UNITED STATES
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 June 30, 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 August 14, 2001.
SALTON SEA FUNDING CORPORATION
Form 10-Q
June 30, 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, June 30, 2001 and December 31, 2000 5
Statements of Operations for the Three and Six Months Ended
June 30, 2001 and 2000 6
Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 10
Combined Balance Sheets, June 30, 2001 and December 31, 2000 11
Combined Statements of Operations for the Three and Six Months Ended
June 30, 2001 and 2000 12
Combined Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 13
Notes to Combined Financial Statements 14
PARTNERSHIP GUARANTORS
Independent Accountants' Report 16
Combined Balance Sheets, June 30, 2001 and December 31, 2000 17
Combined Statements of Operations for the Three and Six Months Ended
June 30, 2001 and 2000 18
Combined Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 19
Notes to Combined Financial Statements 20
SALTON SEA ROYALTY LLC
Independent Accountants' Report 23
Balance Sheets, June 30, 2001 and December 31, 2000 24
Statements of Operations for the Three and Six Months Ended
June 30, 2001 and 2000 25
Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 26
Notes to Financial Statements 27
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 39
- -------
Item 2. Changes in Securities 39
- -------
Item 3. Defaults on Senior Securities 39
- -------
Item 4. Submission of Matters to a Vote of
- -------
Security Holders 39
Item 5. Other Information 39
- -------
Item 6. Exhibits and Reports on Form 8-K 39
- -------
Signatures 40
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 June 30, 2001, and the related statements of operations for
the three-month and six-month month periods ended June 30, 2001 and 2000, and
the related statements of cash flows for the six-month periods ended June 30,
2000 and 2001. 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
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
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
July 27, 2001
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
2001 2000
--------------- ---------------
(unaudited)
ASSETS
Cash $ 29,376 $ 8,467
Prepaid expenses and other assets 3,516 3,563
Current portion of secured project notes
from Guarantors 26,116 23,658
----------- ---------
Total current assets 59,008 35,688
Secured project notes from Guarantors 505,962 520,250
Investment in 1% of net assets of
Guarantors 9,454 9,437
----------- ---------
$ 574,424 $ 565,375
=========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 3,350 $ 3,479
Due to affiliates 25,880 4,753
Current portion of long term debt 26,116 23,658
---------- ---------
Total current liabilities 55,346 31,890
Senior secured notes and bonds 505,962 520,250
---------- ---------
Total liabilities 561,308 552,140
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
---------- ---------
$ 574,424 $ 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 June 30, Six Months Ended June 30,
2001 2000 2001 2000
--------- -------- ---------- ----------
Revenues:
Interest income $ 10,407 $ 10,756 $ 20,736 $ 21,719
Equity in earnings (loss) of Guarantors (3) 98 17 56
---------- ---------- --------- ---------
Total revenues 10,404 10,854 20,753 21,775
--------- ---------- --------- ---------
Expenses:
General and administrative expenses 174 218 463 477
Interest expense 10,230 10,634 20,493 21,397
--------- ---------- --------- ---------
Total expenses 10,404 10,852 20,956 21,874
--------- ---------- --------- ---------
Income (loss) before income taxes --- 2 (203) (99)
Provision (benefit) for income taxes --- 1 (84) (41)
--------- ---------- --------- ---------
Net income (loss) $ --- $ 1 $ (119) $ (58)
========= ========== ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
-------------- -------------
Cash flows from operating activities:
Net loss $ (119) $ (58)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Equity in earnings of Guarantors (17) (56)
Changes in assets and liabilities:
Prepaid expenses and other assets 47 111
Accrued liabilities (129) (168)
------------- -----------
Net cash flows from operating activities (218) (171)
Cash flows from investing activities:
Principal repayments of secured project
notes from Guarantors 11,830 22,552
-------------- -----------
Net cash flows from investing activities 11,830 22,552
Cash flows from financing activities:
Increase (decrease) in due to affiliates 21,127 (16,902)
Contributions from _________ 50 ---
Proceeds from revolving loan --- 15,000
Repayment of senior secured notes and bonds (11,830) (22,552)
-------------- -----------
Net cash flows from financing activities 9,297 (24,454)
Net change in cash 20,909 (2,073)
Cash at beginning of period 8,467 2,086
------------- ------------
Cash at end of period $ 29,376 $ 13
============= ============
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2001 and the results of operations
for the three and six months ended June 30, 2001 and 2000 and cash flows for the
six months ended June 30, 2001 and 2000. The results of operations for the six
months ended June 30, 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 Statement
of Financial Accounting Standard ("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 Funding Corporation implemented the
new standards on January 1, 2001. The initial adoption of SFAS133/138 did not
have a material impact on the Funding Corporation's financial position, results
of operations or any impact on its cash flows.
In June 2001, FASB approved the issuance of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
standards, issued in July 2001, establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. These standards are effective for the Funding Corporation
beginning on January 1, 2002. The Funding Corporation has not quantified the
impact resulting from the adoption of these standards.
3. Contingency:
------------
Southern California Edison ("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. Edison's senior unsecured debt
obligations are currently rated Caa2 by Moody's and D by S&P.
Edison 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.
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 these
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.
As a result of the March 22, 2001 Declaratory Judgment, the Guarantors'
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. On June 18, 2001, the Superior Court terminated the Imperial
Valley projects right to resell power pursuant to the Declaratory Judgment.
On June 20, 2001, the Guarantors entered into Agreements Addressing Renewable
Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). The
Settlement Agreements require Edison make a series of payments to repay the past
due balances under the Power Purchase Agreements (the "stipulated amounts"). The
first payment of approximately $11.6 million, which represented 10% of the
stipulated amounts, was received June 22, 2001. A second partial payment of 10%
is payable within 5 days following the MOU Effective Date. The "MOU Effective
Date" means the first day on which both of the following have occurred: (a) all
legislation implementing the Memorandum of Understanding between Edison and the
California Department of Water Resources dated April 9, 2001 ("MOU") or such
other legislation based on the MOU or otherwise, that restores Edison to
creditworthiness has become effective, and (b) the Commission has issued all
orders that are necessary to implement the MOU or other mechanisms contained in
such legislation based on the MOU or otherwise which are designed to restore
Edison to creditworthiness. The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the MOU or other mechanisms contained
in such other legislation based on the MOU or otherwise restore Edison to
creditworthiness. In addition to these payments, Edison is required to make
monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provides a
revised energy pricing structure, whereby Edison elects to pay the Imperial
Valley Projects a fixed energy price of 5.37 cents/kilowatt hour in lieu of the
Commission-approved SRAC Methodology under the Power Purchase Agreements,
commencing on the first day of the month following the MOU Effective Date and
expiring five years from such date. All other contract terms remain unchanged.
As a result of the aforementioned Settlement Agreements, the Guarantors resumed
power sales to Edison on June 22, 2001. Energy payments are currently calculated
using the SRAC formulas set forth in the Power Purchase Agreements until the
fixed rate period begins.
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 downgraded the ratings for the Salton Sea Funding Securities to Caa2
(negative outlook) and S&P downgraded the ratings for the Salton Sea Funding
Securities to BBB- and placed the Salton Sea Funding Securities on "credit watch
negative". Following the execution of the Settlement Agreements, Moody's placed
the Salton Sea Funding Securities on "credit watch positive".
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 June 30, 2001, and the related combined statements of
operations for the three-month and six-month periods ended June 30, 2001 and
2000, and the related combined statements of cash flows for the six-month
periods ended June 30, 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
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
July 27, 2001
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2001 2000
---------- -----------
(unaudited)
ASSETS
Accounts receivable, net of allowance of $26,931 and
$0, respectively (Note 4) $ 27,221 $ 24,396
Prepaid expenses and other assets 5,026 8,699
------------ ---------
Total current assets 32,247 33,095
Restricted cash --- 17
Property, plant, contracts and equipment, net 561,534 566,577
Excess of cost over fair value of net assets
acquired, net 44,922 45,574
--------- ---------
$ 638,703 $ 645,263
============ =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 531 $ 5
Accrued liabilities 8,509 10,826
Current portion of long term debt 18,902 17,319
------------ ---------
Total current liabilities 27,942 28,150
Due to affiliates 21,570 18,720
Senior secured project note 256,656 266,898
------------ ---------
Total liabilities 306,168 313,768
Commitment and contingencies (Note 4)
Total Guarantors' equity 332,535 331,495
------------ ---------
$ 638,703 $ 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Sales of electricity $ 22,864 $ 18,605 $ 54,994 $ 27,498
Interest and other income 977 86 977 213
----------- --------- --------- ---------
Total revenues 23,841 18,691 55,971 27,711
_________ _________ _________
-----------
Expenses:
Operating, general and
administration 14,209 6,806 27,566 12,564
Depreciation and amortization 4,640 4,227 9,010 8,321
Interest expense 5,814 5,791 11,304 11,631
Less capitalized interest --- (2,813) (1,692) (6,136)
----------- --------- --------- ---------
Total expenses 24,663 14,011 46,188 26,380
----------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change (822) 4,680 9,783 1,331
Cumulative effect of accounting change --- --- (8,743) ---
----------- --------- --------- ---------
Net income (loss) $ (822) $ 4,680 $ 1,040 $ 1,331
=========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
--------------- -------------
Cash flows from operating activities:
Net income $ 1,040 $ 1,331
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 9,010 8,321
Cumulative effect of change in accounting principle 8,743 ---
Changes in assets and liabilities:
Accounts receivable (2,825) (4,226)
Prepaid expenses and other assets (5,070) 1,372
Accounts payable and accrued
liabilities (1,791) (71)
------------ ---------
Net cash flows from operating activities 9,107 6,727
____________ _________
Cash flows from investing activities:
Capital expenditures (3,315) (15,167)
Decrease in restricted cash 17 2,156
------------ ----------
Net cash flows from investing activities (3,298) (13,011)
------------ ----------
Cash flows from financing activities:
Increase in due to affiliates 2,850 15,511
Contributions from _________ 50 ---
Repayment of senior secured project note (8,659) (9,227)
------------ ----------
Net cash flows from financing activities (5,809) 6,284
------------ ----------
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
(Unaudited)
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 June 30, 2001 and the results of operations for the
three and six months ended June 30, 2001 and 2000 and cash flows for the six
months ended June 30, 2001 and 2000. The results of operations for the six
months ended June 30, 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, are now being expensed as incurred. The
new policy went into effect January 1, 2001 and the Guarantors have recorded a
cumulative effect of this change of $8.7 million.
3. Accounting Pronouncements:
--------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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.
In June 2001, FASB approved the issuance of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
standards, issued in July 2001, establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. These standards are effective for the Guarantors beginning on
January 1, 2002. The Guarantors have not quantified the impact resulting from
the adoption of these standards.
4. Contingency:
------------
Southern California Edison ("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 Guarantors are aware that there have been
public announcements that Edison's financial condition has deteriorated as a
result of reduced liquidity. Edison's senior unsecured debt obligations are
currently rated Caa2 by Moody's and D by S&P.
Edison failed to pay approximately $42.3 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.
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.
As a result of the March 22, 2001 Declaratory Judgment, the Guarantors 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. On June 18, 2001, the Superior Court terminated the Declaratory Judgment.
On June 20, 2001, the Guarantors entered into Agreements Addressing Renewable
Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). The
Settlement Agreements require Edison make a series of payments to repay the past
due balances under the Power Purchase Agreements (the "stipulated amounts"). The
first payment of approximately $4.2 million, which represented 10% of the
stipulated amounts, was received June 22, 2001. A second partial payment of 10%
is payable within 5 days following the MOU Effective Date. The "MOU Effective
Date" means the first day on which both of the following have occurred: (a) all
legislation implementing the Memorandum of Understanding between Edison and the
California Department of Water Resources dated April 9, 2001 ("MOU") or such
other legislation based on the MOU or otherwise, that restores Edison to
creditworthiness has become effective, and (b) the Commission has issued all
orders that are necessary to implement the MOU or other mechanisms contained in
such legislation based on the MOU or otherwise which are designed to restore
Edison to creditworthiness. The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the MOU or other mechanisms contained
in such other legislation based on the MOU or otherwise restore Edison to
creditworthiness. In addition to these payments, Edison is required to make
monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provide a revised
energy pricing structure, whereby Edison elects to pay the Guarantors a fixed
energy price of 5.37 cents/kilowatt in lieu of the Commission-approved SRAC
Methodology under the Power Purchase Agreements, commencing on the first day of
the month following the MOU Effective Date and expiring five years from such
date. All other contract terms remained unchanged.
As a result of the aforementioned Settlement Agreements, the Guarantors resumed
power sales to Edison on June 22, 2001. Energy payments are currently calculated
using the SRAC formulas set forth in the Power Purchase Agreements until the
fixed rate period begins.
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 Salton Sea Funding Securities to Caa2
(negative outlook) and S&P has downgraded the ratings for the Salton Sea Funding
Securities to BBB- and has placed the Salton Sea Funding Securities on "credit
watch negative". Following the execution of the Settlement Agreements, Moody's
placed the Salton Sea Funding Securities on "credit watch positive".
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 $26.9 million at June 30,
2001. The allowance for doubtful accounts has been recorded as a reduction of
net sales in the statement of operations.
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 June 30, 2001, the related combined statements of operations
for the three-month and six-month periods ended June 30, 2001 and 2000, and the
related combined statements of cash flows for the six-month periods ended June
20, 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
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
July 27, 2001
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2001 2000
----------- -------------
(unaudited)
ASSETS
Accounts receivable, net of allowance of $55,098 and
$0, respectively (Note 4) $ 45,373 $ 28,319
Prepaid expenses and other assets 18,129 26,661
------------ -------------
Total current liabilities 63,502 54,980
Restricted cash --- 106
Due from affiliates 14,014 35,066
Property, plant, contracts and equipment, net 471,261 470,804
Construction in progress 174,703 165,460
Management fee 69,191 70,855
Excess of cost over fair value of net assets
acquired, net 122,648 124,430
------------ -------------
$ 915,319 $ 921,701
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,090 $ 101
Accrued liabilities 19,226 17,722
Current portion of long term debt 3,267 1,907
------------ -------------
Total current liabilities 24,583 19,730
Senior secured project notes 246,429 248,743
Deferred income taxes 98,655 101,734
------------ -------------
Total liabilities 369,667 370,207
Commitments and contingencies (Note 4)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 157,986 163,828
------------ -------------
Total Guarantors' equity 545,652 551,494
------------ -------------
$ 915,319 $ 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Sales of electricity $ 20,076 $ 19,628 $ 43,570 $ 30,017
Interest and other income 905 625 940 1,101
--------- --------- --------- ---------
Total revenues 20,981 20,253 44,510 31,118
_________ _________ _________ _________
Expenses:
Operating, general and
administration 12,278 9,518 26,672 17,308
Depreciation and amortization 6,937 4,848 12,018 9,493
Interest expense 4,829 5,045 9,622 10,140
Less capitalized interest (2,750) (4,918) (7,483) (9,829)
--------- --------- --------- ---------
Total expenses 21,294 14,493 40,829 27,112
--------- --------- --------- ---------
Income (loss) before income taxes (313) 5,760 3,681 4,006
Provision (benefit) for income taxes (109) 1,901 1,269 1,322
--------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change (204) 3,859 2,412 2,684
Cumulative effect of accounting
change, net of tax --- --- (8,254) ---
--------- --------- ---------- ---------
Net income (loss) $ (204) $ 3,859 $ (5,842) $ 2,684
========== ========= ========== =========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
-------------- -------------
Cash flows from operating activities:
Net income (loss) $ (5,842) $ 2,684
Adjustments to reconcile net income (loss) to net
cash flow from operating activities:
Depreciation and amortization 12,018 9,493
Cumulative effect of change in accounting principle, net of tax 8,254 ---
Deferred income taxes 1,269 1,322
Changes in assets and liabilities:
Accounts receivable (17,054) 82
Prepaid expenses and other assets (4,073) (4,915)
Accounts payable and accrued
liabilities 3,493 (2,569)
-------------- -------------
Net cash flows from operating activities (1,935) 6,097
-------------- -------------
Cash flows from investing activities:
Capital expenditures (7,751) (12,874)
Capital expenditures-construction (11,259) (72,154)
Decrease in restricted cash 106 54,343
Management fee 741 (143)
-------------- -------------
Net cash flows from investing activities (18,163) (30,828)
-------------- -------------
Cash flows from financing activities:
Repayments of senior secured project notes (954) (8,562)
Decrease in due from affiliates 21,052 33,293
-------------- -------------
Net cash flows from financing activities 20,098 24,731
-------------- -------------
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
(Unaudited)
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 June 30, 2001 and the results of operations for the
three and six months ended June 30, 2001 and 2000 and cash flows for the six
months ended June 30, 2001 and 2000. The results of operations for the six
months ended June 30, 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 Statement
of Financial Accounting Standard ("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.
In June 2001, FASB approved the issuance of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
standards, issued in July 2001, establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. These standards are effective for the Guarantors beginning on
January 1, 2002. The Guarantors have not quantified the impact resulting from
the adoption of these standards.
4. Contingency:
------------
Southern California Edison ("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 Guarantors are aware that there have been
public announcements that Edison's financial condition has deteriorated as a
result of reduced liquidity. Edison's senior unsecured debt obligations are
currently rated Caa2 by Moody's and D by S&P.
Edison failed to pay approximately $76.9 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. 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.
As a result of the March 22, 2001 Declaratory Judgment, the Guarantors'
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. On June 18, 2001, the Superior Court terminated the Imperial
Valley projects right to resell power pursuant to the Declaratory Judgment.
On June 20, 2001, the Guarantors entered into Agreements Addressing Renewable
Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). The
Settlement Agreements require Edison make a series of payments to repay the past
due balances under the Power Purchase Agreements (the "stipulated amounts"). The
first payment of approximately $7.5 million, which represented 10% of the
stipulated amounts, was received June 22, 2001. A second partial payment of 10%
is payable within 5 days following the MOU Effective Date. The "MOU Effective
Date" means the first day on which both of the following have occurred: (a) all
legislation implementing the Memorandum of Understanding between Edison and the
California Department of Water Resources dated April 9, 2001 ("MOU") or such
other legislation based on the MOU or otherwise, that restores Edison to
creditworthiness has become effective, and (b) the Commission has issued all
orders that are necessary to implement the MOU or other mechanisms contained in
such legislation based on the MOU or otherwise which are designed to restore
Edison to creditworthiness. The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the MOU or other mechanisms contained
in such other legislation based on the MOU or otherwise restore Edison to
creditworthiness. In addition to these payments, Edison is required to make
monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provides a
revised energy pricing structure, whereby Edison elects to pay the Imperial
Valley Projects a fixed energy price of 5.37 cents/kilowatt hour in lieu of the
Commission-approved SRAC Methodology under the Power Purchase Agreements,
commencing on the first day of the month following the MOU Effective Date and
expiring five years from such date. All other contract terms remained unchanged.
As a result of the aforementioned Settlement Agreements, the Guarantors resumed
power sales to Edison on June 22, 2001. Energy payments are currently calculated
using the SRAC formulas set forth in the Power Purchase Agreements until the
fixed rate period begins.
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 downgraded the ratings for the Salton Sea Funding Securities to Caa2
(negative outlook) and S&P has downgraded the ratings for the Salton Sea Funding
Securities to BBB- and placed the Salton Sea Funding Securities on "credit watch
negative". Following the execution of the Settlement Agreements, Moody's placed
the Salton Sea Funding Securities on "credit watch positive".
The Guarantors are contractually entitled to receive payment under the Power
Purchase Agreements and Settlement Agreements. However, due to the uncertainties
associated with Edison's financial condition and failure to pay contractual
obligations, the Guarantors have established an allowance for doubtful accounts
of approximately $55.1 million on June 30, 2001. The allowance for doubtful
accounts has been recorded as a reduction of net sales in the statement of
operations.
CalEnergy Minerals LLC, a Partnership Guarantor ("Minerals LLC") owns the rights
to proprietary processes for the extraction of zinc from elements in solution in
the geothermal brine and fluids utilized at the Guarantor's Imperial Valley
plants. A pilot plant has successfully produced commercial quality zinc at the
Guarantor's Imperial Valley Project. The Guarantor'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.
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 Guarantors 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
tones per year and is scheduled to commence commercial operations in late 2002.
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 was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, Minerals LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery EPC Contract, the Guarantors drew $29.7 million under the EPC Contract
Letter of Credit on July 20, 2001. The Guarantors have entered into a time and
materials reimbursable engineer, procure and construction management contract
with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
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 June 30, 2001, and the related statements of operations for the three-month
and six-month periods ended June 30, 2001 and 2000, and the related statements
of cash flows for the six-month periods ended June 30, 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
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
July 27, 2001
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
2001 2000
-------------- --------------
(unaudited)
ASSETS
Prepaid expenses and other assets $ 56 $ 82
-------------- --------------
Total current assets 56 82
Royalty stream, net 15,198 15,719
Excess of cost over fair value of net assets
acquired, net 30,918 31,372
Due from affiliates 28,257 26,497
-------------- --------------
$ 74,429 $ 73,670
============== ==============
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 41 $ 57
Current portion of long term debt 3,947 4,434
-------------- --------------
Total current liabilities 3,988 4,491
Senior secured project note 2,877 4,607
-------------- --------------
Total liabilities 6,865 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 66,003 63,011
-------------- --------------
Total equity 67,564 64,572
-------------- --------------
$ 74,429 $ 73,670
============== ==============
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Royalty income $ 2,376 $ 2,707 $ 5,839 $ 4,267
Expenses:
Operating, general and
administrative expenses 650 758 1,529 1,173
Amortization of royalty stream
and goodwill 488 492 975 983
Interest expense 166 258 343 542
------------ ------------ ------------ ------------
Total expenses 1,304 1,508 2,847 2,698
------------ ------------ ------------ ------------
Net income $ 1,072 $ 1,199 $ 2,992 $ 1,569
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
-------------- -------------
Cash flows from operating activities:
Net income $ 2,992 $ 1,569
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 975 983
Changes in assets and liabilities:
Prepaid expenses and other assets 26 77
Accrued liabilities (16) (27)
--------------- -------------
Net cash flows from operating activities 3,977 2,602
--------------- -------------
Net cash flows from financing activities:
(Increase) decrease in due from affiliates (1,760) 2,159
Repayment of senior secured project note (2,217) (4,761)
--------------- --------------
Net cash flows from financing activities (3,977) (2,602)
--------------- --------------
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
(Unaudited)
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 June 30, 2001 and the results of operations for the three and six
months ended June 30, 2001 and 2000 and cash flows for the six months ended June
30, 2001 and 2000. The results of operations for the six months ended June 30,
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 Statement
of Financial Accounting Standard ("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.
In June 2001, FASB approved the issuance of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
standards, issued in July 2001, establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. These standards are effective for the Company beginning on January
1, 2002. The Company has not quantified the impact resulting from the adoption
of these standards.
3. Contingency:
------------
Southern California Edison ("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 Company is aware that there have been
public announcements that Edison's financial condition has deteriorated as a
result of reduced liquidity. Edison's senior unsecured debt obligations are
currently rated Caa2 by Moody's and D by S&P.
Edison 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.
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.
As a result of the March 22, 2001 Declaratory Judgment, the Guarantors suspended
deliveries of energy to Edison and entered into a transaction agreement with El
Paso Merchant Energy, L.P. ("EPME") in which the Guarantors' available power is
sold to EPME based on percentages of the Dow Jones SP-15 Index. On June 18,
2001, the Superior Court terminated the Imperial Valley projects right to resell
power pursuant to the Declaratory Judgment.
On June 20, 2001, the Guarantors entered into Agreements Addressing Renewable
Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). The
Settlement Agreements require Edison make a series of payments to repay the past
due balances under the Power Purchase Agreements (the "stipulated amounts"). The
first payment of approximately $11.6 million, which represented 10% of the
stipulated amounts, was received June 22, 2001. A second partial payment of 10%
is payable within 5 days following the MOU Effective Date. The "MOU Effective
Date" means the first day on which both of the following have occurred: (a) all
legislation implementing the Memorandum of Understanding between Edison and the
California Department of Water Resources dated April 9, 2001 ("MOU") or such
other legislation based on the MOU or otherwise, that restores Edison to
creditworthiness has become effective, and (b) the Commission has issued all
orders that are necessary to implement the MOU or other mechanisms contained in
such legislation based on the MOU or otherwise which are designed to restore
Edison to creditworthiness. The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the MOU or other mechanisms contained
in such other legislation based on the MOU or otherwise restore Edison to
creditworthiness. In addition to these payments, Edison is required to make
monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provide a revised
energy pricing structure, whereby Edison elects to pay the Guarantors a fixed
energy price of 5.37 cents/kilowatt hour in lieu of the Commission-approved SRAC
Methodology under the Power Purchase Agreements, commencing on the first day of
the month following the MOU Effective Date and expiring five years from such
date. All other contract terms have remained unchanged.
As a result of the aforementioned Settlement Agreements, the Guarantors resumed
power sales to Edison on June 22, 2001. Energy payments are currently calculated
using the SRAC formulas set forth in the Power Purchase Agreements until the
fixed rate period begins.
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 Salton Sea Funding Securities to Caa2
(negative outlook) and S&P has downgraded the ratings for the Salton Sea Funding
Securities to BBB- and has placed the Salton Sea Funding Securities on "credit
watch negative". Following the execution of the Settlement Agreements, Moody's
placed the Salton Sea Funding Securities on "credit watch positive".
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.
The Vulcan, Leathers, Del Ranch and Elmore partnerships (collectively, the
"Partnership Projects") sell 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 Partnership Projects instead of obtaining the energy from other sources
(avoided cost of energy) for energy delivered pursuant to their respective SO4
Agreements.
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 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 six months ended June 30, 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 II and Salton Sea III Projects sells 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.
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 Power Purchase Agreement ("PPA") (14 MW). The capacity payment price
for the 20 MW portion adjusts
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)
- ---------------------
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 11.6 cents per kWh and 3.8 per kWh
for the six months ended June 30, 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 of
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 2002. The remainder of the Salton Sea V output is sold
through other market transactions.
The CE Turbo project, which commenced commercial operation in the third quarter
of 2000, sells its output through market transactions. The CE 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 2002. The
remainder of the CE Turbo Project output is sold through other market
transactions.
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 and May 1, 2001, the
Partnership projects, including the CE Turbo project, and Salton Sea I, II, III,
IV and V, respectively, entered into a transaction agreement to sell available
power to EPME based on percentages of the Dow Jones SP-15 Index. On June 20,
2001 the Partnership and Salton Sea Projects (excluding Salton Sea Unit V and CE
Turbo) entered into Agreements Addressing Payment and Pricing Issues with Edison
and, as a result, resumed power sales to Edison on June 22, 2001. See discussion
in Liquidity and Capital Resources, page 34.
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)
- ---------------------
The following data includes the aggregate capacity and electricity production of
Salton Sea Units I, II, III, IV and V:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ------------ --------- --------
Overall capacity factor 75.8% 74.8% 79.9% 60.0%
Capacity (NMW) (average) 168.4 119.4 168.4 119.4
kWh produced (in thousands) 278,900 195,000 584,700 312,900
The overall capacity factor for the Salton Sea Projects increased for the three
and six months ended June 30, 2001 compared to the same periods in 2000
primarily due to timing of overhauls and other maintenance. The capacity
increased due to the start up of Salton Sea 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- --------- ----------- ---------
Overall capacity factor 99.4% 102.4% 100.3% 91.1%
Capacity (NMW) (average) 158 148 158 148
kWh produced (in thousands) 342,900 324,600 688,602 589,200
The overall capacity factor for the Partnership Projects decreased for the three
months and increased for the six months ended June 30, 2001 compared to the same
periods in 2000 due to timing of overhauls and other maintenance. The capacity
increased due to the start up of CE Turbo in the third quarter of 2000.
Revenues:
The Salton Sea Guarantors' sales of electricity increased to $22,864 for the
three months ended June 30, 2001 from $18,605 for the same period in 2000, a
22.9% increase. For the six months ended June 30, 2001, sales of electricity
increased to $54,994 from $27,498 in 2000, a 100.0% 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 Salton Sea Guarantors have
established an allowance for doubtful accounts of approximately $26.9 million,
which reduced revenues in 2001 compared to 2000.
The Salton Sea Guarantors' interest and other income increased to $977 for the
three months ended June 30, 2001 from $86 for the same period in 2000. For the
six months ended June 30, 2001, interest and other income increased to $977 from
$213 in 2000. The increase was due to a payment of interest income by Edison as
part of a settlement agreement.
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 $20,076 for the
three months ended June 30, 2001 from $19,628 for the same period in 2000, a
2.3% increase. For the six months ended June 30, 2001, sales of electricity
increased to $43,570 from $30,017 in 2000, a 45.2% increase. This increase was
primarily due to higher avoided cost rates, the start up of CE 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 Partnership Guarantors have established an allowance for doubtful
accounts of approximately $55.1 million, which reduced revenue in 2001 compared
to 2000.
The Royalty Guarantor revenue decreased to $2,376 for the three months ended
June 30, 2001 from $2,707 for the same period last year. This was due primarily
to a decrease in royalty revenue resulting from lower energy revenue. For the
six months ended June 30, 2001 royalty revenue increased to $5,839 from $4,267
in 2000. The increase 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 $14,209, for the three
months ended June 30, 2001 from $6,806 for the same period in 2000. For the six
months ended June 30, 2001, operating expense increased to $27,566 from $12,564
in 2000. The increases were 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 $12,278 for the
three months ended June 30, 2001 from $9,518 for the same period in 2000. For
the six month period ended June 30, 2001, operating expenses increased to
$26,672 from $17,308 in 2000. These increases for the six months was due to an
increase in royalty expenses resulting from higher revenues, the start up of CE
Turbo in the third quarter of 2000 and higher brine disposal costs.
For the three months ended June 30, 2001 the Royalty Guarantors' operating
expenses decreased to $650 from $758 for the same period in 2000. The decrease
was due to lower royalty costs resulting from lower energy revenue. For the six
months ended June 30, 2001, operating expenses increased to $1,529 from $1,173
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 $4,640 for
the three months ended, June 30 2001 from $4,227 for the same period of 2000, a
9.8% increase. For the six months ended June 30, 2001, depreciation and
amortization increased to $9,010 from $8,321 in 2000, an 8.3% increase. These
increases were due primarily to the start up of Unit V in the third quarter 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)
---------------------------------
Depreciation and Amortization: (continued)
The Partnership Guarantors' depreciation and amortization increased to $6,937
for the three months ended June 30, 2001 from $4,848 for the same period in
2000. For the six months ended June 30, 2001 depreciated and amortization
increased to $12,018 from $9,493 in 2000. The increases were due primarily to
upgraded brine handling system and the start up of CE Turbo in the third quarter
of 2000.
The Royalty Guarantors' amortization was $488 for the three months ended June
30, 2001 compared to $492 for the same period of 2000. For the six months ended
June 30, 2001, amortization was $975 compared to $983 in 2000.
Interest Expense:
The Salton Sea Guarantors' interest expense, net of capitalized interest,
increased to $5,814 for the three months ended June 30, 2001 from $2,978 for the
same period in 2000. For the six months ended June 30, 2001, interest expense,
net of capitalized interest, increased to $9,612 from $5,495 in 2000. The
increase was due to the discontinuance of capitalizing interest on the minerals
extraction process partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized interest,
increased to $2,079 for the three months ended June 30, 2001 from $127 for the
same period in 2000. For the six months ended June 30, 2001, interest expense,
net of capitalized interest, increased to $2,139 from $311 in 2000. The increase
was due to the discontinuance of capitalizing interest on the minerals
extraction process partially offset by reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $166 for the three months
ended June 30, 2001 from $258 from the same period in 2000. For the six months
ended June 30, 2001, interest expense decreased to $343 from $542 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 benefit was $109 for the three months
ended June 30, 2001 compared to a provision of $1,901 for the same period in
2000. For the six months ended June 30, 2001, the income tax provision decreased
to $1,269 from $1,322 in 2000. These decreases were primarily due to a lower
pre-tax income. Income taxes will be paid by the parent of the Partnership
Guarantors from distributions to the parent company by the, Partnership
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.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
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 this change of $8.7 million. The Partnership
Guarantors have recorded a cumulative effect of this change of $8.3 million, net
of tax.
Net Income (Loss):
The Salton Sea Funding Corporation's net income for the three months ended June
30, 2001 was $0 compared to a net income of $1 for the same period in 2000. For
the six months ended June 30, 2001 the net loss was ($119) compared to a net
loss of ($58) 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 Guarantors had a net loss of ($822) for the three months ended
June 30, 2001 compared to net income of $4,680 for the same period of 2000. For
the six months ended June 30, 2001, net income decreased to $1,040 from $1,331
in 2000.
The Partnership Guarantors had a net loss of ($204) for the three months ended
June 30, 2001 compared to net income of $3,859 for the same period of 2000. For
the six months ended June 30, 2001, the Partnership Guarantors' had a net loss
of ($5,842) compared to net income of $2,684 in 2000.
The Royalty Guarantor's net income decreased to $1,072 for the three months
ended June 30, 2001 compared to $1,199 for the same period of 2000. For the six
months ended June 30, 2001, net income increased to $2,992 from $1,569 in 2000.
Liquidity and Capital Resources:
- -------------------------------
Prior to March 22, 2001 and after June 22, 2001, the operating Salton Sea
Guarantors' only source of revenue is payments received pursuant to long term
power sales agreements with Edison, other than Salton Sea V revenue and interest
earned on funds on deposit. Prior to March 22, 2001 and after June 22, 2001, the
operating Partnership Guarantors' primary source of revenue is 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 and service 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 Salton Sea
Funding 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. Edison's
senior unsecured debt obligations are currently rated Caa2 by Moody's and D by
S&P.
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)
- -------------------------------
Edison 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.
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.
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. On June 18, 2001, the Superior Court terminated the Imperial
Valley projects right to resell power pursuant to the Declaratory Judgment.
On June 20, 2001, the Guarantors entered into Agreements Addressing Renewable
Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). The
Settlement Agreements require Edison make a series of payments to repay the past
due balances under the Power Purchase Agreements (the "stipulated amounts"). The
first payment of approximately $11.6 million, which represented 10% of the
stipulated amounts, was received June 22, 2001. A second partial payment is
payable within 5 days following the MOU Effective Date. The "MOU Effective Date"
means the first day on which both of the following have occurred: (a) all
legislation implementing the Memorandum of Understanding between Edison and the
California Department of Water Resources dated April 9, 2001 ("MOU") or such
other legislation based on the MOU or otherwise, that restores Edison to
creditworthiness has become effective, and (b) the Commission has issued all
orders that are necessary to implement the MOU or other mechanisms contained in
such legislation based on the MOU or otherwise which are designed to restore
Edison to creditworthiness. The final payment, representing the remaining
stipulated amounts, shall be paid on the 5th business day after Edison receives
proceeds from the financing resulting from the MOU or other mechanisms contained
in such other legislation based on the MOU or otherwise restore Edison to
creditworthiness. In addition to these payments, Edison is required to make
monthly interest payments calculated at a rate of 7% per annum on the
outstanding stipulated amounts. The Settlement Agreements also provide a revised
energy pricing structure, whereby Edison elects to pay the Imperial Valley
Projects a fixed energy price of 5.37 cents/kilowatt hour in lieu of the
Commission-approved SRAC Methodology under the Power Purchase Agreements,
commencing on the first day of the month following the MOU Effective Date and
expiring five years from such date. All other contract terms remained unchanged.
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)
- -------------------------------
As a result of the aforementioned Settlement Agreements, the Guarantors resumed
power sales to Edison on June 22, 2001. Energy payments are currently calculated
using the SRAC formulas set forth in the Power Purchase Agreements until the
fixed rate period begins.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the downgrades of Edison's credit ratings, Moody's
downgraded the ratings for the Salton Sea Funding Securities to Caa2 (negative
outlook) and S&P downgraded the ratings for the Salton Sea Funding Securities to
BBB- and placed the Salton Sea Funding Securities on "credit watch negative".
Following the execution of the Settlement Agreements, Moody's placed the Salton
Sea Funding Securities on "credit watch positive".
CalEnergy Minerals LLC, a Partnership Guarantor ("Minerals LLC") 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.
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 Guarantors 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 late 2002.
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 was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, Minerals LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery EPC Contract, the Guarantors drew $29.7 million under the EPC Contract
Letter of Credit on July 20, 2001. The Guarantors have entered into a time and
materials reimbursable engineer, procure and construction management contract
with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
Inflation
Inflation has not had a significant impact on the Guarantors' operating revenue
and costs.
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)
- -------------------------------
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.
Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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 Funding Corporation implemented the
new standards on January 1, 2001. The initial adoption of SFAS133/138 did not
have a material impact on the Funding Corporation's financial position, results
of operations or any impact on its cash flows.
In June 2001, FASB approved the issuance of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
standards, issued in July 2001, establish accounting and reporting for business
combinations. SFAS No. 141 requires all business combinations entered into
subsequent to June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible assets with
indefinite lives will not be amortized, but will be tested for impairment on an
annual basis. These standards are effective for the Funding Corporation
beginning on January 1, 2002. The Funding Corporation has not quantified the
impact resulting from the adoption of these standards.
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
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: (continued)
- --------------------------
future periods based on actual costs or new circumstances, and are included in
the accompanying balance sheets at their undiscounted amounts. As of June 30,
2001 and December 31, 2000, the environmental liabilities recorded on the
balance sheet were not material.
Qualitative and Quantitative Disclosures About Market Risk
There have been no significant changes in the Salton Sea Funding Corporation's
market risk for the six months ended June 30, 2001. For additional information
see the Company's Annual Report on Form 10-K for the year ended December 31,
2000.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
---------------------------------
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:
None
(b) Reports on Form 8-K:
Current Report filed June 20, 2001 reporting that the Guarantors have
executed Settlement Agreements with Edison.
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 August 2001.
SALTON SEA FUNDING CORPORATION
Date: August 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