UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0790493
-------- ----------
(State of (IRS Employer
Incorporation) 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 July 31, 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............................................28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........35
Item 4. Controls and Procedures............................................35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................36
Item 2. Changes in Securities and Use of Proceeds..........................36
Item 3. Defaults Upon Senior Securities....................................36
Item 4. Submission of Matters to a Vote of Security Holders................36
Item 5. Other Information..................................................36
Item 6. Exhibits and Reports on Form 8-K...................................36
SIGNATURES....................................................................37
EXHIBIT INDEX.................................................................38
-2-
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 June 30, 2003, and the related statements of
operations for the three-month and six-month periods ended June 30, 2003 and
2002, and of cash flows for the six-month periods ended June 30, 2003 and 2002.
These interim financial statements are the responsibility of the Company's
management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such interim 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
July 30, 2003
-3-
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(In thousands, except share data)
AS OF
------------------------
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash ............................................................. $ 4,706 $ 19,583
Restricted cash .................................................. - 46,293
Accrued interest receivable and other current assets ............. 3,010 3,228
Current portion secured project notes from Guarantors ............ 29,337 28,086
-------- --------
Total current assets ........................................... 37,053 97,190
-------- --------
Secured project notes from Guarantors .............................. 448,302 463,592
Investment in 1% of net assets of Guarantors ....................... 9,777 9,721
-------- --------
TOTAL ASSETS ....................................................... $495,132 $570,503
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued interest ................................................. $ 3,010 $ 3,156
Current portion of long-term debt ................................ 29,337 28,086
-------- --------
Total current liabilities ...................................... 32,347 31,242
-------- --------
Due to affiliates .................................................. 820 62,251
Senior secured notes and bonds ..................................... 448,302 463,592
-------- --------
Total liabilities ................................................ 481,469 557,085
-------- --------
Commitments and contingencies (Note 2)
Stockholder's equity
Common stock authorized - 1,000 shares,
par value $.01 per share; issued and outstanding 100 shares .... - -
Additional paid-in capital ....................................... 6,076 5,811
Retained earnings ................................................ 7,587 7,607
-------- --------
Total stockholder's equity ..................................... 13,663 13,418
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ......................... $495,132 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- --------------------
2003 2002 2003 2002
------- -------- -------- --------
(UNAUDITED)
REVENUE:
Interest income ........................ $ 9,459 $ 10,026 $ 18,928 $ 20,073
Equity in loss of Guarantors ........... (76) (115) (209) (122)
------- -------- -------- --------
Total revenue ........................ 9,383 9,911 18,719 19,951
------- -------- -------- --------
COSTS AND EXPENSES:
General and administrative expenses .... 75 219 190 446
Interest expense ....................... 9,265 9,797 18,562 19,622
------- -------- -------- --------
Total costs and expenses ............. 9,340 10,016 18,752 20,068
------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ........ 43 (105) (33) (117)
Income tax expense (benefit) ........... 18 (43) (13) (48)
------- -------- -------- --------
NET INCOME (LOSS) ........................ $ 25 $ (62) $ (20) $ (69)
======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
-5-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
--------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (20) $ (69)
Adjustments to reconcile net loss to net cash flows from operating activities:
Equity in loss of Guarantors .................................................... 209 122
Changes in assets and liabilities:
Accrued interest receivable and other current assets .......................... 218 26
Accrued interest .............................................................. (146) (145)
-------- --------
Net cash flows from operating activities .................................... 261 (66)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Principal repayments of secured project notes from Guarantors ..................... 14,039 14,286
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted cash ............................................ 46,293 (33,015)
Due to affiliates ................................................................. (61,431) 36,503
Repayment of senior secured notes and bonds ....................................... (14,039) (14,286)
-------- --------
Net cash flows from financing activities ........................................ (29,177) (10,798)
-------- --------
NET CHANGE IN CASH .................................................................. (14,877) 3,422
Cash at the beginning of period ..................................................... 19,583 4,361
-------- --------
CASH AT THE END OF PERIOD ........................................................... $ 4,706 $ 7,783
======== ========
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 June 30, 2003 and the results of operations
for the three-month and six-month periods ended June 30, 2003 and 2002, and of
cash flows for the six-month periods ended June 30, 2003 and 2002. The results
of operations for the three-month and six-month periods ended June 30, 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. COMMITMENTS AND CONTINGENCIES
Due to reduced liquidity, Southern California Edison ("Edison") had failed to
pay approximately $119 million owed under the Power Purchase Agreements with
certain Guarantors (the 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 by Edison of past due
balances 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 June 30, 2003 and December
31, 2002, respectively.
On March 25, 2002, Salton Sea II's 10 megawatt ("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 failed
to recognize the uncontrollable force event and, as such, did not pay amounts
otherwise due and owing, and 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.
On June 11, 2003, certain Guarantors (the Imperial Valley Projects excluding the
Salton Sea I, Salton Sea V and CE Turbo Projects) entered into a settlement
agreement with Edison. The settlement, which relates to the capacity bonus
payment and Salton Sea II uncontrollable force event disputes, provides for an
$800,000 settlement payment from Edison, payment of amounts previously withheld
for the Salton Sea II deration and the recission of such deration. The amounts
previously withheld for the Salton Sea II deration were received in the
-7-
second quarter of 2003. The $800,000 settlement payment is contingent upon
approval by the California Public Utilities Commission.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation had not been
extended beyond its then existing July 2004 expiration date, and as such cash
distributions were not available to CE Generation, LLC ("CE Generation") until
the Funding Corporation debt service reserve fund of approximately $65.4 million
had been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. As of December 31, 2002, the fund had a cash
balance of $46.3 million.
In May 2003, the previous $65.4 million Funding Corporation debt service reserve
letter of credit was replaced by a $32.7 million TransAlta USA Inc.
("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter of
credit which expires on May 30, 2004, and a $32.7 million MidAmerican Energy
Holdings Company letter of credit which expires June 6, 2006.
The new Funding Corporation debt service reserve letters of credit permitted the
cash, which was previously restricted, to be included in funds distributed to CE
Generation on May 29, 2003.
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 resulted in a total
payment of $12.1 million from Stone & Webster in the second quarter 2003 and the
arbitration was dismissed. The settlement was recorded as a $4.5 million
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
3. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta purchased El Paso's Merchant Energy North
American Company's ("EPME") 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 a subsidiary of TransAlta on February
12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will
expire on October 15, 2003. Sales, under these agreements, from the Partnership
and Salton Sea Guarantors totaled $2.9 million and $5.1 million for the
three-month and six-month periods ended June 30, 2003, respectively.
Sales to EPME totaled $0.9 million and $3.5 million during the three-month and
six-month periods ended June 30, 2002, respectively.
-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 June 30, 2003, and the related combined statements of
operations for the three-month and six-month periods ended June 30, 2003 and
2002, and of cash flows for the six-month periods ended June 30, 2003 and 2002.
These interim financial statements are the responsibility of the Salton Sea
Guarantors' management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such combined interim 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
July 30, 2003
-9-
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
------------------------
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Trade accounts receivable, net ..................................... $ 18,810 $ 19,420
Trade accounts receivable from affiliates .......................... 1,894 1,104
Prepaid expenses and other current assets .......................... 4,024 5,283
-------- --------
Total current assets ............................................. 24,728 25,807
-------- --------
Properties, plants, contracts and equipment, net ..................... 524,870 535,220
Goodwill ............................................................. 23,252 23,252
-------- --------
TOTAL ASSETS ......................................................... $572,850 $584,279
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 1,422 $ 328
Accrued interest ................................................... 1,477 1,593
Other accrued liabilities .......................................... 11,106 12,304
Current portion of long-term debt .................................. 23,586 22,765
-------- --------
Total current liabilities ........................................ 37,591 36,990
-------- --------
Due to affiliates .................................................... 45,977 35,665
Senior secured project note .......................................... 211,451 223,654
-------- --------
Total liabilities .................................................. 295,019 296,309
-------- --------
Commitments and contingencies (Note 4)
Guarantors' equity ................................................... 277,831 287,970
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ............................. $572,850 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(UNAUDITED)
REVENUE:
Operating revenue .......................................... $ 19,841 $ 16,093 $ 37,965 $ 39,498
Interest and other income (loss) ........................... (317) - (479) 430
-------- -------- -------- --------
Total revenue ............................................ 19,524 16,093 37,486 39,928
-------- -------- -------- --------
COSTS AND EXPENSES:
Royalty, operating, general and administrative expense ..... 13,549 16,445 28,273 28,335
Depreciation and amortization .............................. 4,886 6,690 9,779 10,965
Interest expense ........................................... 4,797 5,157 9,573 10,319
-------- -------- -------- --------
Total costs and expenses ................................. 23,232 28,292 47,625 $ 49,619
-------- -------- -------- --------
NET LOSS ..................................................... $ (3,708) $(12,199) $(10,139) $ (9,691)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
-11-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
---------------------
2003 2002
-------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $(10,139) $ (9,691)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization ................................................... 9,779 10,965
Other ........................................................................... 172 -
Changes in assets and liabilities:
Trade receivable, net ......................................................... (180) 20,121
Prepaid expenses and other current assets ..................................... 1,259 907
Accounts payable and accrued liabilities ...................................... (220) (4,245)
-------- --------
Net cash flows from operating activities .................................... 671 18,057
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures, net of warranty settlement .................................. 399 (5,479)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured project note .......................................... (11,382) (10,240)
Due to affiliates ................................................................. 10,312 (2,338)
-------- --------
Net cash flows from financing activities ........................................ (1,070) (12,578)
-------- --------
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 June 30, 2003 and the results of operations for the three-month
and six-month periods ended June 30, 2003 and 2002, and of cash flows for the
six-month periods ended June 30, 2003 and 2002. The results of operations for
the three-month and six-month periods ended June 30, 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 loss or Guarantors' equity.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Guarantors adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations".
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, which are included in properties,
plants, contracts and equipment, net, consist of power purchase contracts (the
"Contracts") with a cost of $33.4 million and accumulated amortization of $9.4
million and $8.8 million at June 30, 2003 and December 31, 2002, respectively.
Amortization expense on the Contracts was $0.3 million and $0.6 million for the
three-month and six-month periods ended June 30, 2003 and 2002, respectively.
The Guarantors' expect amortization expense on the Contracts to be $1.2 million
for 2003 and each of the five succeeding fiscal years.
4. COMMITMENTS AND CONTINGENCIES
Edison and the California Power Exchange
- ----------------------------------------
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 (the 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 by Edison of past due
balances 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, the Guarantors (excluding
the Salton Sea I and Salton Sea V Projects) filed a lawsuit against Edison in
California's Imperial County Superior Court seeking a court order requiring
Edison to make the required capacity bonus
-13-
payments under the Power Purchase Agreements. Due to Edison's failure to pay the
contractual obligations, the Guarantors established an allowance for doubtful
accounts of approximately $0.9 million and $0.8 million as of June 30, 2003 and
December 31, 2002, respectively.
On March 25, 2002, Salton Sea II's 10 megawatt ("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 failed
to recognize the uncontrollable force event and, as such, did not pay amounts
otherwise due and owing, and 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.
On June 11, 2003, certain Guarantors (excluding the Salton Sea I and Salton Sea
V Projects) entered into a settlement agreement with Edison. The settlement,
which relates to the capacity bonus payment and Salton Sea II uncontrollable
force event disputes, provides for an $800,000 settlement payment from Edison,
payment of amounts previously withheld for the Salton Sea II deration and the
recission of such deration. The amounts previously withheld for the Salton Sea
II deration were received in the second quarter of 2003. The $800,000 settlement
payment is contingent upon approval by the California Public Utilities
Commission.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation had not been
extended beyond its then existing July 2004 expiration date, and as such cash
distributions were not available to CE Generation, LLC ("CE Generation") until
the Funding Corporation debt service reserve fund of approximately $65.4 million
had been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. As of December 31, 2002, the fund had a cash
balance of $46.3 million.
In May 2003, the previous $65.4 million Funding Corporation debt service reserve
letter of credit was replaced by a $32.7 million TransAlta USA Inc.
("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter of
credit which expires on May 30, 2004, and a $32.7 million MidAmerican Energy
Holdings Company letter of credit which expires June 6, 2006.
The new Funding Corporation debt service reserve letters of credit permitted the
cash, which was previously restricted, to be included in funds distributed to CE
Generation on May 29, 2003.
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 resulted in a total
payment of $12.1 million from Stone & Webster in the second quarter 2003 and the
arbitration was dismissed. The settlement was recorded as a $4.5 million
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
Other Commitments and Contracts
- -------------------------------
On May 20, 2003, Salton Sea Power entered into a Power Sales Agreement with the
City of Riverside, California ("Riverside"). Under the terms of the agreement,
Salton Sea Power will sell up to 20 MW of energy generated from the Salton Sea V
Project to Riverside at $61 per MW hour. Sales under the agreement commenced
June 1, 2003 and will terminate May 31, 2013.
-14-
On July 10, 2003, Salton Sea IV's turbine went out of service due to an
uncontrollable force event. The turbine is expected to be returned to service by
the end of September 2003.
5. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta purchased El Paso Merchant Energy North American
Company's ("EPME") 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power
began selling available power to a subsidiary of TransAlta on February 12, 2003
based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on
October 15, 2003. Sales, under this agreement, from the Guarantors totaled $2.4
million and $4.2 million for the three-month and six-month periods ended June
30, 2003, respectively.
Sales to EPME totaled $0.7 million and $2.9 million during the three-month and
six-month periods ended June 30, 2002, respectively.
-15-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Partnership
Guarantors as of June 30, 2003, and the related combined statements of
operations for the three-month and six-month periods ended June 30, 2003 and
2002, and of cash flows for the six-month periods ended June 30, 2003 and 2002.
These interim financial statements are the responsibility of the Partnership
Guarantors' management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such combined interim 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
July 30, 2003
-16-
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
------------------------
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Trade accounts receivable, net ........................ $ 15,928 $ 14,018
Trade accounts receivable from affiliate .............. 123 312
Prepaid expenses and other current assets ............. 18,323 19,516
-------- --------
Total current assets ................................ 34,374 33,846
-------- --------
Restricted cash ......................................... 266 1
Properties, plants, contracts and equipment, net ........ 668,604 664,722
Management fee .......................................... 67,066 68,679
Due from affiliates ..................................... 92,644 82,083
Goodwill ................................................ 120,866 120,866
-------- --------
TOTAL ASSETS ............................................ $983,820 $970,197
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,951 $ 2,903
Accrued interest ...................................... 1,518 1,576
Other accrued liabilities ............................. 16,156 15,464
Current portion of long-term debt ..................... 5,395 5,017
-------- --------
Total current liabilities ........................... 26,020 24,960
-------- --------
Senior secured project note ............................. 236,212 239,099
Deferred income taxes ................................... 108,656 104,850
-------- --------
Total liabilities ..................................... 370,888 368,909
-------- --------
Commitments and contingencies (Note 4)
Guarantors' equity:
Common stock .......................................... 3 3
Additional paid-in capital ............................ 458,714 432,200
Retained earnings ..................................... 154,215 169,085
-------- --------
Total guarantors' equity ............................ 612,932 601,288
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ................ $983,820 $970,197
======== ========
The accompanying notes are an integral part of these financial statements.
-17-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(UNAUDITED)
REVENUE:
Operating revenue ........................................ $ 22,528 $ 20,296 $ 42,251 $ 42,495
Interest and other income ................................ 202 129 71 665
-------- -------- -------- --------
Total revenue .......................................... 22,730 20,425 42,322 43,160
-------- -------- -------- --------
COSTS AND EXPENSES:
Royalty, operating, general and administrative costs ..... 18,855 14,419 43,054 32,705
Depreciation and amortization ............................ 9,315 5,365 14,948 12,152
Interest expense ......................................... 4,689 4,782 9,353 9,536
Capitalized interest ..................................... - (2,910) - (5,748)
-------- -------- -------- --------
Total costs and expenses ............................... 32,859 21,656 67,355 48,645
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES ................................... (10,129) (1,231) (25,033) (5,485)
Income tax benefit ......................................... (4,112) (387) (10,163) (1,727)
-------- -------- -------- --------
NET LOSS ................................................... $ (6,017) $ (844) $(14,870) $ (3,758)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
-18-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
---------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................... $(14,870) $ (3,758)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization .................................................... 14,948 12,152
Deferred income taxes ............................................................ 3,806 (1,728)
Other ............................................................................ 1,179 -
Changes in assets and liabilities:
Trade accounts receivable, net ................................................. (1,721) 39,899
Prepaid expenses and other current assets ...................................... 1,193 1,096
Accounts payable and accrued liabilities ....................................... 682 1,701
-------- --------
Net cash flows from operating activities ..................................... 5,217 49,362
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures related to operating projects ................................. (12,867) (12,393)
Construction and other development ................................................. (5,684) (22,793)
Decrease (increase) in restricted cash ............................................. (265) 15,951
Management fee ..................................................................... 196 333
-------- --------
Net cash flows from investing activities ......................................... (18,620) (18,902)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due from affiliates ................................................................ (10,602) (36,140)
Repayment of senior secured project notes .......................................... (2,509) (2,313)
Equity contribution ................................................................ 26,514 8,262
-------- --------
Net cash flows from financing activities ......................................... 13,403 (30,191)
-------- --------
NET CHANGE IN CASH ................................................................... - 269
Cash at beginning of period .......................................................... - -
-------- --------
CASH AT THE END OF PERIOD ............................................................ $ - $ 269
======== ========
The accompanying notes are an integral part of these financial statements.
-19-
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 June 30, 2003 the results of operations for the three-month and
six-month periods ended June 30, 2003 and 2002, and of cash flows for the
six-month periods ended June 30, 2003 and 2002. The results of operations for
the three-month and six-month periods ended June 30, 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 loss or retained earnings.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Guarantors adopted Statement of Financial
Accounting Standards, No. 143, "Accounting for Asset Retirement Obligations".
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, which are
included in properties, plants, contracts and equipment, net, as of June 30,
2003 and December 31, 2002 (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002
-------------------------------- --------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts........... $123,002 $ 97,678 $123,002 $ 96,894
Patented Technology................ 46,290 16,350 46,290 15,385
-------- -------- -------- --------
Total............................ $169,292 $114,028 $169,292 $112,279
======== ======== ======== ========
Amortization expense on acquired intangible assets was $0.9 million and $1.7
million for the three-month and six-month periods ended June 30, 2003 and 2002,
respectively. The Guarantors expect amortization expense on acquired intangible
assets to be $3.5 million for 2003 and each of the five succeeding fiscal years.
4. COMMITMENTS AND CONTINGENCIES
Due to reduced liquidity, Southern California Edison ("Edison") had failed to
pay approximately $76.9 million owed under the Power Purchase Agreements with
certain Guarantors (excluding the 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.
-20-
Pursuant to a settlement agreement the final payment by Edison of past due
balances 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, the Guarantors have established an allowance for doubtful accounts
of approximately $2.2 million and $1.9 million as of June 30, 2003 and December
31, 2002, respectively.
On June 11, 2003, certain Guarantors (excluding the Salton Sea I and Salton Sea
V Projects) entered into a settlement agreement with Edison. The settlement,
which relates to the capacity bonus payment and Salton Sea II uncontrollable
force event disputes, provides for an $800,000 settlement payment from Edison,
payment of amounts previously withheld for the Salton Sea II deration and the
recission of such deration. The amounts previously withheld for the Salton Sea
II deration were received in the second quarter of 2003. The $800,000 settlement
payment is contingent upon approval by the California Public Utilities
Commission.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation had not been
extended beyond its then existing July 2004 expiration date, and as such cash
distributions were not available to CE Generation, LLC ("CE Generation") until
the Funding Corporation debt service reserve fund of approximately $65.4 million
had been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. As of December 31, 2002, the fund had a cash
balance of $46.3 million.
In May 2003, the previous $65.4 million Funding Corporation debt service reserve
letter of credit was replaced by a $32.7 million TransAlta USA Inc.
("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter of
credit which expires on May 30, 2004, and a $32.7 million MidAmerican Energy
Holdings Company letter of credit which expires June 6, 2006.
The new Funding Corporation debt service reserve letters of credit permitted the
cash, which was previously restricted, to be included in the funds distributed
to CE Generation on May 29, 2003.
5. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta purchased El Paso Merchant Energy North American
Company's ("EPME") 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, CE Turbo LLC began
selling available power to a subsidiary of 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
and $0.9 million for the three-month and six-month periods ended June 30, 2003.
Sales to EPME totaled $0.2 million and $0.6 million during the three-month and
six-month periods ended June 30, 2002, respectively.
During the six-month period ended June 30, 2003, the Guarantors received
approximately $26.5 million in contributions from MidAmerican Energy Holdings
Company, one of its partners, to be used for capital expenditures.
-21-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of June 30, 2003, and the related statements of operations for the three-month
and six-month periods ended June 30, 2003 and 2002, and of cash flows for the
six-month periods ended June 30, 2003 and 2002. These interim financial
statements are the responsibility of the Salton Sea Royalty LLC's management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such interim 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
July 30, 2003
-22-
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(In thousands, except share data)
AS OF
-----------------------
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Prepaid expenses and other current assets .................. $ 9 $ 13
Royalty stream, net ........................................ 13,584 14,011
Goodwill ................................................... 30,464 30,464
Due from affiliates ........................................ 43,841 39,501
------- -------
TOTAL ASSETS ............................................... $87,898 $83,989
======= =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accrued interest ......................................... $ 6 $ 7
Current portion of long-term debt ........................ 356 304
------- -------
Total current liabilities .............................. 362 311
Senior secured project note ................................ 639 843
------- -------
Total liabilities ........................................ 1,001 1,154
------- -------
Commitments and contingencies
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 ........................................ 85,336 81,274
------- -------
Total members' equity .................................. 86,897 82,835
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY ...................... $87,898 $83,989
======= =======
The accompanying notes are an integral part of these financial statements.
-23-
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2003 2002 2003 2002
------ ------ ------ ------
(UNAUDITED)
REVENUE - ROYALTY INCOME ..................................... $3,104 $2,532 $6,143 $6,214
COSTS AND EXPENSES:
Royalty, operating, general and administrative expenses .... 811 533 1,609 1,625
Amortization of royalty stream ............................. 214 213 427 427
Interest expense ........................................... 22 60 45 149
------ ------ ------ ------
Total costs and expenses ................................. 1,047 806 2,081 2,201
------ ------ ------ ------
NET INCOME ................................................... $2,057 $1,726 $4,062 $4,013
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
-24-
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
------------------
2003 2002
------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 4,062 $ 4,013
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of royalty stream ................................................... 427 427
Changes in assets and liabilities:
Prepaid expenses and other current assets ...................................... 4 9
Accrued interest ............................................................... (1) (12)
------- -------
Net cash flows form operating activities ..................................... 4,492 4,437
------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Due from affiliates ................................................................ (4,340) (2,707)
Repayment of senior secured project note ........................................... (152) (1,730)
------- -------
Net cash flows from financing activities ......................................... (4,492) (4,437)
------- -------
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.
-25-
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 June 30, 2003 and the results of operations for the three-month
and six-month periods ended June 30, 2003 and 2002 and of cash flows for the
six-month periods ended June 30, 2003 and 2002. The results of operations for
the three-month and six-month periods ended June 30, 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. ROYALTY STREAM
The royalty stream has a cost of $60.5 million and accumulated amortization
$46.9 million and $46.5 million as of June 30, 2003 and December 31, 2002,
respectively. Royalty stream amortization expense was $0.2 million and $0.4
million for the three-month and six-month periods ended June 30, 2003 and 2002,
respectively, and is expected to be $0.8 million for 2003 and each of the five
succeeding fiscal years.
-26-
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 Combined 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
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations". 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.
-27-
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 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
megawatts ("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:
THREE MONTHS
ENDED JUNE 30,
--------------------
2003 2002
------- -------
Overall capacity factor ............ 64.4% 63.2%
Capacity NMW (weighted average) .... 168.4 168.4
MW hours ("MWh") produced .......... 237,000 232,400
The overall capacity factor for the Salton Sea Guarantors increased for the
three-month period ended June 30, 2003 compared to the same period in 2002
primarily due to an uncontrollable force event in 2002 at the Salton Sea II
project, partially offset by increased maintenance outages in the second quarter
2003.
The following operating data represents the aggregate capacity and electricity
production of Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
THREE MONTHS
ENDED JUNE 30,
------------------
2003 2002
------- -------
Overall capacity factor ............ 93.6% 106.8%
Capacity NMW (weighted average) .... 158 158
MWh produced ....................... 323,100 368,600
The overall capacity factor for the Partnership Guarantor decreased for the
three-month period ended June 30, 2003 compared to the same period in 2002
primarily due to the timing of maintenance outages.
Southern California Edison's ("Edison") Average Avoided Cost of Energy was 5.4
cents per kilowatthour ("kWh") and 3.5 cents per kWh for the three-month periods
ended June 30, 2003 and 2002, respectively. Estimates of Edison's future Average
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 CE 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 kWh in the first quarter 2002 and increased to 5.37 cents per
kWh effective May 1, 2002 through April 30, 2007.
The Salton Sea Guarantors' operating revenue increased $3.7 million, or 23.0%,
to $19.8 million for the three-month period ended June 30, 2003 from $16.1
million for the same period in 2002. The increase was primarily due to higher
average rates in 2003 and lower production in 2002 due to the Salton Sea II
uncontrollable force event.
The Partnership Guarantors' operating revenue increased $2.2 million, or 10.8%,
to $22.5 million for the three-month period ended June 30, 2003 from $20.3
million for the same period in 2002. The increase was primarily due to higher
average rates in 2003, partially offset by lower production in 2003.
-28-
The Royalty Guarantors' revenue increased $0.6 million, or 24.0%, to $3.1
million for the three-month period ended June 30, 2003 from $2.5 million for the
same period in 2002. The increase was the result of higher energy revenue at the
Partnership Projects resulting in higher royalty income.
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, decreased $2.9 million, or 17.7%, to $13.5
million for the three-month period ended June 30, 2003, from $16.4 million for
the same period in 2002. The decrease was primarily due to the settlement of a
warranty claim with Stone & Webster, Inc. ("Stone & Webster"). The settlement
included a $7.6 million reimbursement of incremental operating expenses related
to legal, other expenses and equipment write-offs. This decrease was partially
offset by the timing of maintenance activities.
The Partnership Guarantors' operating expenses, which include royalty,
operating, general and administrative expenses, increased $4.5 million, or
31.3%, to $18.9 million for the three-month period ended June 30, 2003, from
$14.4 million for the same period in 2002. The increase in expenses was
primarily due to operating expenses at a project which is recovering zinc from
geothermal brine of certain power projects (the "Zinc Recovery Project"), which
began limited production in December 2002.
The Royalty Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, increased $0.3 million to $0.8 million for
the three-month period ended June 30, 2003 from $0.5 million for the same period
in 2002. The increase was due to higher royalty expense.
The Salton Sea Guarantors' depreciation and amortization decreased $1.8 million
to $4.9 million for the three-month period ended June 30, 2003 from $6.7 million
for the same period in 2002. The decrease was due to the write-off of an
abandoned project in 2002, partially offset by increases in 2003 due to a change
in salvage value assumptions and higher depreciable asset balances.
The Partnership Guarantors' depreciation and amortization increased $3.9 million
to $9.3 million for the three- month period ended June 30, 2003 from $5.4
million for the same period in 2002. The increase was due to depreciation on the
Zinc Recovery Project, which began limited production in December 2002, and a
change in salvage value assumptions.
The Salton Sea Guarantors' interest expense decreased $0.4 million to $4.8
million for the three-month period ended June 30, 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-month period ended June 30,
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 Project began limited production in December 2002, partially
offset by reduced indebtedness.
The Salton Sea Guarantors are comprised of partnerships. Income taxes are the
responsibility of the partners and Salton Sea Guarantors have no obligation to
provide funds to the partners for payment of any tax liabilities. Accordingly,
the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' benefit for income taxes, increased to $4.1 million
for the three-month period ended June 30, 2003 from $0.4 million for the same
period in 2002. The increase was due to higher losses at entities with higher
tax rates. The effective tax rate was 40.6% and 31.4% in 2003 and 2002,
respectively. The change in the effective rate was due primarily to the
generation of energy tax credits and the resolution of certain tax issues,
primarily related to depletion deductions in 2002. 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.
The Royalty Guarantors are 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.
-29-
The Funding Corporation's net income (loss) was not significant for the
three-month periods ended June 30, 2003 and 2002. The net income (loss)
primarily represents interest income and expense, net of applicable tax, and the
Funding Corporation's 1% equity in earnings of the Guarantors.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 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 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:
SIX MONTHS
ENDED JUNE 30,
--------------------
2003 2002
------- -------
Overall capacity factor ............ 68.0% 76.2%
Capacity NMW (weighted average) .... 168.4 168.4
MWh produced ....................... 497,600 557,200
The overall capacity factor for the Salton Sea Guarantors decreased for the
six-month period ended June 30, 2003 compared to the same period in 2002
primarily due to more extensive maintenance outages in 2003 partially offset by
the uncontrollable force event at Salton Sea II in 2002.
The following operating data represents the aggregate capacity and electricity
production of Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
SIX MONTHS
ENDED JUNE 30,
------------------
2003 2002
------- -------
Overall capacity factor ............ 97.8% 98.3%
Capacity NMW (weighted average) .... 158 158
MWh produced ....................... 671,000 674,602
The overall capacity factor for the Partnership Guarantor decreased marginally
for the six-month period ended June 30, 2003 compared to the same period in
2002.
Edison's Average Avoided Cost of Energy was 5.8 cents per kWh and 3.2 cents per
kWh for the six-month periods ended June 30, 2003 and 2002, respectively.
Estimates of Edison's future Average 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 kWh in the first quarter
2002 and increased to 5.37 cents per kWh effective May 1, 2002 through April 30,
2007.
The Salton Sea Guarantors' operating revenue decreased $1.5 million, or 3.8%, to
$38.0 million for the six-month period ended June 30, 2003 from $39.5 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 extended overhauls in 2003, partially offset by higher average rates in 2003.
-30-
The Partnership Guarantors' operating revenue decreased $0.2 million to $42.3
million for the six-month period ended June 30, 2003 from $42.5 million for the
same period in 2002. The impact of a $14.1 million adjustment to the Edison
provision in 2002 was offset by higher average rates in 2003.
The Royalty Guarantors' revenue decreased $0.1 million to $6.1 million for the
six-month period ended June 30, 2003 from $6.2 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 were $28.3 million for the six-month periods
ended June 30, 2003 and 2002. During the second quarter of 2003, the settlement
of a warranty claim with Stone & Webster included a $7.6 million reimbursement
of incremental operating expenses related to legal, other expenses and equipment
write-offs which reduced operating costs. This decrease was partially offset by
the timing of overhauls and higher pipe repair costs.
The Partnership Guarantors' operating expenses, which include royalty,
operating, general and administrative expenses, increased $10.4 million, or
31.8%, to $43.1 million for the six-month period ended June 30, 2003, from $32.7
million for the same period in 2002. The increase in expenses was primarily due
to operating expenses at the Zinc Recovery Project, which began limited
production in December 2002.
The Royalty Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, were $1.6 million for the six-month periods
ended June 30, 2003 and 2002.
The Salton Sea Guarantors' depreciation and amortization decreased $1.2 million
to $9.8 million for the six-month period ended June 30, 2003 from $11.0 million
for the same period in 2002. The decrease was due to the write-off of an
abandoned project in 2002, partially offset by a change in salvage value
assumptions and higher depreciable asset balances in 2003.
The Partnership Guarantors' depreciation and amortization increased $2.7 million
to $14.9 million for the six-month period ended June 30, 2003 from $12.2 million
for the same period in 2002. The increase is due to depreciation on the Zinc
Recovery Project, which began limited production in December 2002, and a change
in salvage value assumptions.
The Salton Sea Guarantors' interest expense decreased $0.7 million to $9.6
million for the six-month period ended June 30, 2003 from $10.3 million for the
same period in 2002. The decrease was due to reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased $5.6 million to $9.4 million for the six-month period ended June 30,
2003 from $3.8 million for the same period in 2002. The increase was due to the
discontinuance of capitalizing interest on the Zinc Recovery Project which began
limited production in December 2002, partially offset by reduced indebtedness.
The Salton Sea Guarantors are comprised of partnerships. Income taxes are the
responsibility of the partners and Salton Sea Guarantors have no obligation to
provide funds to the partners for payment of any tax liabilities. Accordingly,
the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' benefit for income taxes, increased to $10.2 million
for the six-month period ended June 30, 2003 from $1.7 million for the same
period in 2002. The increase was due to higher losses. The effective tax rate
was 40.6% and 31.5% in 2003 and 2002, respectively. The change in the effective
rate was due primarily to the generation of energy tax credits and the
resolution of certain tax issues, primarily related to depletion deductions in
2002. 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.
The Royalty Guarantors are 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.
-31-
The Funding Corporation's net losses were not significant for the six-month
period ended June 30, 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
$0.7 million for the six-month period ended June 30, 2003 from $18.1 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
$5.2 million for the six-month period ended June 30, 2003 from $49.4 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 the CE 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 and higher net losses due to the Zinc
Recovery Project being in production.
The Royalty Guarantors' cash flow from operating activities increased to $4.5
million for the six-month period ended June 30, 2003 from $4.4 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 (the 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 by Edison of the past due
balances 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 June 30, 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 failed to recognize the
uncontrollable force event and as such did not pay amounts otherwise due and
owing and 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 amounts and to rescind such deration.
On June 11, 2003, certain Guarantors entered into a settlement agreement with
Edison. The settlement, which relates to the capacity bonus payment and Salton
Sea II uncontrollable force event disputes, provides for an $800,000 settlement
payment from Edison, payment of amounts previously withheld for the Salton Sea
II deration and the recission of such deration. The amounts previously withheld
for the Salton Sea II deration were received in the second quarter of 2003. The
$800,000 settlement payment is contingent upon approval by the California Public
Utilities Commission.
-32-
On July 10, 2003, Salton Sea IV's turbine went out of service due to an
uncontrollable force event. The turbine is expected to be returned to service by
the end of September 2003.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation had not been
extended beyond its then existing July 2004 expiration date, and, as such, cash
distributions were not available to CE Generation, LLC ("CE Generation") until
the Funding Corporation debt service reserve fund of approximately $65.4 million
had been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. As of December 31, 2002, the fund had a cash
balance of $46.3 million.
In May 2003, the previous $65.4 million Salton Sea Funding Corporation debt
service reserve letter of credit was replaced by a $32.7 million TransAlta USA
Inc. ("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter
of credit which expires on May 30, 2004, and a $32.7 million MidAmerican Energy
Holdings Company letter of credit which expires June 6, 2006.
The new Funding Corporation debt service reserve letters of credit permitted the
cash, which was previously restricted, to be included in the funds distributed
to CE Generation on May 29, 2003.
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 resulted in a total
payment of $12.1 million from Stone & Webster in the second quarter 2003 and the
arbitration was dismissed. The settlement was recorded as a $4.5 million
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
The Salton Sea Guarantors' cash flow from investing activities increased to a
source of $0.4 million for the six-month period ended June 30, 2003 from a use
of $5.5 million for the same period in 2002. During the second quarter of 2003,
$4.5 million of the Stone & Webster settlement was recorded as a reduction to
capital equipment. Capital expenditures are the primary component of investing
activities.
The Partnership Guarantors' cash flow used in investing activities was $18.6
million for the six-month period ended June 30, 2003 and $18.9 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. 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 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 $159.5 million, net of payments for
liquidated damages, through June 30, 2003. The Zinc Recovery Project anticipates
incurring $8.4 million in capital expenditures during the remainder of 2003 to
optimize production.
-33-
The Funding Corporation's net cash flows used in financing activities was $29.2
million for the six-month period ended June 30, 2003 and $10.8 million for the
same period in 2002. The increased use of cash was primarily due to payments
made to affiliates partially offset by the release of the restricted cash.
Salton Sea Guarantors' net cash flows used in financing activities was $1.1
million for the six-month period ended June 30, 2003 and $12.6 million for the
same period in 2002. The decreased use of cash was primarily due to higher
borrowings from affiliates during 2003.
Partnership Guarantors' net cash flows from financing activities was a source of
cash totaling $13.4 million for the six-month period ended June 30, 2003 and use
of cash totaling $30.2 million for the same period in 2002. The change was
primarily due to higher equity contributions and lower payments to affiliates in
2003.
RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta purchased El Paso Merchant Energy North American
Company's ("EPME") 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 a subsidiary of 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 $2.9 million and $5.1 million for the three-month and
six-month periods ended June 30, 2003, respectively.
Sales to EPME totaled $0.9 million and $3.5 million during the three-month and
six-month periods ended June 30, 2002, respectively.
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
other than as discussed in the "Liquidity and Capital Resources" section.
-34-
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.
An evaluation was performed under the supervision and with the participation of
Salton Sea Funding Corporation's management, including its chief executive
officer and chief financial officer, regarding the effectiveness of the design
and operation of Salton Sea Funding Corporation's disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended) as of June 30, 2003. Based on that evaluation,
Salton Sea Funding Corporation's management, including the chief executive
officer and chief financial officer, concluded that Salton Sea Funding
Corporation's disclosure controls and procedures were effective. There have been
no significant changes in Salton Sea Funding Corporation's internal controls or
in other factors that could significantly affect internal controls.
-35-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 2 to the financial statements and discussion in Management's Discussion
and Analysis.
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.
-36-
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: August 7, 2003 /s/ Wayne F. Irmiter
------------------------------
Wayne F. Irmiter
Vice President & Controller
-37-
EXHIBIT INDEX
Exhibit No.
- -----------
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Accounting Officer's Certificate Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Accounting Officer's Certificate Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
-38-