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 September 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 November 14, 2001.
SALTON SEA FUNDING CORPORATION
Form 10-Q
September 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, September 30, 2001 and December 31, 2000 5
Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 6
Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 11
Combined Balance Sheets, September 30, 2001 and December 31, 2000 12
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 13
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 14
Notes to Combined Financial Statements 15
PARTNERSHIP GUARANTORS
Independent Accountants' Report 18
Combined Balance Sheets, September 30, 2001 and December 31, 2000 19
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 20
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 21
Notes to Combined Financial Statements 22
SALTON SEA ROYALTY LLC
Independent Accountants' Report 26
Balance Sheets, September 30, 2001 and December 31, 2000 27
Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 28
Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 29
Notes to Financial Statements 30
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 33
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Changes in Securities 44
Item 3. Defaults on Senior Securities 44
Item 4. Submission of Matters to a Vote of
Security Holders 44
Item 5. Other Information 44
Item 6. Exhibits and Reports on Form 8-K 44
Signatures 45
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 September 30, 2001, and the related statements of operations
for the three-month and nine-month periods ended September 30, 2001 and 2000,
and the related statements of cash flows for the nine-month periods ended
September 30, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
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
October 26, 2001
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
2001 2000
(unaudited)
ASSETS
Cash $ 46,404 $ 8,467
Prepaid expenses and other assets 13,963 3,563
Current portion of secured project notes
from Guarantors 26,116 23,658
__________ __________
Total current assets 86,483 35,688
Secured project notes from Guarantors 505,962 520,250
Investment in 1% of net assets of
Guarantors 9,476 9,437
__________ __________
$ 601,921 $ 565,375
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 13,513 $ 3,479
Due to affiliates 43,033 4,753
Current portion of long term debt 26,116 23,658
__________ __________
Total current liabilities 82,662 31,890
Senior secured notes and bonds 505,962 520,250
__________ __________
Total liabilities 588,624 552,140
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 7,931 7,869
__________ __________
Total stockholder's equity 13,297 13,235
__________ __________
$ 601,921 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Revenues:
Interest income $ 10,753 $ 10,702 $ 31,489 $ 32,421
Equity in earnings of Guarantors 22 279 39 335
________ _________ _________ _________
Total revenues 10,775 10,981 31,528 32,756
________ _________ _________ _________
Expenses:
General and administrative expenses 283 234 746 711
Interest expense 10,183 10,434 30,676 31,831
_________ _________ _________ _________
Total expenses 10,466 10,668 31,422 32,542
_________ _________ _________ _________
Income before income taxes 309 313 106 214
Provision for income taxes 128 129 44 88
_________ _________ _________ _________
Net income $ 181 $ 184 $ 62 $ 126
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income $ 62 $ 126
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in earnings of Guarantors (39) (335)
Changes in assets and liabilities:
Prepaid expenses and other assets (10,400) (10,474)
Accrued liabilities 10,034 10,266
___________ ____________
Net cash flows from operating activities (343) (417)
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 in due to affiliates 38,280 22,266
Repayment of senior secured notes and bonds (11,830) (22,552)
___________ ____________
Net cash flows from financing activities 26,450 (286)
___________ ____________
Net change in cash 37,937 21,849
Cash at beginning of period 8,467 2,086
___________ ____________
Cash at end of period $ 46,404 $ 23,935
============ ============
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 September 30, 2001 and the results of
operations for the three and nine months ended September 30, 2001 and 2000 and
cash flows for the nine months ended September 30, 2001 and 2000. The results of
operations for the nine months ended September 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 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB No. 133" and amended by SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133 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 SFAS 133 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.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard addresses financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. SFAS 143 is effective for the
Company's fiscal year beginning January 1, 2003. Management is in the process of
evaluating the impact this standard will have on the Company's consolidated
financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" (SFAS 144). The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and is
effective for the Company's fiscal year beginning January 1, 2002. Management is
in the process of evaluating the impact this standard will have on the
Guarantors' consolidated financial statements.
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 was 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 that 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 occurrence of Events to
restore Edison to creditworthiness (the "Effective Date"). 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
occurrence of Events to 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 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.
On October 2, 2001 the California Public Utilities Commission (PUC) and Edison
reached a settlement in the Filed Rate Doctrine lawsuit Edison filed in Federal
Court against the PUC. By its own terms, the settlement is intended to restore
Edison to creditworthiness so that it is able to resume procuring the
electricity needed by its customers; limit ratepayers' costs of paying off the
debt; and maintain the state's role in regulating the investor owned utility by
enabling Edison to pay down its back debts over a reasonable period of time. As
a result of such settlement the Guarantors believe the conditions to the
Effective Date under the Settlement Agreements have been satisfied. Edison
disputes such conditions have been satisfied. The Guarantors are vigorously
pursing enforcement of their rights under the Settlement Agreements.
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".
The Guarantors' are contractually entitled to receive payments under the Power
Purchase 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 $90 million
on September 30, 2001.
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 September 30, 2001, and the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2001
and 2000, and the related combined statements of cash flows for the nine-month
periods ended September 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
October 26, 2001
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2001 2000
(unaudited)
ASSETS
Accounts receivable, net of allowance of $29,189
and $0, respectively (Note 4) $ 28,829 $ 24,396
Prepaid expenses and other assets 5,733 8,699
__________ _________
Total current assets 34,562 33,095
Restricted cash --- 17
Property, plant, contracts and equipment, net 561,228 566,577
Excess of cost over fair value of net assets
acquired, net 44,596 45,574
__________ _________
$ 640,386 $ 645,263
========== =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 408 $ 5
Accrued liabilities 16,161 10,826
Current portion of long term debt 18,902 17,319
__________ _________
Total current liabilities 35,471 28,150
Due to affiliates 17,603 18,720
Senior secured project note 256,656 266,898
__________ __________
Total liabilities 309,730 313,768
Commitment and contingencies (Note 4)
Total Guarantors' equity 330,656 331,495
__________ _________
$ 640,386 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
_________ _________ _________ _________
Revenues:
Sales of electricity $ 22,853 $ 32,375 $ 77,847 $ 59,873
Interest and other income 652 119 1,629 332
_________ _________ _________ _________
Total revenues 23,505 32,494 79,476 60,205
_________ _________ _________ _________
Expenses:
Operating, general and
administration 15,438 11,288 43,004 23,852
Depreciation and amortization 4,372 4,751 13,382 13,072
Interest expense 5,574 5,745 16,878 17,376
Less capitalized interest --- (1,988) (1,692) (8,124)
_________ _________ _________ _________
Total expenses 25,384 19,796 71,572 46,176
_________ _________ _________ _________
Income (loss) before cumulative
effect of accounting change (1,879) 12,698 7,904 14,029
Cumulative effect of accounting change --- --- (8,743) ---
_________ _________ _________ _________
Net income (loss) $ (1,879) $ 12,698 $ (839) $ 14,029
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income (loss) $ (839) $ 14,029
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 13,382 13,072
Cumulative effect of change in accounting principle 8,743 ---
Changes in assets and liabilities:
Accounts receivable (4,433) (10,694)
Prepaid expenses and other assets (5,777) 2,533
Accounts payable and accrued
liabilities 5,738 4,985
_______________ _____________
Net cash flows from operating activities 16,814 23,925
_______________ _____________
Cash flows from investing activities:
Capital expenditures (7,055) (17,522)
Decrease in restricted cash 17 2,526
_______________ _____________
Net cash flows from investing activities (7,038) (14,996)
_______________ _____________
Cash flows from financing activities:
Increase (decrease) in due to affiliates (1,117) 298
Contributions from _________ 50 ---
Repayment of senior secured project note (8,659) (9,227)
Net cash flows from financing activities (9,776) (8,929)
_______________ _____________
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 September 30, 2001 and the results of operations for
the three and nine months ended September 30, 2001 and 2000 and cash flows for
the nine months ended September 30, 2001 and 2000. The results of operations for
the nine months ended September 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.
Certain prior year amounts have been reclassified in order to conform with
current year classifications.
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 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB No. 133" and amended by SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133 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 SFAS 133 did not have a material impact on the Guarantors' 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.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard addresses financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. SFAS 143 is effective for the
Guarantor's fiscal year beginning January 1, 2003. Management is in the process
of evaluating the impact this standard will have on the Guarantors' consolidated
financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" (SFAS 144). The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and is
effective for the Guarantors' fiscal year beginning January 1, 2002. Management
is in the process of evaluating the impact this standard will have on the
Guarantors' consolidated financial statements.
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 projects' available power was 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 that 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 occurrence of Events to
restore Edison to creditworthiness (the "Effective Date"). 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
occurrence of Events to 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 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.
On October 2, 2001 the California Public Utilities Commission (PUC) and Edison
reached a settlement in the Filed Rate Doctrine lawsuit Edison filed in Federal
Court against the PUC. By its own terms, the settlement is intended to restore
Edison to creditworthiness so that it is able to resume procuring the
electricity needed by its customers; limit ratepayers' costs of paying off the
debt; and maintain the state's role in regulating the investor owned utility by
enabling Edison to pay down its back debts over a reasonable period of time. As
a result of such settlement the Guarantors believe the conditions to the
Effective Date under the Settlement Agreements have been satisfied. Edison
disputes such conditions have been satisfied. The Guarantors are vigorously
pursing enforcement of their rights under the Settlement Agreements.
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 $29.2 million at September
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 September 30, 2001, the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2001
and 2000, and the related combined statements of cash flows for the nine-month
periods ended September 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
October 26, 2001
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2001 2000
(unaudited)
ASSETS
Accounts receivable, net of allowance of $60,802
and $0, respectively (Note 4) $ 42,326 $ 28,319
Prepaid expenses and other assets 19,538 26,661
_________ _________
Total current liabilities 61,864 54,980
Restricted cash 29,657 106
Due from affiliates 25,224 35,066
Property, plant, contracts and equipment, net 468,365 470,804
Construction in progress 150,134 165,460
Management fee 69,305 70,855
Excess of cost over fair value of net assets
acquired, net 121,757 124,430
_________ _________
$ 926,306 $ 921,701
=========== =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,738 $ 101
Accrued liabilities 23,934 17,722
Current portion of long term debt 3,267 1,907
_________ _________
Total current liabilities 29,939 19,730
Senior secured project notes 246,429 248,743
Deferred income taxes 100,599 101,734
_________ _________
Total liabilities 376,967 370,207
Commitments and contingencies (Note 4)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 161,673 163,828
_________ _________
Total Guarantors' equity 549,339 551,494
_________ _________
$ 926,306 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
_________ _________ _________ _________
Revenues:
Sales of electricity $ 20,782 $ 35,063 $ 64,352 $ 65,080
Interest and other income 1,702 1,783 2,642 2,884
_________ _________ _________ _________
Total revenues 22,484 36,846 66,994 67,964
_________ _________ _________ _________
Expenses:
Operating, general and
administration 8,974 12,119 35,646 29,427
Depreciation and amortization 5,877 4,966 17,895 14,459
Interest expense 4,857 4,984 14,479 15,124
Less capitalized interest (2,855) (4,855) (10,338) (14,684)
_________ _________ _________ _________
Total expenses 16,853 17,214 57,682 44,326
_________ _________ _________ _________
Income before income taxes 5,631 19,632 9,312 23,638
Provision for income taxes 1,944 6,477 3,213 7,799
_________ _________ _________ _________
Income before cumulative
effect of accounting change 3,687 13,155 6,099 15,839
Cumulative effect of accounting
change, net of tax --- --- (8,254) ---
Net income (loss) $ 3,687 $ 13,155 $ (2,155) $ 15,839
========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income (loss) $ (2,155) $ 15,839
Adjustments to reconcile net income (loss) to net
cash flow from operating activities:
Depreciation and amortization 17,895 14,459
Cumulative effect of change in accounting principle, net of tax 8,254 ---
Deferred income taxes 3,213 7,799
Changes in assets and liabilities:
Accounts receivable (14,007) (7,304)
Prepaid expenses and other assets (5,481) (4,843)
Accounts payable and accrued
liabilities 8,849 5,098
______________ _____________
Net cash flows from operating activities 16,568 31,048
______________ _____________
Cash flows from investing activities:
Capital expenditures (11,394) (11,887)
Capital expenditures-construction (14,322) (96,314)
Receipt of liquidated damages 29,648 ---
Decrease (increase) in restricted cash (29,551) 55,468
Management fee 163 (1,537)
______________ _____________
Net cash flows from investing activities (25,456) (54,270)
______________ _____________
Cash flows from financing activities:
Repayments of senior secured project notes (954) (8,562)
Decrease in due from affiliates 9,842 31,784
______________ _____________
Net cash flows from financing activities 8,888 23,222
______________ _____________
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 September 30, 2001 and the results of operations for
the three and nine months ended September 30, 2001 and 2000 and cash flows for
the nine months ended September 30, 2001 and 2000. The results of operations for
the nine months ended September 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.
Certain prior year amounts have been reclassified in order to conform with
current year classifications.
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 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB No. 133" and amended by SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133 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 SFAS 133 did not have a material impact on the Guarantors' 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.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard addresses financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. SFAS 143 is effective for the
Guarantor's fiscal year beginning January 1, 2003. Management is in the process
of evaluating the impact this standard will have on the Guarantors' consolidated
financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" (SFAS 144). The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and is
effective for the Guarantors' fiscal year beginning January 1, 2002. Management
is in the process of evaluating the impact this standard will have on the
Guarantors' consolidated financial statements.
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 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 $76.9 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 was 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 that 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 occurrence of Events to
restore Edison to creditworthiness (the "Effective Date"). 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
occurrence of Events to 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 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.
On October 2, 2001 the California Public Utilities Commission (PUC) and Edison
reached a settlement in the Filed Rate Doctrine lawsuit Edison filed in Federal
Court against the PUC. By its own terms, the settlement is intended to restore
Edison to creditworthiness so that it is able to resume procuring the
electricity needed by its customers; limit ratepayers' costs of paying off the
debt; and maintain the state's role in regulating the investor owned utility by
enabling Edison to pay down its back debts over a reasonable period of time. As
a result of such settlement the Guarantors believe the conditions to the
Effective Date under the Settlement Agreements have been satisfied. Edison
disputes such conditions have been satisfied. The Guarantors are vigorously
pursing enforcement of their rights under the Settlement Agreements.
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 $60.8 million on September 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 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.
On July 11, 2001, Kvaerner filed an Amended Demand For Arbitration against
Minerals LLC characterizing the nature of the dispute as concerns regarding
change orders and performance penalties. Kvaerner did not state the amount of
its claim.
On August 7, 2001, Minerals LLC filed an Answering Statement and Counterclaim
against Kvaerner. Minerals LLC denied all material allegations in Kvaerner's
Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for
breach of contract and specific performance. Minerals LLC alleged that its total
estimated damage for Kvaerner's breach of contract are in excess of
approximately $60.0 million; however, Minerals LLC has offset approximately
$42.5 million of these damages by exercising its rights under the EPC Contract
to claim the retainage and by drawing on a letter of credit. Therefore, Minerals
LLC asked for a judgment in excess of approximately $20.0 million. The
arbitration is scheduled for June 2002.
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 September 30, 2001, and the related statements of operations for the
three-month and nine-month periods ended September 30, 2001 and 2000, and the
related statements of cash flows for the nine-month periods ended September 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
October 26, 2001
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
2001 2000
(unaudited)
ASSETS
Prepaid expenses and other assets $ 44 $ 82
__________ __________
Total current assets 44 82
Royalty stream, net 14,938 15,719
Excess of cost over fair value of net assets
acquired, net 30,691 31,372
Due from affiliates 28,890 26,497
__________ __________
$ 74,563 $ 73,670
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 168 $ 57
Current portion of long term debt 3,947 4,434
__________ __________
Total current liabilities 4,115 4,491
Senior secured project note 2,877 4,607
__________ __________
Total liabilities 6,992 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 66,010 63,011
__________ __________
Total equity 67,571 64,572
__________ __________
$ 74,563 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
_________ _________ _________ _________
Revenues:
Royalty income $ 759 $ 3,816 $ 6,598 $ 8,083
Expenses:
Operating, general and
administrative expenses 126 1,099 1,655 2,272
Amortization of royalty stream
and goodwill 487 491 1,462 1,474
Interest expense 139 206 482 748
_________ _________ _________ _________
Total expenses 752 1,796 3,599 4,494
_________ _________ _________ _________
Net income $ 7 $ 2,020 $ 2,999 $ 3,589
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income $ 2,999 $ 3,589
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 1,462 1,474
Changes in assets and liabilities:
Prepaid expenses and other assets 38 115
Accrued liabilities 111 141
____________ ___________
Net cash flows from operating activities 4,610 5,319
Net cash flows from financing activities:
Increase in due from affiliates (2,393) (558)
Repayment of senior secured project note (2,217) (4,761)
____________ ___________
Net cash flows from financing activities (4,610) (5,319)
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 September 30, 2001 and the results of operations for the three
and nine months ended September 30, 2001 and 2000 and cash flows for the nine
months ended September 30, 2001 and 2000. The results of operations for the nine
months ended September 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 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 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB No. 133" and amended by SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133 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 SFAS 133 did not have a material impact on the Guarantors' 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 Company beginning on January
1, 2002. The Company has not quantified the impact resulting from the adoption
of these standards.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard addresses financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. SFAS 143 is effective for the
Company's fiscal year beginning January 1, 2003. Management is in the process of
evaluating the impact this standard will have on the Company's consolidated
financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" (SFAS 144). The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and is
effective for the Company's fiscal year beginning January 1, 2002. Management is
in the process of evaluating the impact this standard will have on the Company's
consolidated financial statements.
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 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 was 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 that 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 occurrence of Events to
restore Edison to creditworthiness (the "Effective Date"). 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
occurrence of Events to 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 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.
On October 2, 2001 the California Public Utilities Commission (PUC) and Edison
reached a settlement in the Filed Rate Doctrine lawsuit Edison filed in Federal
Court against the PUC. By its own terms, the settlement is intended to restore
Edison to creditworthiness so that it is able to resume procuring the
electricity needed by its customers; limit ratepayers' costs of paying off the
debt; and maintain the state's role in regulating the investor owned utility by
enabling Edison to pay down its back debts over a reasonable period of time. As
a result of such settlement the Guarantors believe the conditions to the
Effective Date under the Settlement Agreements have been satisfied. Edison
disputes such conditions have been satisfied. The Guarantors are vigorously
pursing enforcement of their rights under the Settlement Agreements.
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 under the Power
Purchase Agreements and Settlement Agreements. However, due to the uncertainties
associated with Edison's financial condition and failures to pay contractual
obligations, the Guarantors have established an allowance for doubtful accounts
of approximately $90 million on September 30, 2001.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
_________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and 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.
Business
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.
Power Purchase Agreements
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 nine months ended September 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 FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
_________________________________
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 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 8.9 cents per kWh and 4.6 per kWh
for the nine months ended September 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 Projects
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 38.
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 data includes the aggregate capacity and electricity production of
Salton Sea Units I, II, III, IV and V:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Overall capacity factor 79.9% 77.6% 79.9% 67.5%
Capacity (NMW) (weighted average) 168.4 168.4 168.4 138.5
kWh produced (in thousands) 297,200 288,400 881,900 614,400
The overall capacity factor for the Salton Sea Projects increased for the three
and nine months ended September 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Overall capacity factor 105.9% 103.7% 102.2% 95.5%
Capacity (NMW) (weighted average) 158 154.6 158 150.2
kWh produced (in thousands) 369,600 353,900 1,058,200 943,100
The overall capacity factor for the Partnership Projects increased for the three
months and nine months ended September 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 decreased to $22,853 for the
three months ended September 30, 2001 from $32,375 for the same period in 2000,
a 29.4% decrease. For the nine months ended September 30, 2001, sales of
electricity increased to $77,847 from $59,873 in 2000, a 30.0% increase. 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 $29.2 million. The decrease in the quarter was primarily due to
the increased allowance for doubtful accounts and lower avoided cost rates. The
year to date 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 partially offset by the
allowance for doubtful accounts.
The Salton Sea Guarantors' interest and other income increased to $652 for the
three months ended September 30, 2001 from $119 for the same period in 2000. For
the nine months ended September 30, 2001, interest and other income increased to
$1,629 from $332 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 decreased to $20,782 for the
three months ended September 30, 2001 from $35,063 for the same period in 2000,
a 40.7% decrease. For the nine months ended September 30, 2001, sales of
electricity decreased to $64,352 from $65,080 in 2000, a 1.1% decrease. 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 $60.8 million. The decrease in the quarter was primarily due to
the increased allowance for doubtful accounts and lower avoided cost rates. The
year to date decrease was primarily due to the allowance for doubtful accounts,
partially offset by higher production and higher avoided cost rates in 2001.
The Royalty Guarantor revenue decreased to $759 for the three months ended
September 30, 2001 from $3,816 for the same period last year. For the nine
months ended September 30, 2001 royalty revenue decreased to $6,598 from $8,083
in 2000. These decreases were due primarily to lower energy revenue from the
Partnership Projects.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, increased to $15,438, for the three
months ended September 30, 2001 from $11,288 for the same period in 2000. For
the nine months ended September 30, 2001, operating expense increased to $43,004
from $23,852 in 2000. The increases were due to higher brine disposal costs and
the start up of Unit V in the third quarter of 2000. The year to date increase
was also due to higher royalty expenses resulting from higher revenues.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, decreased to $8,974 for the
three months ended September 30, 2001 from $12,119 for the same period in 2000.
The decrease in costs in the third quarter was due to a decrease in royalty
expense resulting from lower revenues. For the nine month period ended September
30, 2001, operating expenses increased to $35,646 from $29,427 in 2000. The
increase for the nine months was due to the start up of CE Turbo in the third
quarter of 2000 and higher brine disposal costs.
For the three months ended September 30, 2001 the Royalty Guarantors' operating
expenses decreased to $126 from $1,099 for the same period in 2000. The decrease
was due to lower royalty costs resulting from lower energy revenue. For the nine
months ended September 30, 2001, operating expenses decreased to $1,655 from
$2,272 in 2000. This decrease was due to lower royalty costs resulting from
lower energy revenue.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization decreased to $4,372 for
the three months ended, September 30 2001 from $4,751 for the same period of
2000, a 8.0% decrease. For the nine months ended September 30, 2001,
depreciation and amortization increased to $13,382 from $13,072 in 2000, a 2.4%
increase. The increase was 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 $5,877
for the three months ended September 30, 2001 from $4,966 for the same period in
2000. For the nine months ended September 30, 2001 depreciation and amortization
increased to $17,895 from $14,459 in 2000. The increases were due primarily to
the upgraded brine handling system and the start up of CE Turbo in the third
quarter of 2000.
The Royalty Guarantors' amortization was $487 for the three months ended
September 30, 2001 compared to $491 for the same period of 2000. For the nine
months ended September 30, 2001, amortization was $1,462 compared to $1,474 in
2000.
Interest Expense:
The Salton Sea Guarantors' interest expense, net of capitalized interest,
increased to $5,574 for the three months ended September 30, 2001 from $3,757
for the same period in 2000. For the nine months ended September 30, 2001,
interest expense, net of capitalized interest, increased to $15,186 from $9,252
in 2000. The increases were 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 $2,002 for the three months ended September 30, 2001 from $129 for
the same period in 2000. For the nine months ended September 30, 2001, interest
expense, net of capitalized interest, increased to $4,141 from $440 in 2000. The
increases were due to the discontinuance of capitalizing interest on the
minerals extraction process partially offset by reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $139 for the three months
ended September 30, 2001 from $206 from the same period in 2000. For the nine
months ended September 30, 2001, interest expense decreased to $482 from $748 in
2000. The decreases were 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 $1,944 for the three months
ended September 30, 2001 compared to a provision of $6,477 for the same period
in 2000. For the nine months ended September 30, 2001, the income tax provision
decreased to $3,213 from $7,799 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.
The Royalty Guarantor is a partnership. 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
September 30, 2001 was $181 compared to a net income of $184 for the same period
in 2000. For the nine months ended September 30, 2001 the net income was $62
compared to $126 in 2000. The net income 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 $1,879 for the three months ended
September 30, 2001 compared to net income of $12,698 for the same period of
2000. For the nine months ended September 30, 2001, the net loss was $839
compared to net income of $14,029 in 2000.
The Partnership Guarantors had a net income of $3,687 for the three months ended
September 30, 2001 compared to net income of $13,155 for the same period of
2000. For the nine months ended September 30, 2001, the Partnership Guarantors'
had a net loss of $2,155 compared to net income of $15,839 in 2000.
The Royalty Guarantor's net income decreased to $7 for the three months ended
September 30, 2001 compared to $2,020 for the same period of 2000. For the nine
months ended September 30, 2001, net income decreased to $2,999 from $3,589 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 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 was 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 that 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 occurrence of Events to
restore Edison to creditworthiness (the "Effective Date"). 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
occurrence of Events to 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 Effective Date and expiring five years from such date. All other
contract terms remain 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.
On October 2, 2001 the California Public Utilities Commission (PUC) and Edison
reached a settlement in the Filed Rate Doctrine lawsuit Edison filed in Federal
Court against the PUC. By its own terms, the settlement is intended to restore
Edison to creditworthiness so that it is able to resume procuring the
electricity needed by its customers; limit ratepayers' costs of paying off the
debt; and maintain the state's role in regulating the investor owned utility by
enabling Edison to pay down its back debts over a reasonable period of time. As
a result of such settlement the Guarantors believe the conditions to the
Effective Date under the Settlement Agreements have been satisfied. Edison
disputes such conditions have been satisfied. The Guarantors are vigorously
pursing enforcement of their rights under the Settlement Agreements.
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 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
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)
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.
On July 11, 2001, Kvaerner filed an Amended Demand For Arbitration against
Minerals LLC characterizing the nature of the dispute as concerns regarding
change orders and performance penalties. Kvaerner did not state the amount of
its claim.
On August 7, 2001, Minerals LLC filed an Answering Statement and Counterclaim
against Kvaerner. Minerals LLC denied all material allegations in Kvaerner's
Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for
breach of contract and specific performance. Minerals LLC alleged that its total
estimated damage for Kvaerner's breach of contract are in excess of
approximately $60.0 million; however, Minerals LLC has offset approximately
$42.5 million of these damages by exercising its rights under the EPC Contract
to claim the retainage and by drawing on a letter of credit. Therefore, Minerals
LLC asked for a judgment in excess of approximately $20.0 million. The
arbitration is scheduled for June 2002.
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 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB No. 133" and amended by SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133 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 SFAS 133 did not have a material impact on the Guarantors' financial
position, results of operations or any impact on their cash flows
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
_________________________________
Accounting Pronouncements: (continued)
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.
In July 2001, FASB issued SFAS No.143, "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard addresses financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. SFAS 143 is effective for the
Company's fiscal year beginning January 1, 2003. Management is in the process of
evaluating the impact this standard will have on the Company's consolidated
financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" (SFAS 144). The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and is
effective for the Company's fiscal year beginning January 1, 2002. Management is
in the process of evaluating the impact this standard will have on the Company's
consolidated financial statements.
Environmental Liabilities:
The Company may be exposed to environmental costs in the ordinary course of
business. Expenditures for ongoing compliance with environmental regulations
that relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of September 30, 2001 and December 31, 2000,
the environmental liabilities recorded on the balance sheet were not material.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per kwh data)
_________________________________
Qualitative and Quantitative Disclosures About Market Risk
There have been no significant changes in the Salton Sea Funding Corporation's
market risk for the nine months ended September 30, 2001. For additional
information see the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
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)
_________________________________
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:
None
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 November 2001.
SALTON SEA FUNDING CORPORATION
Date: November 14, 2001 /s/ Joseph M. Lillo
By: Joseph M. Lillo
Vice President and Controller