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 June 30, 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 August 14, 2002.
SALTON SEA FUNDING CORPORATION
Form 10-Q
June 30, 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, June 30, 2002 and December 31, 2001 5
Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001 6
Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 10
Combined Balance Sheets, June 30, 2002 and December 31, 2001 11
Combined Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001 12
Combined Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 13
Notes to Combined Financial Statements 14
PARTNERSHIP GUARANTORS
Independent Accountants' Report 17
Combined Balance Sheets, June 30, 2002 and December 31, 2001 18
Combined Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001 19
Combined Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 20
Notes to Combined Financial Statements 21
SALTON SEA ROYALTY LLC
Independent Accountants' Report 25
Balance Sheets, June 30, 2002 and December 31, 2001 26
Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001 27
Statements of Cash Flows for the Six Months Ended
June 30, 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 June 30, 2002, and the related statements of
operations for the three-month and six-month periods ended June 30, 2002 and
2001, and the related statements of cash flows for the six-month periods ended
June 30, 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 the 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 2, 2002
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 7,783 $ 4,361
Restricted cash 35,964 2,949
Accrued interest receivable and other assets 3,325 3,351
Current portion of secured project notes
from Guarantors 28,329 28,572
__________ __________
Total current assets 75,401 39,233
Secured project notes from Guarantors 477,635 491,678
Investment in 1% of net assets of
Guarantors 9,630 9,669
__________ __________
Total assets $ 562,666 $ 540,580
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued interest $ 3,188 $ 3,333
Due to affiliates 40,402 3,899
Current portion of long term debt 28,329 28,572
__________ __________
Total current liabilities 71,919 35,804
Senior secured notes and bonds 477,635 491,678
__________ __________
Total liabilities 549,554 527,482
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 5,449 5,366
Retained earnings 7,663 7,732
__________ __________
Total stockholder's equity 13,112 13,098
__________ __________
Total liabilities and stockholder's equity $ 562,666 $ 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Interest income $ 10,026 $ 10,407 $ 20,073 $ 20,736
Equity in earnings (loss) of Guarantors (115) (3) (122) 187
_________ ________ _______ _______
Total revenues 9,911 10,404 19,951 20,923
_________ ________ _______ _______
Expenses:
General and administrative expenses 219 174 446 463
Interest expense 9,797 10,230 19,622 20,493
_________ ________ _______ _______
Total expenses 10,016 10,404 20,068 20,956
_________ ________ _______ _______
Loss before income taxes (105) --- (117) (33)
Income tax benefit (43) --- (48) (14)
_________ ________ _______ _______
Loss before cumulative effect
of accounting change $ (62) $ --- $ (69) $ (19)
Cumulative effect of accounting
change, net of tax --- --- --- (100)
_________ ________ _______ _______
Net loss $ (62) $ --- $ (69) $ (119)
_________ ________ _______ _______
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net loss $ (69) $ (119)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Equity in (earnings) loss of Guarantors. net of contributions 122 (187)
Equity in cumulative effect of accounting change --- 100
Changes in assets and liabilities:
Prepaid expenses and other assets 26 48
Accrued liabilities (145) (129)
___________ ___________
Net cash flows from operating activities (66) (287)
___________ ___________
Cash flows from investing activities:
Principal repayments of secured project
notes from Guarantors 14,286 11,829
___________ ___________
Net cash flows from investing activities 14,286 11,829
___________ ___________
Cash flows from financing activities:
Increase in due to affiliates 36,503 21,197
Increase in restricted cash (33,015) ---
Repayment of senior secured notes and bonds (14,286) (11,830)
___________ ___________
Net cash flows from financing activities (10,798) 9,367
__________ __________
Net change in cash 3,422 20,909
Cash at the beginning of period 4,361 8,467
___________ ___________
Cash at the end of period $ 7,783 $ 29,376
========== ==========
Supplemental disclosures:
Interest paid $ 19,800 $ 20,677
========== ==========
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 June 30, 2002 and the results of operations
for the three and six months ended June 30, 2002 and 2001 and cash flows for the
six-months ended June 30, 2002 and 2001. The results of operations for the three
and six-months ended June 30, 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 Policies:
On January 1, 2002, the Funding Corporation adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes the accounting for acquired goodwill
and other intangible assets and provides goodwill and indefinite-lived
intangible assets will not be amortized, but will be tested for impairment on an
annual basis. 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 three and six-months ended June 30, 2002 and 2001, to adjusted net loss (in
thousands):
Three Months Six months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Reported net income (loss) $ (62) $ --- $ (69) $ (119)
Goodwill amortization --- 14 --- 29
______ _____ _____ _____
Adjusted net income (loss) $ (62) $ 14 $ (69) $ (90)
====== ===== ===== =====
In accordance with SFAS No. 142, the Guarantors have determined their reporting
units and completed their transitional impairment testing of goodwill in the
second quarter primarily using a discounted cash flow methodology as of January
1, 2002. The results of the transitional impairment tests indicated potential
goodwill impairment at the Salton Sea and Partnership Guarantors. The Guarantors
will determine the potential impairment charge, if any, and record such charge
in the financial statements no later than the period ending December 31, 2002.
The impairment charge will be recorded as a cumulative effect of change in
accounting as of January 1, 2002.
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.
The payment 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, LLC 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 $3.9 million of capacity bonus payments
for the months from October 2001 through May 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, certain
Guarantors have established an allowance for doubtful accounts of approximately
$1.3 million as of June 30, 2002.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Salton Sea
Guarantors as of June 30, 2002, and the related combined statements of
operations for the three-month and six-month periods ended June 30, 2002 and
2001, and the related statements of cash flows for the six-month periods ended
June 30, 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 2, 2002
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2002 2001
(unaudited)
ASSETS
Accounts receivable, net of allowance of $3,421 and
$9,829, respectively $ 16,526 $ 36,647
Prepaid expenses and other assets 4,407 5,314
____________ _____________
Total current assets 20,933 41,961
Property, plant, contracts and equipment, net 538,233 543,719
Excess of cost over fair value of net assets
acquired, net 44,270 44,270
____________ _____________
Total assets $ 603,436 $ 629,950
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 1,508 $ 2,862
Accrued liabilities 6,640 9,414
Accrued interest 1,604 1,721
Current portion of long term debt 21,625 20,487
____________ _____________
Total current liabilities 31,377 34,484
Due to affiliates 24,771 27,109
Senior secured project note 235,034 246,412
____________ _____________
Total liabilities 291,182 308,005
Commitment and contingencies (Note 3)
Total Guarantors' equity 312,254 321,945
____________ _____________
Total liabilities and Guarantors' equity $ 603,436 $ 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Sales of electricity $ 16,093 $ 22,864 $ 39,498 $ 54,994
Interest and other income --- 977 430 977
_________ _________ _________ _________
Total revenues 16,093 23,841 39,928 55,971
_________ _________ _________ _________
Expenses:
Operating, general and
administration 16,445 14,209 28,335 27,566
Depreciation and amortization 6,690 4,640 10,965 9,010
Interest expense 5,157 5,814 10,319 11,304
Less capitalized interest --- --- --- (1,692)
_________ _________ _________ _________
Total expenses 28,292 24,663 49,619 46,188
_________ _________ _________ _________
Income (loss) before cumulative
effect of accounting change (12,199) (822) (9,691) 9,783
Cumulative effect of accounting change --- --- --- (8,743)
_________ _________ _________ _________
Net income (loss) $ (12,199) $ (822) $ (9,691) $ 1,040
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ (9,691) $ 1,040
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Cumulative effect of change in accounting principle --- 8,743
Depreciation and amortization 10,965 9,010
Changes in assets and liabilities:
Accounts receivable 20,121 (2,825)
Prepaid expenses and other assets 907 (5,070)
Accounts payable and accrued liabilities (4,245) (1,791)
____________ _________
Net cash flows from operating activities 18,057 9,107
____________ _________
Capital expenditures (5,479) (3,315)
Decrease in restricted cash --- 17
____________ __________
Net cash flows from investing activities (5,479) (3,298)
____________ __________
Cash flows from financing activities:
Increase (decrease) in due to affiliates (2,338) 2,850
Repayment of senior secured project note (10,240) (8,659)
____________ __________
Net cash flows from financing activities (12,578) (5,809)
____________ __________
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 combined financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of June 30, 2002 and the results of operations for the
three and six-months ended June 30, 2002 and 2001 and cash flows for the
six-months ended June 30, 2002 and 2001. The results of operations for the
three-months ended June 30, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full year.
The unaudited combined financial statements shall be read in conjunction with
the combined 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:
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 six months ended June 30, 2001.
On January 1, 2002, the Guarantors adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes the accounting for acquired goodwill and
other intangible assets, and provides goodwill and indefinite-lived intangible
assets will not be amortized, but will be tested for impairment on an annual
basis. The Guarantor's related amortization consists solely of goodwill
amortization. Following is a reconciliation of net income as originally reported
for the three and six-months ended June 30, 2002 and 2001, to adjusted net
income (loss) (in thousands):
Three Months Six months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Reported net income (loss) $ (12,199) $ (822) $ (9,691) $ 1,040
Goodwill amortization --- 326 --- 652
_____ _____ _____ _____
Adjusted net income (loss) $ (12,199) $ (496) $ (9,691) $ 1,692
===== ===== ===== =====
The Guarantors' acquired intangible assets consists of power purchase contracts
(the "contracts") with a cost of $7.9 million and accumulated amortization of
$3.0 million at June 30, 2002, and are included in property, plant, contracts
and equipment in the accompanying combined balance sheet. Amortization expense
on the contracts was $0.2 million for the six months ended June 30, 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 SFAS No. 142, the Guarantors have determined their reporting
units and completed their transitional impairment testing of goodwill in the
second quarter primarily using a discounted cash flow methodology as of January
1, 2002. The results of the transitional impairment tests indicated potential
goodwill impairment at the Guarantors. The Guarantors will determine the
potential impairment charge, if any, and record such charge in the financial
statements no later than the period ending December 31, 2002. The impairment
charge will be recorded as a cumulative effect of change in accounting as of
January 1, 2002.
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.
The payment 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, LLC 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 $1.1 million of capacity bonus payments
for the months from October 2001 through May 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 $.4 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 June 30, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were not material.
4. 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 was
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, the Guarantors 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 Guarantors (excluding the Salton Sea V
Project) ceased selling available power to EPME and resumed power sales to
Edison.
Pursuant to these agreements, sales to EPME from the Guarantors totaled $.7
million and $39.2 million for the three-months and $2.9 million and $48.8
million for the six-months ended June 30, 2002 and 2001, respectively. As of
June 30, 2002 and December 31, 2001, accounts receivable from EPME were $.4
million and $.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 June 30, 2002, and the related combined statements of
operations for the three-month and six-month periods ended June 30, 2002 and
2001, and the related statements of cash flows for the six-month periods ended
June 30, 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 2, 2002
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 269 $ -
Accounts receivable, net of allowance of $1,720 and
$14,925, respectively 19,485 59,384
Prepaid expenses and other assets 17,458 19,358
________ ________
Total current assets 37,212 78,742
Restricted cash 5,331 21,282
Property, plant, contracts and equipment, net 659,257 633,574
Management fee, net 69,056 70,806
Due from affiliates 48,784 13,072
Excess of cost over fair value of net assets
acquired, net 120,866 120,866
________ _________
Total assets $ 940,506 $ 938,342
======== =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,029 $ 5,480
Accrued liabilities 18,054 12,853
Accrued interest 1,556 1,605
Current portion of long term debt 4,822 4,625
________ _________
Total current liabilities 26,461 24,563
Senior secured project notes 241,607 244,117
Deferred income taxes 100,355 102,083
________ _________
Total liabilities 368,423 370,763
Commitments and contingencies (Note 3)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 395,925 387,663
Retained earnings 176,155 179,913
________ _________
Total Guarantors' equity 572,083 567,579
________ _________
Total liabilities and Guarantors' equity $ 940,506 $ 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Sales of electricity $ 20,296 $ 20,076 $ 42,495 $ 43,570
Interest and other income 129 905 665 940
_________ _________ _________ _________
Total revenues 20,425 20,981 43,160 44,510
_________ _________ _________ _________
Expenses:
Operating, general and
administration 14,419 12,278 32,705 26,672
Depreciation and amortization 5,365 6,937 12,152 12,018
Interest expense 4,782 4,829 9,536 9,622
Less capitalized interest (2,910) (2,750) (5,748) (7,483)
_________ _________ _________ _________
Total expenses 21,656 21,294 48,645 40,829
_________ _________ _________ _________
Income (loss) before income taxes (1,231) (313) (5,485) 3,681
Provision (benefit) for income taxes (387) (109) (1,727) 1,269
_________ _________ _________ _________
Income (loss) before cumulative
effect of accounting change (844) (204) (3,758) 2,412
Cumulative effect of accounting
change, net of tax --- --- --- (8,254)
_________ _________ _________ _________
Net loss $ (844) $ (204) $ (3,758) $ (5,842)
========= ========= ========== =========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net loss $ (3,758) $ (5,842)
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 12,152 12,018
Deferred income taxes (1,728) 1,269
Changes in assets and liabilities:
Accounts receivable 39,899 (17,054)
Prepaid expenses and other assets 1,096 (4,073)
Accounts payable and accrued
liabilities 1,701 3,493
______________ _____________
Net cash flows from operating activities 49,362 (1,935)
______________ _____________
Cash flows from investing activities:
Capital expenditures (12,393) (7,751)
Capital expenditures - construction (22,793) (11,259)
Decrease in restricted cash 15,951 106
Management fee 333 741
______________ _____________
Net cash flows from investing activities (18,902) (18,163)
______________ _____________
Cash flows from financing activities:
Repayments of senior secured project notes (2,313) (954)
Decrease (increase) in due from affiliates (36,140) 21,052
Equity contribution 8,262 ---
Net cash flows from financing activities (30,191) 20,098
______________ _____________
Net change in cash 269 ---
Cash at beginning of period --- ---
______________ _____________
Cash at end of period $ 269 $ ---
============== =============
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 June 30, 2002 and the results of operations for the
three and six-months ended June 30, 2002 and 2001 and cash flows for the
six-months ended June 30, 2002 and 2001. The results of operations for the three
and six-months ended June 30, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full year.
The unaudited combined financial statements shall be read in conjunction with
the combined financial statements included in the Funding Corporation's annual
report on Form 10-K for the year ended December 31, 2001.
2. Accounting Policies:
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 six months ended June 30, 2001.
On January 1, 2002, the Guarantors adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes the accounting for acquired goodwill and
other intangible assets and provides goodwill and indefinite-lived intangible
assets will not be amortized, but will be tested for impairment on an annual
basis. 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 three and six-months ended June 30, 2002
and 2001, to adjusted net income (loss) (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Reported net income (loss) $ (844) $ (204) $ (3,758) $ (5,842)
Goodwill amortization --- 891 --- 1,782
_____ ______ _____ _____
Adjusted net income (loss) $ (844) $ 687 $ (3,758) $ (4,060)
===== ====== ===== =====
The following table summarizes the acquired intangible assets as of June 30,
2002 (in thousands):
Gross Carrying Accumulated
Amount Amortization
______________ ____________
Amortized Intangible Assets:
Power Purchase Contracts $ 123,002 $ 96,110
Patented Technology 46,290 14,421
______________ ____________
Total $ 169,292 $ 110,531
============== ============
Amortization expense on acquired intangible assets was $1.8 million for the
six-months ended June 30, 2002. The Guarantors expect amortization expense on
acquired intangible assets to be $1.8 million for the remainder of fiscal 2002
and $3.5 million for each of the five succeeding fiscal years.
In accordance with SFAS No. 142, the Guarantors have determined their reporting
units and completed their transitional impairment testing of goodwill in the
second quarter primarily using a discounted cash flow methodology as of January
1, 2002. The results of the transitional impairment tests indicated potential
goodwill impairment at the Guarantors. The Guarantors will determine the
potential impairment charge, if any, and record such charge in the financial
statements no later than the period ending December 31, 2002. The impairment
charge will be recorded as a cumulative effect of change in accounting as of
January 1, 2002.
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.
The payment 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.
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 $2.7 million of capacity bonus payments
for the months from October 2001 through May 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 $.9 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 default under the Zinc Recovery EPC Contract, the
Guarantors drew $29.6 million under the EPC Contract Letter of Credit ("LOC") on
July 20, 2001 and claimed the retainage and balance of the contract price. The
LOC draw, retainage and balance of the contract price have been accounted for as
a reduction of the capitalized costs of the project. The Guarantors have entered
into a time and materials engineering, procurement 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 balance of the contract price, the retainage and by drawing on the
LOC.
On May 23, 2002, Minerals LLC and Kvaerner entered into a Settlement Agreement.
Under the terms of the agreement, Minerals retained the amounts drawn under the
LOC, the EPC retainage amounts and the EPC contract balance and will pay to
Kvaerner three equal installments of $2.25 million payable in January of 2003,
2004 and 2005.
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 June 30, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were not material.
4. 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 was
equivalent to the value actually received by EPME for the sale of such power,
including renewable premiums.
On January 17, 2001, CE Turbo 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, the Guarantors 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 Guarantors (excluding the 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 million
and $30.8 million for the three-months and $.6 million and $49.5 million for the
six months ended June 30, 2002 and 2001, respectively. As of June 30, 2002 and
December 31, 2001, accounts receivable from EPME were $.5 million and $.1
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 June 30, 2002, and the related statements of operations for the three-month
and six-month periods ended June 30, 2002 and 2001, and the related statements
of cash flows for the six-month periods ended June 30, 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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 2, 2002
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
2002 2001
(unaudited)
ASSETS
Prepaid expenses and other assets $ 22 $ 31
__________ __________
Total current assets 22 31
Royalty stream, net 14,438 14,865
Excess of cost over fair value of net assets
acquired, net 30,464 30,464
Due from affiliates 36,647 33,940
__________ __________
Total assets $ 81,571 $ 79,300
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued interest $ 17 $ 29
Current portion of long term debt 1,882 3,460
__________ __________
Total current liabilities 1,899 3,489
Senior secured project note 995 1,147
__________ __________
Total liabilities 2,894 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 77,116 73,103
__________ __________
Total equity 78,677 74,664
__________ __________
Total liabilities and equity $ 81,571 $ 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Royalty income $ 2,532 $ 2,376 $ 6,214 $ 5,839
Expenses:
Operating, general and
administrative expenses 533 650 1,625 1,529
Amortization of royalty stream
and goodwill 213 488 427 975
Interest expense 60 166 149 343
_________ ________ __________ ________
Total expenses 806 1,304 2,201 2,847
_________ ________ __________ ________
Net income $ 1,726 $ 1,072 $ 4,013 $ 2,992
========= ======== ========== ========
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income $ 4,013 $ 2,992
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization 427 975
Changes in assets and liabilities:
Prepaid expenses and other assets 9 26
Accrued liabilities (12) (16)
_________ __________
Net cash flows from operating activities 4,437 3,977
_________ __________
Net cash flows from financing activities:
Increase in due from affiliates (2,707) (1,760)
Repayment of senior secured project note (1,730) (2,217)
_________ __________
Net cash flows from financing activities (4,437) (3,977)
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 Salton Sea Royalty LLC (the "Company"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2002 and the results of operations for the three and
six-months ended June 30, 2002 and 2001 and cash flows for the six-months ended
June 30, 2002 and 2001. The results of operations for the three and six months
ended June 30, 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 Policies:
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes the accounting for acquired goodwill and
other intangible assets and provides goodwill and indefinite-lived intangible
assets will not be amortized, but will be tested for impairment on an annual
basis. The Company's related amortization consists soley of goodwill
amortization. Following is a reconciliation of net income as originally reported
for the three and six-months ended June 30, 2002 and 2001, to adjusted net
income (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Reported net income $ 1,726 $ 1,072 $ 4,013 $ 2,992
Goodwill amortization --- 227 --- 454
________ ______ _______ _______
Adjusted net income $ 1,726 $ 1,299 $ 4,013 $ 3,446
======== ====== ======= =======
The Company's acquired intangible assets consist of the royalty stream with a
cost of $60.5 million and accumulated amortization of $46 million at June 30,
2002. Amortization expense on the royalty stream was $0.4 million for the
six-months ended June 30, 2002. The Company expects amortization expense on the
royalty stream to be $0.4 million for the remainder of fiscal 2002 and $0.9
million for each of the five succeeding fiscal years.
In accordance with SFAS No. 142, the Company has determined its reporting units
and completed the transitional impairment testing of goodwill in the second
quarter primarily using a discounted cash flow methodology as of January 1,
2002. No impairment was indicated as a result of the transitional impairment
test.
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.
The payment 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.
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 Combined Financial Statements and accompanying notes. Note 2 to
the Combined Financial Statements in the Annual Report on Form 10-K describes
the significant accounting policies and methods used in the preparation of the
Combined 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 Combined
Financial Statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Guarantors' 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 Guarantors' 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 with useful lives, which range from 3
to 40 years. The Guarantors believe the useful lives of its long-lived assets
are reasonable. The Guarantors evaluate goodwill impairment on an annual basis.
The Guarantors evaluate the long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Triggering events include a significant change in the extent or
manner in which long-lived assets are being used or in its physical condition,
in legal factors, or in the business climate that could affect the value of the
long-lived assets, including changes in regulation. The interpretation of such
events requires judgment from management as to whether such an event has
occurred and is required. If an event occurs that could affect the carrying
value of the asset and management does not identify it as a triggering event,
future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Guarantors expect to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value which is based on discounted estimated cash flows from the future use
of the asset.
The estimated cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Guarantors would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
In accordance with SFAS No. 142, the Guarantors have determined their reporting
units and completed their transitional impairment testing of goodwill in the
second quarter primarily using a discounted cash flow methodology as of January
1, 2002. The results of the transitional impairment tests indicated potential
goodwill impairment at the Salton Sea and Partnership Guarantors. The Guarantors
will determine the potential impairment charge, if any, and record such charge
in the financial statements no later than the period ending December 31, 2002.
The impairment charge will be recorded as a cumulative effect of change in
accounting as of January 1, 2002.
Contingent Liabilities
The Guarantors are subject to the possibility of various loss contingencies,
including tax, legal and environmental, arising in the ordinary course of
business. The Guarantors consider the likelihood of the loss 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 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 $16.1 million for
the three months ended June 30, 2002 from $22.9 million for the same period in
2001, a 29.7% decrease. This decrease was due to lower production and rates in
2002, and a $.9 million write-off related to prior year accounts receivables.
For the six months ended June 30, 2002 sales of electricity decreased to $39.5
million from $55.0 million for the same period in 2001, a 28.2% decrease. Sales
of electricity for the six-months ended June 30, 2002 included the impact of a
$6.8 million reduction in the allowance for doubtful accounts. Sales of
electricity for the six months ended June 30, 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 $34.3 million or 51.2% to $32.7 million for the six
months ended June 30, 2002 from $67.0 million for the six-months June 30, 2001.
This decrease was primarily due to lower rates and production in 2002.
The following data includes the aggregate capacity and electricity production of
the Salton Sea Guarantors:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Overall capacity factor 63.2% 75.8% 76.2% 79.9%
Capacity (NMW) (average) 168.4 168.4 168.4 168.4
kWh produced (in thousands) 232,400 278,900 557,200 584,700
The overall capacity factor for the Salton Sea Guarantors decreased for the
three and six months ended June 30, 2002 compared to the same period in 2001
primarily due to overhauls and other maintenance. The 2002 overhauls include an
uncontrollable force event at the Salton Sea II Project. Salton Sea II's 10 MW
turbine went out of service on March 25th and is expected to be placed back into
service in December. The Guarantors expect to collect lost revenues under the
Salton Sea II PPA and through insurance coverage excluding deductibles.
The Partnership Guarantors' sales of electricity increased to $20.3 million for
the three months ended June 30, 2002 from $20.1 million for the same period in
2001, a 1.0% increase. This increase was due to higher production offset by
lower rates in 2002 and a write off related to prior year accounts receivable.
For the six-months ended June 30, 2002 sales of electricity decreased to $42.5
million from $43.6 million for the same period in 2001, a 2.5% decrease. Sales
of electricity for the six months ended June 30, 2002 included the impact of
$14.1 million reduction in the allowance for doubtful accounts. Sales of
electricity for the six months ended June 30, 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 $44.1 million or 60.8% to $28.4 million for the six
months ended June 30, 2002 from $72.5 million for the six months ended June 30,
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Overall capacity factor 106.8% 99.4% 98.3% 100.3%
Capacity (NMW) (average) 158 158 158 158
kWh produced (in thousands) 368,600 342,900 674,602 688,602
The overall capacity factor for the Partnership Guarantors increased for the
three months ended June 30, 2002 compared to the same period in 2001 due to
higher plant availability. The decrease for the six months ended June 30, 2002
compared to 2001 was due to scheduled overhauls in 2002.
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 from January through April 30,
2002 and increased to 5.37 cents/per kilowatt hour effective May 1, 2002 through
April 30, 2007. Edison's Average Avoided Cost of Energy was 8.1 cents per
kilowatt-hour for the three months and 11.6 cents per kilowatt-hour for the
six-months ended June 30, 2001, respectively.
The Royalty Guarantor revenue increased to $2.5 million for the three months
ended June 30, 2002 from $2.4 million for the same period last year. The
increase relates to higher royalties based on higher revenue at the Partnership
Guarantor. For the six months ended June 30, 2002 revenue increased to $6.2
million from $5.8 million for the same period in 2001. 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, increased to $16.4 million for the
three months ended June 30, 2002 from $14.2 million for the same period in 2001.
For the six months ended June 30, 2002 operating expenses increased to $28.3
million from $27.6 million for the same period in 2001. The increases were due
to higher costs from an overhaul offset by lower royalty expenses of
approximately $.5 million resulting from lower revenues.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $14.4 million
for the three months ended June 30, 2002 from $12.3 million for the same period
in 2001. For the six months ended June 30, 2002 operating expenses increased to
$32.7 million from $26.7 million for the same period in 2001. The increases were
due to higher overhaul costs in 2002.
The Royalty Guarantors' operating expenses decreased to $.5 million for the
three months ended June 30, 2002, from $.7 million for the same period in 2001.
For the six months ended June 30, 2002 operating expenses increased to $1.6
million from $1.5 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 increased to $6.7
million for the three months ended June 30, 2002 from $4.6 million for the same
period of 2001. For the six months ended June 30, 2002 depreciation and
amortization increased to $11.0 million from $9.0 million for the same period in
2001. These increases were due to significant capital additions and the write
off of an abandoned project, partially offset by the discontinuation of goodwill
amortization in 2002 of $ 0.7 million.
The Partnership Guarantors' depreciation and amortization decreased to $5.4
million for the three months ended June 30, 2002 from $6.9 million for the same
period in 2001. The decrease was due to the discontinuation of goodwill
amortization in 2002 of $.9 million. For the six months ended June 30, 2002
depreciation and amortization increased to $12.2 million from $12.0 million for
the same period in 2001. The increase was due primarily to capital additions,
partially offset by the discontinuation of goodwill amortization in 2002 of $1.8
million.
The Royalty Guarantors' amortization decreased to $0.2 million for the three
months ended June 30, 2002 compared to $.5 million for the same period of 2001.
For the six months ended June 30, 2002, amortization decreased to $.4 million
from $1.0 million for the same period in 2001. The decreases were due to the
discontinuation of goodwill amortization in 2002.
Interest Expense:
The Salton Sea Guarantors' interest expense, decreased to $5.2 million for the
three months ended June 30, 2002 from $5.8 million for the same period in 2001.
The decrease was due to reduced indebtedness. For the six months ended June 30,
2002 interest expense, net of capitalized amounts, amounts increased to $10.3
million from $9.6 million for the same period in 2001. The increase was due to
the discontinuation of capitalized interest on the minerals extraction process
partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
decreased to $1.9 million for the three months ended June 30, 2002 from $2.1
million for the same period in 2001. The decrease was due to reduced
indebtedness. For the six months ended June 30, 2002 interest expense, net of
capitalized amounts, increased to $3.8 million from $2.1 million for the same
period in 2001. The increase was due to discontinuation of capitalized interest
on the minerals extraction process.
The Royalty Guarantors' interest expense decreased to $0.1 million for the three
months ended June 30, 2002 from $0.2 million from the same period in 2001. For
the six months ended June 30, 2002 interest expense decreased to $.2 million
from $.3 million from the same period in 2001. The decrease was due to reduced
indebtedness.
Income Tax Provision:
The Partnership Guarantors' income tax benefit increased to $.4 million for the
three months ended June 30, 2002 from a benefit of $.1 million for the same
period in 2001. For the six months ended June 30, 2002 the income tax provision
decreased to a benefit of $1.7 million from an expense of $1.3 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. The effective tax rate was 31.5% and 34.5% for the six months
ended June 30, 2002 and 2001, respectively.
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 of $4.3
million.
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 was 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 $.9 million
and $70.1 million for the three months and $3.5 million and $98.3 million for
the six months ended June 30, 2002 and 2001, respectively. As of June 30, 2002
and December 31, 2001, accounts receivable from EPME were $.5 million and $.9
million, respectively.
Liquidity and Capital Resources
The Salton Sea Guarantors' cash flows from operating activities increased to
$18.1 million for the six months ended June 30, 2002 from $9.1 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
offset by lower revenues and higher operation and maintenance payments in 2002.
The Partnership Guarantors' cash flows from operating activities increased to
$49.4 million for the six months ended June 30, 2002 from a net cash use of $1.9
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 $4.4 million for the six
months ended June 30, 2002 from $4.0 million for the same period in 2001. The
Royalty Guarantors' only source of revenue is royalties received pursuant to
resource lease agreements with the Partnership Projects.
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.
The payment 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 $3.9 million of capacity bonus payments
for the months from October 2001 through May 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 are
vigorously pursuing 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
$1.3 million.
The Salton Sea Guarantors' cash flow used in investing activities increased to
$5.5 million for the six months ended June 30, 2002 from $3.3 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 increased to
$18.9 million for the six months ended June 30, 2002 from $18.2 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 funds received in connection with the
settlement of disputes with Kvaerner U.S. Inc (Kvaerner), which is being funded
by $140.5 million of debt and the balance from equity contributions. The Zinc
Recovery Project has incurred $187.0 million, net of the funds received in
connection with the settlement with Kvaerner, of such costs through June 30,
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 default under the Zinc
Recovery EPC Contract, the Partnership Guarantors claimed the balance of the
contract price, the retainage and 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 engineering, procurement and construction
management contract with AMEC E&C Services, Inc. to complete the Zinc Recovery
Project.
Salton Sea Funding Corporation's net cash flows from financing activities
decreased to a net cash use of $10.8 million for the six months ended June 30,
2002 from a net cash flow of $9.4 million for the same period in 2001. Salton
Sea Guarantors' net cash flows used in financing activities increased to $12.6
million from $5.8 million for the same period in 2001. Partnership Guarantors'
net cash used in financing activities increased to $30.2 million for the six
months ended June 30, 2002 from a net cash provided of $20.1 million for the
same period in 2001. The changes in net cash flows from financing activities are
primarily the result of the funding of the debt service reserve fund and debt
repayments. 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 June 30, 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:
Not applicable.
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: August 14, 2002 /s/ Joseph M. Lillo
By: Joseph M. Lillo
Vice President and Controller