UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002 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, 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) 341-4500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
All common stock of Salton Sea Funding Corporation is indirectly held by Magma
Power Company. 100 shares of Common Stock were outstanding on May [14], 2002.
SALTON SEA FUNDING CORPORATION
Form 10-Q
March 31, 2002
-------------
C O N T E N T S
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements Page
SALTON SEA FUNDING CORPORATION
Independent Accountants' Report 4
Balance Sheets, March 31, 2002 and December 31, 2001 5
Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 6
Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 10
Combined Balance Sheets, March 31, 2002 and December 31, 2001 11
Combined Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 12
Combined Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 13
Notes to Combined Financial Statements 14
PARTNERSHIP GUARANTORS
Independent Accountants' Report 17
Combined Balance Sheets, March 31, 2002 and December 31, 2001 18
Combined Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 19
Combined Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 20
Notes to Combined Financial Statements 21
SALTON SEA ROYALTY LLC
Independent Accountants' Report 25
Balance Sheets, March 31, 2002 and December 31, 2001 26
Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 27
Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 28
Notes to Financial Statements 29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities 39
Item 3. Defaults on Senior Securities 39
Item 4. Submission of Matters to a Vote of
Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Salton Sea Funding Corporation
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Funding
Corporation (the "Company") as of March 31, 2002, and the related statements of
operations and cash flows for the three-month periods ended March 31, 2002 and
2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Salton Sea
Funding Corporation as of December 31, 2001, 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 17, 2002 (March 1, 2002 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, 2001 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
April 26, 2002
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 99,220 $ 4,361
Restricted cash 2,956 2,949
Accrued interest receivable and other assets 13,296 3,351
Current portion of secured project notes
from Guarantors 28,572 28,572
Total current assets 144,044 39,233
Secured project notes from Guarantors 491,678 491,678
Investment in 1% of net assets of
Guarantors 9,662 9,669
$ 645,384 $ 540,580
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued interest $ 13,159 $ 3,333
Due to affiliates 98,884 3,899
Current portion of long term debt 28,572 28,572
Total current liabilities 140,615 35,804
Senior secured notes and bonds 491,678 491,678
Total liabilities 632,293 527,482
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 7,725 7,732
---------- ----------
Total stockholder's equity 13,091 13,098
---------- ----------
$ 645,384 $ 540,580
========== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Revenues:
Interest income $ 10,047 $ 10,329
Equity in earnings (loss) of Guarantors (7) 190
Total revenues 10,040 10,519
--------- --------
Expenses:
General and administrative expenses 227 289
Interest expense 9,825 10,263
--------- --------
Total expenses 10,052 10,552
--------- --------
Loss before income taxes (12) (33)
Income tax benefit (5) (14)
Loss before cumulative effect of accounting change (7) (19)
Cumulative effect of accounting change, net of tax --- (100)
--------- --------
Net loss $ (7) $ (119)
========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net loss $ (7) $ (119)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Equity in (earnings) loss of Guarantors 7 (20)
Changes in assets and liabilities:
Prepaid expenses and other assets (9,945) (10,328)
Accrued liabilities 9,826 10,263
Net cash flows from operating activities (119) (204)
Cash flows from financing activities:
Increase (decrease) in due to affiliates 94,985 (5,102)
Restricted cash (7) ---
Net cash flows from financing activities 94,978 (5,102)
---------- ----------
Net change in cash 94,859 (5,306)
Cash at the beginning of period 4,361 8,467
Cash at the end of period $ 99,220 $ 3,161
========== ==========
Supplemental disclosures:
Interest paid $ --- $ ---
========== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
---------------------
1. General:
In the opinion of management of the Salton Sea Funding Corporation (the "Funding
Corporation"), the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2002 and the results of operations
for the three-months ended March 31, 2002 and 2001 and cash flows for the
three-months ended March 31, 2002 and 2001. The results of operations for the
three-months ended March 31, 2002 and 2001 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, 2001.
Certain prior year amounts have been reclassified to conform with current year
classifications.
2. Accounting Pronouncements:
On January 1, 2002, the Funding Corporation adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which dictates the accounting for acquired goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and indefinite-lived intangible assets be discontinued and that entities
disclose net income for prior periods adjusted to exclude such amortization and
related income tax effects, as well as a reconciliation from the originally
reported net income to the adjusted net income. The Funding Corporation's
related amortization consists solely of its share of the goodwill amortization
at the Guarantors, which has no income tax effect. Following is a reconciliation
of net loss as originally reported for the quarters ended March 31, 2002 and
2001, to adjusted net loss (in thousands):
Three months
ended March 31,
2002 2001
Reported net loss..........................$ (7) $ (119)
Goodwill amortization...................... --- 14
Adjusted net loss..........................$ (7) $ (105)
In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". The standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. There was no
financial statement impact as a result of the Funding Corporation's adoption of
SFAS No. 144 on January 1, 2002.
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. Due to reduced liquidity, Edison failed to
pay approximately $119 million owed under the power purchase agreements with
certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and
Turbo Projects) for power delivered in the fourth quarter 2000 and the first
quarter 2001. Due to Edison's failure to pay contractual obligations, the
Guarantors had established an allowance for doubtful accounts of approximately
$21.0 million as of December 31, 2001.
On June 20, 2001, the Guarantors' (excluding Salton Sea V and CE Turbo) entered
into Agreements Addressing Renewable Energy Pricing and Payment Issues with
Edison ("Settlement Agreements"). On June 22, 2001 Edison made an initial $11.6
million payment to repay the past due balances under the Power Purchase
Agreements (the "stipulated amounts"). On November 30, 2001, the Settlement
Agreements were amended to reflect when Edison would be required to make the
final payment on past due amounts. The final payment of approximately $104.6
million, representing the remaining stipulated amounts, was received March 1,
2002. Following the receipt of Edison's final payment of past due balances, the
Guarantors released the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation has not been
extended beyond its current July 2004 expiration date, and as such cash
distributions are not available to CE Generation until the Funding Corporation
debt service reserve fund of approximately $67.6 million has been funded or the
letter of credit has been extended beyond its July 2004 expiration date or
replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and Turbo Projects have not received payment for power
sold under the Transaction Agreements during December 2000 and January 2001 of
approximately $3.8 million. The Guarantors have established an allowance for
doubtful accounts for the full amount of this receivable.
Edison has failed to pay approximately $2.8 million of capacity bonus payments
for the months from October 2001 through March 2002. On December 10, 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 capacity bonus payments under the Power Purchase Agreements. The
Project entities will vigorously pursue collection of the capacity bonus
payments. However, due to Edison's failure to pay the contractual obligations,
the Imperial Valley Projects have established an allowance for doubtful accounts
of approximately $.8 million.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Salton Sea
Guarantors as of March 31, 2002, and the related combined statements of
operations and cash flows for the three-month periods ended March 31, 2002 and
2001. 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, 2001, 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 17, 2002 (March 1,
2002 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, 2001 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
April 26, 2002
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Accounts receivable, net of allowance of $3,268 and
$9,829, respectively $ 11,205 $ 36,647
Prepaid expenses and other assets 5,989 5,314
Total current assets 17,194 41,961
Due from affiliates 2,465 ---
Property, plant, contracts and equipment, net 542,042 543,719
Excess of cost over fair value of net assets
acquired, net 44,270 44,270
--------- ----------
$ 605,971 $ 629,950
======== =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 980 $ 2,862
Accrued liabilities 6,920 9,414
Accrued interest 6,719 1,721
Current portion of long term debt 20,487 20,487
Total current liabilities 35,106 34,484
Due to affiliates --- 27,109
Senior secured project note 246,412 246,412
--------- ----------
Total liabilities 281,518 308,005
Commitment and contingencies (Note 3)
Total Guarantors' equity 324,453 321,945
--------- ----------
$ 605,971 $ 629,950
========= ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Revenues:
Sales of electricity $ 23,405 $ 32,130
Interest and other income 430 ---
Total revenues 23,835 32,130
-------------- -------------
Expenses:
Operating, general and administration 11,890 13,357
Depreciation and amortization 4,275 4,370
Interest expense 5,162 5,490
Less capitalized interest --- (1,692)
Total expenses 21,327 21,525
Income before cumulative effect of
accounting change 2,508 10,605
Cumulative effect of accounting change --- (8,743)
-------------- -------------
Net income $ 2,508 $ 1,862
============== =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net income $ 2,508 $ 1,862
Adjustments to reconcile net income to net
cash flows from operating activities:
Cumulative effect of change in accounting principle --- 8,743
Depreciation and amortization 4,275 4,370
Changes in assets and liabilities:
Accounts receivable 25,442 (18,292)
Prepaid expenses and other assets (675) 774
Accounts payable and accrued
liabilities 622 7,037
-------- ---------
Net cash flows from operating activities 32,172 4,494
-------- ---------
Cash flows from investing activities:
Capital expenditures (2,598) (2,676)
Decrease in restricted cash --- 17
-------- ----------
Net cash flows from investing activities (2,598) (2,659)
-------- ----------
Cash flows from financing activities:
Decrease in due to affiliates (29,574) (1,835)
--------
Net cash flows from financing activities (29,574) (1,835)
--------
Net change in cash --- ---
Cash at beginning of period --- ---
Cash at end of period $ --- $ ---
======== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Salton Sea Guarantors (the "Guarantors"),
the accompanying unaudited financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2002 and the results of operations for the
three months ended March 31, 2002 and 2001 and cash flows for the three months
ended March 31, 2002 and 2001. The results of operations for the three months
ended March 31, 2002 and 2001 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, 2001.
Certain prior year amounts have been reclassified in order to conform with
current year classification.
2. Accounting Pronouncements:
On January 1, 2002, the Guarantors adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which dictates the accounting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that amortization of goodwill and
indefinite-lived intangible assets be discontinued and that entities disclose
net income for prior periods adjusted to exclude such amortization and related
income tax effects, as well as a reconciliation from the originally reported net
income to the adjusted net income. The Guarantor's related amortization consists
solely of goodwill amortization. Following is a reconciliation of net income as
originally reported for the quarters ended March 31, 2002 and 2001, to adjusted
net income (in thousands):
Three months
ended March 31,
2002 2001
Reported net income................$ 2,508 $ 1,862
Goodwill amortization............... --- 326
Adjusted net income.................$ 2,508 $ 2,188
The Guarantors' acquired intangible assets consists of power purchase contracts
(the "contracts") with a cost of $7.9 million and accumulated amortization of
$2.9 million at March 31, 2002, and are included in property, plant, contracts
and equipment in the accompanying combined balance sheet. Amortization expense
on the contracts was $.08 million for the three months ended March 31, 2002. The
Guarantors expect amortization expense on the contracts to be $.2 million for
the remainder of fiscal 2002 and $.3 million for each of the five succeeding
fiscal years.
In accordance with the new standard, the Guarantors are continuing to evaluate
the other provisions of the standard including the determination of reporting
units, the allocation of corporate assets and liabilities, including goodwill,
and the impairment testing of goodwill.
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". 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 No. 143 is effective for the Guarantors'
fiscal year beginning January 1, 2003. The Guarantors have not quantified the
impact resulting from the adoption of this standard.
In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". The standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. There was no
financial statement impact as a result of the Guarantors' adoption of SFAS No.
144 on January 1, 2002.
3. Contingency:
A. Southern California Edison
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. Due to reduced liquidity, Edison failed to
pay approximately $42.3 million owed under the power purchase agreements with
certain Guarantors (excluding the Salton Sea V Project) for power delivered in
the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to
pay contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $6.8 million as of December 31, 2001.
On June 20, 2001, the Guarantors' (excluding the Salton Sea V Project) entered
into Agreements Addressing Renewable Energy Pricing and Payment Issues with
Edison ("Settlement Agreements"). On June 22, 2001 Edison made an initial $4.1
million payment to repay the past due balances under the Power Purchase
Agreements (the "stipulated amounts"). On November 30, 2001, the Settlement
Agreements were amended to reflect when Edison would be required to make the
final payment on past due amounts. The final payment of approximately $36.9
million, representing the remaining stipulated amounts, was received March 1,
2002. Following the receipt of Edison's final payment of past due balances, the
Guarantors released the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such, cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V Project has not received payment for power sold under
the Transaction Agreements during December 2000 and January 2001 of
approximately $3.0 million. The Guarantors have established an allowance for
doubtful accounts for the full amount of this receivable.
Edison has failed to pay approximately $.7 million of capacity bonus payments
for the months from October 2001 through March 2002. On December 10, 2001
certain Guarantors (except the Salton Sea V Project) filed a lawsuit against
Edison in California's Imperial County Superior Court seeking a court order
requiring Edison to make the required capacity bonus payments under the Power
Purchase Agreements. The Guarantors will vigorously pursue collection of the
capacity bonus payments. However, due to Edison's failure to pay these
contractual obligations, the Guarantors have established an allowance for
doubtful accounts of approximately $.2 million.
B. Environmental Liabilities
The Guarantors are subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Guarantors' existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Guarantors' cost of waste disposal and (vi) reducing the
reliability of service provided by the Guarantors and the amount of energy
available from the Guarantors' facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Guarantors in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of March 31, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were not material.
4. Change in Accounting Policy
Effective January 1, 2001, the Guarantors changed their accounting policy for
overhaul and well workover costs. These costs, had historically been accounted
for using the deferral method, and are now expensed as incurred. The Guarantors
have recorded a cumulative effect of this change of approximately $8.7 million
in the three months ended March 31, 2001.
5. Related Party Transactions
On September 29, 2000, Salton Sea Power L.L.C. ("Salton Sea Power") entered into
an agreement to sell all available power from the Salton Sea V Project to El
Paso Merchant Energy Company ("EPME"). Under the terms of the agreement, EPME
purchased and sold available power on behalf of Salton Sea Power, into the
California ISO markets. The purchase price for the available power shall be
equivalent to the value actually received by EPME for the sale of such power,
including renewable premiums.
On January 17, 2001, Salton Sea Power entered into a Transaction Agreement to
sell available power from the Salton Sea V Project to EPME. Under the terms of
the agreement, at the option of Salton Sea Power, EPME purchased all available
power from the Salton Sea V Project based on day ahead price quotes received
from EPME.
On March 27, 2001 and May 1, 2001, Salton Sea Power entered into a Transaction
Agreement to sell available power to EPME based on percentages of the Dow Jones
SP-15 Index.
Pursuant to these agreements, sales to EPME from the Guarantors totaled $2.0
million and $14.0 million for the three months ended March 31, 2002 and 2001,
respectively. As of March 31, 2002 and December 31, 2001, accounts receivable
from EPME were $1.4 million and $11.8 million, respectively.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Partnership
Guarantors as of March 31, 2002, and the related combined statements of
operations and cash flows for the three-month periods ended March 31, 2002 and
2001. 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, 2001, 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 17, 2002 (March 1,
2002 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, 2001 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
April 26, 2002
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 2,676 $ -
Accounts receivable, net of allowance of $1,399 and
$14,925, respectively 11,776 59,384
Prepaid expenses and other assets 18,735 19,358
Total current liabilities 33,187 78,742
Restricted cash 14,269 21,282
Property, plant, contracts and equipment, net 640,038 633,574
Management fee 69,739 70,806
Due from affiliates 56,158 13,072
Excess of cost over fair value of net assets
acquired, net 120,866 120,866
------------ -------------
$ 934,257 $ 938,342
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,024 $ 5,480
Accrued liabilities 11,784 12,853
Accrued interest 6,299 1,605
Current portion of long term debt 4,625 4,625
Total current liabilities 24,732 24,563
Senior secured project notes 244,117 244,117
Deferred income taxes 100,743 102,083
------------ -------------
Total liabilities 369,592 370,763
Commitments and contingencies (Note 3)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 176,999 179,913
------------ -------------
Total Guarantors' equity 564,665 567,579
------------ -------------
$ 934,257 $ 938,342
============ =============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Revenues:
Sales of electricity $ 22,199 $ 23,494
Interest and other income 536 35
Total revenues 22,735 23,529
---------
Expenses:
Operating, general and
administration 18,286 14,394
Depreciation and amortization 6,787 5,081
Interest expense 4,754 4,793
Less capitalized interest (2,838) (4,733)
---------
Total expenses 26,989 19,535
---------
Income (loss) before income taxes (4,254) 3,994
Provision for income tax expense (benefit) (1,340) 1,378
Income (loss) before cumulative effect of accounting
change (2,914) 2,616
Cumulative effect of accounting change, net of tax --- (8,254)
------------- -------------
Net loss $ (2,914) $ (5,638)
============= ==============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net loss $ (2,914) $ (5,638)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Cumulative effect of change in accounting
principle, net of tax --- 8,254
Depreciation and amortization 6,787 5,081
Deferred income taxes (1,340) 1,378
Changes in assets and liabilities:
Accounts receivable 47,608 (21,111)
Prepaid expenses and other assets 623 (4,016)
Accounts payable and accrued
liabilities 169 11,639
---------- ----------
Net cash flows from operating activities 50,933 (4,413)
---------- ----------
Cash flows from investing activities:
Capital expenditures (12,542) (6,299)
Decrease in restricted cash 7,013 106
Management fee 358 819
---------- ----------
Net cash flows from investing activities (5,171) (5,374)
---------- ----------
Cash flows from financing activities:
Decrease (increase) in due from affiliates (43,086) 9,787
---------- ----------
Net cash flows from financing activities (43,086) 9,787
---------- ----------
Net change in cash 2,676 ---
Cash at beginning of period --- ---
---------- ----------
Cash at end of period $ 2,676 $ ---
========== ==========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Partnership Guarantors (the "Guarantors"),
the accompanying unaudited combined financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2002 and the results of operations for the
three-months ended March 31, 2002 and 2001 and cash flows for the three-months
ended March 31, 2002 and 2001. The results of operations for the three-months
ended March 31, 2002 and 2001 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, 2001.
2. Accounting Pronouncements:
On January 1, 2002, the Guarantors adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which dictates the accounting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that amortization of goodwill and
indefinite-lived intangible assets be discontinued and that entities disclose
net income for prior periods adjusted to exclude such amortization and related
income tax effects, as well as a reconciliation from the originally reported net
income to the adjusted net income. The Guarantors' related amortization consists
solely of goodwill amortization, which has no income tax effect. Following is a
reconciliation of net loss as originally reported for the quarters ended March
31, 2002 and 2001, to adjusted net loss (in thousands):
Three months
ended March 31,
2002 2001
Reported net loss...........................$(2,914) $(5,638)
Goodwill amortization....................... --- 891
Adjusted net loss...........................$(2,914) $(4,747)
The following table summarizes the acquired intangible assets as of March 31,
2002 (in thousands):
Gross Carrying Accumulated
Amount Amortization
Amortized Intangible Assets:
Power Purchase Contracts $ 123,002 $ 95,716
Patented Technology 46,290 13,938
------------- -------------
Total $ 169,292 $ 109,654
============= =============
Amortization expense on acquired intangible assets was $.9 million for the three
months ended March 31, 2002. The Guarantors expect amortization expense on
acquired intangible assets to be $2.6 million for the remainder of fiscal 2002
and $3.5 million for each of the five succeeding fiscal years.
In accordance with the new standard, the Guarantors are continuing to evaluate
the other provisions of the standard including the determination of reporting
units, the allocation of corporate assets and liabilities, including goodwill,
and the impairment testing of goodwill.
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". 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 No. 143 is effective for the Guarantors'
fiscal year beginning January 1, 2003. The Guarantors have not quantified the
impact resulting from the adoption of this standard.
In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". The standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. There was no
financial statement impact as a result of the Guarantors' adoption of SFAS No.
144 on January 1, 2002.
3. Contingency:
A. Southern California Edison
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. Due to reduced liquidity, Edison failed to
pay approximately $76.9 million owed under the power purchase agreements with
certain Guarantors (excluding the Turbo Project) for power delivered in the
fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay
contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $14.1 million as of December 31, 2001.
On June 20, 2001, the Guarantors' (excluding the Turbo Project) entered into
Agreements Addressing Renewable Energy Pricing and Payment Issues with Edison
("Settlement Agreements"). On June 22, 2001 Edison made an initial $7.5 million
payment to repay the past due balances under the Power Purchase Agreements (the
"stipulated amounts"). On November 30, 2001, the Settlement Agreements were
amended to reflect when Edison would be required to make the final payment on
past due amounts. The final payment of approximately $67.7 million, representing
the remaining stipulated amounts, was received March 1, 2002. Following the
receipt of Edison's final payment of past due balances, the Guarantors released
the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Turbo Project has not received payment for power sold under the
Transaction Agreements during December 2000 and January 2001 of approximately
$.8 million. The Guarantors have established an allowance for doubtful accounts
for the full amount of this receivable.
Edison has failed to pay approximately $2.0 million of capacity bonus payments
for the months from October 2001 through March 2002. On December 10, 2001
certain Guarantors (excluding the Turbo Project) filed a lawsuit against Edison
in California's Imperial County Superior Court seeking a court order requiring
Edison to make the required capacity bonus payments under the Power Purchase
Agreements.
The Guarantors will vigorously pursue collection of the capacity bonus payments.
However, due to Edison's failure to pay these contractual obligations, the
Guarantors have established an allowance for doubtful accounts of approximately
$.6 million.
B. Minerals
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 $29.6 million under the EPC Contract
Letter of Credit on July 20, 2001. The liquidated damages have been accounted
for as a reduction of the capitalized costs of the project. 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 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 the letter of credit. Therefore, Minerals
LLC asked for a judgment in excess of approximately $20 million. The arbitration
is scheduled for June 2002.
C. Environmental Liabilities
The Guarantors are subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Guarantors' existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Guarantors' cost of waste disposal and (vi) reducing the
reliability of service provided by the Guarantors and the amount of energy
available from the Guarantors' facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Guarantors in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of March 31, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were not material.
4. Change in Accounting Policy
Effective January 1, 2001, the Guarantors changed their accounting policy for
overhaul and well workover costs. These costs, had historically been accounted
for using the deferral method, and are now expensed as incurred. The Guarantors
have recorded a cumulative effect of this change of approximately $8.3 million,
net of tax in the three months ended March 31, 2001.
5. Related Party Transactions
On September 29, 2000, CE Turbo LLC ("CE Turbo") entered into an agreement to
sell all available power from the Turbo Project to EPME. Under the terms of the
agreement, EPME purchased and sold available power on behalf of CE Turbo, into
the California ISO markets. The purchase price for the available power shall be
equivalent to the value actually received by EPME for the sale of such power,
including renewable premiums.
On January 17, 2001, the CE Turbo Project entered into a Transaction Agreement
to sell available power from the Turbo Project to EPME. Under the terms of the
agreement, at the option of CE Turbo, EPME purchased all available power from
the Turbo Project based on day ahead price quotes received from EPME.
On March 27, 2001 and May 1, 2001, CE Turbo entered into a Transaction Agreement
to sell available power to EPME based on percentages of the Dow Jones SP-15
Index.
Pursuant to these agreements, sales to EPME from the Company totaled $.4 million
and $2.9 million for the three months ended March 31, 2002 and 2001,
respectively. As of March 31, 2002 and December 31, 2001, accounts receivable
from EPME were $.2 million and $2.4 million, respectively.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of March 31, 2002, and the related statements of operations and cash flows for
the three-month periods ended March 31, 2002 and 2001. 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, 2001, and the related statements of operations,
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 17, 2002 (March 1, 2002 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, 2001
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
April 26, 2002
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Prepaid expenses and other assets $ 26 $ 31
Total current assets 26 31
Royalty stream, net 14,651 14,865
Excess of cost over fair value of net assets
acquired, net 30,464 30,464
Due from affiliates 36,530 33,940
$ 81,671 $ 79,300
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued interest $ 113 $ 29
Current portion of long term debt 3,460 3,460
Total current liabilities 3,573 3,489
Senior secured project note 1,147 1,147
---------- ----------
Total liabilities 4,720 4,636
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 75,390 73,103
---------- ----------
Total equity 76,951 74,664
---------- ----------
$ 81,671 $ 79,300
========== ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Revenues:
Royalty income $ 3,682 $ 3,463
Expenses:
Operating, general and
administrative expenses 1,092 879
Amortization 214 487
Interest expense 89 177
--------- ----------
Total expenses 1,395 1,543
--------- ----------
Net income $ 2,287 $ 1,920
========= ==========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net income $ 2,287 $ 1,920
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization 214 487
Changes in assets and liabilities:
Prepaid expenses and other assets 5 13
Accrued liabilities and deferred income taxes 84 164
Net cash flows from operating activities 2,590 2,584
Net cash flows from financing activities:
Increase in due from affiliates (2,590) (2,584)
--------- ---------
Net cash flows from financing activities (2,590) (2,584)
Net change in cash --- ---
Cash at beginning of period --- ---
---------
Cash at end of period $ --- $ ---
========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
NOTES TO FINANCIAL STATEMENTS
--------------------
1. General:
In the opinion of management of the Salton Sea Royalty LLC (the "Company"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2001 and the results of operations for the three months
ended March 31, 2002 and 2001 and cash flows for the three months ended March
31, 2002 and 2001. The results of operations for the three months ended March
31, 2002 and 2001 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, 2001.
2. Accounting Pronouncements:
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which dictates the accounting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that amortization of goodwill and
indefinite-lived intangible assets be discontinued and that entities disclose
net income for prior periods adjusted to exclude such amortization and related
income tax effects, as well as a reconciliation from the originally reported net
income to the adjusted net income. The Company's amortization consists solely of
goodwill amortization. Following is a reconciliation of net income as originally
reported for the quarters ended March 31, 2002 and 2001, to adjusted net income
(in thousands):
Three months
ended March 31,
2002 2001
Reported net income.....................$ 2,287 $ 1,920
Goodwill amortization................... --- 227
Adjusted net income.....................$ 2,287 $ 2,147
The Company's acquired intangible assets consist of the royalty stream with a
cost of $60.7 million and accumulated amortization of $46 million at March 31,
2002. Amortization expense on the royalty stream was $0.2 million for the three
months ended March 31, 2002. The Company expects amortization expense on the
royalty stream to be $0.6 million for the remainder of fiscal 2002 and $0.9
million for each of the five succeeding fiscal years.
In accordance with the new standard, the Company is continuing to evaluate the
other provisions of the standard including the determination of reporting units,
the allocation of corporate assets and liabilities, including goodwill, and the
impairment testing of goodwill.
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". 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 No.143 is effective for the Company's
fiscal year beginning January 1, 2003. The Company has not quantified the impact
resulting from the adoption of this standard.
In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". The standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. There was no
financial statement impact as a result of the Company's adoption of SFAS No. 144
on January 1, 2002.
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. Due to reduced liquidity, Edison failed to
pay approximately $119 million owed under the power purchase agreements with
certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and
Turbo Projects) for power delivered in the fourth quarter 2000 and the first
quarter 2001. Due to Edison's failure to pay contractual obligations, the
Guarantors had established an allowance for doubtful accounts of approximately
$21.0 million as of December 31, 2001.
On June 20, 2001, the Guarantors' (excluding the Salton Sea V and Turbo
Projects) entered into Agreements Addressing Renewable Energy Pricing and
Payment Issues with Edison ("Settlement Agreements"). On June 22, 2001 Edison
made an initial $11.6 million payment to repay the past due balances under the
Power Purchase Agreements (the "stipulated amounts"). On November 30, 2001, the
Settlement Agreements were amended to reflect when Edison would be required to
make the final payment on past due amounts. The final payment of approximately
$104.6 million, representing the remaining stipulated amounts, was received
March 1, 2002. Following the receipt of Edison's final payment of past due
balances, the Guarantors released the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and Turbo Projects have not received payment for power
sold under the Transaction Agreements during December 2000 and January 2001 of
approximately $3.8 million. The Guarantors have established an allowance for
doubtful accounts for the full amount of this receivable.
Edison has failed to pay approximately $2.8 million of capacity bonus payments
for the months from October 2001 through March 2002. On December 10, 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 capacity bonus payments under the Power Purchase Agreements. The
Guarantors will vigorously pursue collection of the capacity bonus payments.
However, due to Edison's failure to pay these contractual obligations, the
Guarantors have established an allowance for doubtful accounts of $.8 million.
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------
Forward-Looking Statements
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 geothermal resources, uncertainties relating to 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.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Consolidated Financial Statements and accompanying notes. Note 2
to the Consolidated Financial Statements in the Annual Report on Form 10-K
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Estimates are used for,
but not limited to, the accounting for the allowance for doubtful accounts,
impairment of long-lived assets and contingent liabilities. Actual results could
differ from these estimates. The following critical accounting policies are
impacted significantly by judgments, assumptions and estimates used in the
preparation of the Consolidated Financial Statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than the Company's historical experience,
estimates of the recoverability of amounts due could be adversely affected.
Impairment of Long-Lived Assets
The Guarantors' long-lived assets consist primarily of property, plant and
equipment, goodwill and intangible assets that were acquired in business
acquisitions. The Guarantors believe the useful lives we assigned to these
assets, which range from 3 to 40 years, are reasonable. The Guarantors evaluate
the long-lived assets for impairment when events or changes in circumstances
indicate, in management's judgment, that the carrying value of such assets may
not be recoverable. These computations utilized judgments and assumptions
inherent in management's estimate of undiscounted future cash flows to determine
recoverability of an asset. If the Guarantors assumptions about these assets
change as a result of events or circumstances, and the Guarantors believe the
assets may have declined in value, then the Guarantors may record impairment
charges, resulting in lower profits.
Contingent Liabilities
The Guarantors are subject to the possibility of various loss contingencies
arising in the ordinary course of business. The Guarantors consider the
likelihood of the loss or impairment of an asset or the incurrence of a
liability as well as the ability to reasonably estimate the amount of loss in
determining loss contingencies. An estimated loss contingency is accrued when it
is probable that a liability has been incurred or an asset has been impaired and
the amount of loss can be reasonably estimated. The Guarantors regularly
evaluate current information available to determine whether such accruals should
be adjusted.
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"), 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.
Revenues:
The Salton Sea Guarantors' sales of electricity decreased to $23.4 million for
the three months ended March 31, 2002 from $32.1 million for the same period in
2001, a 27.2% decrease. Sales of electricity for the three months ended March
31, 2002 included the impact of a $6.8 million reduction in the allowance for
doubtful accounts. Sales of electricity for the three months ended March 31,
2001 included the impact of a $12.5 million increase in the allowance for
doubtful accounts. Excluding the impact of the adjustments related to the
allowance for doubtful accounts, sales of electricity decreased $28 million or
62% to $16.6 million for the three months ended March 31, 2002 from $44.6
million for the three months March 31, 2001. This decrease was primarily due to
lower rates in 2002, partially offset by outages in 2001, which were more
extensive compared to 2002.
The following data includes the aggregate capacity and electricity production of
the Salton Sea Guarantors:
Three Months Ended
March 31,
2002 2001
Overall capacity factor 89.3% 84.1%
Capacity (NMW) (average) 168.4 168.4
kWh produced (in thousands) 324,800 305,800
The overall capacity factor for the Salton Sea Guarantors increased for the
three months ended March 31, 2002 compared to the same period in 2001 primarily
due to outage timing.
The Partnership Guarantors' sales of electricity decreased to $22.2 million for
the three months ended March 31, 2002 from $23.5 million for the same period in
2001, a 5.5% decrease. Sales of electricity for the three months ended March 31,
2002 included the impact of $14.1 million reduction in the allowance for
doubtful accounts. Sales of electricity for the three months ended March 31,
2001 included the impact of a $28.9 million increase in the allowance for
doubtful accounts. Excluding the impact of the adjustments related to the
allowance for doubtful accounts, sales of electricity decreased $44.3 million or
85% to $8.1 million for the three months ended March 31, 2002 from $52.4 million
for the three months March 31, 2001. This decrease was due to lower rates and
decreased production from scheduled overhauls.
The following data includes the aggregate capacity and electricity production of
the Partnership Guarantors:
Three Months Ended
March 31,
2002 2001
Overall capacity factor 89.3% 101.3%
Capacity (NMW) (average) 158 158
kWh produced (in thousands) 306,000 345,700
The overall capacity factor for the Partnership Guarantors decreased for the
three months ended March 31, 2002 compared to the same period in 2001 due to
scheduled overhauls in 2002.
Edison's Average Avoided Cost of Energy was 2.9 cents per kilowatt-hour and 15.2
cents per kilowatt-hour for the three months ended March 31, 2002 and 2001,
respectively. Estimates of Edison's future Avoided Cost of Energy vary
substantially from year to year. As a result of the Settlement Agreements,
Edison has elected to pay the Guarantors (except Salton Sea Projects IV and V
and the Turbo Project) a fixed energy price in lieu of Edison's Average Avoided
Cost of Energy. The fixed energy price was 3.25 cents/per kilowatt-hour in the
first quarter 2002 and is scheduled to increase to 5.37 cents/per kilowatt hour
effective May 1, 2002 through April 30, 2007.
The Royalty Guarantor revenue increased to $3.7 million for the three months
ended March 31, 2002 from $3.5 million for the same period last year. The
increase relates to additional royalties recognized on the past due interest
payments from Edison.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, decreased to $11.9 million for the
three months ended March 31, 2002 from $13.4 for the same period in 2001. The
decrease was due to lower royalty expenses resulting from lower revenues and
lower brine disposal costs.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $18.3 million
for the three months ended March 31, 2002 from $14.4 million for the same period
in 2001. The increase was due to overhaul costs in 2002.
The Royalty Guarantors' operating expenses increased to $1.1 million for the
three months ended March 31, 2002 from $0.9 million for the same period in 2001.
This increase was due to higher royalty costs resulting from higher revenue.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization decreased to $4.3
million for the three months ended March 31, 2002 from $4.4 million for the same
period of 2001, due to the discontinuation of goodwill amortization in 2002.
The Partnership Guarantors' depreciation and amortization increased to $6.8
million for the three months ended March 31, 2002 from $5.1 million for the same
period in 2001. The increase was due primarily to the upgraded brine handling
system, partially offset by the discontinuation of goodwill amortization in 2002
of $0.9 million.
The Royalty Guarantors' amortization decreased to $0.2 million for the three
months ended March 31, 2002 compared to $0.5 million for the same period of
2001. The decrease was due primarily to the discontinuation of goodwill
amortization in 2002 of $0.2 million.
Interest Expense:
The Salton Sea Guarantors' interest expense net of capitalized amounts,
increased to $5.2 million for the three months ended March 31, 2002 from $3.8
million for the same period in 2001. The increase was due to lower capitalized
interest on the minerals extraction process partially offset by reduced
indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased to $1.9 million for the three months ended March 31, 2002 from $0.1
million for the same period in 2001. The increase was due to reduced capitalized
interest on the minerals extraction process.
The Royalty Guarantors' interest expense decreased to $0.1 million for the three
months ended March 31, 2002 from $0.2 million from the same period in 2001. The
decrease was due to reduced indebtedness.
Income Tax Provision:
The Partnership Guarantors income tax provision decreased to a benefit of $1.3
million for the three months ended March 31, 2002 from an expense of $1.4
million for the same period in 2001. This decrease was primarily due to a lower
pre-tax income. Income taxes will be paid by the parent of the Guarantors from
distributions to the parent company by the Guarantors, which occur after
operating expenses and debt service.
Cumulative Effect of Accounting Policy Change:
On January 1, 2001, the Guarantors changed their policy of accounting for the
overhaul and well workover costs. These costs, which have historically been
accounted for using the deferral method, are expensed as incurred. The Salton
Sea Guarantors recorded a cumulative effect of $8.7 million. The Partnership
Guarantors recorded a cumulative effect of $8.3 million, net of tax.
Net Income:
The Salton Sea Funding Corporation's net loss for the three months ended March
31, 2002 was not significant compared to a loss of $0.1 million for the same
period in 2001. The net loss primarily represents interest income and expense,
net of applicable tax, and the Salton Sea Funding Corporation's 1% equity in
earnings (losses) of the Guarantors.
The Salton Sea Guarantors' net income increased to $2.5 million for the three
months ended March 31, 2002 compared to $1.9 million for the same period of
2001.
The Partnership Guarantors' net loss decreased to $2.9 million for the three
months ended March 31, 2002 compared to $5.6 million for the same period of
2001.
The Royalty Guarantors' net income increased to $2.3 million for the three
months ended March 31, 2002 compared to $1.9 million for the same period of
2001.
Related Party Transactions
On September 29, 2000, Salton Sea Power L.L.C. ("Salton Sea Power") and CE Turbo
LLC ("CE Turbo") entered into an agreement to sell all available power from the
Salton Sea V Project and Turbo Project to EPME. Under the terms of the
agreement, EPME purchased and sold available power on behalf of Salton Sea Power
and CE Turbo, into the California ISO markets. The purchase price for the
available power shall be equivalent to the value actually received by EPME for
the sale of such power, including renewable premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and Turbo
Project to EPME. Under the terms of the agreement, at the option of Salton Sea
Power and CE Turbo, EPME purchased all available power from the Salton Sea V
Project and Turbo Project based on day ahead price quotes received from EPME.
On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into a
Transaction Agreement to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 28, 2001, the Imperial Valley Projects
(excluding the Salton Sea V Project and Turbo Project) ceased selling available
power to EPME and resumed power sales to Edison.
Pursuant to these agreements, sales to EPME from the Company totaled $2.4
million and $16.9 million for the three months ended March 31, 2002 and 2001,
respectively. As of March 31, 2002 and December 31, 2001, accounts receivable
from EPME were $1.6 million and $14.2 million, respectively.
Liquidity and Capital Resources
The Salton Sea Guarantors' cash flows from operating activities increased to
$32.2 million for the three months ended March 31, 2002 from $4.5 million for
the same period in 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 Project revenue and interest earned on funds on
deposit. The increase was primarily due to the receipt of past due balances from
Edison.
The Partnership Guarantors' cash flows from operating activities increased to
$50.9 million for the three months ended March 31, 2002 from from a net cash use
of $4.4 million for the same period in 2001. The operating Partnership
Guarantors' primary source of revenue is payments received pursuant to long term
power sales agreements with Edison, other than Turbo Project and Zinc Recovery
Project revenue and interest earned on funds on deposit. The increase was
primarily due to the receipt of past due balances from Edison.
The Royalty Guarantors' cash flow from operations was $2.6 million for the
periods ended March 31, 2002 and 2001. The Royalty Guarantors' only source of
revenue is royalties received pursuant to resource lease agreements with the
Partnership Projects.
If Edison pays the projects, these payments, for each of the Guarantors, are
expected to be sufficient to fund operating and maintenance expenses, payments
of interest and principal on the Securities, projected capital expenditures and
debt service reserve fund requirements.
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. Due to
reduced liquidity, Edison failed to pay approximately $119 million owed under
the power purchase agreements with certain Guarantors (Imperial Valley Projects,
excluding the Salton Sea V and Turbo Projects) for power delivered in the fourth
quarter 2000 and the first quarter 2001. Due to Edison's failure to pay
contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $21.0 million as of December 31, 2001.
On June 20, 2001, the Guarantors' (excluding Salton Sea V and CE Turbo) entered
into Agreements Addressing Renewable Energy Pricing and Payment Issues with
Edison ("Settlement Agreements"). On June 22, 2001 Edison made an initial $11.6
million payment to repay the past due balances under the Power Purchase
Agreements (the "stipulated amounts"). On November 30, 2001, the Settlement
Agreements were amended to reflect when Edison would be required to make the
final payment on past due amounts. The final payment of approximately $104.6
million, representing the remaining stipulated amounts, was received March 1,
2002. Following the receipt of Edison's final payment of past due balances, the
Guarantors released the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and Turbo Projects have not received payment for power
sold under the Transaction Agreements during December 2000 and January 2001 of
approximately $3.8 million. The Guarantors have established an allowance for
doubtful accounts for the full amount of this receivable.
Edison has failed to pay approximately $2.8 million of capacity bonus payments
for the months from October 2001 through March 2002. On December 10, 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 capacity bonus payments under the Power Purchase Agreements. The
Guarantors will vigorously pursue collection of the capacity bonus payments.
However, due to Edison's failure to pay the contractual obligations, the
Imperial Valley Projects have established an allowance for doubtful accounts of
approximately $.8 million.
The Salton Sea Guarantors' cash flow used in investing activities decreased to
$2.6 million for the three months ended March 31, 2002 from $2.7 million for the
same period in 2001. Capital expenditures are the primary component of investing
activities.
The Partnership Guarantors' cash flow used in investing activities decreased to
$5.2 million for the three months ended March 31, 2002 from $5.4 million for the
same period in 2001. Capital expenditures are the primary component of investing
activities.
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 sites of the Imperial Valley Projects 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.
Total project costs of the Zinc Recovery Project are expected to be
approximately $217.9 million, net of payments for liquidated damages, which is
being funded by $140.5 million of debt and the balance from equity
contributions. The Zinc Recovery Project has incurred $165.0 million, net of
payments for liquidated damages received, of such costs through March 31, 2002.
The Zinc Recovery Project was being constructed by 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 Partnership Guarantors
drew $29.6 million under the EPC Contract Letter of Credit on July 20, 2001. The
Partnership 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.
Salton Sea Funding Corporation's net cash flows provided from financing
activities increased to $95.0 million for the three months ended March 31, 2002
from a net cash use of $5.1 million for the same period in 2001. Salton Sea
Guarantors' net cash flows used in financing activities increased to $29.6
million from $1.8 million for the same period in 2001. Partnership Guarantors'
net cash use in financing activities increased to $43.1 million for the three
months ended March 31, 2002 from a net cash provided of $9.8 million for the
same period in 2001. The changes in net cash flows from financing activities are
primarily the result of the receipt of the past due balances from Edison. These
receipts were deposited into cash accounts at Salton Sea Funding Corporation and
are recorded as amounts due to the Salton Sea and Partnership Guarantors.
Environmental Liabilities
The Guarantors are subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Guarantors' existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Guarantors' cost of waste disposal and (vi) reducing the
reliability of service provided by the Guarantors and the amount of energy
available from the Guarantors' facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Guarantors in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of March 31, 2002 and December 31, 2001, the
Guarantors' environmental liabilities recorded on the balance sheet were not
material.
Inflation
Inflation has not had a significant Impact on the Guarantors' cost structure.
Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in the market risk from the information
provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk
of the Funding Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
Contractual Obligations and Commercial Commitments
There have been no material changes in the contractual obligations and
commercial commitments from the information provided in Item 7 of the Funding
Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.
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:
Not applicable.
(b) Reports on Form 8-K:
Current Report filed March 4, 2002, reporting of receipt of past
due payments from Southern California Edison.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf and on behalf of the other registrants by the undersigned thereunto duly
authorized, in the City of Omaha, State of Nebraska, on this 14th day of May
2002.
SALTON SEA FUNDING CORPORATION
Date: May 14, 2002 /s/ Paul J. Leighton
By: Paul J. Leighton
Secretary