SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001 Commission
File No. 33-95538
SALTON SEA FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
47-0790493
(IRS Employer Identification No.)
Salton Sea Brine Processing L.P. California 33-0601721
Salton Sea Power Generation L.P. California 33-0567411
Fish Lake Power LLC Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Corporation Delaware 33-0268085
Salton Sea Royalty LLC Delaware 47-0790492
VPC Geothermal LLC Delaware 91-1244270
San Felipe Energy Company California 33-0315787
Conejo Energy Company California 33-0268500
Niguel Energy Company California 33-0268502
Vulcan/BN Geothermal Power Company Nevada 33-3992087
Leathers, L.P. California 33-0305342
Del Ranch, L.P. California 33-0278290
Elmore, L.P. California 33-0278294
Salton Sea Power L.L.C. Delaware 47-0810713
CalEnergy Minerals LLC Delaware 47-0810718
CE Turbo LLC Delaware 47-0812159
CE Salton Sea Inc. Delaware 47-0810711
Salton Sea Minerals Corp. Delaware 47-0811261
(Exact name of Registrants (State or other (I.R.S. Employer
as specified in their charters) jurisdiction of Identification No.)
incorporation or organization)
302 S. 36th Street, Suite 400-A, Omaha, NE 68131
(Address of principal executive offices and Zip Code of
Salton Sea Funding Corporation)
Salton Sea Funding Corporation's telephone number,
including area code: (402) 231-1641
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
All common stock of Salton Sea Funding Corporation is indirectly held by
Magma Power Company. 100 shares of Common Stock were outstanding on May [14],
2001.
SALTON SEA FUNDING CORPORATION
Form 10-Q
March 31, 2001
-------------
C O N T E N T S
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements Page
SALTON SEA FUNDING CORPORATION
Independent Accountants' Report 4
Balance Sheets, March 31, 2001 and December 31, 2000 5
Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 6
Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 10
Combined Balance Sheets, March 31, 2001 and December 31, 2000 11
Combined Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 12
Combined Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 13
Notes to Combined Financial Statements 14
PARTNERSHIP GUARANTORS
Independent Accountants' Report 16
Combined Balance Sheets, March 31, 2001 and December 31, 2000 17
Combined Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 18
Combined Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 19
Notes to Combined Financial Statements 20
SALTON SEA ROYALTY LLC
Independent Accountants' Report 22
Balance Sheets, March 31, 2001 and December 31, 2000 23
Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 24
Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 25
Notes to Financial Statements 26
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities 37
Item 3. Defaults on Senior Securities 37
Item 4. Submission of Matters to a Vote of
Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
Exhibit Index 39
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Salton Sea Funding Corporation
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Funding
Corporation as of March 31, 2001, and the related statements of operations and
cash flows for the three month periods ended March 31, 2001 and 2000. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Salton Sea
Funding Corporation as of December 31, 2000, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 18, 2001 (March 27, 2001 as
to Note 4), we expressed an unqualified opinion on those financial statements.
In our opinion, the information set forth in the accompanying balance sheet as
of December 31, 2000 is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 7, 2001
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
March 31, December 31,
2001 2000
(unaudited)
ASSETS
Cash $ 3,161 $ 8,467
Prepaid expenses and other assets 13,891 3,563
Due from affiliates 349 ---
Current portion of secured project notes
from Guarantors 23,658 23,658
-------- ---------
Total current assets 41,059 35,688
Secured project notes from Guarantors 520,250 520,250
Investment in 1% of net assets of
Guarantors 9,457 9,437
---------- ----------
$ 570,766 $ 565,375
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 13,742 $ 3,479
Due to affiliates --- 4,753
Current portion of long term debt 23,658 23,658
--------- ---------
Total current liabilities 37,400 31,890
Senior secured notes and bonds 520,250 520,250
--------- ---------
Total liabilities 557,650 552,140
Commitments and contingencies (Note 3)
Stockholder's equity:
Common stock--authorized 1,000
shares, par value $.01 per share;
issued and outstanding 100 shares --- ---
Additional paid-in capital 5,366 5,366
Retained earnings 7,750 7,869
---------- ----------
Total stockholder's equity 13,116 13,235
---------- ----------
$ 570,766 $ 565,375
========== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Revenues:
Interest income $ 10,329 $ 10,963
Equity in earnings (loss) of Guarantors 20 (42)
--------- --------
Total revenues 10,349 10,921
--------- --------
Expenses:
General and administrative expenses 289 259
Interest expense 10,263 10,763
--------- --------
Total expenses 10,552 11,022
--------- --------
Loss before income taxes (203) (101)
Income tax benefit (84) (42)
--------- --------
Net loss $ (119) $ (59)
========= ========
The accompanying notes are an integral part of these
financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Cash flows from operating activities:
Net loss $ (119) $ (59)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Equity in (earnings) loss of Guarantors (20) 42
Changes in assets and liabilities:
Prepaid expenses and other assets (10,328) (10,877)
Accrued liabilities 10,263 10,782
------------ ------------
Net cash flows from operating activities (204) (112)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in due to affiliates (5,102) 8,746
------------ ------------
Net cash flows from financing activities (5,102) 8,746
------------ ------------
Net change in cash (5,306) 8,634
Cash at the beginning of period 8,467 2,086
------------ ------------
Cash at the end of period $ 3,161 $ 10,720
============ ============
Supplemental disclosures:
Interest paid $ --- $ ---
============ ============
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
---------------------
1. General:
In the opinion of management of the Salton Sea Funding Corporation (the "Funding
Corporation"), the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2001 and the results of operations
for the three months ended March 31, 2001 and 2000 and cash flows for the three
months ended March 31, 2001 and 2000. The results of operations for the three
months ended March 31, 2001 and 2000 are not necessarily indicative of the
results to be expected for the full year.
The unaudited financial statements should be read in conjunction with the
financial statements included in the Funding Corporation's annual report on Form
10-K for the year ended December 31, 2000.
2. Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138. SFAS 133/138 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value.
Salton Sea Funding Corporation implemented the new standards on January 1, 2001.
The initial adoption of SFAS133/138 did not have a material impact on Salton Sea
Funding Corporation's financial position, results of operations or any impact on
its cash flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. Salton Sea Funding Corporation has not determined if the ultimate
resolution of those issues would have a material impact on its financial
statements.
3. Contingency:
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. The Funding
Corporation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, the Funding Corporation understands that Edison has not
made certain payments to other qualifying facilities ("QFs") from which Edison
purchases power and has not made scheduled payments of debt service. Edison's
senior unsecured debt obligations are currently rated Caa2 (on watch for
possible downgrade) by Moody's and D by S&P.
Edison has failed to pay approximately $119 million due under the Power Purchase
Agreements for power delivered in November and December 2000 and January,
February and March 2001, although the Power Purchase Agreements provide for
billing and payment on a schedule where payments would have normally been
received in early January, February, March, April and May 2001. Edison has not
notified the Imperial Valley Projects as to when they can expect to receive
these payments.
On February 21, 2001, certain Guarantors filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Guarantors to suspend deliveries of power to Edison and to permit the Guarantors
to sell such power to other purchasers in California.
On March 22, 2001, the Superior Court granted Guarantors' Motion for Summary
Adjudication and a Declaratory Judgment ordering that: 1) under the Power
Purchase Agreements, Guarantors have the right to temporarily suspend deliveries
of capacity and energy to Edison, 2) Guarantors are entitled to resell the
energy and capacity to other purchasers and 3) the interim suspension of
deliveries to Edison shall not in any respect result in the modifications or
termination of the Power Purchase Agreements and the Power Purchase Agreements
shall in all respects continue in full force and effect other than the temporary
suspension of deliveries to Edison. The Guarantors intend to vigorously pursue
their other remedies in this action in light of Edison's continuing non-payment.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley projects' available power is sold to EPME based on percentages of the Dow
Jones SP-15 Index.
The Funding Corporation is hopeful that the current Edison situation is
temporary and the proceedings in the legal, regulatory, financial and political
arenas will lead to the improvement of Edison's financial condition in the near
future and the payment by Edison of amounts due under the Power Purchase
Agreements. However, no assurance can be given that this will be the case.
As a result of SoCal Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of SoCal Edison's credit ratings,
Moody's has downgraded the ratings for the Securities to Caa2 (negative outlook)
and S&P has downgraded the ratings for the Securities to BBB- and has placed the
Securities on "credit watch negative".
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Salton Sea
Guarantors as of March 31, 2001, and the related combined statements of
operations and cash flows for the three month period ended March 31, 2001 and
2000. These financial statements are the responsibility of the Salton Sea
Guarantors' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such combined financial statements for them to be in conformity with
generally accepted accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
Salton Sea Guarantors as of December 31, 2000, and the related combined
statements of operations, Guarantors' equity, and cash flows for the year then
ended (not presented herein); and in our report dated January 18, 2001 (March
27, 2001 as to Note 6), we expressed an unqualified opinion on those combined
financial statements. In our opinion, the information set forth in the
accompanying combined balance sheet as of December 31, 2000 is fairly stated, in
all material respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 7, 2001
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2001 2000
(unaudited)
ASSETS
Accounts receivable, net of allowance of $12,532 and
$0, respectively $ 42,688 $ 24,396
Prepaid expenses and other assets 5,982 8,699
------------ -------------
Total current assets 48,670 33,095
Restricted cash --- 17
Property, plant, contracts and equipment, net 564,457 566,577
Excess of cost over fair value of net assets
acquired, net 45,248 45,574
------------ -------------
$ 658,375 $ 645,263
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 3,477 $ 5
Accrued liabilities 12,812 10,826
Current portion of long term debt 17,319 17,319
------------ -------------
Total current liabilities 33,608 28,150
Due to affiliates 24,512 18,720
Senior secured project note 266,898 266,898
------------ -------------
Total liabilities 325,018 313,768
Commitment and contingencies (Note 4)
Total Guarantors' equity 333,357 331,495
------------ -------------
$ 658,375 $ 645,263
============ =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31
2001 2000
-------------- -------------
Revenues:
Sales of electricity $ 32,130 $ 8,893
Interest and other income --- 127
-------------- -------------
Total revenues 32,130 9,020
-------------- -------------
Expenses:
Operating, general and administration 13,357 5,758
Depreciation and amortization 4,370 4,094
Interest expense 5,490 5,840
Less capitalized interest (1,692) (3,323)
-------------- -------------
Total expenses 21,525 12,369
-------------- -------------
Income (loss) before cumulative effect of accounting change 10,605 (3,349)
Cumulative effect of accounting change (8,743) ---
-------------- -------------
Net income (loss) $ 1,862 $ (3,349)
============== =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
--------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,862 $ (3,349)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 4,370 4,094
Cumulative effect of change in accounting principle 8,743 ---
Changes in assets and liabilities:
Accounts receivable (18,292) 8,129
Prepaid expenses and other assets (6,026) (1,111)
Accounts payable and accrued
liabilities 5,458 6,235
--------------- -------------
Net cash flows from operating activities (3,885) 13,998
--------------- -------------
Cash flows from investing activities:
Capital expenditures (1,924) (6,977)
Decrease in restricted cash 17 2,094
--------------- -------------
Net cash flows from investing activities (1,907) (4,883)
--------------- -------------
Cash flows from financing activities:
Increase (decrease) in due to affiliates 5,792 (9,115)
--------------- -------------
Net cash flows from financing activities 5,792 (9,115)
--------------- -------------
Net change in cash --- ---
Cash at beginning of period --- ---
--------------- -------------
Cash at end of period $ --- $ ---
=============== =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Salton Sea Guarantors (the "Guarantors"),
the accompanying unaudited financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2001 and the results of operations for the
three months ended March 31, 2001 and 2000 and cash flows for the three months
ended March 31, 2001 and 2000. The results of operations for the three months
ended March 31, 2001 and 2000 are not necessarily indicative of the results to
be expected for the full year.
The unaudited financial statements shall be read in conjunction with the
financial statements included in the Funding Corporation's annual report on Form
10-K for the year ended December 31, 2000.
2. Accounting Policy Change:
The Guarantors have changed their policy of accounting for major maintenance,
overhaul and well workover costs. These costs which have historically been
accounted for using deferral methods, will be expensed as incurred. The new
policy went into effect January 1, 2001 and the Guarantors have recorded a
cumulative effect of $8.7 million.
3. Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138. SFAS 133/138 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. The
Guarantors implemented the new standards on January 1, 2001. The initial
adoption of SFAS133/138 did not have a material impact on the Guarantors's
financial position, results of operations or any impact on their cash flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. The Guarantors have not determined if the ultimate resolution of those
issues would have a material impact on their financial statements.
4. Contingency:
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. The Funding
Corporation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, the Funding Corporation understands that Edison has not
made certain payments to other qualifying facilities ("QFs") from which Edison
purchases power and has not made scheduled payments of debt service. Edison's
senior unsecured debt obligations are currently rated Caa2 (on watch for
possible downgrade) by Moody's and D by S&P.
Edison has failed to pay approximately $42.2 million to the Guarantors due under
the Power Purchase Agreements for power delivered in November and December 2000
and January, February and March 2001, although the Power Purchase Agreements
provide for billing and payment on a schedule where payments would have normally
been received in early January, February, March, April and May 2001. Edison has
not notified the Imperial Valley Projects as to when they can expect to receive
these payments.
On February 21, 2001, certain Guarantors filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Guarantors to suspend deliveries of power to Edison and to permit the Guarantors
to sell such power to other purchasers in California.
On March 22, 2001, the Superior Court granted Guarantors' Motion for Summary
Adjudication and a Declaratory Judgment ordering that: 1) under the Power
Purchase Agreements, Guarantors have the right to temporarily suspend deliveries
of capacity and energy to Edison, 2) Guarantors are entitled to resell the
energy and capacity to other purchasers and 3) the interim suspension of
deliveries to Edison shall not in any respect result in the modifications or
termination of the Power Purchase Agreements and the Power Purchase Agreements
shall in all respects continue in full force and effect other than the temporary
suspension of deliveries to Edison. The Guarantors intend to vigorously pursue
their other remedies in this action in light of Edison's continuing non-payment.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley project's available power is sold to EPME based on percentages of the Dow
Jones SP-15 Index. The Funding Corporation is hopeful that the current Edison
situation is temporary and the proceedings in the legal, regulatory, financial
and political arenas will lead to the improvement of Edison's financial
condition in the near future and the payment by Edison of amounts due under the
Power Purchase Agreements. However, no assurance can be given that this will be
the case.
As a result of SoCal Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of SoCal Edison's credit ratings,
Moody's has downgraded the ratings for the Securities to Caa2 (negative outlook)
and S&P has downgraded the ratings for the Securities to BBB- and has placed the
Securities on "credit watch negative".
The Guarantors are contractually entitled to receive payments due under the
Power Purchase Agreements. However, due to the uncertainties associated with
Edison's financial condition and failure to pay, the Guarantors have established
an allowance for doubtful accounts of approximately $12.5 million at March 31,
2001.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Partnership
Guarantors as of March 31, 2001, and the related combined statements of
operations and cash flows for the three month periods ended March 31, 2001 and
2000. These financial statements are the responsibility of the Partnership
Guarantors' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such combined financial statements for them to be in conformity with
generally accepted accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
Partnership Guarantors as of December 31, 2000, and the related combined
statements of operations, Guarantors' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 18, 2001 (March
27, 2001 as to Note 8A), we expressed an unqualified opinion on those combined
financial statements. In our opinion, the information set forth in the
accompanying combined balance sheet as of December 31, 2000 is fairly stated, in
all material respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 7, 2001
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2001 2000
------------ -------------
(unaudited)
ASSETS
Accounts receivable, net of allowance of $28,845 and
$0, respectively $ 49,430 $ 28,319
Prepaid expenses and other assets 18,075 26,661
------------ -------------
Total current liabilities 67,505 54,980
Restricted cash --- 106
Due from affiliates 25,279 35,066
Property, plant, contracts and equipment, net 638,835 636,264
Management fee 69,574 70,855
Excess of cost over fair value of net assets
acquired, net 123,539 124,430
------------ -------------
$ 924,732 $ 921,701
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 8,627 $ 101
Accrued liabilities 20,835 17,722
Current portion of long term debt 1,907 1,907
------------ -------------
Total current liabilities 31,369 19,730
Senior secured project notes 248,743 248,743
Deferred income taxes 98,764 101,734
------------ -------------
Total liabilities 378,876 370,207
Commitments and contingencies (Note 4)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 158,190 163,828
------------ -------------
Total Guarantors' equity 545,856 551,494
------------ -------------
$ 924,732 $ 921,701
============ =============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------- -------------
Revenues:
Sales of electricity $ 23,494 $ 10,389
Interest and other income 35 476
------------- -------------
Total revenues 23,529 10,865
------------- -------------
Expenses:
Operating, general and
administration 14,394 7,790
Depreciation and amortization 5,081 4,645
Interest expense 4,793 5,095
Less capitalized interest (4,733) (4,911)
------------- -------------
Total expenses 19,535 12,619
------------- -------------
Income (loss) before income taxes 3,994 (1,754)
Provision for income taxes expense (benefit) 1,378 (579)
------------- -------------
Income (loss) before cumulative effect of accounting change 2,616 (1,175)
Cumulative effect of accounting change, net of tax (8,254) ---
------------- -------------
Net loss $ (5,638) $ (1,175)
============= =============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
-------------- -------------
Cash flows from operating activities:
Net loss $ (5,638) $ (1,175)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Depreciation and amortization 5,081 4,645
Cumulative effect of change in accounting principle, net of tax 8,254 ---
Deferred income taxes 1,378 (579)
Changes in assets and liabilities:
Accounts receivable (21,111) 7,336
Prepaid expenses and other assets (4,016) (4,563)
Accounts payable and accrued
liabilities 11,639 12,218
-------------- -------------
Net cash flows from operating activities (4,413) 17,882
-------------- -------------
Cash flows from investing activities:
Capital expenditures (6,299) (60,850)
Decrease in restricted cash 106 33,984
Management fee 819 197
-------------- -------------
Net cash flows from investing activities (5,374) (26,669)
-------------- -------------
Cash flows from financing activities:
Increase in due from affiliates 9,787 8,787
-------------- -------------
Net cash flows from financing activities 9,787 8,787
-------------- -------------
Net change in cash --- ---
Cash at beginning of period --- ---
-------------- -------------
Cash at end of period $ --- $ ---
============== =============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Partnership Guarantors (the "Guarantors"),
the accompanying unaudited combined financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2001 and the results of operations for the
three months ended March 31, 2001 and 2000 and cash flows for the three months
ended March 31, 2001 and 2000. The results of operations for the three months
ended March 31, 2001 and 2000 are not necessarily indicative of the results to
be expected for the full year.
The unaudited financial statements shall be read in conjunction with the
financial statements included in the Funding Corporation's annual report on Form
10-K for the year ended December 31, 2000.
2. Accounting Policy Change:
The Guarantors have changed their policy of accounting for major maintenance,
overhaul and well workover costs. These costs which have historically been
accounted for using deferral methods, will be expensed as incurred. The new
policy went into effect January 1, 2001 and the Guarantors have recorded a
cumulative effect of $8.3 million, net of tax.
3. Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138. SFAS 133/138 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. The
Guarantors implemented the new standards on January 1, 2001. The initial
adoption of SFAS133/138 did not have a material impact on the Guarantors's
financial position, results of operations or any impact on their cash flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. The Guarantors have not determined if the ultimate resolution of those
issues would have a material impact on their financial statements.
4. Contingency:
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. The Funding
Corporation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, the Funding Corporation understands that Edison has not
made certain payments to other qualifying facilities ("QFs") from which Edison
purchases power and has not made scheduled payments of debt service. Edison's
senior unsecured debt obligations are currently rated Caa2 (on watch for
possible downgrade) by Moody's and D by S&P.
Edison has failed to pay approximately $76.8 million to the Guarantors due under
the Power Purchase Agreements for power delivered in November and December 2000
and January, February and March 2001, although the Power Purchase Agreements
provide for billing and payment on a schedule where payments would have normally
been received in early January, February, March, April and May 2001. Edison has
not notified the Imperial Valley Projects as to when they can expect to receive
these payments.
On February 21, 2001, certain Guarantors filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Guarantors to suspend deliveries of power to Edison and to permit the Guarantors
to sell such power to other purchasers in California.
On March 22, 2001, the Superior Court granted Guarantors' Motion for Summary
Adjudication and a Declaratory Judgment ordering that: 1) under the Power
Purchase Agreements, Guarantors have the right to temporarily suspend deliveries
of capacity and energy to Edison, 2) Guarantors are entitled to resell the
energy and capacity to other purchasers and 3) the interim suspension of
deliveries to Edison shall not in any respect result in the modifications or
termination of the Power Purchase Agreements and the Power Purchase Agreements
shall in all respects continue in full force and effect other than the temporary
suspension of deliveries to Edison. The Guarantors intend to vigorously pursue
their other remedies in this action in light of Edison's continuing non-payment.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley project's available power is sold to EPME based on percentages of the Dow
Jones SP-15 Index.
The Funding Corporation is hopeful that the current Edison situation is
temporary and the proceedings in the legal, regulatory, financial and political
arenas will lead to the improvement of Edison's financial condition in the near
future and the payment by Edison of amounts due under the Power Purchase
Agreements. However, no assurance can be given that this will be the case.
As a result of SoCal Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of SoCal Edison's credit ratings,
Moody's has downgraded the ratings for the Securities to Caa2 (negative outlook)
and S&P has downgraded the ratings for the Securities to BBB- and has placed the
Securities on "credit watch negative".
The Guarantors are contractually entitled to receive payments due under the
Power Purchase Agreements. However, due to the uncertainties associated with
Edison's financial condition and failure to pay, the Guarantors have established
an allowance for doubtful accounts of approximately $28.8 million at March 31,
2001.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of March 31, 2001, and the related statements of operations and cash flows for
the three month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of the Salton Sea Royalty LLC's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of the Salton Sea
Royalty LLC as of December 31, 2000, and the related statements of operations,
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 18, 2001 (March 27, 2001 as to Note 5), we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying balance sheet as of December 31, 2000
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 7, 2001
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
March 31, December 31,
2001 2000
(unaudited)
---------- ----------
ASSETS
Prepaid expenses and other assets $ 69 $ 82
---------- ----------
Total current assets 69 82
Royalty stream, net 15,459 15,719
Excess of cost over fair value of net assets
acquired, net 31,145 31,372
Due from affiliates 29,081 26,497
---------- ----------
$ 75,754 $ 73,670
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 221 $ 57
Current portion of long term debt 4,434 4,434
---------- ----------
Total current liabilities 4,655 4,491
Senior secured project note 4,607 4,607
---------- ----------
Total liabilities 9,262 9,098
Commitment and contingencies (Note 3)
Equity:
Common stock, par value $.01 per share; 100
share authorized, issued and outstanding --- ---
Additional paid-in capital 1,561 1,561
Retained earnings 64,931 63,011
---------- ----------
Total equity 66,492 64,572
---------- ----------
$ 75,754 $ 73,670
========== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Revenues:
Royalty income $ 3,463 $ 1,560
Expenses:
Operating, general and
administrative expenses 879 415
Amortization of royalty stream
and goodwill 487 491
Interest expense 177 284
----------- -------------
Total expenses 1,543 1,190
----------- -------------
Net income $ 1,920 $ 370
=========== =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 1,920 $ 370
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 487 491
Changes in assets and liabilities:
Prepaid expenses and other assets 13 38
Accrued liabilities and deferred income taxes 164 245
------------- -------------
Net cash flows from operating activities 2,584 1,144
------------- -------------
Net cash flows from financing activities:
Increase in due from affiliates (2,584) (1,144)
------------- -------------
Net cash flows from financing activities (2,584) (1,144)
Net change in cash --- ---
Cash at beginning of period --- ---
------------- -------------
Cash at end of period $ --- $ ---
============= =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
NOTES TO FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Salton Sea Royalty LLC (the "Company"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2001 and the results of operations for the three months
ended March 31, 2001 and 2000 and cash flows for the three months ended March
31, 2001 and 2000. The results of operations for the three months ended March
31, 2001 and 2000 are not necessarily indicative of the results to be expected
for the full year.
The unaudited financial statements shall be read in conjunction with the
financial statements included in the Funding Corporation's annual report on Form
10-K for the year ended December 31, 2000.
2. Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138. SFAS 133/138 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. The
Company implemented the new standards on January 1, 2001. The initial adoption
of SFAS133/138 did not have a material impact on the Company's financial
position, results of operations or any impact on its cash flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. The Company has not determined if the ultimate resolution of those
issues would have a material impact on its financial statements.
3. Contingency:
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. The Funding
Corporation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, the Funding Corporation understands that Edison has not
made certain payments to other qualifying facilities ("QFs") from which Edison
purchases power and has not made scheduled payments of debt service. Edison's
senior unsecured debt obligations are currently rated Caa2 (on watch for
possible downgrade) by Moody's and D by S&P.
Edison has failed to pay approximately $119 million to the Guarantors due under
the Power Purchase Agreements for power delivered in November and December 2000
and January, February and March 2001, although the Power Purchase Agreements
provide for billing and payment on a schedule where payments would have normally
been received in early January, February, March, April and May 2001. Edison has
not notified the Imperial Valley Projects as to when they can expect to receive
these payments.
On February 21, 2001, certain Guarantors filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Guarantors to suspend deliveries of power to Edison and to permit the Guarantors
to sell such power to other purchasers in California.
On March 22, 2001, the Superior Court granted Guarantors' Motion for Summary
Adjudication and a Declaratory Judgment ordering that: 1) under the Power
Purchase Agreements, Guarantors have the right to temporarily suspend deliveries
of capacity and energy to Edison, 2) Guarantors are entitled to resell the
energy and capacity to other purchasers and 3) the interim suspension of
deliveries to Edison shall not in any respect result in the modifications or
termination of the Power Purchase Agreements and the Power Purchase Agreements
shall in all respects continue in full force and effect other than the temporary
suspension of deliveries to Edison. The Guarantors intend to vigorously pursue
their other remedies in this action in light of Edison's continuing non-payment.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley project's available power is sold to EPME based on percentages of the Dow
Jones SP-15 Index.
The Funding Corporation is hopeful that the current Edison situation is
temporary and the proceedings in the legal, regulatory, financial and political
arenas will lead to the improvement of Edison's financial condition in the near
future and the payment by Edison of amounts due under the Power Purchase
Agreements. However, no assurance can be given that this will be the case.
As a result of SoCal Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of SoCal Edison's credit ratings,
Moody's has downgraded the ratings for the Securities to Caa2 (negative outlook)
and S&P has downgraded the ratings for the Securities to BBB- and has placed the
Securities on "credit watch negative".
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Results of Operations:
The following is management's discussion and analysis of certain significant
factors which have affected the Salton Sea Funding Corporation's (the "Funding
Corporation") and the Salton Sea Guarantors, the Partnership Guarantors and the
Salton Sea Royalty LLC's (collectively, the "Guarantors") financial condition
and results of operations during the periods included in the accompanying
statements of operations.
Funding Corporation was organized for the sole purpose of acting as issuer of
senior secured notes and bonds (the "Securities"). The Securities are payable
from the proceeds of payments made of principal and interest on the senior
secured project notes by the Guarantors to the Funding Corporation. The
Securities are guaranteed on a joint and several basis by the Guarantors. The
guarantees of the Partnership Guarantors and Salton Sea Royalty LLC are limited
to available cash flow. The Funding Corporation does not conduct any operations
apart from the Securities.
Until March 22, 2001, the Vulcan, Leathers, Del Ranch and Elmore partnerships
(collectively, the "Partnership Projects") sold all electricity generated by the
respective plants pursuant to four long-term SO4 Agreements between the projects
and Southern California Edison Company ("Edison"). These SO4 Agreements provide
for capacity payments, capacity bonus payments and energy payments. Edison is
contractually obligated to make fixed annual capacity payments to the projects
and, to the extent that capacity factors exceed certain benchmarks, is required
to make capacity bonus payments. The price for capacity and capacity bonus
payments is fixed for the life of the SO4 Agreements and the capacity payments
are significantly higher in the months of June through September. The price for
energy sold is based on the cost that Edison avoids by purchasing energy from
the Imperial Valley Partnership Projects instead of obtaining the energy from
other sources (avoided cost of energy) for energy delivered pursuant to their
respective SO4 Agreements.
Until March 22, 2001, the Salton Sea I Project sold electricity to Edison
pursuant to a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy payments. The energy
payment is calculated using a base price which is subject to quarterly
adjustments based on a basket of indices. The time period weighted average
energy payment for Salton Sea I was 5.9 cents per kWh during the three months
ended March 31, 2001. As the Salton Sea I PPA is not an SO4 Agreement, the
energy payments do not revert to Edison's avoided cost of energy.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Results of Operations: (continued)
Until March 22, 2001, the Salton Sea II and Salton Sea III Projects sold
electricity to Edison pursuant to 30-year modified SO4 Agreements that provide
for capacity payments, capacity bonus payments and energy payments. The price
for contract capacity and contract capacity bonus payments is fixed for the life
of the modified SO4 Agreements. The energy payments for the first ten year
period, which expired on April 4, 2000 for Salton Sea II and expired on February
13, 1999 for Salton Sea III, were levelized at a time period weighted average of
10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and Salton Sea III,
respectively. Thereafter, the price for energy is Edison's avoided cost of
energy. For Salton Sea II only, Edison is entitled to receive, at no cost, 5% of
all energy delivered in excess of 80% of contract capacity through March 31,
2004.
Until March 22, 2001, the Salton Sea IV Project sold 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 Power Purchase Agreement ("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.
Edison's average avoided cost of energy was 15.2 cents per kWh and 3.2 per kWh
for the three months ended March 31, 2001 and 2000, respectively. Estimates of
Edison's future avoided cost of energy vary substantially from year to year. The
Company cannot predict the likely level of avoided cost of energy prices under
the SO4 Agreements and the modified SO4 Agreements.
The Salton Sea V project, which commenced operations in the third quarter 2000,
will sell approximately one-third of its net output to a zinc facility, which is
owned by a subsidiary of MidAmerican and is expected to commence commercial
operations in mid to late 2001. The remainder of the Salton Sea V output is sold
through other market transactions.
The Turbo project, which commenced commercial operation in the third quarter of
2000, sells its output through market transactions. The Turbo project may sell
its output to a zinc facility which is owned by a subsidiary of MidAmerican and
is expected to commence commercial operations in mid to late 2001.
On January 17, 2001, Salton Sea Power L.L.C. entered into an agreement to sell
available power from Salton Sea V and CE Turbo to El Paso Merchant Energy, L.P.
("EPME"). Under the terms of the agreement, at the option of Salton Sea Power
and CE Turbo, EPME purchases available power from Salton Sea Unit V and CE Turbo
based on day ahead price quotes received from EPME.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Results of Operations: (continued)
As a result of legal proceedings with Edison, on March 22, 2001 the Partnership
Projects and Salton Sea I, Salton Sea II, Salton Sea III and Salton Sea IV
suspended power sales to Edison. On March 27, 2001 the Partnership Projects,
including the Turbo project, and Salton Sea I, II, III, IV and V entered into a
transaction agreement to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. See discussion in Liquidity and Capital Resources,
page 34.
The following data includes the aggregate capacity and electricity production of
Salton Sea Units I, II, III, IV and V:
Three Months Ended
March 31,
2001 2000
------- -------
Overall capacity factor 84.1% 45.2%
Capacity (NMW) (average) 168.4 119.4
kWh produced (in thousands) 305,800 117,900
The overall capacity factor for the Salton Sea Projects increased for the three
months ended March 31, 2001 compared to the same period in 2000 primarily due to
scheduled overhauls in 2000. The capacity increased due to the start up of Unit
V in the third quarter of 2000.
The following data includes the aggregate capacity and electricity production of
the Partnership Projects:
Three Months Ended
March 31,
2001 2000
-------- -------
Overall capacity factor 101.3% 81.9%
Capacity (NMW) (average) 158 148
kWh produced (in thousands) 345,700 264,600
The overall capacity factor for the Partnership Projects increased for the three
months ended March 31, 2001 compared to the same period in 2000 due to scheduled
overhauls at all plants in 2000. The capacity increased due to the start up of
Turbo in August, 2000.
Revenues:
The Salton Sea Guarantors' sales of electricity increased to $32,130 for the
three months ended March 31, 2001 from $8,893 for the same period in 2000, a
261.3% increase. This increase was primarily due to higher avoided cost rates in
2001, the start up of Unit V in the third quarter of 2000 and scheduled
overhauls in 2000 which were more extensive compared to 2001. Due to
uncertainties associated with Edison's financial condition and failure to pay,
the Guarantors have established an allowance for doubtful accounts of
approximately $12.5 million which reduced revenues in 2001 compared to 2000.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Revenues: (continued)
The Partnership Guarantors' sales of electricity increased to $23,494 for the
three months ended March 31, 2001 from $10,389 for the same period in 2000, a
126.1% increase. This increase was primarily due to higher avoided cost rates,
the start up of Turbo in the third quarter of 2000 and more production due to
fewer outages compared to 2000. Due to uncertainties associated with Edison's
financial conditions and failure to pay, the Guarantors have established an
allowance for doubtful accounts of approximately $28.9 million which reduced
revenue in 2001 compared to 2000.
The Royalty Guarantor revenue increased to $3,463 for the three months ended
March 31, 2001 from $1,560 for the same period last year. This was due primarily
to an increase in royalty revenue resulting from higher energy revenue.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, increased to $13,357, for the three
months ended March 31, 2001 from $5,758 for the same period in 2000. The
increase was due to higher royalty expenses resulting from higher revenues,
higher brine disposal costs and the start up of Unit V in the third quarter of
2000.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $14,394 for the
three months ended March 31, 2001 from $7,790 for the same period in 2000. The
increase was due to an increase in royalty expenses resulting from higher
revenues, the start up of Turbo in the third quarter of 2000 and higher brine
disposal costs.
The Royalty Guarantors' operating expenses increased to $879 for the three
months ended March 31, 2001 from $415 for the same period in 2000. This increase
was due to higher royalty costs resulting from higher revenue.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization increased to $4,370 for
the three months ended March 31, 2001 from $4,094 for the same period of 2000, a
6.7% increase. This increase was due primarily to the start up of Unit V in the
third quarter of 2000.
The Partnership Guarantors' depreciation and amortization increased to $5,081
for the three months ended March 31, 2001 from $4,645 for the same period in
2000. The increase was due primarily to upgraded brine handling system and the
start up of Turbo in the third quarter of 2000.
The Royalty Guarantors' amortization was $487 for the three months ended March
31, 2001 compared to $491 for the same period of 2000.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Interest Expense:
The Salton Sea Guarantors' interest expense, net of capitalized amounts,
increased to $3,798 for the three months ended March 31, 2001 from $2,517 for
the same period in 2000. The increase was due to lower capitalized interest on
construction projects partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
decreased to $60 for the three months ended March 31, 2001 from $184 for the
same period in 2000. The decrease was due to reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $177 for the three months
ended March 31, 2001 from $284 from the same period in 2000. The decrease was
due to reduced indebtedness.
Income Tax Provision:
The Salton Sea Guarantors are comprised of partnerships. Income taxes are the
responsibility of the partners and Salton Sea Guarantors have no obligation to
provide funds to the partners for payment of any tax liabilities. Accordingly,
the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors income tax provision increased to $1,378 for the
three months ended March 31, 2001 from a benefit of $(579) for the same period
in 2000. This increase was primarily due to a higher pre-tax income. Income
taxes will be paid by the parent of the Guarantors from distributions to the
parent company by the Guarantors which occur after operating expenses and debt
service.
Income taxes are the responsibility of the partners and Royalty Guarantor has no
obligation to provide funds to the partners for payment of any tax liabilities.
Accordingly, the Royalty Guarantor has no tax obligations.
Cumulative Effect of Accounting Policy Change:
The Guarantors have changed their policy of accounting for major maintenance,
overhaul and well workover costs. These costs which have historically been
accounted for using deferral methods, will be expensed as incurred. The new
policy went into effect January 1, 2001 and the Salton Sea Guarantors have
recorded a cumulative effect of $8.7 million. The Partnership Guarantors have
recorded a cumulative effect of $8.3 million, net of tax.
Net Income:
The Salton Sea Funding Corporation's net loss for the three months ended March
31, 2001 was $119 compared to $59 for the same period in 2000. The net loss
primarily represents interest income and expense, net of applicable tax, and the
Salton Sea Funding Corporation's 1% equity in earnings of the Guarantors.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Net Income: (continued)
The Salton Sea Guarantors' net income (loss) increased to $1,862 for the three
months ended March 31, 2001 compared to $(3,349) for the same period of 2000.
The Partnership Guarantors' net loss decreased to $5,638 for the three months
ended March 31, 2001 compared to $1,175 for the same period of 2000.
The Royalty Guarantors' net income increased to $1,920 for the three months
ended March 31, 2001 compared to $370 for the same period of 2000.
Liquidity and Capital Resources:
Until March 22, 2001, the operating Salton Sea Guarantors' only source of
revenue was payments received pursuant to long term power sales agreements with
Edison, other than Salton Sea V revenue and interest earned on funds on deposit.
Until March 22, 2001, the operating Partnership Guarantors' primary source of
revenue was payments received pursuant to long term power sales agreements with
Edison, other than CE Turbo and interest earned on funds on deposit. The Royalty
Guarantor's only source of revenue is Royalties received pursuant to resource
lease agreements with the Partnership Projects. If Edison pays the projects,
these payments, for each of the Guarantors, are expected to be sufficient to
fund operating and maintenance expenses, payments of interest and principal on
the Securities, projected capital expenditures and debt service reserve fund
requirements.
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. The Funding
Corporation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, the Funding Corporation understands that Edison has not
made certain payments to other qualifying facilities ("QFs") from which Edison
purchases power and has not made scheduled payments of debt service. Edison's
senior unsecured debt obligations are currently rated Caa2 (on watch for
possible downgrade) by Moody's and D by S&P.
Edison has failed to pay approximately $119 million due under the Power Purchase
Agreements for power delivered in November and December 2000 and January,
February and March 2001, although the Power Purchase Agreements provide for
billing and payment on a schedule where payments would have normally been
received in early January, February, March, April and May 2001. Edison has not
notified the Imperial Valley Projects as to when they can expect to receive
these payments.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Liquidity and Capital Resources: (Continued)
On February 21, 2001, certain Guarantors filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required payments under the Power Purchase Agreements. The
lawsuit also requested, among other things, that the court order permit the
Guarantors to suspend deliveries of power to Edison and to permit the Guarantors
to sell such power to other purchasers in California.
On March 22, 2001, the Superior Court granted Guarantors' Motion for Summary
Adjudication and a Declaratory Judgment ordering that: 1) under the Power
Purchase Agreements, Guarantors have the right to temporarily suspend deliveries
of capacity and energy to Edison, 2) Guarantors are entitled to resell the
energy and capacity to other purchasers and 3) the interim suspension of
deliveries to Edison shall not in any respect result in the modifications or
termination of the Power Purchase Agreements and the Power Purchase Agreements
shall in all respects continue in full force and effect other than the temporary
suspension of deliveries to Edison. The Guarantors intend to vigorously pursue
their other remedies in this action in light of Edison's continuing non-payment.
As a result of the March 22, 2001 Declaratory Judgment, the Imperial Valley
projects suspended deliveries of energy to Edison and entered into a transaction
agreement with El Paso Merchant Energy, L.P. ("EPME") in which the Imperial
Valley project's available power is sold to EPME based on percentages of the Dow
Jones SP-15 Index. As a result of the cash received from these sales and
estimated future sales, the Guarantors estimated the May 2001 principal and
interest payment will be made from available cash.
The Funding Corporation is hopeful that the current Edison situation is
temporary and the proceedings in the legal, regulatory, financial and political
arenas will lead to the improvement of Edison's financial condition in the near
future and the payment by Edison of amounts due under the Power Purchase
Agreements. However, no assurance can be given that this will be the case.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of Edison's credit ratings,
Moody's has downgraded the ratings for the Securities to Caa2 (negative outlook)
and S&P has downgraded the ratings for the Securities to BBB- and has placed the
Securities on "credit watch negative".
The Guarantors are contractually entitled to receive payments due under the
Power Purchase Agreements. However, due to the uncertainties associated with
Edison's financial condition and failure to pay, the Guarantors have established
an allowance for doubtful accounts of approximately $41.4 million at March 31,
2001.
CalEnergy Minerals LLC, a Partnership Guarantor ("Minerals LLC"), developed and
owns the rights to proprietary processes for the extraction of zinc from
elements in solution in the geothermal brine and fluids utilized at the
company's Imperial Valley plants. A pilot plant has successfully produced
commercial quality zinc at the Company's Imperial Valley Project. The Company's
affiliates intend to sequentially develop facilities for the extraction of
manganese, silver, gold, lead, boron, lithium and other products as they further
develop the extraction technology.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Liquidity and Capital Resources: (Continued)
Minerals LLC is constructing the Zinc Recovery Project which will recover zinc
from the geothermal brine (the "Zinc Recovery Project"). Facilities are being
installed near the Imperial Valley Project sites to extract a zinc chloride
solution from the geothermal brine through an 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 operations in mid to late 2001. In September 1999, Minerals LLC
entered into a sales agreement whereby all high grade zinc produced by the Zinc
Recovery Project will be sold to Cominco, Ltd. The initial term of the agreement
expires in December 2005.
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.
Inflation has not had a significant impact on the Guarantors' operating revenue
and costs.
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development and construction
uncertainty, operating uncertainty, acquisition uncertainty, uncertainties
relating to doing business outside of the United States, uncertainties relating
to geothermal resources, uncertainties relating to domestic and international
economic and political conditions and uncertainties regarding the impact of
regulations, changes in government policy, industry deregulation and
competition. Reference is made to all of the Company's SEC filings, incorporated
herein by reference, for a description of such factors. The Company assumes no
responsibility to update forward-looking information contained herein.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
Environmental Liabilities:
The Company may be exposed to environmental costs in the ordinary course of
business. Expenditures for ongoing compliance with environmental regulations
that relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of March 31, 2001 and December 31, 2000, the
environmental liabilities recorded on the balance sheet were not material.
SALTON SEA FUNDING CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.
Neither the Salton Sea Funding Corporation nor the Guarantors are parties
to any material legal matters except as noted in footnote 3 of the Salton Sea
Funding Corporation financial statements.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Default on Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 18, Letter of Deloitte & Touche, LLP regarding Change in
Accounting Principles.
(b) Reports on Form 8-K:
Current Report filed January 16, 2001, report of unscheduled material
events regarding California electricity crisis and Edison's financial
condition.
Current Report filed January 19, 2001, report of unscheduled material
events regarding California electricity crisis and Edison's financial
condition.
Current Report filed February 8, 2001, report of unscheduled material
events regarding California electricity crisis and Edison's financial
condition.
Current Report filed February 20, 2001, report of unscheduled material
events regarding California electricity crisis and Edison's financial
condition.
Current Report filed February 21, 2001, amended report of unscheduled
material events regarding California electricity crisis and Edison's
financial condition.
Current Report filed March 23, 2001, report of unscheduled material
events regarding California electricity crisis and Edison's financial
condition.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Omaha, State
of Nebraska, on this 14th day of May, 2001.
SALTON SEA FUNDING CORPORATION
Date: May 14, 2001 /s/ Joseph M. Lillo*
By: Joseph M. Lillo
Vice President and Controller
*By: /s/ Douglas L. Anderson
Douglas L. Anderson
Attorney-in-Fact
EXHIBIT INDEX
Exhibit Page
No. No.
18 Independent Accountants' Report regarding change in accounting 40