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 September 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 November 14, 2002.
SALTON SEA FUNDING CORPORATION
Form 10-Q
September 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, September 30, 2002 and December 31, 2001 5
Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 6
Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 10
Combined Balance Sheets, September 30, 2002 and December 31, 2001 11
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 12
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 13
Notes to Combined Financial Statements 14
PARTNERSHIP GUARANTORS
Independent Accountants' Report 17
Combined Balance Sheets, September 30, 2002 and December 31, 2001 18
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 19
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 20
Notes to Combined Financial Statements 21
SALTON SEA ROYALTY LLC
Independent Accountants' Report 25
Balance Sheets, September 30, 2002 and December 31, 2001 26
Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 27
Statements of Cash Flows for the Nine Months Ended
September 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
Item 4 Internal Controls and Procedures 39
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities 40
Item 3. Defaults on Senior Securities 40
Item 4. Submission of Matters to a Vote of
Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
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 September 30, 2002, and the related statements
of operations for the three-month and nine-month periods ended September 30,
2002 and 2001, and the related statements of cash flows for the nine-month
periods ended September 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
November 8, 2002
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 15,090 $ 4,361
Restricted cash 36,123 2,949
Accrued interest receivable and other assets 12,956 3,351
Current portion of secured project notes
from Guarantors 28,329 28,572
------------ -----------
Total current assets 92,498 39,233
Secured project notes from Guarantors 477,635 491,678
Investment in 1% of net assets of
Guarantors 9,901 9,669
------------ -----------
Total assets $ 580,034 $ 540,580
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued interest $ 12,867 $ 3,333
Due to affiliates 47,784 3,899
Current portion of long term debt 28,329 28,572
------------ -----------
Total current liabilities 88,980 35,804
Senior secured notes and bonds 477,635 491,678
------------ -----------
Total liabilities 566,615 527,482
Commitments and contingencies (Note 3)
Stockholder's equity:
Common stock--authorized 1,000
shares, par value $.01 per share;
issued and outstanding 100 shares --- ---
Additional paid-in capital 5,564 5,366
Retained earnings 7,855 7,732
------------ -----------
Total stockholder's equity 13,419 13,098
------------ -----------
Total liabilities and stockholder's equity$ 580,034 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues:
Interest income $ 9,984 $ 10,753 $ 30,057 $ 31,489
Equity in earnings of Guarantors 156 22 34 209
----------- ----------- ----------- ---------
Total revenues 10,140 10,775 30,091 31,698
----------- ----------- ----------- ---------
General and administrative expenses 135 283 581 746
Interest expense 9,679 10,183 29,301 30,676
----------- ----------- ----------- ---------
Total expenses 9,814 10,466 29,882 31,422
----------- ----------- ----------- ---------
Income before income taxes 326 309 209 276
Provision for income taxes 134 128 86 114
----------- ----------- ----------- ---------
Income before cumulative effect
of accounting change 192 181 123 162
Cumulative effect of accounting
change, net of tax --- --- --- (100)
----------- ----------- ----------- ---------
Net income $ 192 $ 181 $ 123 $ 62
=========== =========== =========== =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income $ 123 $ 62
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in earnings of Guarantors, net of contributions (34) (209)
Equity in cumulative effect of accounting change --- 100
Changes in assets and liabilities:
Prepaid expenses and other assets (9,605) (10,400)
Accrued liabilities 9,534 10,034
------------ ------------
Net cash flows from operating activities 18 (413)
------------ ------------
Cash flows from investing activities:
Principal repayments of secured project
notes from Guarantors 14,286 11,830
------------ ------------
Net cash flows from investing activities 14,286 11,830
------------ ------------
Cash flows from financing activities:
Increase in due to affiliates 43,885 38,350
Increase in restricted cash (33,174) ---
Repayment of senior secured notes and bonds (14,286) (11,830)
------------ ------------
Net cash flows from financing activities (3,575) 26,520
------------ ------------
Net change in cash 10,729 37,937
Cash at the beginning of period 4,361 8,467
------------ ------------
Cash at the end of period $ 15,090 $ 46,404
============ ============
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
(Unaudited)
1. General:
In the opinion of management of the Salton Sea Funding Corporation (the "Funding
Corporation"), the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of September 30, 2002 and the results of
operations for the three and nine months ended September 30, 2002 and 2001 and
cash flows for the nine-months ended September 30, 2002 and 2001. The results of
operations for the three and nine-months ended September 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 income as originally reported
for the three and nine-months ended September 30, 2002 and 2001, to adjusted net
income (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Reported net income $ 192 $ 181 $ 123 $ 62
Goodwill amortization --- 14 --- 43
--------- -------- -------- ---------
Adjusted net income $ 192 $ 195 $ 123 $ 105
========= ======== ======== =========
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 during the quarterending December 31, 2002. The
impairment charge will be recorded as a cumulative effect of change in
accounting as of January 1, 2002. The Guarantors will complete their annual
goodwill impairment test during the fourth quarter of 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 determined 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 Funding Corporation's adoption of
SFAS No. 144 on January 1, 2002.
3. Contingencies:
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 final payment of past due amounts by Edison 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 September 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 September 30, 2002, and the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2002
and 2001, and the related statements of cash flows for the nine-month periods
ended September 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
November 8, 2002
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2002 2001
(unaudited)
ASSETS
Accounts receivable, net of allowance of $3,373 and
$9,829, respectively $ 26,424 $ 36,647
Prepaid expenses and other assets 5,927 5,314
------------ -------------
Total current assets 32,351 41,961
Property, plant, contracts and equipment, net 537,892 543,719
Excess of cost over fair value of net assets
acquired, net 44,270 44,270
------------ -------------
Total assets $ 614,513 $ 629,950
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 568 $ 2,862
Accrued liabilities 7,977 9,414
Accrued interest 6,523 1,721
Current portion of long term debt 21,625 20,487
------------ -------------
Total current liabilities 36,693 34,484
Due to affiliates 25,057 27,109
Senior secured project note 235,034 246,412
------------ -------------
Total liabilities 296,784 308,005
Commitment and contingencies (Note 3)
Total Guarantors' equity 317,729 321,945
------------ -------------
Total liabilities and Guarantors' equity $ 614,513 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Sales of electricity $ 27,438 $ 22,853 $ 66,936 $ 77,847
Interest and other income 2,185 652 2,615 1,629
_________ _________ _________ _________
Total revenues 29,623 23,505 69,551 79,476
_________ _________ _________ _________
Expenses:
Operating, general and
administration 14,374 15,438 42,709 43,004
Depreciation and amortization 4,721 4,372 15,686 13,382
Interest expense 5,053 5,574 15,372 16,878
Less capitalized interest --- --- --- (1,692)
_________ _________ _________ _________
Total expenses 24,148 25,384 73,767 71,572
_________ _________ _________ _________
Income (loss) before cumulative
effect of accounting change 5,475 (1,879) (4,216) 7,904
Cumulative effect of accounting change --- --- --- (8,743)
_________ _________ _________ _________
Net income (loss) $ 5,475 $ (1,879) $ (4,216) $ (839)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net loss $ (4,216) $ (839)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Cumulative effect of change in accounting principle --- 8,743
Depreciation and amortization 15,686 13,382
Changes in assets and liabilities:
Accounts receivable 10,223 (4,433)
Prepaid expenses and other assets (613) (5,777)
Accounts payable and accrued liabilities 1,071 5,738
____________ _________
Net cash flows from operating activities 22,151 16,814
____________ _________
Cash flows from investing activities:
Capital expenditures (9,859) (7,055)
Decrease in restricted cash --- 17
____________ _________
Net cash flows from investing activities (9,859) (7,038)
____________ _________
Cash flows from financing activities:
Decrease in due to affiliates (2,052) (1,117)
Repayment of senior secured project note (10,240) (8,659)
____________ _________
Net cash flows from financing activities (12,292) (9,776)
____________ _________
Net change in cash --- ---
Cash at beginning of period --- ---
____________ _________
Cash at end of period $ --- $ ---
============ =========
Supplemental disclosures:
Interest paid $ 10,077 $ 11,020
============ =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. General:
In the opinion of management of the Salton Sea Guarantors (the "Guarantors"),
the accompanying unaudited combined financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of September 30, 2002 and the results of operations for
the three and nine-months ended September 30, 2002 and 2001 and cash flows for
the nine-months ended September 30, 2002 and 2001. The results of operations for
the nine-months ended September 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 nine months ended September 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 that 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 nine-months ended September 30, 2002 and 2001, to adjusted net
income (loss) (in thousands):
Three Months Nine months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Reported net income (loss) $ 5,475 $ (1,879) $ (4,216) $ (839)
Goodwill amortization --- 326 --- 978
Adjusted net income (loss) $ 5,475 $ (1,553) $ (4,216) $ 139
The Guarantors' acquired intangible assets consists of power purchase contracts
(the "contracts") with a cost of $7.9 million and accumulated amortization of
$3.1 million at September 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 nine months ended September
30, 2002. The Guarantors expect amortization expense on the contracts to be $.1
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 during the quarter ending December 31, 2002. The impairment charge
will be recorded as a cumulative effect of change in accounting as of January 1,
2002. The Guarantors will complete their annual goodwill impairment test during
the fourth quarter of 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. Contingencies:
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 final payment of the past due amounts by Edison 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 $.3 million.
B. Stone and Webster
The Salton Sea V Project was constructed by Stone & Webster, Inc. (formerly
Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw
Group ("Stone & Webster"), pursuant to date certain, fixed-price, turnkey
engineering, procure, construct and manage contract (the "Salton Sea V Project
EPC Contract"). On March 7, 2002, Salton Sea Power L.L.C., the owner of the
Salton Sea V Project, filed a Demand for Arbitration against Stone & Webster for
breach of contract and breach of warranty arising from deficiencies in Stone &
Webster's design, engineering, construction and procurement of equipment for the
Salton Sea V Project pursuant to the Salton Sea V Project EPC Contract. The
arbitration relating to the Salton Sea V Project is currently scheduled to
commence in April 2003, with no current stated claim amount.
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 September 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 Transaction Agreements 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 Imperial Valley Projects entered into
Transaction Agreements to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 22, 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 under the Power Purchase
Agreements ("PPAs"). Effective September 16, 2002, Salton Sea Power entered into
a Transaction Agreement to sell available power to EPME at increased percentages
of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to EPME from the Company totaled $2.7
million and $3.5 million for the three months ended September 30, 2002 and 2001,
respectively and $6.1 million and $29.9 million for the nine months ended
September 30, 2002 and 2001, respectively. As of September 30, 2002 and December
31, 2001, accounts receivable from EPME were $.7 million and $.9 million,
respectively.
Effective August 1, 2002, Salton Sea Power amended the power sales agreement
with CalEnergy Minerals, LLC ("Minerals") to provide for a fixed price of $31.00
per Megawatt hour for all hours of August 1, 2002 through December 31, 2002.
Pursuant to this agreement, sales to Minerals from Salton Sea Power totaled $.1
million and $.1 million for the three and nine months ended September 30, 2002
and 2001, respectively and $.2 million and $.9 million for the nine months ended
September 30, 2002 and 2001, 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 September 30, 2002, and the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2002
and 2001, and the related statements of cash flows for the nine-month periods
ended September 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
November 8, 2002
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2002 2001
(unaudited)
ASSETS
Cash $ 67 $ ---
Accounts receivable, net of allowance of $1,611 and
$14,925, respectively 34,948 59,384
Prepaid expenses and other assets 19,902 19,358
------------ -------------
Total current assets 54,917 78,742
Restricted cash --- 21,282
Property, plant, contracts and equipment, net 676,023 633,574
Management fee 69,405 70,806
Due from affiliates 49,051 13,072
Excess of cost over fair value of net assets
acquired, net 120,866 120,866
------------ -------------
Total assets $ 970,262 $ 938,342
============ =============
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,254 $ 5,480
Accrued liabilities 19,887 12,853
Accrued interest 6,289 1,605
Current portion of long term debt 4,822 4,625
------------ -------------
Total current liabilities 33,252 24,563
Senior secured project notes 241,607 244,117
Deferred income taxes 103,958 102,083
------------ -------------
Total liabilities 378,817 370,763
Commitments and contingencies (Note 3)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 407,451 387,663
Retained earnings 183,991 179,913
------------ -------------
Total Guarantors' equity 591,445 567,579
------------ -------------
Total liabilities and Guarantors' equity $ 970,262 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Sales of electricity $ 33,229 $ 20,782 $ 75,724 $ 64,352
Interest and other income 1,103 1,702 1,768 2,642
_________ _________ _________ _________
Total revenues 34,332 22,484 77,492 66,994
_________ _________ _________ _________
Expenses:
Operating, general and
administration 15,668 8,974 48,373 35,646
Depreciation and amortization 5,484 5,877 17,636 17,895
Interest expense 4,792 4,857 14,328 14,479
Less capitalized interest (3,050) (2,855) (8,798) (10,338)
_________ _________ _________ _________
Total expenses 22,894 16,853 71,539 57,682
_________ _________ _________ _________
Income before income taxes 11,438 5,631 5,953 9,312
Provision for income taxes 3,602 1,944 1,875 3,213
_________ _________ _________ _________
Income before cumulative
effect of accounting change 7,836 3,687 4,078 6,099
Cumulative effect of accounting
change, net of tax --- --- --- (8,254)
_________ _________ _________ _________
Net income (loss) $ 7,836 $ 3,687 $ 4,078 $ (2,155)
========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ 4,078 $ (2,155)
Adjustments to reconcile net income (loss) to net
cash flow from operating activities:
Cumulative effect of change in accounting principle, net of tax --- 8,254
Depreciation and amortization 17,636 17,895
Deferred income taxes 1,875 3,213
Changes in assets and liabilities:
Accounts receivable 24,436 (14,007)
Prepaid expenses and other assets (1,347) (5,481)
Accounts payable and accrued
liabilities 8,492 8,849
______________ _____________
Net cash flows from operating activities 55,170 16,568
______________ _____________
Cash flows from investing activities:
Capital expenditures (16,938) (11,394)
Capital expenditures - construction (39,453) (14,322)
Receipt of liquidated damages --- 29,648
Decrease (increase) in restricted cash 21,282 (29,551)
Management fee (724) 163
______________ _____________
Net cash flows from investing activities (35,833) (25,456)
______________ _____________
Cash flows from financing activities:
Repayments of senior secured project notes (2,313) (954)
Decrease (increase) in due from affiliates (36,745) 9,842
Equity contribution 19,788 ---
Net cash flows from financing activities (19,270) 8,888
______________ _____________
Net change in cash 67 ---
Cash at beginning of period --- ---
______________ _____________
Cash at end of period $ 67 $ ---
============== =============
Supplemental disclosures:
Interest paid $ 9,465 $ 9,547
============== =============
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. General:
In the opinion of management of the Partnership Guarantors (the "Guarantors"),
the accompanying unaudited combined financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position as of September 30, 2002 and the results of operations for
the three and nine-months ended September 30, 2002 and 2001 and cash flows for
the nine-months ended September 30, 2002 and 2001. The results of operations for
the three and nine-months ended September 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 nine months ended September 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 income (loss) as originally reported for the three and nine-months ended
September 30, 2002 and 2001, to adjusted net income (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Reported net income (loss) $ 7,836 $ 3,687 $ 4,078 $ (2,155)
Goodwill amortization --- 891 --- 2,673
--------- -------- --------- ---------
Adjusted net income $ 7,836 $ 4,578 $ 4,078 $ 518
========= ======== ========= =========
The following table summarizes the acquired intangible assets as of September
30, 2002 (in thousands):
Gross Carrying Accumulated
Amount Amortization
Amortized Intangible Assets:
Power Purchase Contract $ 123,002 $ 96,502
Patented Technology 46,290 14,903
---------- ---------
Total $ 169,292 $ 111,405
========== =========
Amortization expense on acquired intangible assets was $2.6 million for the
nine-months ended September 30, 2002. The Guarantors expect amortization expense
on acquired intangible assets to be $.9 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 during the quarter ending December 31, 2002. The impairment charge
will be recorded as a cumulative effect of change in accounting as of January 1,
2002. The Guarantors will complete their annual goodwill impairment test during
the fourth quarter of 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 determined 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 final payment of the past due amounts by Edison 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 $.8 million.
B. Stone and Webster
The Turbo Project was constructed by Stone & Webster, Inc. (formerly Stone &
Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw Group
("Stone & Webster"), pursuant to date certain, fixed-price, turnkey engineering,
procure, construct and manage contract ( the "Turbo Project EPC Contract"). On
March 7, 2002, Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and CE Turbo
LLC, the owners of the Turbo Project, filed a Demand for Arbitration against
Stone & Webster for breach of contract and breach of warranty arising from
deficiencies in Stone & Webster's design, engineering, construction and
procurement of equipment for the Turbo Project pursuant to the Turbo Project EPC
Contract. The arbitration is currently scheduled for December 2002, with a
stated claim amount of approximately $6 million of actual damages and an as yet
undetermined amount of consequential damages.
C. 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.
D. 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 September 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 Transaction
Agreements to sell available power to EPME based on percentages of the Dow Jones
SP-15 Index. On June 22, 2001, the Guarantors (excluding the Turbo Project)
ceased selling available power to EPME and resumed power sales to Edison under
the Power Purchase Agreements. Effective September 16, 2002 CE Turbo entered
into a Transaction Agreement to sell available power to EPME at increased
percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to EPME from the Company totaled $.4 million
and $.5 million for the three-months and $1.0 million and $49.3 million for the
nine months ended September 30, 2002 and 2001, respectively. As of September 30,
2002 and December 31, 2001, accounts receivable from EPME were $.1 million and
$.1 million, respectively.
Effective August 1, 2002, CE Turbo amended the power sales agreement with
CalEnergy Minerals, LLC ("Minerals") to provide for a fixed price of $31.00 per
megawatt hour for all hours of August 1, 2002 through December 31, 2002.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of September 30, 2002, and the related statements of operations for the
three-month and nine-month periods ended September 30, 2002 and 2001, and the
related statements of cash flows for the nine-month periods ended September 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
November 8, 2002
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
2002 2001
(unaudited)
ASSETS
Prepaid expenses and other assets $ 17 $ 31
-------------- --------------
Total current assets 17 31
Royalty stream, net 14,225 14,865
Excess of cost over fair value of net assets
acquired,net 30,464 30,464
Due from affiliates 39,138 33,940
-------------- --------------
Total assets $ 83,844 $ 79,300
============== ==============
LIABILITIES AND EQUITY
Liabilities:
Accrued interest $ 72 $ 29
Current portion of long term debt 1,882 3,460
-------------- --------------
Total current liabilities 1,954 3,489
Senior secured project note 995 1,147
-------------- --------------
Total liabilities 2,949 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 79,334 73,103
-------------- --------------
Total equity 80,895 74,664
Total liabilities and equity $ 83,844 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
_________ _________ _________ _________
Revenues:
Royalty income $ 3,371 $ 759 $ 9,585 $ 6,598
Expenses:
Operating, general and
administrative expenses 863 126 2,488 1,655
Amortization of royalty stream
and goodwill 214 487 641 1,462
Interest expense 76 139 225 482
------------ ------------ ----------- -----------
Total expenses 1,153 752 3,354 3,599
------------ ------------ ----------- -----------
Net income $ 2,218 $ 7 $ 6,231 $ 2,999
------------ ------------ ----------- -----------
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income $ 6,231 $ 2,999
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization 641 1,462
Changes in assets and liabilities:
Prepaid expenses and other assets 14 38
Accrued liabilities 42 111
------------- -------------
Net cash flows from operating activities 6,928 4,610
------------- -------------
Net cash flows from financing activities:
Increase in due from affiliates (5,198) (2,393)
Repayment of senior secured project note (1,730) (2,217)
------------- -------------
Net cash flows from financing activities (6,928) (4,610)
Net change in cash --- ---
Cash at beginning of period --- ---
------------- -------------
Cash at end of period $ --- $ ---
============= =============
Supplemental disclosures:
Interest paid $ 169 $ 333
============= =============
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. General:
In the opinion of management of Salton Sea Royalty LLC (the "Company"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2002 and the results of operations for the three
and nine-months ended September 30, 2002 and 2001 and cash flows for the
nine-months ended September 30, 2002 and 2001. The results of operations for the
three and nine months ended September 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 nine-months ended September 30, 2002 and 2001, to adjusted net
income (in thousands):
Three Months Nine Months
Ended September 30, Ended September,
2002 2001 2002 2001
Reported net income $ 2,218 $ 7 $ 6,231 $ 2,999
Goodwill amortization --- 227 --- 681
--------- -------- -------- ---------
Adjusted net income $ 2,218 $ 234 $ 6,231 $ 3,680
========= ======== ======== =========
The Company's acquired intangible assets consist of the royalty stream with a
cost of $60.5 million and accumulated amortization of $46.3 million at September
30, 2002. Amortization expense on the royalty stream was $0.6 million for the
nine-months ended September 30, 2002. The Company expects amortization expense
on the royalty stream to be $0.2 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. The Company will complete its annual goodwill impairment test in the
fourth quarter of 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 final payment of past due amounts by Edison 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
The following is management's discussion and analysis of significant factors,
which have affected the Company's financial condition and results of operations
during the periods included in the accompanying statements of operations. The
Company's actual results in the future could differ significantly from the
historical results.
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 and intangible assets with useful lives, which range from 3 to 40
years, and goodwill. 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 Guarantors 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. The Guarantors will complete their
annual goodwill impairment test in the fourth quarter of 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 increased to $27.4 million for
the three months ended September 30, 2002 from $22.9 million for the same period
in 2001, a 19.7% increase. This increase was due to higher production and a $3.2
million accrual for the allowance for doubtful accounts in 2001. For the nine
months ended September 30, 2002 sales of electricity decreased to $66.9 million
from $77.9 million for the same period in 2001, a 14.0% decrease. Sales of
electricity for the nine-months ended September 30, 2002 included the impact of
a $6.8 million reduction in the allowance for doubtful accounts. Sales of
electricity for the nine months ended September 30, 2001 included the impact of
a $9.3 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 $27.0 million or 31.0% to $60.1 million for the nine
months ended September 30, 2002 from $87.1 million for the nine-months September
30, 2001. This decrease was primarily due to lower electricity rates in 2002.
The following data includes the aggregate capacity and electricity production of
the Salton Sea Guarantors:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Overall capacity factor 85.6% 79.9% 79.4% 79.9%
Capacity (NMW) (average) 168.4 168.4 168.4 168.4
kWh produced (in thousands) 318,300 297,200 875,500 881,900
The overall capacity factor for the Salton Sea Guarantors increased for the
three months ended September 30, 2002 compared to the same period in 2001
primarily due to higher availability. For the nine months, ended September 30,
2002 the capacity factor decreased 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 25, 2002 and is expected to be placed back
into service in December 2002. 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 $33.2 million for
the three months ended September 30, 2002 from $20.8 million for the same period
in 2001, a 59.6% increase. This increase was due to higher rates in 2002. For
the nine-months ended September 30, 2002 sales of electricity increased to $75.7
million from $64.4 million for the same period in 2001, a 17.5% increase. Sales
of electricity for the nine months ended September 30, 2002 included the impact
of $14.1 million reduction in the allowance for doubtful accounts. Sales of
electricity for the nine months ended September 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 $31.7 million or 34.0% to $61.6 million for the nine
months ended September 30, 2002 from $93.3 million for the nine months ended
September 30, 2001. This decrease was due to lower electricity rates and
decreased production from scheduled overhauls.
The following data includes the aggregate capacity and electricity production of
the Partnership Guarantors:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Overall capacity factor 104.7% 105.9% 100.4% 102.2%
Capacity (NMW) (average) 158 158 158 158
kWh produced (in thousands) 365,200 369,600 1,039,800 1,508,200
The overall capacity factor for the Partnership Guarantors decreased for the
three and nine months ended September 30, 2002 compared to the same period in
2001. The decrease for the periods ended September 30, 2002 compared to 2001 was
due to 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 3.6 cents per
kilowatt-hour for the three months and 8.9 cents per kilowatt-hour for the
nine-months ended September 30, 2001, respectively. The Royalty Guarantor
revenue increased to $3.4 million for the three months ended September 30, 2002
from $.8 million for the same period last year. The increase relates to higher
royalties based on higher revenue at the Partnership Guarantor. For the nine
months ended September 30, 2002 revenue increased to $9.6 million from $6.6
million for the same period in 2001. The increase relates to higher revenue at
the Partnership Guarantors and 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 $14.4 million for the
three months ended September 30, 2002 from $15.4 million for the same period in
2001. For the nine months ended September 30, 2002 operating expenses decreased
marginally to $42.7 million from $43.0 million for the same period in 2001.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $15.7 million
for the three months ended September 30, 2002 from $9.0 million for the same
period in 2001. The increase was primarily due to higher royalties from higher
revenues and additional start-up costs at the zinc plant. For the nine months
ended September 30, 2002 operating expenses increased to $48.4 million from
$35.6 million for the same period in 2001. The increase was due to higher
royalties, zinc start-up costs and higher overhaul costs in 2002.
The Royalty Guarantors' operating expenses increased to $.9 million for the
three months ended September 30, 2002, from $.1 million for the same period in
2001. For the nine months ended September 30, 2002 operating expenses increased
to $2.5 million from $1.7 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 $4.7
million for the three months ended September 30, 2002 from $4.4 million for the
same period of 2001. For the nine months ended September 30, 2002 depreciation
and amortization increased to $15.7 million from $13.4 million for the same
period in 2001. These increases were due to significant capital additions and
the write off of miscellaneous equipment, partially offset by the
discontinuation of goodwill amortization in 2002.
The Partnership Guarantors' depreciation and amortization decreased to $5.5
million for the three months ended September 30, 2002 from $5.9 million for the
same period in 2001. The decrease was due to the discontinuation of goodwill
amortization in 2002, partially offset by depreciation on capital additions. For
the nine months ended September 30, 2002 depreciation and amortization decreased
to $17.6 million from $17.9 million for the same period in 2001. The decrease
was due primarily to capital additions, partially offset by the discontinuation
of goodwill amortization in 2002 of $2.7 million.
The Royalty Guarantors' amortization decreased to $0.2 million for the three
months ended September 30, 2002 compared to $.5 million for the same period of
2001. For the nine months ended September 30, 2002, amortization decreased to
$.6 million from $1.5 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 $5.1 million for the
three months ended September 30, 2002 from $5.6 million for the same period in
2001. The decrease was due to reduced indebtedness. For the nine months ended
September 30, 2002 interest expense, net of capitalized amounts, amounts
increased to $15.4 million from $15.2 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 $1.7 million for the three months ended September 30, 2002 from
$2.0 million for the same period in 2001. The decrease was due to reduced
indebtedness. For the nine months ended September 30, 2002 interest expense, net
of capitalized amounts, increased to $5.5 million from $4.1 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 September 30, 2002 from $0.1 million from the same period in 2001.
For the nine months ended September 30, 2002 interest expense decreased to $.2
million from $.5 million from the same period in 2001. The decrease was due to
reduced indebtedness.
Income Tax Provision:
The Partnership Guarantors' income tax provision increased to $3.6 million for
the three months ended September 30, 2002 from a provision of $1.9 million for
the same period in 2001. For the nine months ended September 30, 2002 the income
tax provision decreased to $1.9 million from $3.2 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 nine months ended
September 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 El Paso Merchant Energy Company
("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 Transaction
Agreements to sell available power from the Salton Sea V Project and Turbo
Project to EPME. Under the terms of the agreements, 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
Transaction Agreements to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 22, 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 under the Power Purchase
Agreements. Effective September 16, 2002 Salton Sea Power and CE Turbo entered
into a Transaction Agreement to sell available power to EPME at increased
percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to EPME from the Company totaled $2.7
million and $3.5 million for the three months ended September 30, 2002 and 2001,
respectively and $6.1 million and $29.9 million for the nine months ended
September 30, 2002 and 2001, respectively. As of September 30, 2002 and December
31, 2001, accounts receivable from EPME were $.7 million and $.9 million,
respectively.
Effective August 1, 2002, Salton Sea Power and CE Turbo amended their respective
power sale agreements with CalEnergy Minerals, LLC to provide for a fixed price
of $31.00 per megawatt hour for all hours of August 1, 2002 through December 31,
2002. Pursuant to these agreements, sales to Minerals from Salton Sea Power and
CE Turbo totaled $.1million and $.1 million for the three and nine months ended
September 30, 2002 and 2001, respectively and $.2 million and $.9 million for
the nine months ended September 30, 2002 and 2001, respectively.
Liquidity and Capital Resources
The Salton Sea Guarantors' cash flows from operating activities increased to
$22.2 million for the nine months ended September 30, 2002 from $16.8 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
$55.2 million for the nine months ended September 30, 2002 from $16.6 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 $6.9 million for the nine
months ended September 30, 2002 from $4.6 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 final payment of the past due amounts by Edison 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. As of September 30, 2002 the balance in the debt service
reserve fund was approximately $36.1 million.
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
$1.1 million.
The Salton Sea Guarantors' cash flow used in investing activities increased to
$9.9 million for the nine months ended September 30, 2002 from $7.0 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
$35.8 million for the nine months ended September 30, 2002 from $25.5 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 initial
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 $235.3 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 $206.2 million, net of the funds received in
connection with the settlement with Kvaerner, of such costs through September
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.
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.
Salton Sea Funding Corporation's net cash flows from financing activities
decreased to a net cash use of $3.6 million for the nine months ended September
30, 2002 from a net cash flow of $26.5 million for the same period in 2001.
Salton Sea Guarantors' net cash flows used in financing activities increased to
$12.3 million from $9.8 million for the same period in 2001. Partnership
Guarantors' net cash used in financing activities increased to $19.3 million for
the nine months ended September 30, 2002 from a net cash provided of $8.9
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 September 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.
Item 4. Controls and Procedures
The Company's chief executive officer and chief financial officer have
established "disclosure controls and procedures" (as defined in Rule 13a-14 (C)
and Rule 15d - 14(C) of the Securities and exchange Act of 1934) to ensure that
material information of the companies and their subsidiaries is made known to
them by others within the respective companies. Under their supervision, an
evaluation of the disclosure controls and procedures was performed within 90
days prior to the filing of this quarterly report. Based on that evaluation, the
above-mentioned officers have concluded that, as of the date of the evaluation,
the disclosure controls and procedures were operating effectively. Additionally,
the above-mentioned officers find that there have been no signification changes
in internal controls, or in other factors that could significantly affect
internal controls, subsequent to the date of that evaluation.
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
November 2002.
SALTON SEA FUNDING CORPORATION
Date: November 14, 2002 /s/ Joseph M. Lillo
By: Joseph M. Lillo
Vice President and Controller
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Edward J. Heinrich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salton Sea Funding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Edward J. Heinrich
Edward J. Heinrich
President
(chief executive officer)
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Joseph M. Lillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salton Sea Funding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Joseph M. Lillo
Joseph M. Lillo
Vice President and Controller
(chief financial officer)