casecnan 150 105 Hydro Philippine 2000 Yes NIA (GOP) Yes
Salton Sea V 49 25 Geo Calif. 2000 Yes Zinc/TBD No
CE Turbo 10 5 Geo Calif. 2000 Yes Zinc/TBD No
Total Projects
Under
Construction 209 135
Development
Projects 5
Telephone Flat 44 44 Geo Calif. 2001 Yes BPA No
Cordova Merchant
Plant 500 500 Gas Illinois 2001 Yes TBD No
Exeter Power Ltd. 50 25 Gas England 2000 No Northern No
Total Development
Projects 594 569
Total Power
Generation
Projects 10,320 5,901
1 The Company operates all such projects other than Teesside Power Limited,
Quad Cities Power Station, Ottumwa Generation Station and Desert Peak.
2 The above table excludes three projects in Indonesia, two of which are
currently in arbitration. One unit became operational in March 1998.
3 Actual MW may vary depending on operating and reservoir conditions and
plant design. Facility Net Capacity (in MW) represents facility gross
capacity (in MW) less parasitic load. Parasitic load is electrical output
used by the facility and not made available for sale to utilities or other
outside purchasers. Net MW owned indicates current legal ownership, but, in
some cases, does not reflect the current allocation of partnership
distributions.
4 PNOC-Energy Development Corporation ("PNOC-EDC"); Government of the
Philippines ("GOP") and Philippine National Irrigation Administration ("NIA")
(NIA also purchases water from this facility), Northern Electric plc
("Northern"). The Government of the Philippines undertaking supports PNOC-EDC's
and NIA's respective obligations. Southern California Edison Company
("Edison"); San Diego Gas & Electric Company ("SDG&E"); Utah Power & Light
Company ("UP&L"); Bonneville Power Administration ("BPA"); New York State
Electric & Gas Corporation ("NYSEG"); Texas Utilities Electric Company ("TUEC");
Niagara Mohawk Power Corporation ("NIMO"); and MidAmerican Energy Company
("MEC").
5 Significant contingencies exist in respect of awards, including without
limitation, the need to obtain financing, permits and licenses, and the
completion of construction. The company is also pursuing a number of other
power projects which are in the preliminary stage of development.
PROJECTS IN OPERATION
United States Power Generation
MidAmerican Energy Generation Facilities
All of the coal-fired generating stations operated by
MidAmerican Energy are fueled primarily by low-sulfur, western
coal from the Powder River Basin. The use of low-sulfur western
coal enables MidAmerican Energy to comply with the acid rain
provisions of the CAAA without having to install additional
costly emissions control equipment at its generating stations.
MidAmerican Energy's coal supply portfolio includes multiple
suppliers and mines under agreements of varying term and quantity
flexibility. During 1998 approximately 65% of MidAmerican
Energy's coal purchases were made under spot coal purchase
agreements. MidAmerican Energy regularly monitors the western
coal market, looking for opportunities to improve its coal supply
portfolio. MidAmerican Energy believes its sources of coal
supply are and will continue to be satisfactory.
MidAmerican Energy uses both the Union Pacific Railroad
("UP") and the Burlington Northern and Santa Fe Railway ("BNSF")
as originating carriers of its coal supply in order to achieve
transportation diversity and competitive rates. Coal is
delivered directly to MidAmerican Energy's Neal Energy Center and
Council Bluffs Energy Center ("CBEC") by the UP and the BNSF,
respectively. Coal for MidAmerican Energy's Louisa and Riverside
Energy Centers is delivered to an interchange point by the BNSF
for transportation to its destination by the I&M Rail Link.
Competitive rail access is available to CBEC and to the
interchange point for deliveries to Louisa and Riverside Energy
Centers. MidAmerican Energy believes its coal transportation
arrangements are adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for peak
demand electric generation, transmission support and standby
purposes. These sources are presently in adequate supply and
available to meet MidAmerican Energy's needs.
While coal deliveries to certain of MidAmerican Energy's
generating stations were adversely affected by the UP's
nationwide operational problems in 1997 and early 1998,
MidAmerican Energy believes its coal inventories are adequate to
meet its needs at expected generation levels.
MidAmerican Energy is a 25% joint owner of Quad Cities
Station. MidAmerican Energy has been advised by ComEd, the joint
owner and operator of Quad Cities Station, that the majority of
its uranium concentrate and uranium conversion requirements for
Quad Cities Station for 1999 can be met under existing supplies
or commitments. ComEd foresees no problem in obtaining the
remaining requirements now or obtaining future requirements.
ComEd further advises that all enrichment requirements have been
contracted through 2004. Commitments for fuel fabrication have
been obtained at least through 2001. ComEd does not anticipate
that it will have difficulty in contracting for uranium
concentrates for conversion, enrichment or fabrication of nuclear
fuel needed to operate Quad Cities Station.
CE Generation Geothermal Facilities
CE Generation affiliates currently operate eight geothermal
plants in the Imperial Valley in California (the "Imperial Valley
Project"). Four of these Imperial Valley Project plants (the
"Partnership Projects") were developed by Magma which originally
owned a 50% interest. On April 17, 1996, the Company completed
the Partnership Interest Acquisition pursuant to which the
Company acquired the remaining 50% interests in each of the
Partnership Projects for $70 million. The Partnership Projects
consist of the Vulcan, Hoch (Del Ranch), Elmore and Leathers
projects (the "Vulcan Project," the "Hoch (Del Ranch) Project,"
the "Elmore Project" and the "Leathers Project," respectively).
The remaining four operating Imperial Valley Project plants
(the "Salton Sea Projects") are wholly owned by subsidiaries of
Magma. Three of these plants were purchased by Magma on March
31, 1993 from Union Oil Company of California. These geothermal
power plants consist of the Salton Sea I project (the "Salton Sea
I Project"), the Salton Sea II project (the "Salton Sea II
Project") and the Salton Sea III project (the "Salton Sea III
Project"). The fourth plant, the Salton Sea IV project (the
"Salton Sea IV Project"), commenced commercial operations in
1996.
Vulcan. The Vulcan Project sells electricity to Edison
under a 30-year SO4 Agreement that commenced on February 10,
1986. The Vulcan Project has a contract capacity and contract
nameplate of 29.5 MW and 34 MW, respectively. Under the SO4
Agreement, Edison is obligated to pay the Vulcan Project a
capacity payment, a capacity bonus payment and an energy payment.
The price for contract capacity payments is fixed for the life of
such SO4 Agreement. The as-available capacity price is based on
a payment schedule as approved by the CPUC from time to time.
The contract energy payment increased each year for the first ten
years, which period expired on February 9, 1996. Thereafter, the
energy payments are based on Edison's Avoided Cost of Energy.
Hoch (Del Ranch). The Hoch (Del Ranch) Project sells
electricity to Edison under a 30-year SO4 Agreement that
commenced on January 2, 1989. The contract capacity and contract
nameplate are 34 MW and 38 MW, respectively. The provisions of
such SO4 Agreement are substantially the same as the SO4
Agreement with respect to the Vulcan Project. The price for
contract capacity payments is fixed for the life of the SO4
Agreement. The fixed price period for energy payments per kWh
expired on January 1, 1999. After January 1, 1999, the energy
payments are based on Edison's Avoided Cost.
Elmore. The Elmore Project sells electricity to Edison
under a 30-year SO4 Agreement that commenced on January 1, 1989.
The contract capacity and contract nameplate are 34 MW and 38 MW,
respectively. The provisions of such SO4 Agreement are
substantially the same as the SO4 Agreement with respect to the
Vulcan Project. The price for contract capacity payments is
fixed for the life of SO4 Agreement. The fixed price period for
energy payments per kWh expires on December 31, 1998. After
December 31, 1998, the energy payments are based on Edison's
Avoided Cost of Energy.
Leathers. The Leathers Project sells electricity to Edison
pursuant to a 30-year SO4 Agreement that commenced on January 1,
1990. The contract capacity and contract nameplate are 34 MW and
38 MW, respectively. The provisions of such SO4 Agreement are
substantially the same as the SO4 Agreement with respect to the
Vulcan Project. The price for contract capacity payments is
fixed for the life of SO4 Agreement which expires on December 31,
1999. Thereafter, the energy payments will be based on Edison's
Avoided Cost of Energy.
Salton Sea I Project. The Salton Sea I Project sells
electricity to Edison pursuant to a 30-year negotiated power
purchase agreement, as amended (the "Salton Sea I PPA"), which
provides capacity and energy payments. The contract capacity and
contract nameplate are each 10 MW. The capacity payment is based
on the firm capacity price which is currently $132.58kW-year.
The contract capacity payment adjusts quarterly based on a basket
of energy indices for the term of the Salton Sea I PPA. The
energy payment is calculated using a Base Price (defined as the
initial value of the energy payment (4.701 cents per kWh for the
second quarter of 1992)), which is subject to quarterly
adjustments based on a basket of indices. The time period
weighted average energy payment for Salton Sea I was 5.4 cents
per kWh during 1998. As the Salton Sea I PPA is not an SO4
Agreement, the energy payments do not revert to Edison's Avoided
Cost of Energy.
Salton Sea II Project. The Salton Sea II Project sells
electricity to Edison pursuant to a 30-year modified SO4
Agreement that commenced on April 5, 1990. The contract capacity
and contract nameplate are 15 MW (16.5 MW during on-peak periods)
and 20 MW, respectively. The contract requires Edison to make
capacity payments, capacity bonus payments and energy payments.
The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreement.
The energy payments for the first ten-year period, which period
expires on April 4, 2000, are levelized at a time period weighted
average of 10.6 cents per kWh. Thereafter, the monthly energy
payments will be Edison's Avoided Cost of Energy. Edison is
entitled to receive, at no cost, 5% of all energy delivered in
excess of 80% of contract capacity through September 30, 2004.
Salton Sea III Project. The Salton Sea III Project sells
electricity to Edison pursuant to a 30-year modified SO4
Agreement that commenced on February 13, 1989. The contract
capacity is 47.5 MW and the contract nameplate is 49.8 MW. The
SO4 Agreement requires Edison to make capacity payments, capacity
bonus payments and energy payments for the life of the SO4
Agreement. The price for contract capacity payments is fixed at
$175/kW per year. The energy payments for the first ten-year
period, which period expired on February 12, 1999, were levelized
at a time period weighted average of 9.8 cents per kWh.
Thereafter, the monthly energy payments are Edison's Avoided Cost
of Energy.
Salton Sea IV Project. The Salton Sea IV Project sells
electricity to Edison pursuant to a modified SO4 agreement which
provides for contract capacity payments on 34 MW of capacity at
two different rates based on the respective contract capacities
deemed attributable to the original Salton Sea PPA option (20 MW)
and to the original Fish Lake PPA (14 MW). The capacity payment
price for the 20 MW portion adjusts quarterly based upon
specified indices and the capacity payment price for the 14 MW
portion is a fixed levelized rate. The energy payment (for
deliveries up to a rate of 39.6 MW) is at a fixed price for 55.6%
of the total energy delivered by Salton Sea IV and is based on an
energy payment schedule for 44.4% of the total energy delivered
by Salton Sea IV. The contract has a 30-year term but Edison is
not required to purchase the 20 MW of capacity and energy
originally attributable to the Salton Sea I PPA option after
September 30, 2017, the original termination date of the Salton
Sea I PPA.
CE Generation Gas Facilities
Yuma Project. The Yuma Project is a 50 net MW natural gas-
fired cogeneration project in Yuma, Arizona providing 50 MW of
electricity to San Diego Gas & Electric Company ("SDG&E") under
an existing 30-year power purchase contract. The energy is sold
at SDG&E's Avoided Cost of Energy and the capacity is sold to
SDG&E at a fixed price for the life of the power purchase
contract. The power is wheeled to SDG&E over transmission lines
constructed and owned by Arizona Public Service Company ("APS").
The Yuma Project commenced commercial operation in May 1994. The
project entity has executed steam sales contracts with an
adjacent industrial entity to act as its thermal host. Since the
industrial entity has the right under its agreement to terminate
the agreement upon one year's notice if a change in its
technology eliminates its need for steam, and in any case to
terminate the agreement at any time upon three years notice,
there can be no assurance that the Yuma Project will maintain its
status as a QF. However, if the industrial entity terminates the
agreement, the Company anticipates that it will be able to locate
an alternative thermal host in order to maintain its status as a
QF. A natural gas supply and transportation agreement has been
executed with Southwest Gas Corporation, terminable under certain
circumstances by the Company and Southwest Gas Corporation. The
Yuma Project is unleveraged. The Company and SDG&E are currently
engaged in discussions regarding a potential contract amendment
of the Yuma PPA.
Saranac Project. Saranac is a 240 net MW natural gas-fired
cogeneration facility located in Plattsburgh, New York, which
began commercial operation in June 1994. Saranac has entered
into a 15-year power purchase agreement (the "Saranac PPA") with
NYSEG. Saranac is a QF and has entered into 15-year steam
purchase agreements (the "Saranac Steam Purchase Agreements")
with Georgia-Pacific Corporation and Tenneco Packaging, Inc.
Saranac has a 15-year natural gas supply contract (the "Saranac
Gas Supply Agreement") with Shell Canada Limited ("Shell Canada")
to supply 100% of Saranac's fuel requirements. Shell Canada is
responsible for production and delivery of natural gas to the
U.S.-Canadian border; the gas is then transported by the North
Country Gas Pipeline Corporation ("NCGP") the remaining 22 miles
to the plant. NCGP is a wholly-owned subsidiary of Saranac Power
Partners, L.P. (the "Saranac Partnership"), which also owns
Saranac. NCGP also transports gas for NYSEG and Georgia-Pacific.
Each of the Saranac PPA, the Saranac Steam Purchase Agreements
and the Saranac Gas Supply Agreement contains rates that are
fixed for the respective contract terms. Revenues escalate at a
higher rate than fuel costs. The Saranac Partnership is
indirectly owned by subsidiaries of CE Generation, Tomen
Corporation ("Tomen") and General Electric Capital Corporation.
On February 14, 1995, NYSEG filed with the FERC a Petition
for a Declaratory Order, Complaint, and Request for Modification
of Rates in Power Purchase Agreements Imposed Pursuant to the
Public Utility Regulatory Policies Act of 1978 ("Petition")
seeking FERC (i) to declare that the rates NYSEG pays under the
Saranac PPA, which was approved by the New York Public Service
Commission (the "PSC"), were in excess of the level permitted
under PURPA and (ii) to authorize the PSC to reform the Saranac
PPA. On March 14, 1995, the Saranac Partnership intervened in
opposition to the Petition asserting, inter alia, that the
Saranac PPA fully complied with PURPA, that NYSEG's action was
untimely and that the FERC lacked authority to modify the Saranac
PPA. On March 15, 1995, the Company intervened also in
opposition to the Petition and asserted similar arguments. On
April 12, 1995, the FERC by a unanimous (5-0) decision issued an
order denying the various forms of relief requested by NYSEG and
finding that the rates required under the Saranac PPA were
consistent with PURPA and the FERC's regulations. On May 11,
1995, NYSEG requested rehearing of the order and, by order issued
July 19, 1995, the FERC unanimously (5-0) denied NYSEG's request.
On June 14, 1995, NYSEG petitioned the United States Court of
Appeals for the District of Columbia Circuit (the "Court of
Appeals") for review of FERC's April 12, 1995 order. FERC moved
to dismiss NYSEG's petition for review on July 28, 1995. On
October 30, 1996, all parties filed final briefs and the Court of
Appeals heard oral arguments on December 2, 1996. On July 11,
1997, the Court of Appeals dismissed NYSEG's appeal from FERC's
denial of the petition on jurisdictional grounds.
On August 7, 1997, NYSEG filed a complaint in the U.S.
District Court for the Northern District of New York against the
FERC, the PSC (and the Chairman, Deputy Chairman and the
Commissioners of the PSC as individuals in their official
capacity), the Saranac Partnership and Lockport Energy
Associates, L.P. ("Lockport") concerning the power purchase
agreements that NYSEG entered into with Saranac Partners and
Lockport. NYSEG's suit asserts that the PSC and the FERC
improperly implemented PURPA in authorizing the pricing terms
that NYSEG, the Saranac Partnership and Lockport agreed to in
those contracts. The action raises similar legal arguments to
those rejected by the FERC in its April and July 1995 orders.
NYSEG in addition asks for retroactive reformation of the
contracts as of the date of commercial operation and seeks a
refund of $281 million from the Saranac Partnership. Saranac and
other parties have filed motions to dismiss and oral arguments on
those motions were heard on March 2, 1998 and again on March 3,
1999. Saranac believes that NYSEG's claims are without merit for
the same reasons described in the FERC's orders.
Power Resources Project. Power Resources is a 200 net MW
natural gas-fired cogeneration project located near Big Spring,
Texas, which has a 15-year power purchase agreement (the "Power
Resources PPA") with Texas Utilities Electric Company. Power
Resources began commercial operation in June 1988. Power
Resources is a QF and has entered into a 15-year steam purchase
agreement (the "Power Resources Steam Purchase Agreement") with
Fina Oil and Chemical Company ("Fina"), a subsidiary of Petrofina
S.A. of Belgium. Power Resources has entered into an agreement
(the "FSGC Gas Supply Agreement") with Falcon Seaboard Gas
Company ("FSGC") for Power Resources' fuel requirements through
December 2003. In June 1995, FSGC and Louis Dreyfus Natural Gas
Corp. ("Dreyfus") executed an eight-year natural gas supply
agreement (the "FSGC-Dreyfus Gas Supply Agreement"), with which
FSGC will fulfill its supply commitment to PRI from October 1995
to the end of the term of the Power Resources PPA. Each of the
Power Resources PPA, the Power Resources Steam Purchase Agreement
and the FSGC Gas Supply Agreement contains rates that are fixed
for the respective contract terms. Revenues escalate at a higher
rate than fuel costs.
NorCon Project. NorCon is an 80 net MW natural gas-fired
cogeneration facility located in North East, Pennsylvania which
began commercial operation in December 1992. NorCon has a 25-
year power purchase agreement (the "NorCon PPA") with Niagara
Mohawk Power Corporation ("NIMO"). NorCon is a QF and has
entered into a 20-year steam purchase agreement (the "NorCon
Thermal Energy Agreement") with Welch Foods Inc., a Cooperative
("Welch Foods"). NorCon has a 15-year natural gas supply
contract (the "NorCon Gas Purchase Agreement") with Louis Dreyfus
Gas Marketing Corp. to supply 100% of NorCon's fuel requirements.
A twenty-year natural gas transportation agreement has been
entered into with National Fuel Gas Supply Corporation ("National
Fuel") to provide transportation to NorCon. Transportation costs
are deducted from payments made pursuant to the NorCon Gas
Purchase Agreement. The NorCon Thermal Energy Agreement contains
rates that escalate at an inflation-based index, and the NorCon
Gas Purchase Agreement's rates are fixed for the contract term.
NorCon Power Partners, L.P. ("the "NorCon Partnership"), which
owns NorCon, is indirectly owned by subsidiaries of CE Generation
and Tomen. The NorCon project has had a number of on-going
contractual disputes with NIMO which are unresolved.
Other U.S. Geothermal Interests
Roosevelt Hot Springs. A subsidiary of the Company operates
and owns an approximately 70% indirect interest in a geothermal
steam field which supplies geothermal steam to a 23 net MW power
plant owned by Utah Power & Light Company ("UP&L") located on the
Roosevelt Hot Springs property under a 30-year steam sales
contract. The Company obtained approximately $20.3 million of
cash under a pre-sale agreement with UP&L whereby UP&L paid in
advance for the steam produced by the steam field. The Company
must make certain penalty payments to UP&L if the steam produced
does not meet certain quantity and quality requirements.
Desert Peak. A subsidiary of the Company is the owner of a
10 net MW geothermal plant at Sparks, Nevada. In 1998 the
Company executed an agreement pursuant to which the Desert Peak
Project is leased to a third party power producer and the Company
receives rental payments.
Mammoth. Magma receives royalty revenues from a 10 net MW
and a 12 net MW contract nameplate geothermal power plant (the
"First Mammoth Plant" and the "Second Mammoth Plant,"
respectively, and referred to herein, collectively, as the
"Mammoth Plants") at Mammoth Lakes, California. Electricity from
the Mammoth Plants is sold to Edison under two long-term power
purchase agreements. The First Mammoth Plant and the Second
Mammoth Plant began commercial operation in 1985 and 1991,
respectively. Magma leases both property and geothermal
resources to support the Mammoth Plants in return for certain
base royalty and bonus royalty payments. For the First Mammoth
Plant and the Second Mammoth Plant, the base royalty is 12.5% and
12%, respectively, of gross electricity sales revenues. The
bonus royalty for the Mammoth Plants is 50% of the excess of
annual gross electricity sales revenues over an annual revenue
standard based on the Mammoth Plants operating at 85% of contract
capacity.
United Kingdom Power Generation
In the United Kingdom, a Northern subsidiary, Northern
Electric Generation Limited ("Northern Generation"), focuses on
electricity generation, primarily through its ownership in
Teesside (described herein) and its operation and ownership of
Viking (described herein). Northern Generation also owns and
operates a 5 MW diesel power generating plant located in
Northallerton, England.
Teesside. Teesside Power Limited ("Teesside") owns and
operates an 1,875 net MW combined cycle gas-fired power plant at
Wilton. Northern owns a 15.4% interest in Teesside, but does not
operate the plant. Northern purchases 400 MW of electricity from
Teesside under a long-term power purchase agreement.
Viking. Viking Power Limited ("Viking") is a company owned
50% by Northern and 50% by Rolls-Royce Power Ventures which
operates a 50 net MW natural gas-fired power plant at Seal Sands
on Teesside. The project utilizes an aero-derivative Rolls-Royce
Trent Engine and is embedded on the Northern distribution
network. Viking became operational in October 1998, has a long-
term gas supply and electricity off-take contract with Northern
and is being operated by Northern Generation.
The Philippines Power Generation
Upper Mahiao. The Upper Mahiao facility has been in
commercial operation since June 17, 1996, although output was
constrained until 1998 because the required full capacity
transmission line was not completed and provided by the
Philippine National Power Corporation ("NPC") to CE Cebu
Geothermal Power Company, Inc. ("CE Cebu"), a Philippine
corporation that is 100% indirectly owned by the Company. During
the period of constrained operation, PNOC-EDC was required to,
and paid all capacity fees under the take or pay provisions of
the contract. In early 1998, the required transmission line was
completed, allowing unconstrained operation. As a result, CE
Cebu has been receiving capacity and energy payments from PNOC-
EDC since that time.
A consortium of international banks are providing the term
loans, supported by political risk insurance from the Ex-Im Bank.
Upon completion of the transmission line, the construction loan
was converted to a term loan in May 1998 provided by United
States Export-Import Bank and a local Philippine bank.
Under the terms of an energy conversion agreement, executed
on September 6, 1993 (the "Upper Mahiao ECA"), CE Cebu owns and
operates the Upper Mahiao Project during the ten-year cooperation
period, which commenced in June, 1996 after which ownership will
be transferred to PNOC-EDC at no cost.
The Upper Mahiao Project is located on land provided by PNOC-
EDC at no cost. It takes geothermal steam and fluid, also
provided by PNOC-EDC at no cost, and converts its thermal energy
into electrical energy sold to PNOC-EDC on a "take-or-pay" basis.
Specifically, PNOC-EDC is obligated to pay for 100% of the
electric capacity that is nominated each year by CE Cebu,
irrespective of whether PNOC-EDC is willing or able to accept
delivery of such capacity. PNOC-EDC pays to CE Cebu a fee (the
"Capacity Fee") based on the plant capacity nominated to PNOC-EDC
in any year (which, at the plant's design capacity, is
approximately 95% of total contract revenues) and a fee (the
"Energy Fee") based on the electricity actually delivered to PNOC-
EDC (approximately 5% of total contract revenues). Payments
under the Upper Mahiao ECA are denominated in U.S. dollars, or
computed in U.S. dollars and paid in Philippine pesos at the then-
current exchange rate, except for the Energy Fee. Significant
portions of the Capacity Fee and Energy Fee are indexed to U.S.
and Philippine inflation rates, respectively. PNOC-EDC's payment
requirements, and its other obligations under the Upper Mahiao
ECA, are supported by the Government of the Philippines through a
performance undertaking.
The payment of the Capacity Fee is not excused if PNOC-EDC
fails to deliver or remove the steam or fluids or fails to
provide the transmission facilities, even if its failure was
caused by a force majeure event. In addition, PNOC-EDC must
continue to make Capacity Fee payments if there is a force
majeure event (e.g., war, nationalization, etc.) that affects the
operation of the Upper Mahiao Project and that is within the
reasonable control of PNOC-EDC or the Government of the
Philippines or any agency or authority thereof.
PNOC-EDC is obligated to purchase CE Cebu's interest in the
facility under certain circumstances, including (i) extended
outages resulting from the failure of PNOC-EDC to provide the
required geothermal fluid, (ii) certain material changes in
policies or laws which adversely affect CE Cebu's interest in the
project, (iii) transmission failure, (iv) failure of PNOC-EDC to
make timely payments of amounts due under the Upper Mahiao ECA,
(v) privatization of PNOC-EDC or NPC, and (vi) certain other
events. The price will be the net present value (at a discount
rate based on the last published Commercial Interest Reference
Rate of the Organization for Economic Cooperation and
Development) of the total remaining amount of Capacity Fees over
the remaining term of the Upper Mahiao ECA.
Mahanagdong. The Mahanagdong Project is a 165 net MW
geothermal power project owned and operated by CE Luzon
Geothermal Power Company, Inc. ("CE Luzon"), a Philippine
corporation of which 100% of the common stock is indirectly owned
by the Company. Another industrial company owns an approximate
10% preferred equity interest in the project. The Mahanagdong
Project has been in commercial operation since July 25, 1997,
although its output was constrained until early 1998 because the
required full transmission line was not completed until that
time. The Mahanagdong Project sells 100% of its capacity on a
similar basis as described above for the Upper Mahiao Project to
PNOC-EDC, which in turn sells the power to NPC for distribution
to the island of Luzon. During the period of constrained
operation, PNOC-EDC was required to, and paid all capacity fees
under the take or pay provisions of the contract.
The project financing term loan is being provided by OPIC,
Ex-Im Bank and a consortium of international banks. Upon
completion of the transmission line, the construction loan was
converted to a term loan in June, 1998. Political risk insurance
from Ex-Im Bank has been obtained for the commercial lenders.
The terms of an energy conversion agreement, executed on
September 18, 1993 (the "Mahanagdong ECA"), are substantially
similar to those of the Upper Mahiao ECA. The Mahanagdong ECA
provides for a ten-year cooperation period. At the end of the
cooperation period, the facility will be transferred to PNOC-EDC
at no cost. All of PNOC-EDC's obligations under the Mahanagdong
ECA are supported by the Government of the Philippines through a
performance undertaking. The capacity fees are expected to be
approximately 97% of total revenues at the design capacity levels
and the energy fees are expected to be approximately 3% of such
total revenues.
Malitbog. The Malitbog Project is a 216 net MW geothermal
project owned and operated by Visayas Geothermal Power Company
("VGPC"), a Philippine general partnership that is wholly owned,
indirectly, by the Company. The three Units of the Malitbog
facility were put into commercial operation on July 25, 1996 (for
Unit I) and July 25, 1997 (for Units II and III), although as
with the Upper Mahiao and Mahanagdong projects, operation was
constrained due to a lack of the necessary transmission line.
VGPC is selling 100% of its capacity on substantially the same
basis as described above for the Upper Mahiao Project to PNOC-
EDC, which sells the power to NPC. During the period of
constrained operation, PNOC-EDC was required to, and paid all
capacity fees under the take or pay provisions of the contract.
A consortium of international banks and OPIC are providing
the term loan facilities. Upon completion of the transmission
line, the construction loan was converted to a term loan in
April, 1998.
The Malitbog Project is located on land provided by PNOC-EDC
at no cost. The electrical energy produced by the facility will
be sold to PNOC-EDC on a take-or-pay basis. Specifically, PNOC-
EDC is obligated to make payments (the "Capacity Payments") to
VGPC based upon the available capacity of the Malitbog Project.
The Capacity Payments equal approximately 100% of total revenues.
The Capacity Payments will be payable so long as the Malitbog
Project is available to produce electricity, even if the Malitbog
Project is not operating due to scheduled maintenance, because
PNOC-EDC fails to supply steam to the Malitbog Project as
required or because NPC is unable (or unwilling) to accept
delivery of electricity from the Malitbog Project. In addition,
PNOC-EDC must continue to make the Capacity Payments if there is
a force majeure event (e.g., war, nationalization, etc.) that
affects the operation of the Malitbog Project and that is within
the reasonable control of PNOC-EDC or the Government of the
Philippines or any agency or authority thereof. A substantial
majority of the Capacity Payments are required to be made by PNOC-
EDC in dollars. The portion of Capacity Payments payable to PNOC-
EDC in pesos is expected to vary over the term of the Malitbog
ECA from 10% of VGPC's revenues in the early years of the
Cooperation Period (as defined below) to 23% of VGPC's revenues
at the end of the Cooperation Period. Payments made in pesos
will generally be made to a peso-dominated account and will be
used to pay peso-denominated operation and maintenance expenses
with respect to the Malitbog Project and Philippine withholding
taxes, if any, on the Malitbog Project's debt service. The
Government of the Philippines has entered into a performance
undertaking (the "Performance Undertaking"), which provides that
all of PNOC-EDC's obligations pursuant to the Malitbog ECA carry
the full faith and credit of, and are affirmed and guaranteed by,
the Government of the Philippines.
PNOC-EDC is obligated to purchase VGPC's interest in the
facility under certain circumstances, including (i) certain
material changes in policies or laws which adversely affect
VGPC's interest in the project, (ii) any event of force majeure
which delays performance by more than 90 days and (iii) certain
other events. The price will be the net present value of the
capital cost recovery fees that would have been due for the
remainder of the Cooperation Period with respect to such
generating unit(s).
The Malitbog ECA cooperation period will expire ten years
after the date of commencement of commercial operation of Unit
III. At the end of the cooperation period, the facility will be
transferred to PNOC-EDC at no cost, on an "as is" basis. All of
PNOC-EDC's obligations under the Malitbog ECA are supported by
the Government of the Philippines through a performance
undertaking. The capacity fees are 100% of total revenues and
there is no energy fee.
Projects in Construction
United States
Zinc Recovery Project. The Company developed and owns the
rights to a proprietary process for the extraction of minerals
from elements in solution in the geothermal brine and fluids
utilized at its Imperial Valley plants as well as the production
of power to be used in the extraction process. A pilot plant
has successfully produced commercial quality zinc at the
Company's Imperial Valley Project.
Minerals LLC, an indirect wholly-owned subsidiary of the
Company, is constructing the Zinc Recovery Project which will
recover zinc from the geothermal brine (the "Zinc Recovery
Project"). Four facilities will be installed near Imperial
Valley Project sites to extract a zinc chloride solution from the
brine through and ion exchange process. This solution will be
transported to a central processing plant where zinc ingots will
be produced through solvent extraction, electrowinning and
casting processes. The Zinc Recovery Project is designed to have
a capacity of approximately 30,000 metric tonnes per year and is
scheduled to commence commercial operation in mid-2000. The zinc
produced by the Zinc Recovery Project is expected to be sold
primarily to U.S. West Coast customers such as steel companies,
alloyers and galvanizers.
The Zinc Recovery Project is being constructed by Kvaerner
U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price,
turnkey engineering, procurement and construction contract (the
"Zinc Recovery Project EPC Contract"). Kvaerner is a wholly-
owned indirect subsidiary of Kvaerner ASA, an internationally
recognized engineering and construction firm experienced in the
metals, mining and processing industries.
Salton Sea V. Power LLC, an indirect wholly owned
subsidiary of CE Generation, is construction Salton Sea V.
Salton Sea V will be a 49 net MW geothermal power plant which
will sell approximately one-third of its net output to the Zinc
Recovery Project. The remainder will be sold through the
California Power Exchange ("PX"). Salton Sea V is being
constructed pursuant to a date certain, fixed price, turnkey
engineering, procurement and construction contract (the "Salton
Sea V EPC Contract") by Stone & Webster Engineering Corporation
("SWEC"). SWEC is one of the world's leading engineering and
construction firms for the construction of electric power plants
and, in particular, geothermal power plants. Salton Sea V is
schedule to commence commercial operation in mid-2000.
CE Turbo. Turbo LLC, an indirect wholly-owned subsidiary of
CE Generation, is constructing the CE Turbo Project. The CE
Turbo Project will have a capacity of 10 net MW. The net output
of the CE Turbo Project will be sold to the Zinc Recovery Project
or sold through the PX. In addition to the CE Turbo Project, the
Partnership Projects are constructing an upgrade to the
geothermal brine processing facilities at the Vulcan and Del
Ranch Projects to incorporate the pH Modification Process, which
has reduced operating costs at the Salton Sea Project. The CE
Turbo Project and the Region 2 brine facilities construction are
being constructed by SWEC pursuant to a date certain, fixed
price, turnkey engineering, procurement and construction contract
(the "Region 2 Upgrade EPC Contract"). The obligations of SWEC
will be guaranteed by Stone & Webster, Incorporated. The CE
Turbo Project is scheduled to commence initial operations in mid-
2000 and the Region 2 Brine Facilities Construction is scheduled
to be completed in early-2000.
Philippines
Casecnan. In November 1995, the Company closed the
financing and commenced construction of the Casecnan Project, a
combined irrigation and 150 net MW hydroelectric power generation
project (the "Casecnan Project") located in the central part of
the island of Luzon in the Republic of the Philippines. The
Casecnan Project will consist generally of diversion structures
in the Casecnan and Taan (Denip) Rivers that will divert water
into a tunnel of approximately 23 kilometers. The tunnel will
transfer the water from the Casecnan and Taan (Denip) Rivers into
the Pantabangan Reservoir for irrigation and hydroelectric use in
the Central Luzon area. An underground powerhouse located at the
end of the water tunnel and before the Pantabangan Reservoir will
house a power plant consisting of approximately 150 MW of newly
installed rated electrical capacity. A tailrace tunnel of
approximately three kilometers will deliver water from the water
tunnel and the new powerhouse to the Pantabangan Reservoir,
providing additional water for irrigation and increasing the
potential electrical generation of two downstream existing
hydroelectric facilities of the NPC.
CE Casecnan Water and Energy Company, Inc., a Philippine
corporation ("CE Casecnan") which is expected to be at least 70%
indirectly owned by the Company, is developing the Casecnan
Project under the terms of the Project Agreement between CE
Casecnan and the National Irrigation Administration ("NIA").
Under the Project Agreement, CE Casecnan will develop, finance
and construct the Casecnan Project over the construction period,
and thereafter own and operate the Casecnan Project for 20 years
(the "Cooperation Period"). During the Cooperation Period, NIA
is obligated to accept all deliveries of water and energy, and so
long as the Casecnan Project is physically capable of operating
and delivering in accordance with agreed levels set forth in the
Project Agreement, NIA will pay CE Casecnan a guaranteed fee for
the delivery of water and a guaranteed fee for the delivery of
electricity, regardless of the amount of water or electricity
actually delivered. In addition, NIA will pay a fee for all
electricity delivered in excess of a threshold amount up to a
specified amount. NIA will sell the electricity it purchases to
NPC, although NIA's obligations to CE Casecnan under the Project
Agreement are not dependent on NPC's purchase of the electricity
from NIA. All fees to be paid by NIA to CE Casecnan are payable
in U.S. dollars. The guaranteed fees for the delivery of water
and energy are expected to provide approximately 70% of CE
Casecnan's revenues.
The Project Agreement provides for additional compensation
to CE Casecnan upon the occurrence of certain events, including
increases in Philippine taxes and adverse changes in Philippine
law. Upon the occurrence and during the continuance of certain
force majeure events, including those associated with Philippines
political action, NIA may be obligated to buy the Casecnan
Project from CE Casecnan at a buy out price expected to be in
excess of the aggregate principal amount of the outstanding CE
Casecnan debt securities, together with accrued but unpaid
interest. At the end of the Cooperation Period, the Casecnan
Project will be transferred to NIA and NPC for no additional
consideration on an "as is" basis.
The Republic of the Philippines has provided a Performance
Undertaking under which NIA's obligations under the Project
Agreement are guaranteed by the full faith and credit of the
Republic of the Philippines. The Project Agreement and the
Performance Undertaking provide for the resolution of disputes by
binding arbitration in Singapore under international arbitration
rules.
CE Casecnan entered into a fixed price, date certain,
turnkey engineering, procurement and construction contract to
complete the construction of the Casecnan Project (the "Casecnan
Construction Contract"). The work under the Casecnan
Construction Contract is being conducted by a consortium
consisting of Cooperativa Muratori Cementisti CMC di Ravenna and
Impresa Pizzarotti & C. Spa working together with Siemens A.G.,
Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering
Ltd. The construction of the Casecnan Project is proceeding on
schedule and is expected to be completed in 2000.
Indonesia
On December 2, 1994, subsidiaries of the Company, Himpurna
California Energy Ltd., ("HCE") and Patuha Power, Ltd. ("PPL",
together with HCE, the "Indonesian Subsidiaries") executed
separate joint operation contracts for the development of the
geothermal steam field and geothermal power facilities located in
Central Java in Indonesia with Perusahaan Pertambangam Minyak Dan
Gas Cumi Negara ("Pertamina"), the Indonesian national oil
company, and executed separate "take-or-pay" energy sales
contracts with both Pertamina and P.T. PLN (Persero) ("PLN"), the
Indonesian national electric utility. The Government of
Indonesia provided sovereign guarantees of the obligations under
the "take-or-pay" contracts.
In 1997 and 1998 a series of Indonesian government decrees
and other actions (including the non-payment of all monthly
invoices from HCE's Dieng Unit I which became operational in
March 1998) have created significant uncertainty as to whether
PLN and the Indonesian government will honor their contractual
obligations to the Indonesian Subsidiaries. The Indonesian
Subsidiaries in 1998 initiated dispute resolution procedures
under the ESCs and sovereign guarantees with PLN and the
Government of Indonesia and subsequently commenced arbitration to
resolve the dispute and they intend to continue to take actions
to require the Government of Indonesia to honor its contractual
obligations. However, actions by the Government of Indonesia
have created significant risks to the Indonesian Subsidiaries.
Dieng Unit I was operationally and contractually completed in
March 1998 when the "take-or-pay" obligations under its contract
with PLN commenced. However, PLN has defaulted on the
contractually required and sovereign guaranteed "take-or-pay"
payment obligations. Accordingly, the arbitration is proceeding
before an international arbitration panel, as provided under the
Indonesian Subsidiaries' contracts with PLN. The arbitration
involves both PLN and the Government of Indonesia and is expected
to conclude in the third quarter of 1999.
PROJECTS IN DEVELOPMENT
The following is a summary description of certain
information concerning the Company's advanced stage development
projects. Since these projects are still in development there can
be no assurance that this information will not change materially
over time. In addition, there can be no assurance that
development efforts on any particular project, or the Company's
development efforts generally, will be successful. See also "Risk
Factors" contained in the Company's Report on Form 8-K dated
March 26, 1999, incorporated herein by reference.
United States
Salton Sea Minerals Extraction. In addition to zinc
recovery, the Company intends to sequentially develop manganese,
silver, gold, lead, boron, lithium and other products as it
further develops the extraction technology. If successfully
developed for the other products, the mineral extraction process
will provide an environmentally responsible and low cost minerals
recovery methodology. The Company is also investigating producing
silica from the solids precipitated out of the geothermal power
process. Silica is used as a filler for such products as paint,
plastics and high temperature cement.
Telephone Flat. The Company is developing a 48 net MW
geothermal project at Telephone Flat in Northern California where the
Company has two successful production wells (the "Telephone Flat
Project"). Under an amended contract arrangement with the Bonneville
Power Administration ("BPA"), BPA will purchase 30 MW from the
project and has an option to purchase an additional 100 MW. The
completion of the project and BPA's purchase obligation are subject
to obtaining a final environmental impact statement relating to the
new site location.
Cordova. The power station is a nominal 500 MW gas-fired
generating plant that is targeted for completion in the late
spring of 2001. The preferred site for the power station is near
Cordova, Il., northeast of the Quad Cities. The Quad Cities
Energy Company has signed contracts for five major equipment
components for the planned electric power station near the Quad
Cities. The Quad Cities Energy Company which is developing the
project through a subsidiary, is a subsidiary of the Company.
With its strategic location in the Quad Cities area, it will
border on two electric reliability districts: the Mid-Continent
Area Power Pool and the MidAmerica Interconnected Network. The
plant will also feature highly efficient operations, flexible
transmission access and competitive gas supply.
United Kingdom
Exeter. Exeter Power Limited ("Exeter") is a company owned
50% by Northern Electric Generation Limited and 50% by Rolls-
Royce Power Ventures. Exeter is developing a 50 net MW gas-fired
power plant at Exeter, England. This project is based upon the
U.K. "Mid-merit" model (described below) and will be managed and
operated by Northern upon commercial operation. The power
purchase contract and permits for the project are currently being
finalized.
U.K. Mid-merit Projects. The Company, through Northern
Generation, is pursuing a number of "Mid-merit" project
opportunities in addition to Exeter and Viking, in conjunction
with and separate from Rolls-Royce. However, the gas moratorium
in the U.K. has significantly adversely impacted the ability to
develop these projects.
"Mid-merit" projects are those projects which have
generation units having a registered capacity of 50 net MW or
less. As a result, these projects only require local planning
permission and limited central government permits. In addition,
these projects are connected to the local distribution system and
not the National Grid, which means these projects do not have to
be a member of the Pool and pay generator related grid and Pool
charges. These Mid-merit generating projects are also not
subject to central dispatch by the National Grid and therefore
allow for the potential of gas arbitrage between the electricity
day-ahead pool market and the within-day gas spot market.
Finally, these projects are based on open (simple) cycle
aero derivative gas turbines which are ideally suited to multiple
start/stop operations. This flexible capability provides
significant economic benefits to Northern's electricity supply
business in buying electricity from the Mid-merit plant and
avoiding pool purchases at high pool price times and making Pool
purchases when the Pool price is below the Mid-merit plant's
marginal costs.
U.K. Gas Transportation and Storage. The Company, through
CE Gas, is pursuing a number of gas transportation and storage
opportunities in the U.K. to integrate with its