UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0790493
-------- -------------------
(State of Incorporation) (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 95-2636765
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 95-3992087
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
302 S. 36th Street, Suite 400, Omaha, Nebraska 68131
- ---------------------------------------------- ----------
(Address of principal executive offices of (Zip Code of
Salton Sea Funding Corporation) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
All common stock of Salton Sea Funding Corporation is indirectly held by Magma
Power Company. As of May 12, 2003, 100 shares of common stock were outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........31
Item 4. Controls and Procedures............................................31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................32
Item 2. Changes in Securities and Use of Proceeds..........................32
Item 3. Defaults Upon Senior Securities....................................32
Item 4. Submission of Matters to a Vote of Security Holders................32
Item 5. Other Information..................................................32
Item 6. Exhibits and Reports on Form 8-K...................................32
SIGNATURES....................................................................33
CERTIFICATIONS................................................................34
EXHIBIT INDEX.................................................................36
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Salton Sea Funding Corporation
Omaha, Nebraska
We have reviewed the accompanying balance sheet of Salton Sea Funding
Corporation (the Company) as of March 31, 2003, and the related statements of
operations and cash flows for the three-month periods ended March 31, 2003 and
2002. 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, 2002, 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 24, 2003 (January 29, 2003 as
to Note 6), 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, 2002 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
May 8, 2003
-3-
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(In thousands, except per share amounts)
AS OF
-----------------------
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash ........................................................... $ 23,236 $ 19,583
Restricted cash ................................................ 46,448 46,293
Accrued interest receivable and other current assets ........... 12,466 3,228
Current portion secured project notes from Guarantors .......... 28,086 28,086
-------- --------
Total current assets ......................................... 110,236 97,190
-------- --------
Secured project notes from Guarantors ............................ 463,592 463,592
Investment in 1% of net assets of Guarantors ..................... 9,688 9,721
-------- --------
TOTAL ASSETS ..................................................... $583,516 $570,503
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued interest ............................................... $ 12,453 $ 3,156
Current portion of long-term debt .............................. 28,086 28,086
-------- --------
Total current liabilities .................................... 40,539 31,242
-------- --------
Due to affiliates ................................................ 65,912 62,251
Senior secured notes and bonds ................................... 463,592 463,592
-------- --------
Total liabilities .............................................. 570,043 557,085
-------- --------
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 ..................................... 5,911 5,811
Retained earnings .............................................. 7,562 7,607
-------- --------
Total stockholder's equity ................................... 13,473 13,418
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ....................... $583,516 $570,503
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
-------------------
2003 2002
------- --------
(UNAUDITED)
REVENUE:
Interest income ......................... $ 9,469 $ 10,047
Equity in loss of Guarantors ............ (133) (7)
------- --------
Total revenue ......................... 9,336 10,040
------- --------
COSTS AND EXPENSES:
General and administrative expenses ..... 115 227
Interest expense ........................ 9,297 9,825
------- --------
Total costs and expenses .............. 9,412 10,052
------- --------
LOSS BEFORE INCOME TAXES .................. (76) (12)
Benefit for income taxes ................ (31) (5)
------- --------
NET LOSS .................................. $ (45) $ (7)
======= ========
The accompanying notes are an integral part of these financial statements.
-5-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (45) $ (7)
Adjustments to reconcile net loss to net cash flows from operating activities:
Equity in loss of Guarantors ............................................... 133 7
Changes in assets and liabilities:
Accrued interest receivable and other current assets ..................... (9,238) (9,945)
Accrued interest ......................................................... 9,297 9,826
-------- --------
Net cash flows from operating activities ............................... 147 (119)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash .................................................. (155) (7)
Due to affiliates ............................................................ 3,661 94,985
-------- --------
Net cash flows from financing activities ................................... 3,506 94,978
-------- --------
NET CHANGE IN CASH ............................................................. 3,653 94,859
Cash at the beginning of period ................................................ 19,583 4,361
-------- --------
CASH AT THE END OF PERIOD ...................................................... $ 23,236 $ 99,220
======== ========
The accompanying notes are an integral part of these financial statements.
-6-
SALTON SEA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of Salton Sea Funding Corporation (the "Funding
Corporation"), the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2003 and the results of operations
and cash flows for the three-month periods ended March 31, 2003 and 2002. The
results of operations for the three-month period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year.
The unaudited financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included in
the Funding Corporation's annual report on Form 10-K for the year ended December
31, 2002.
Certain amounts in the prior year financial statements have been reclassified in
order to conform to current year presentation. Such reclassifications did not
impact previously reported net income (loss) or retained earnings.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Funding Corporation adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement
provides accounting and disclosure requirements for retirement obligations
associated with long-lived assets. The cumulative effect of initially applying
this statement did not have a material effect on the Funding Corporation's
financial position, results of operations or cash flows.
3. CONTINGENCY
Due to reduced liquidity, Southern California Edison ("Edison") had failed to
pay approximately $119 million owed under the power purchase agreements with
certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and CE
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.
Pursuant to a settlement agreement 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.
Edison has disputed a portion of the settlement agreement and 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. Due to Edison's failure to pay the contractual
obligations, certain Guarantors established an allowance for doubtful accounts
of approximately $3.1 million and $2.7 million as of March 31, 2003 and December
31, 2002, respectively.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
II returned to service on December 17, 2002. Edison has failed to recognize the
uncontrollable force event and, as such, has not paid amounts otherwise due and
owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the
Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power
Generation L.P., owner of Salton Sea II, served a complaint on Edison for such
unpaid amount and to rescind such deration.
-7-
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 ("CE Generation") until the
Funding Corporation debt service reserve fund of approximately $65.4 million has
been funded or the letter of credit has been extended beyond its July 2004
expiration date or replaced. The fund had a cash balance of $46.4 million and
$46.3 million as of March 31, 2003 and December 31, 2002, respectively.
4. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA, Inc. ("TransAlta"), a wholly owned
subsidiary of TransAlta Corporation, purchased El Paso's Merchant Energy's 50%
interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, CE Turbo and Salton
Sea Power began selling available power to TransAlta on February 12, 2003 based
on percentages of the Dow Jones SP-15 Index. Such agreement will expire on
October 15, 2003. Sales to TransAlta from the Partnership and Salton Sea
Guarantors totaled $2.3 million for the three months ended March 31, 2003. The
accounts receivable balance at March 31, 2003 was $2.3 million.
At December 31, 2002 accounts receivable from El Paso Merchant Energy were $1.4
million.
-8-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Salton Sea
Guarantors as of March 31, 2003, and the related combined statements of
operations and cash flows for the three-month periods ended March 31, 2003 and
2002. 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, 2002, 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 24, 2003 (January
29, 2003 as to Note 7), 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, 2002 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
May 8, 2003
-9-
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
------------------------
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable, net ................................. $ 16,932 $ 20,524
Prepaid expenses and other current assets ................ 4,659 5,283
-------- --------
Total current assets ................................... 21,591 25,807
-------- --------
Properties, plants, contracts and equipment, net ........... 534,407 535,220
Excess of cost over fair value of net assets acquired ...... 23,252 23,252
-------- --------
TOTAL ASSETS ............................................... $579,250 $584,279
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 1,810 $ 328
Accrued interest ......................................... 6,219 1,593
Other accrued liabilities ................................ 14,141 12,304
Current portion of long-term debt ........................ 22,765 22,765
-------- --------
Total current liabilities .............................. 44,935 36,990
-------- --------
Due to affiliates .......................................... 29,122 35,665
Senior secured project note ................................ 223,654 223,654
-------- --------
Total liabilities ........................................ 297,711 296,309
-------- --------
Commitments and contingencies (Notes 4 and 5)
Guarantors' equity ......................................... 281,539 287,970
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ................... $579,250 $584,279
======== ========
The accompanying notes are an integral part of these financial statements.
-10-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
-------- -------
(UNAUDITED)
REVENUE:
Operating revenue ....................................... $ 18,124 $23,405
Interest and other income (loss), net ................... (162) 430
-------- -------
Total revenue ......................................... 17,962 23,835
-------- -------
COSTS AND EXPENSES:
Royalty, operating, general and administrative expense .. 14,724 11,890
Depreciation and amortization ........................... 4,893 4,275
Interest expense ........................................ 4,776 5,162
-------- -------
Total costs and expenses .............................. 24,393 21,327
-------- -------
NET INCOME (LOSS) ......................................... $ (6,431) $ 2,508
======== =======
The accompanying notes are an integral part of these financial statements.
-11-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ (6,431) $ 2,508
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization .................... 4,893 4,275
Changes in assets and liabilities:
Accounts receivable, net ....................... 3,592 25,442
Prepaid expenses and other current assets ...... 624 (675)
Accounts payable and accrued liabilities ....... 7,945 622
-------- --------
Net cash flows from operating activities ..... 10,623 32,172
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures ............................... (4,080) (2,598)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES -
Due to affiliates .................................. (6,543) (29,574)
-------- --------
NET CHANGE IN CASH ................................... -- --
Cash at the beginning of period ...................... -- --
-------- --------
CASH AT THE END OF PERIOD ............................ $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements.
-12-
SALTON SEA GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of Salton Sea Guarantors (the "Guarantors"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2003 and the results of operations and cash flows for
the three-month periods ended March 31, 2003 and 2002. The results of operations
for the three months ended March 31, 2003 are not necessarily indicative of the
results to be expected for the full year.
The unaudited financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included in
the Guarantors' annual report on Form 10-K for the year ended December 31, 2002.
Certain amounts in the prior year financial statements have been reclassified in
order to conform to current year presentation. Such reclassifications did not
impact previously reported net income (loss) or Guarantors' equity.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Guarantors adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
did not have a material effect on the Guarantors' financial position, results of
operations or cash flows.
3. INTANGIBLE ASSETS
The Guarantors' acquired intangible assets consist of power purchase contracts
(the "contracts") with a cost of $33.4 million and accumulated amortization of
$9.1million and $8.8 million at March 31, 2003 and December 31, 2002,
respectively. Amortization expense on the contracts was $0.3 million for the
three-month periods ended March 31, 2003 and 2002. The Guarantors' expect
amortization expense on the contracts to be $0.9 million for the remaining nine
months of 2003 and $1.2 million for each of the four succeeding fiscal years.
4. CONTINGENCIES
Due to reduced liquidity, Southern California Edison ("Edison") had failed to
pay approximately $42.3 million owed under the power purchase agreements with
certain Guarantors (Imperial Valley Projects, 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.
Pursuant to a settlement agreement 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.
Edison has disputed a portion of the settlement agreement and 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. Due to
Edison's failure to pay the contractual obligations, certain Guarantors
established an allowance for doubtful accounts of approximately $0.9 million and
$0.8 million as of March 31, 2003 and December 31, 2002, respectively.
-13-
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
II returned to service on December 17, 2002. Edison has failed to recognize the
uncontrollable force event and, as such, has not paid amounts otherwise due and
owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the
Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power
Generation L.P., owner of Salton Sea II served a complaint on Edison for such
unpaid amount and to rescind such deration.
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 ("CE Generation") until the
Funding Corporation debt service reserve fund of approximately $65.4 million has
been funded or the letter of credit has been extended beyond its July 2004
expiration date or replaced. The fund had a cash balance of $46.4 million and
$46.3 million as of March 31, 2003 and December 31, 2002, respectively.
Stone & 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 a 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. ("Salton Sea Power"),
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 demand for arbitration did not include a stated
claim amount. On April 25, 2003, Salton Sea Power entered into a settlement
agreement with Stone & Webster. The Settlement Agreement will result in a total
payment of $12.1 million from Stone & Webster in the second quarter of 2003 and
the arbitration will be dismissed.
5. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA Inc. ("TransAlta"), a wholly owned subsidiary
of TransAlta Corporation, purchased El Paso Merchant Energy North American
Company's 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power
began selling available power to TransAlta on February 12, 2003 based on
percentages of the Dow Jones SP-15 Index. Such agreement will expire on October
15, 2003. Sales to TransAlta from the Guarantors totaled $1.8 million for the
three months ended March 31, 2003. The accounts receivable balance at March 31,
2003 was $1.8 million.
At December 31, 2002 accounts receivable from El Paso Merchant Energy were $1.1
million.
-14-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Partnership
Guarantors as of March 31, 2003, and the related combined statements of
operations and cash flows for the three-month periods ended March 31, 2003 and
2002. 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, 2002, 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 24, 2003 (January
29, 2003 as to Note 9), 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, 2002 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
May 8, 2003
-15-
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
------------------------
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable, net ................................. $ 13,511 $ 14,330
Prepaid expenses and other current assets ................ 19,003 19,516
-------- --------
Total current assets ................................... 32,514 33,846
-------- --------
Restricted cash ............................................ 132 1
Properties, plants, contracts and equipment, net ........... 667,687 664,722
Management fee ............................................. 67,621 68,679
Due from affiliates ........................................ 91,240 82,083
Excess of fair value over net assets acquired .............. 120,866 120,866
-------- --------
TOTAL ASSETS ............................................... $980,060 $970,197
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 3,506 $ 2,903
Accrued interest ......................................... 6,182 1,576
Other accrued liabilities ................................ 17,043 15,464
Current portion of long-term debt ........................ 5,017 5,017
-------- --------
Total current liabilities .................................. 31,748 24,960
-------- --------
Senior secured project note ................................ 239,099 239,099
Deferred income taxes ...................................... 106,753 104,850
-------- --------
Total liabilities ........................................ 377,600 368,909
-------- --------
Commitments and contingencies (Notes 4 and 5)
Guarantors' equity:
Common stock ............................................. 3 3
Additional paid-in capital ............................... 442,225 432,200
Retained earnings ........................................ 160,232 169,085
-------- --------
Total guarantors' equity ............................... 602,460 601,288
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ................... $980,060 $970,197
======== ========
The accompanying notes are an integral part of these financial statements.
-16-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
-------- --------
(UNAUDITED)
REVENUE:
Operating revenue ..................................... $ 19,723 $ 22,199
Interest and other income (loss), net ................. (131) 536
-------- --------
Total revenue ....................................... 19,592 22,735
-------- --------
COSTS AND EXPENSES:
Royalty, operating, general and administrative costs .. 24,199 18,286
Depreciation and amortization ......................... 5,633 6,787
Interest expense ...................................... 4,664 4,754
Capitalized interest .................................. -- (2,838)
-------- --------
Total costs and expenses ............................ 34,496 26,989
-------- --------
LOSS BEFORE INCOME TAXES ................................ (14,904) (4,254)
Benefit for income taxes ................................ (6,051) (1,340)
-------- --------
NET LOSS ................................................ $ (8,853) $ (2,914)
======== ========
The accompanying notes are an integral part of these financial statements.
-17-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (8,853) $ (2,914)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization .......................... 5,633 6,787
Deferred income taxes .................................. 1,903 (1,340)
Changes in assets and liabilities:
Accounts receivable, net ............................. 819 47,608
Prepaid expenses and other current assets ............ 513 623
Accounts payable and accrued liabilities ............. 6,788 169
-------- --------
Net cash flows from operating activities ........... 6,803 50,933
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures pertaining to operating projects .... (6,582) (6,191)
Construction ............................................. (1,098) (6,351)
Decrease (increase) in restricted cash ................... (131) 7,013
Management fee ........................................... 350 358
-------- --------
Net cash flows from investing activities ............... (7,461) (5,171)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due from affiliates ...................................... (9,367) (43,086)
Equity contribution ...................................... 10,025 --
-------- --------
Net cash flows from financing activities ............... 658 (43,086)
-------- --------
NET CHANGE IN CASH ......................................... -- 2,676
Cash at beginning of period ................................ -- --
-------- --------
CASH AT THE END OF PERIOD .................................. $ -- $ 2,676
======== ========
The accompanying notes are an integral part of these financial statements.
-18-
PARTNERSHIP GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of Partnership Guarantors (the "Guarantors"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2003 and the results of operations and cash flows for
the three-month periods ended March 31, 2003 and 2002. The results of operations
for the three-month period ended March 31, 2003 are not necessarily indicative
of the results to be expected for the full year.
The unaudited financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included in
the Guarantors' annual report on Form 10-K for the year ended December 31, 2002.
Certain amounts in the prior year financial statements have been reclassified in
order to conform to current year presentation. Such reclassifications did not
impact previously reported net income (loss) or retained earnings.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Guarantors adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
did not have a material effect on the Guarantors' financial position, results of
operations or cash flows.
3. INTANGIBLE ASSETS
The following table summarizes the acquired intangible assets as of March 31,
2003 and December 31, 2002 (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------- ----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Amortized Intangible Assets:
Power Purchase Contracts ..... $123,002 $ 97,286 $123,002 $ 96,894
Patented Technology .......... 46,290 15,867 46,290 15,385
-------- -------- -------- --------
Total ...................... $169,292 $113,153 $169,292 $112,279
======== ======== ======== ========
Amortization expense on acquired intangible assets was $0.9 million for the
three-month periods ended March 31, 2003 and 2002. The Guarantors expect
amortization expense on acquired intangible assets to be $2.6 million for the
nine months remaining in 2003 and $3.5 million for each of the four succeeding
fiscal years.
4. CONTINGENCY
Due to reduced liquidity, Southern California Edison ("Edison") failed to pay
approximately $76.9 million owed under the power purchase agreements with
certain Guarantors (excluding CE 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.
-19-
Pursuant to a settlement agreement 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.
Edison has disputed a portion of the settlement agreement and 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 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. Due to Edison's failure to pay the contractual
obligations, certain Guarantors have established an allowance for doubtful
accounts of approximately $2.2 million and $1.9 million as of March 31, 2003 and
December 31, 2002, respectively.
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 ("CE Generation") until the
Funding Corporation debt service reserve fund of approximately $65.4 million has
been funded or the letter of credit has been extended beyond its July 2004
expiration date or replaced. The fund had a cash balance of $46.4 million and
$46.3 million as of March 31, 2003 and December 31, 2002, respectively.
5. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA, Inc. ("TransAlta"), a wholly owned
subsidiary of TransAlta Corporation, purchased El Paso Merchant Energy North
American Company's 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, CE Turbo LLC began
selling available power to TransAlta on February 12, 2003 based on percentages
of the Dow Jones SP-15 Index. Such agreement will expire on October 15, 2003.
Sales to TransAlta from the Guarantors totaled $0.5 million for the three months
ended March 31, 2003. The accounts receivable balance at March 31, 2003 was $0.5
million.
During the three months ended March 31, 2003, the Guarantors received
approximately $10.0 million in contributions from MidAmerican Energy Holdings
Company, one of its partners, to be used for capital expenditures.
At December 31, 2002 accounts receivable from El Paso Merchant Energy were $0.3
million.
-20-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of March 31, 2003, and the related statements of operations and cash flows for
the three-month periods ended March 31, 2003 and 2002. 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, 2002, and the related statements of operations,
members' equity, and cash flows for the year then ended (not presented herein);
and in our report dated January 24, 2003 (January 29, 2003 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,
2002 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
May 8, 2003
-21-
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(In thousands, except per share amounts)
AS OF
-----------------------
MARCH 31, DECEMBER 31,
2003 2002
-------- ------------
(UNAUDITED)
ASSETS
Prepaid expenses and other current assets .............. $ 11 $ 13
Royalty stream, net .................................... 13,798 14,011
Excess of cost over fair value of net assets acquired .. 30,464 30,464
Due from affiliates .................................... 41,742 39,501
------- -------
TOTAL ASSETS ........................................... $86,015 $83,989
======= =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accrued interest .................................... $ 28 $ 7
Current portion of long-term debt ................... 304 304
------- -------
Total current liabilities ......................... 332 311
Senior secured project note ............................ 843 843
------- -------
Total liabilities ................................... 1,175 1,154
------- -------
Commitments and contingencies (Note 4)
Members' equity:
Common stock, par value $.01 per share;
100 shares authorized, issued and outstanding ..... -- --
Additional paid-in capital .......................... 1,561 1,561
Retained earnings ................................... 83,279 81,274
------- -------
Total members' equity ............................. 84,840 82,835
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY .................. $86,015 $83,989
======= =======
The accompanying notes are an integral part of these financial statements.
-22-
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
------------------
2003 2002
-------- ------
(UNAUDITED)
REVENUE - ROYALTY INCOME ................................... $3,039 $3,682
COSTS AND EXPENSES:
Royalty, operating, general and administrative expenses .. 798 1,092
Amortization of royalty stream ........................... 213 214
Interest expense ......................................... 23 89
------ ------
Total costs and expenses ............................... 1,034 1,395
------ ------
NET INCOME ................................................. $2,005 $2,287
====== ======
The accompanying notes are an integral part of these financial statements.
-23-
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 2,005 $ 2,287
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of royalty stream and goodwill .................................. 213 214
Changes in assets and liabilities:
Prepaid expenses and other current assets .................................. 2 5
Accrued interest ........................................................... 21 84
------- -------
Net cash flows form operating activities ................................. 2,241 2,590
------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Due from affiliates ............................................................ (2,241) (2,590)
------- -------
NET CHANGE IN CASH ............................................................... -- --
Cash at beginning of period ...................................................... -- --
------- -------
CASH AT THE END OF PERIOD ........................................................ $ -- $ --
======= =======
The accompanying notes are an integral part of these financial statements.
-24-
SALTON SEA ROYALTY
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 March 31, 2003 and the results of operations and cash flows for
the three-month periods ended March 31, 2003 and 2002. The results of operations
for the three-month period ended March 31, 2003 are not necessarily indicative
of the results to be expected for the full year.
The unaudited financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 2002.
Certain amounts in the prior year financial statements have been reclassified in
order to conform to current year presentation. Such reclassifications did not
impact previously reported net income or retained earnings.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
did not have a material effect on the Company's financial position, results of
operations or cash flows.
3. ROYALTY STREAM
The Royalty Company's policy is to provide amortization expense beginning upon
the commencement of revenue production over the estimated remaining useful life
of the identifiable assets.
The royalty streams have been assigned values separately for each of (1) the
remaining portion of the fixed price periods of the Projects' power sales
agreements and (2) the 20-year avoided cost periods of the Projects' power sales
agreements and are amortized separately over such periods using the straight
line method. The royalty stream has a cost of $60.5 million and accumulated
amortization $46.7 million and $46.5 million as of March 31, 2003 and December
31, 2002, respectively. Royalty stream amortization expense was $0.2 million for
the three-month periods ended March 31, 2003 and 2002 and is expected to be $0.6
million for the remaining nine months of 2003 and $0.8 million for each of the
four succeeding four fiscal years.
4. CONTINGENCY
Due to reduced liquidity, Southern California Edison ("Edison") failed to pay
approximately $119 million owed under the power purchase agreements with certain
Guarantors Partnership 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 LLC until Salton Sea Funding
Corporation debt service reserve fund
-25-
of approximately $65.4 million has been funded or the letter of credit has been
extended beyond its July 2004 expiration date or replaced. The fund had a cash
balance of $46.4 million and $46.3 million as of March 31, 2003 and December 31,
2002, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
Salton Sea Funding Corporation (the "Funding Corporation") and the Salton Sea
Guarantors, the Partnership Guarantors, and Salton Sea Royalty LLC (the "Royalty
Guarantors", or collectively the "Guarantors"), during the periods included in
the accompanying statements of operations. This discussion should be read in
conjunction with the Funding Corporation's and the Guarantors' historical
financial statements and the notes to those statements. Actual results in the
future could differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
From time to time, the Funding Corporation and the Guarantors may make
forward-looking statements within the meaning of the federal securities laws
that involve judgments, assumptions and other uncertainties beyond their
control. These forward-looking statements may include, among others, statements
concerning revenue and cost trends, cost recovery, cost reduction strategies and
anticipated outcomes, pricing strategies, changes in the utility industry,
planned capital expenditures, financing needs and availability, statements of
the Funding Corporation's or the Guarantors' expectations, beliefs, future plans
and strategies, anticipated events or trends and similar comments concerning
matters that are not historical facts. These types of forward-looking 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 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 Private Securities Litigation Reform Act of 1995, the Funding
Corporation and the Guarantors have identified important factors that could
cause actual results to differ materially from those expectations, including
weather effects on revenues and other operating uncertainties, uncertainties
relating to economic and political conditions and uncertainties regarding the
impact of regulations, changes in government policy and competition. Neither the
Funding Corporation nor the Guarantors assume any responsibility to update
forward-looking information contained herein.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Consolidated Financial Statements and accompanying notes. Note 2
to the Funding Corporation's and the Guarantors' financial statements included
in their annual report on Form 10-K for the year ended December 31, 2002
describes the significant accounting policies and methods used in the
preparation of the financial statements. Estimates are used for, but not limited
to, the accounting for the allowance for doubtful accounts and impairment of
long-lived assets. Actual results could differ from these estimates.
For additional discussion of the Funding Corporation's and Guarantors' critical
accounting policies, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Funding Corporation's and
the Guarantors' Annual Report on Form 10-K for the year ended December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Funding Corporation and the Guarantors adopted
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This
statement provides accounting and disclosure requirements for retirement
obligations associated with long-lived assets. The cumulative effect of
initially applying this statement did not have a material effect on the Funding
Corporation's or the Guarantors' financial position, results of operations or
cash flows.
-26-
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2003 AND 2002
For purposes of consistency in financial presentation, plant capacity factors
for the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV and Salton
Sea V plants are based on nominal capacity amounts of 10, 20, 50, 40 and 49 net
mega-watts ("NMW"), respectively and for the Vulcan, Elmore, Leathers, Del
Ranch, and CE Turbo plants are based on capacity amounts of 34, 38, 38, 38 and
10 NMW, respectively. Each plant possesses an operating margin, which allows for
production in excess of the amounts listed above. Utilization of this operating
margin is based upon a variety of factors and can be expected to vary throughout
the year under normal operating conditions.
The following operating data represents the aggregate capacity and electricity
production of Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV and
Salton Sea V:
PERIOD ENDED MARCH 31,
-----------------------
2003 2002
-------- --------
Overall capacity factor........... 71.6% 89.3%
Capacity NMW (weighted average)... 168.4 168.4
MWh produced...................... 260,600 324,800
The overall capacity factor for the Salton Sea Guarantor decreased for the three
months ended March 31, 2003 compared to the same period in 2002 primarily due to
the timing of scheduled outages which are typically scheduled from January
through May.
The following operating data represents the aggregate capacity and electricity
production of Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
PERIOD ENDED MARCH 31,
-------------------------
2003 2002
-------- ----------
Overall capacity factor.......... 101.9% 89.3%
Capacity NMW (weighted average).. 158.0 158.0
MWh produced..................... 347,900 306,000
The overall capacity factor for the Partnership Guarantor increased for the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due to the timing of scheduled outages which are typically scheduled from
January through May.
Southern California Edison's ("Edison") Average Avoided Cost of Energy was 6.2
cents per kilowatt-hour and 2.9 cents per kilowatt-hour for the three months
ended March 31, 2003 and 2002, respectively. Estimates of Edison's future
Avoided Cost of Energy vary substantially from year to year. During 2002, as a
result of certain settlement agreements, Edison elected to pay the Guarantors
(except Salton Sea Projects IV and V and the Turbo Project) a fixed energy price
in lieu of Edison's Average Avoided Cost of Energy. The fixed energy price was
3.25 cents per kilowatt-hour in the first quarter 2002 and increased to 5.37
cents per kilowatt hour effective May 1, 2002 through April 30, 2007.
The Salton Sea Guarantors' operating revenue decreased $5.3 million, or 22.6%,
to $18.1 million for the three months ended March 31, 2003 from $23.4 million
for the same period in 2002. The decrease was primarily due to the impact of a
$6.8 million adjustment to the Edison provision in 2002 and lower production due
to more overhauls in 2003, offset by higher rates in 2003.
The Salton Sea Guarantors' interest and other income (loss) decreased $0.6
million to a net loss of $0.2 million for the three months ended March 31, 2003
from a net income of $0.4 million for the same period in 2002. The decrease was
due to interest earned on the past due balances from Edison in 2002.
-27-
The Partnership Guarantors' operating revenue decreased $2.5 million, or 11.3%,
to $19.7 million for the three months ended March 31, 2003 from $22.2 million
for the same period in 2002. The decrease was primarily due to the impact of a
$14.1 million adjustment to the Edison provision in 2002 partially offset by
higher rates and, to a lesser degree, higher production in 2003.
The Partnership Guarantors' interest and other income (loss) decreased $0.6
million to a net loss of $0.1 million for the three months ended March 31, 2003
from a net income of $0.5 million for the same period in 2002. The decrease was
due to lower interest income due to interest earned on the past due balances
from Edison in 2002.
The Royalty Guarantors' revenue decreased $0.7 million, or 18.9%, to $3.0
million for the three months ended March 31, 2003 from $3.7 million for the same
period in 2002. The decrease was the result of lower energy revenue at the
Partnership Projects resulting in lower royalty income.
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, increased $2.8 million, or 23.5%, to $14.7
million for the three months ended March 31, 2003, from $11.9 million for the
same period in 2002 primarily due to the timing of overhauls and higher pipe
repair costs, partially offset by lower royalty expense.
The Partnership Guarantors' operating expenses, which include royalty,
operating, general and administrative expenses, increased $5.9 million, or
32.2%, to $24.2 million for the three months ended March 31, 2003, from $18.3
million for the same period in 2002. The increase in expenses was primarily due
to operating expenses at the zinc recovery plant, which began limited production
in December 2002, partially offset by lower royalty expense.
The Royalty Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, decreased $0.3 million to $0.8 million for
the three months ended March 31, 2003 from $1.1 million for the same period in
2002. The decrease was primarily due to lower royalty expense.
The Salton Sea Guarantors' depreciation and amortization increased $0.6 million
to $4.9 million for the three months ended March 31, 2003 from $4.3 million for
the same period in 2002. The increase was due to a change in salvage value
assumptions and higher depreciable asset balances.
The Partnership Guarantors' depreciation and amortization decreased $1.2 million
to $5.6 million for the three months ended March 31, 2003 from $6.8 million for
the same period in 2002. The decrease was due to the write off of an abandoned
project during 2002 partially offset by a change in salvage value assumptions
and higher depreciable asset balances.
The Salton Sea Guarantors' interest expense decreased $0.4 million to $4.8
million for the three months ended March 31, 2003 from $5.2 million for the same
period in 2002. The decrease was due to reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased $2.8 million to $4.7 million for the three months ended March 31, 2003
from $1.9 million for the same period in 2002. The increase was due to the
discontinuance of capitalizing interest on the minerals extraction process, as
the zinc recovery plant began limited production in December 2002, partially
offset by reduced indebtedness.
The Salton Sea Guarantors are substantially comprised of partnerships. Income
taxes are the responsibility of the partners and Salton Sea Guarantors have no
obligation to provide funds to the partners for payment of any tax liabilities.
Accordingly, the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' benefit for income taxes, increased to $6.1 million
for the three months ended March 31, 2003 from $1.3 million for the same period
in 2002. The increase was due to higher pre-tax loss. The effective tax rate was
40.6% and 31.5% in 2003 and 2002, respectively. The changes from year to year in
the effective rate are due primarily to the generation of energy tax credits,
the resolution of certain tax issues, primarily related to depletion, and
depletion deductions. Income taxes will be paid by the parent of the Guarantors
from distributions to the parent company by the Guarantors, which occur after
payment of operating expenses and debt service.
-28-
The Royalty Guarantors are substantially comprised of partnerships. Income taxes
are the responsibility of the partners and Royalty Guarantors have no obligation
to provide funds to the partners for payment of any tax liabilities.
Accordingly, the Royalty Guarantors have no tax obligations.
The Funding Corporation's net losses were not significant for the three months
ended March 31, 2003 and 2002. The net loss primarily represents interest income
and expense, net of applicable tax, and the Funding Corporation's 1% equity in
earnings of the Guarantors.
LIQUIDITY AND CAPITAL RESOURCES
The Salton Sea Guarantors' cash flows from operating activities decreased to
$10.6 million for the three months ended March 31, 2003 from $32.2 million for
the same period in 2002. The 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 decrease was primarily due to the receipt of past due balances from Edison
in 2002.
The Partnership Guarantors' cash flows from operating activities decreased to
$6.8 million for the three months ended March 31, 2003 from a source of $50.9
million for the same period in 2002. The 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 decrease was primarily due to the
receipt of past due balances from Edison in 2002.
The Royalty Guarantors' cash flow from operations decreased to $2.2 million for
the three months ended March 31, 2003 from $2.6 million for the same period in
2002. The Royalty Guarantors' only source of revenue is royalties received
pursuant to resource lease agreements with the Partnership Projects.
Due to reduced liquidity, Edison had 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.
Pursuant to a settlement agreement 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.
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. Due to Edison's
failure to pay the contractual obligations, the Imperial Valley Projects have
established an allowance for doubtful accounts of approximately $3.1 million as
of March 31, 2003.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea II returned to service, on December 17, 2002. Edison has failed to recognize
the uncontrollable force event and as such has not paid amounts otherwise due
and owing and has improperly derated Salton Sea II from 15 MW to 12.5 MW, under
the Salton Sea II Power Purchase Agreement. On January 29, 2003, Salton Sea
Power Generation, L.P. served a complaint on Edison for such unpaid amounts and
to rescind such deration.
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 Salton Sea Funding
Corporation debt service reserve
-29-
fund of approximately $65.4 million has been funded or the letter of credit has
been extended beyond its July 2004 expiration date or replaced. The fund had a
cash balance of $46.4 million and $46.3 million as of March 31, 2003 and
December 31, 2002, respectively.
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 a 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. ("Salton Sea Power"),
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. On April 25, 2003, Salton Sea Power entered into a
settlement agreement with Stone & Webster. The Settlement Agreement will result
in a $12.1 million payment from Stone & Webster and the arbitration will be
dismissed.
The Salton Sea Guarantors' cash flow used in investing activities increased to
$4.1 million for the three months ended March 31, 2003 from $2.6 million for the
same period in 2002. Capital expenditures are the primary component of investing
activities.
The Partnership Guarantors' cash flow used in investing activities increased to
$7.5 million for the three months ended March 31, 2003 from $5.2 million for the
same period in 2002. Capital expenditures are the primary component of investing
activities.
Minerals LLC constructed the Zinc Recovery Project, which is recovering zinc
from the geothermal brine (the "Zinc Recovery Project"). Facilities have been
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 is being transported to a central processing plant where zinc
ingots are being 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. Limited production began during
December 2002 and full production is expected by late-2003. 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 capital costs, excluding interest during construction, of the Zinc
Recovery Project are approximately $153.4 million, net of payments for
liquidated damages, through March 31, 2003. The Zinc Recovery Project
anticipates incurring $14.5 million in capital expenditures during the remainder
of 2003 to optimize production.
The Funding Corporation's net cash flows from financing activities decreased to
$3.5 million for the three months ended March 31, 2003 from $95.0 million for
the same period in 2002 primarily due to reduced borrowings from affiliates.
Salton Sea Guarantors' net cash flows used in financing activities decreased to
$6.5 million from $29.6 million for the same period in 2002. Partnership
Guarantors' net cash flows from financing activities increased to $0.7 million
for the three months ended March 31, 2003 from a net cash use of $43.1 million
for the same period in 2002 primarily due to an equity contribution received in
2003. The changes in net cash flows from financing activities are primarily the
result of the funding of the debt service reserve fund. These receipts were
deposited into cash accounts at the Funding Corporation and are recorded as
amounts due to the Salton Sea and Partnership Guarantors.
RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA, Inc. ("TransAlta"), a wholly owned
subsidiary of TransAlta Corporation, purchased El Paso Merchant Energy North
American Company's 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo and began selling available power to TransAlta, on February 12, 2003,
based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on
October 15, 2003. Sales to TransAlta from the Guarantors totaled $2.3 million
for the three months ended March 31, 2003. The accounts receivable balance at
March 31, 2003 was $2.3 million
-30-
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, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
Salton Sea Funding Corporation'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 significant changes in internal controls, or in other factors that could
significantly affect internal controls, subsequent to the date of that
evaluation.
-31-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In addition to the proceedings described in Note 3 in the notes to the
consolidated financial statements, the Funding Corporation and its subsidiaries
are currently parties to various minor items of litigation or arbitration, none
of which, if determined adversely, would have a material adverse effect on the
Funding Corporation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON 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:
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Quarterly Report.
(B) REPORTS ON FORM 8-K:
None.
-32-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALTON SEA FUNDING CORPORATION
(Registrant)
Date: May 12, 2003 /s/ Wayne F. Irmiter
------------------------------
Wayne F. Irmiter
Vice President & Controller
-33-
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: May 12, 2003
/s/ Edward J. Heinrich
----------------------
Edward J. Heinrich
President (chief executive officer)
-34-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Wayne F. Irmiter, 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: May 12, 2003
/s/ Wayne F. Irmiter
--------------------
Wayne F. Irmiter
Vice President and Controller
(chief accounting officer)
-35-
EXHIBIT INDEX
Exhibit No.
- -----------
99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Accounting Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-36-