UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 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...........36
Item 4. Controls and Procedures..............................................36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................37
Item 2. Changes in Securities and Use of Proceeds............................37
Item 3. Defaults Upon Senior Securities......................................37
Item 4. Submission of Matters to a Vote of Security Holders..................37
Item 5. Other Information....................................................37
Item 6. Exhibits and Reports on Form 8-K.....................................37
SIGNATURES....................................................................38
EXHIBIT INDEX.................................................................39
-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 September 30, 2003, and the related statements
of operations for the three-month and nine-month periods ended September 30,
2003 and 2002, and of cash flows for the nine-month periods ended September 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
November 3, 2003
-3-
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(In thousands, except share data)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash ........................................................ $ 30,765 $ 19,583
Restricted cash ............................................. - 46,293
Accrued interest receivable and other current assets ........ 12,146 3,228
Current portion secured project notes from Guarantors ....... 29,337 28,086
-------- --------
Total current assets ...................................... 72,248 97,190
-------- --------
Secured project notes from Guarantors ......................... 448,302 463,592
Investment in 1% of net assets of Guarantors .................. 9,882 9,721
-------- --------
TOTAL ASSETS .................................................. $530,432 $570,503
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued interest ............................................ $ 12,136 $ 3,156
Current portion of long-term debt ........................... 29,337 28,086
-------- --------
Total current liabilities ................................. 41,473 31,242
-------- --------
Due to affiliates ............................................. 26,950 62,251
Senior secured notes and bonds ................................ 448,302 463,592
-------- --------
Total liabilities ........................................... 516,725 557,085
-------- --------
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 .................................. 6,144 5,811
Retained earnings ........................................... 7,563 7,607
-------- --------
Total stockholder's equity ................................ 13,707 13,418
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .................... $530,432 $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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- -------- -------
(UNAUDITED)
REVENUE:
Interest income ...................... $ 9,217 $ 9,984 $ 28,145 $30,057
Equity in income (loss) of Guarantors 37 156 (172) 34
------- ------- -------- -------
Total revenue ...................... 9,254 10,140 27,973 30,091
------- ------- -------- -------
COSTS AND EXPENSES:
General and administrative expenses .. 107 135 297 581
Interest expense ..................... 9,188 9,679 27,750 29,301
------- ------- -------- -------
Total costs and expenses ........... 9,295 9,814 28,047 29,882
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES ...... (41) 326 (74) 209
Income tax expense (benefit) ......... (17) 134 (30) 86
------- ------- -------- -------
NET INCOME (LOSS) ...................... $ (24) $ 192 $ (44) $ 123
======= ======= ======== =======
The accompanying notes are an integral part of these financial statements.
-5-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................................ $ (44) $ 123
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Equity in (income) loss of Guarantors ................................................ 172 (34)
Changes in assets and liabilities:
Accrued interest receivable and other current assets ............................... (8,918) (9,605)
Accrued interest ................................................................... 8,980 9,534
-------- --------
Net cash flows from operating activities ......................................... 190 18
-------- --------
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 (33,174)
(Decrease) increase in due to affiliates ............................................... (35,301) 43,885
Repayment of senior secured notes and bonds ............................................ (14,039) (14,286)
-------- --------
Net cash flows from financing activities ............................................. (3,047) (3,575)
-------- --------
NET CHANGE IN CASH ....................................................................... 11,182 10,729
Cash at the beginning of period .......................................................... 19,583 4,361
-------- --------
CASH AT THE END OF PERIOD ................................................................ $ 30,765 $ 15,090
======== ========
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 September 30, 2003, and the results of
operations for the three-month and nine-month periods ended September 30, 2003
and 2002, and of cash flows for the nine-month periods ended September 30, 2003
and 2002. The results of operations for the three-month and nine-month periods
ended September 30, 2003 are not necessarily indicative of the results to be
expected for the full year.
The unaudited financial statements should be read in conjunction with the
financial statements included in the Funding Corporation's Annual Report on Form
10-K for the year ended December 31, 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. 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 $2.7 million as of December 31, 2002. In connection with the
June 11, 2003 settlement discussed below, the receivables associated with this
allowance were written off during 2003.
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 second
quarter of 2003. The $800,000 settlement payment is contingent upon approval by
the California Public Utilities Commission.
-7-
On July 10, 2003 Salton Sea IV's 34 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totalling $1.7 million.
On September 19, 2003 and October 17, 2003, Salton Sea Power Generation, L.P.,
with Fish Lake Power Company, owner of Salton Sea IV, served notices of error on
Edison for such unpaid amounts. As a result, the Company has recorded a
liability of $1.4 million for capacity payments as of September 30, 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 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.
On November 25, 2002, Vulcan/BN Geothermal Power Company, Del Ranch, L.P. and CE
Turbo, LLC entered into a settlement agreement with Stone & Webster related to 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 CE Turbo Project. The
settlement agreement resulted in a $3.5 million payment from Stone & Webster
which was recorded as a reduction of incremental capital expenditures.
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.
-8-
Minerals LLC ("Minerals") contracted with Zachry Construction Corporation
("Zachry") under a time and materials contract to do a maximum of $1.32 million
work for the Zinc Recovery Project. Zachry has invoiced Minerals for $4.7
million of work under this contract. Minerals has been unable to substantiate
Zachry's invoices. Zachry filed a demand for arbitration with the American
Arbitration Association (the "AAA") on August 19, 2003 for collection of its
claimed outstanding invoices. Although the AAA has selected an arbitration
panel, neither the AAA nor the panel has scheduled any hearings on this matter
to date. Minerals anticipates that the evidentiary hearing on this matter will
not likely occur prior to the summer of 2004.
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. The Transaction
Agreement shall continue until the earlier of (a) 30 days following a written
notice of termination after October 1, 2003 or (b) any other termination date
mutually agreed to by the parties. No such notice of termination has been given
by either party. Sales, under these agreements, from the Partnership and Salton
Sea Guarantors totaled $2.4 million and $7.5 million for the three-month and
nine-month periods ended September 30, 2003, respectively.
Sales to EPME totaled $2.7 million and $6.1 million during the three-month and
nine-month periods ended September 30, 2002, respectively.
-9-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Salton Sea
Guarantors as of September 30, 2003, and the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2003
and 2002, and of cash flows for the nine-month periods ended September 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
November 3, 2003
-10-
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
---------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Trade accounts receivable, net ....................... $ 19,091 $ 19,420
Trade accounts receivable from affiliates ............ 1,330 1,104
Prepaid expenses and other current assets ............ 3,445 5,283
-------- --------
Total current assets ............................... 23,866 25,807
-------- --------
Properties, plants, contracts and equipment, net ....... 515,881 535,220
Goodwill ............................................... 23,252 23,252
-------- --------
TOTAL ASSETS ........................................... $562,999 $584,279
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 1,424 $ 328
Accrued interest ..................................... 5,968 1,593
Other accrued liabilities ............................ 12,428 12,304
Current portion of long-term debt .................... 23,586 22,765
-------- --------
Total current liabilities .......................... 43,406 36,990
-------- --------
Due to affiliates ...................................... 30,602 35,665
Senior secured project note ............................ 211,451 223,654
-------- --------
Total liabilities .................................. 285,459 296,309
-------- --------
Commitments and contingencies (Note 4)
Guarantors' equity ..................................... 277,540 287,970
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ............... $562,999 $584,279
======== ========
The accompanying notes are an integral part of these financial statements.
-11-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- ------- -------- --------
(UNAUDITED)
REVENUE:
Operating revenue ...................................... $ 26,646 $27,438 $ 64,611 $ 66,936
Interest and other (loss) income ....................... 12 2,185 (467) 2,615
-------- ------- -------- --------
Total revenue ........................................ 26,658 29,623 64,144 69,551
-------- ------- -------- --------
COSTS AND EXPENSES:
Royalty, operating, general and administrative expense . 17,373 14,374 45,646 42,709
Depreciation and amortization .......................... 4,894 4,721 14,673 15,686
Interest expense ....................................... 4,682 5,053 14,255 15,372
-------- ------- -------- --------
Total costs and expenses ............................. 26,949 24,148 74,574 $ 73,767
-------- ------- -------- --------
NET (LOSS) INCOME ........................................ $ (291) $ 5,475 $(10,430) $ (4,216)
======== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
-12-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(10,430) $ (4,216)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization ................................................ 14,673 15,686
Other ........................................................................ 172 -
Changes in assets and liabilities:
Trade accounts receivable, net ............................................. 103 10,223
Prepaid expenses and other current assets .................................. 1,838 (613)
Accounts payable and accrued liabilities ................................... 5,595 1,071
-------- --------
Net cash flows from operating activities ................................. 11,951 22,151
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures, net of warranty settlement ............................... (710) (9,859)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured project note ....................................... (11,382) (10,240)
Increase (decrease) in due to affiliates ....................................... 141 (2,052)
-------- --------
Net cash flows from financing activities ..................................... (11,241) (12,292)
-------- --------
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.
-13-
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 September 30, 2003 and the results of operations for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 30, 2003 and 2002. The
results of operations for the three-month and nine-month periods ended September
30, 2003 are not necessarily indicative of the results to be expected for the
full year.
The unaudited financial statements should be read in conjunction with the
financial statements included in the 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 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 $9.7
million and $8.8 million at September 30, 2003 and December 31, 2002,
respectively. Amortization expense on the Contracts was $0.3 million and $0.9
million for the three-month and nine-month periods ended September 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 payments under the Power Purchase
Agreements. Due to Edison's failure to pay the contractual obligations, the
-14-
Guarantors established an allowance for doubtful accounts of approximately $0.8
million as of December 31, 2002. In connection with the June 11, 2003 settlement
discussed below, the receivables associated with this allowance were written off
during 2003.
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.
On July 10, 2003, Salton Sea IV's 34 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totaling $1.7 million. On
September 19, 2003 and October 17, 2003, Salton Sea Power Generation, L.P., with
Fish Lake Power Company, owner of Salton Sea IV served notices of error on
Edison for such unpaid amounts. As a result, the Guarantors have recorded a
liability of $1.4 million for capacity payments as of September 30, 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 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.
-15-
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.
Minerals LLC ("Minerals") contracted with Zachry Construction Corporation
("Zachry") under a time and materials contract to do a maximum of $1.32 million
work for the Zinc Recovery Project. Zachry has invoiced Minerals for $4.7
million of work under this contract. Minerals has been unable to substantiate
Zachry's invoices. Zachry filed a demand for arbitration with the American
Arbitration Association (the "AAA") on August 19, 2003 for collection of its
claimed outstanding invoices. Although the AAA has selected an arbitration
panel, neither the AAA nor the panel has scheduled any hearings on this matter
to date. Minerals anticipates that the evidentiary hearing on this matter will
not likely occur prior to the summer of 2004.
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. The Transaction Agreement
shall continue until the earlier of (a) 30 days following a written notice of
termination after October 1, 2003 or (b) any other termination date mutually
agreed to by the parties. No such notice of termination has been given by either
party. Sales, under this agreement, from the Guarantors totaled $1.8 million and
$6.0 million for the three-month and nine-month periods ended September 30,
2003, respectively.
Sales to EPME totaled $2.3 million and $5.1 million during the three-month and
nine-month periods ended September 30, 2002, respectively.
-16-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying combined balance sheet of the Partnership
Guarantors as of September 30, 2003, and the related combined statements of
operations for the three-month and nine-month periods ended September 30, 2003
and 2002, and of cash flows for the nine-month periods ended September 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
November 3, 2003
-17-
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(In thousands)
AS OF
---------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Trade accounts receivable, net ....................... $ 22,430 $ 14,018
Trade accounts receivable from affiliate ............. 329 312
Prepaid expenses and other current assets ............ 18,256 19,516
-------- --------
Total current assets ................................. 41,015 33,846
-------- --------
Restricted cash ........................................ 288 1
Properties, plants, contracts and equipment, net ....... 645,245 644,951
Management fee ......................................... 67,418 68,679
Due from affiliates .................................... 125,136 101,854
Goodwill ............................................... 120,866 120,866
-------- --------
TOTAL ASSETS ........................................... $999,968 $970,197
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 2,667 $ 2,903
Accrued interest ..................................... 6,143 1,576
Other accrued liabilities ............................ 18,083 15,464
Current portion of long-term debt .................... 5,395 5,017
-------- --------
Total current liabilities ............................ 32,288 24,960
-------- --------
Senior secured project note ............................ 236,212 239,099
Deferred income taxes .................................. 109,896 104,850
-------- --------
Total liabilities .................................... 378,396 368,909
-------- --------
Commitments and contingencies (Note 4)
Guarantors' equity:
Common stock ......................................... 3 3
Additional paid-in capital ........................... 465,538 432,200
Retained earnings .................................... 156,031 169,085
-------- --------
Total guarantors' equity ............................. 621,572 601,288
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ............... $999,968 $970,197
======== ========
The accompanying notes are an integral part of these financial statements.
-18-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
------- -------- -------- --------
(UNAUDITED)
REVENUE:
Operating revenue .................................... $33,113 $ 33,229 $ 75,364 $ 75,724
Interest and other income ............................ 1,257 1,103 1,328 1,768
------- -------- -------- --------
Total revenue ...................................... 34,370 34,332 76,692 77,492
------- -------- -------- --------
COSTS AND EXPENSES:
Royalty, operating, general and administrative costs . 18,602 15,668 61,656 48,373
Depreciation and amortization ........................ 7,983 5,484 22,931 17,636
Interest expense ..................................... 4,729 4,792 14,082 14,328
Capitalized interest ................................. - (3,050) - (8,798)
------- -------- -------- --------
Total costs and expenses ........................... 31,314 22,894 98,669 71,539
------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ...................... 3,056 11,438 (21,977) 5,953
Income tax expense (benefit) ........................... 1,240 3,602 (8,923) 1,875
------- -------- -------- --------
NET INCOME (LOSS) ...................................... $ 1,816 $ 7,836 $(13,054) $ 4,078
======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
-19-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................................... $(13,054) $ 4,078
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization ....................................................... 22,931 17,636
Deferred income taxes ............................................................... 5,046 1,875
Other ............................................................................... 1,179 -
Changes in assets and liabilities:
Trade accounts receivable, net .................................................... (8,429) 24,436
Prepaid expenses and other current assets ......................................... 1,260 (1,347)
Accounts payable and accrued liabilities .......................................... 6,950 8,492
-------- --------
Net cash flows from operating activities ........................................ 15,883 55,170
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures related to operating projects .................................... (12,207) (16,938)
Construction and other development .................................................... (10,074) (39,453)
(Increase) decrease in restricted cash ................................................ (287) 21,282
Management fee ........................................................................ (862) (724)
-------- --------
Net cash flows from investing activities ............................................ (23,430) (35,833)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from affiliates ....................................................... (23,282) (36,745)
Repayment of senior secured project notes ............................................. (2,509) (2,313)
Equity contribution ................................................................... 33,338 19,788
-------- --------
Net cash flows from financing activities ............................................ 7,547 (19,270)
-------- --------
NET CHANGE IN CASH ...................................................................... - 67
Cash at beginning of period ............................................................. - -
-------- --------
CASH AT THE END OF PERIOD ............................................................... $ - $ 67
======== ========
The accompanying notes are an integral part of these financial statements.
-20-
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 September 30, 2003, the results of operations for the three-month
and nine-month periods ended September 30, 2003 and 2002, and of cash flows for
the nine-month periods ended September 30, 2003 and 2002. The results of
operations for the three-month and nine-month periods ended September 30, 2003
are not necessarily indicative of the results to be expected for the full year.
The unaudited financial statements should be read in conjunction with the
audited financial statements 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 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 September
30, 2003 and December 31, 2002 (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts ..... $123,002 $ 98,070 $123,002 $ 96,894
Patented Technology .......... 46,290 16,832 46,290 15,385
-------- -------- -------- --------
Total ...................... $169,292 $114,902 $169,292 $112,279
======== ======== ======== ========
Amortization expense on acquired intangible assets was $0.9 million and $2.6
million for the three-month and nine-month periods ended September 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.
-21-
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 $1.9 million as of December 31, 2002. In connection with the
June 11, 2003 settlement discussed below, the receivables associated with this
allowance were written off during 2003.
On June 11, 2003, certain Guarantors (excluding the CE Turbo Project) 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. The Transaction Agreement shall
continue until the earlier of (a) 30 days following a written notice of
termination after October 1, 2003 or (b) any other termination date mutually
agreed to by the parties. No such notice of termination has been given by either
party. Sales to TransAlta from the Guarantors totaled $0.6 million and $1.5
million for the three-month and nine-month periods ended September 30, 2003.
Sales to EPME totaled $0.4 million and $1.0 million during the three-month and
nine-month periods ended September 30, 2002, respectively.
During the nine-month period ended September 30, 2003, the Guarantors received
approximately $33.3 million in contributions from MidAmerican Energy Holdings
Company, one of its partners, to be used for capital expenditures.
-22-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Magma Power Company
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Royalty LLC as
of September 30, 2003, and the related statements of operations for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 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
November 3, 2003
-23-
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(In thousands, except share data)
AS OF
-----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Prepaid expenses and other current assets .................. $ 7 $ 13
Royalty stream, net ........................................ 13,370 14,011
Goodwill ................................................... 30,464 30,464
Due from affiliates ........................................ 46,267 39,501
------- -------
TOTAL ASSETS ............................................... $90,108 $83,989
======= =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accrued interest ......................................... $ 24 $ 7
Current portion of long-term debt ........................ 356 304
------- -------
Total current liabilities .............................. 380 311
------- -------
Senior secured project note ................................ 639 843
------- -------
Total liabilities ........................................ 1,019 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 ........................................ 87,528 81,274
------- -------
Total members' equity .................................. 89,089 82,835
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY ...................... $90,108 $83,989
======= =======
The accompanying notes are an integral part of these financial statements.
-24-
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
(UNAUDITED)
REVENUE - ROYALTY INCOME .................................. $3,284 $3,371 $9,427 $9,585
COSTS AND EXPENSES:
Royalty, operating, general and administrative expenses . 857 863 2,466 2,488
Amortization of royalty stream .......................... 214 214 641 641
Interest expense ........................................ 21 76 66 225
------ ------ ------ ------
Total costs and expenses .............................. 1,092 1,153 3,173 3,354
------ ------ ------ ------
NET INCOME ................................................ $2,192 $2,218 $6,254 $6,231
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
-25-
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 6,254 $ 6,231
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of royalty stream ................................................ 641 641
Changes in assets and liabilities:
Prepaid expenses and other current assets ................................... 6 14
Accrued interest ............................................................ 17 42
------- -------
Net cash flows form operating activities .................................. 6,918 6,928
------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from affiliates ................................................. (6,766) (5,198)
Repayment of senior secured project note ........................................ (152) (1,730)
------- -------
Net cash flows from financing activities ...................................... (6,918) (6,928)
------- -------
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.
-26-
SALTON SEA ROYALTY LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of Salton Sea Royalty LLC (the "Company"), the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2003, and the results of operations for the
three-month and nine-month periods ended September 30, 2003 and 2002 and of cash
flows for the nine-month periods ended September 30, 2003 and 2002. The results
of operations for the three-month and nine-month periods ended September 30,
2003 are not necessarily indicative of the results to be expected for the full
year.
The unaudited financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
2. ROYALTY STREAM
The royalty stream has a cost of $60.5 million and accumulated amortization of
$47.1 million and $46.5 million as of September 30, 2003 and December 31, 2002,
respectively. Royalty stream amortization expense was $0.2 million and $0.6
million for the three-month and nine-month periods ended September 30, 2003 and
2002, respectively, and is expected to be $0.8 million for 2003 and each of the
five succeeding fiscal years.
-27-
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.
-28-
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 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 SEPTEMBER 30,
-------------------
2003 2002
------- -------
Overall capacity factor ........... 72.1% 85.6%
Capacity NMW (weighted average) ... 168.4 168.4
MW hours ("MWh") produced ......... 268,200 318,300
The overall capacity factor for the Salton Sea Guarantors decreased for the
three-month period ended September 30, 2003 compared to the same period in 2002
primarily due to an uncontrollable force event in 2003 at the Salton Sea IV
project.
The following operating data represents the aggregate capacity and electricity
production of Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
2003 2002
------- -------
Overall capacity factor ........ 102.6% 104.7%
Capacity NMW (weighted average) 158.0 158.0
MWh produced ................... 357,800 365,200
The overall capacity factor for the Partnership Guarantors decreased for the
three-month period ended September 30, 2003 compared to the same period in 2002
primarily due to maintenance outages.
Southern California Edison's ("Edison") Average Avoided Cost of Energy was 5.2
cents per kilowatt hour ("kWh") and 3.2 cents per kWh for the three-month
periods ended September 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 decreased $0.8 million, or 2.9%, to
$26.6 million for the three-month period ended September 30, 2003 from $27.4
million for the same period in 2002. The decrease was primarily due to lower
production in 2003 due to the Salton Sea IV uncontrollable force event partially
offset by higher average rates in 2003.
The Partnership Guarantors' operating revenue decreased $0.1 million to $33.1
million for the three-month period ended September 30, 2003 from $33.2 million
for the same period in 2002. The decrease was primarily due to marginally lower
production partially offset by slightly higher average rates in 2003.
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The Royalty Guarantors' revenue decreased $0.1 million to $3.3 million for the
three-month period ended September 30, 2003 from $3.4 million for the same
period in 2002.
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses, increased $3.0 million, or 20.8%, to $17.4
million for the three-month period ended September 30, 2003, from $14.4 million
for the same period in 2002. The increase was primarily due to repair costs
associated with the Salton Sea IV uncontrollable force event, partially offset
by decreased legal costs related to disputes with Edison in 2002.
The Partnership Guarantors' operating expenses, which include royalty,
operating, general and administrative expenses, increased $2.9 million, or
18.5%, to $18.6 million for the three-month period ended September 30, 2003,
from $15.7 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, were $0.9 million for the three-month
periods ended September 30, 2003 and 2002.
The Salton Sea Guarantors' depreciation and amortization increased $0.2 million
to $4.9 million for the three-month period ended September 30, 2003 from $4.7
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 increased $2.5 million
to $8.0 million for the three- month period ended September 30, 2003 from $5.5
million for the same period in 2002. The increase was due to depreciation on the
Zinc Recovery Project and a change in salvage value assumptions.
The Salton Sea Guarantors' interest expense decreased $0.4 million to $4.7
million for the three-month period ended September 30, 2003 from $5.1 million
for the same period in 2002. The decrease was due to reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased $3.0 million to $4.7 million for the three-month period ended
September 30, 2003 from $1.7 million for the same period in 2002. The increase
was due to the discontinuance of capitalizing interest on the minerals
extraction process, 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' income tax expense, decreased to $1.2 million for
the three-month period ended September 30, 2003 from $3.6 million for the same
period in 2002. The decrease was due to lower income before tax. The effective
tax rate was 40.6% and 31.5% in 2003 and 2002, respectively. Changes in the
effective rates are due primarily to the generation of energy tax credits and
changes in 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.
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.
The Funding Corporation's net income (loss) was not significant for the
three-month periods ended September 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.
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RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND
2002
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:
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
-------- --------
Overall capacity factor ........ 69.4% 79.4%
Capacity NMW (weighted average) 168.4 168.4
MWh produced ................... 765,800 875,500
The overall capacity factor for the Salton Sea Guarantors decreased for the
nine-month period ended September 30, 2003 compared to the same period in 2002
primarily due to the uncontrollable force event at Salton Sea IV in 2003.
The following operating data represents the aggregate capacity and electricity
production of Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2003 2002
--------- ---------
Overall capacity factor ........ 99.4% 100.4%
Capacity NMW (weighted average) 158.0 158.0
MWh produced ................... 1,028,800 1,039,800
The overall capacity factor for the Partnership Guarantors decreased marginally
for the nine-month period ended September 30, 2003 compared to the same period
in 2002 primarily due to maintenance outages.
Edison's Average Avoided Cost of Energy was 5.6 cents per kWh and 3.2 cents per
kWh for the nine-month periods ended September 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 decreased $2.3 million, or 3.4%, to
$64.6 million for the nine-month period ended September 30, 2003 from $66.9
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 and the Salton Sea IV uncontrollable force
event in 2003, partially offset by higher average rates in 2003.
The Partnership Guarantors' operating revenue decreased $0.3 million to $75.4
million for the nine-month period ended September 30, 2003 from $75.7 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 $0.2 million to $9.4 million for the
nine-month period ended September 30, 2003 from $9.6 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 $3.0 million, or 7.0% to $45.6
million for the nine-month period ended September 30, 2003 from $42.7 million
for the same period in 2002. The increase was primarily due to timing of
overhauls, increased pipe replacement costs and repair costs associated with the
Salton Sea IV uncontrollable force event. The increase was partially offset by
the second quarter 2003 warranty claim settlement with Stone & Webster, which
included
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a $7.6 million reimbursement of incremental operating expenses related to legal,
other expenses and equipment write-offs which reduced operating costs.
The Partnership Guarantors' operating expenses, which include royalty,
operating, general and administrative expenses, increased $13.3 million, or
27.5%, to $61.7 million for the nine-month period ended September 30, 2003, from
$48.4 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 $2.5 million for the nine-month
periods ended September 30, 2003 and 2002.
The Salton Sea Guarantors' depreciation and amortization decreased $1.0 million
to $14.7 million for the nine-month period ended September 30, 2003 from $15.7
million for the same period in 2002. The decrease was due to the write-off of an
abandoned project in 2002, partially offset by a change in salvage value
assumptions and higher depreciable asset balances in 2003.
The Partnership Guarantors' depreciation and amortization increased $5.3 million
to $22.9 million for the nine-month period ended September 30, 2003 from $17.6
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 $1.1 million to $14.3
million for the nine-month period ended September 30, 2003 from $15.4 million
for the same period in 2002. The decrease was due to reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased $8.5 million to $14.0 million for the nine-month period ended
September 30, 2003 from $5.5 million for the same period in 2002. The increase
was due to the discontinuance of capitalizing interest on the Zinc Recovery
Project, 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' income tax was an $8.9 million benefit for the
nine-month period ended September 30, 2003 as compared to an expense of $1.9
million for the same period in 2002. The change was due to a pretax loss in 2003
compared to pretax income in 2002. The effective tax rate was 40.6% and 31.5% in
2003 and 2002, respectively. Changes in the effective rate are due primarily to
the generation of energy tax credits and changes to 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.
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.
The Funding Corporation's net income (loss) was not significant for the
nine-month period ended September 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.
LIQUIDITY AND CAPITAL RESOURCES
The Salton Sea Guarantors' cash flows from operating activities decreased to
$12.0 million for the nine-month period ended September 30, 2003 from $22.2
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 and lower earnings in 2003.
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The Partnership Guarantors' cash flows from operating activities decreased to
$15.9 million for the nine-month period ended September 30, 2003 from $55.2
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 was $6.9 million for
the nine-month periods ended September 30, 2003 and 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 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, excluding Salton Sea I, Salton Sea V and CE Turbo 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 payments under
the Power Purchase Agreements. Due to Edison's failure to pay the contractual
obligations, the Imperial Valley Projects established an allowance for doubtful
accounts of approximately $2.7 million as of December 31, 2002. In connection
with the June 11, 2003 settlement discussed below, the receivables associated
with this allowance were written off during 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, excluding 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 second quarter of 2003. The
$800,000 settlement payment is contingent upon approval by the California Public
Utilities Commission.
On July 10, 2003, Salton Sea IV's 34 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totaling $1.7 million. On
September 17, 2003 and October 19, 2003 Salton Sea Power Generation, L.P., with
Fish Lake Power Company, owner of Salton Sea IV served notices of error on
Edison for such unpaid amounts. As a result, the Company recorded a liability of
$1.4 million for capacity payments as of September 30, 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
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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 used in investing activities decreased to $0.7
million for the nine-month period ended September 30, 2003 from $9.9 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 $23.4
million for the nine-month period ended September 30, 2003 and $35.8 million for
the same period in 2002. Capital expenditures are the primary component of
investing activities.
Minerals LLC ("Minerals") 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 currently expected to have a capacity of approximately
30,000 metric tonnes per year. Limited production began during December 2002 and
production is expected by late-2003. Minerals 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.
Minerals contracted with Zachry Construction Corporation ("Zachry") under a time
and materials contract to do a maximum of $1.32 million work for the Zinc
Recovery Project. Zachry has invoiced Minerals for $4.7 million of work under
this contract. Minerals has been unable to substantiate Zachry's invoices.
Zachry filed a demand for arbitration with the American Arbitration Association
(the "AAA") on August 19, 2003 for collection of its claimed outstanding
invoices. Although the AAA has selected an arbitration panel, neither the AAA
nor the panel has scheduled any hearings on this matter to date. Minerals
anticipates that the evidentiary hearing on this matter will not likely occur
prior to the summer of 2004.
Total capital costs, excluding interest during construction, of the Zinc
Recovery Project are approximately $161.1 million, net of payments for
liquidated damages, through September 30, 2003. The Zinc Recovery Project
anticipates incurring $6.9 million in capital expenditures during the remainder
of 2003 to optimize production.
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The Funding Corporation's net cash flows used in financing activities was $3.0
million for the nine-month period ended September 30, 2003 and $3.6 million for
the same period in 2002. The decreased use of cash was primarily due the release
of the restricted cash partially offset by payments made to affiliates.
Salton Sea Guarantors' net cash flows used in financing activities was $11.2
million for the nine-month period ended September 30, 2003 and $12.3 million for
the same period in 2002. The decreased use of cash was primarily due to higher
payments to affiliates during 2002.
Partnership Guarantors' net cash flows from financing activities was a source of
cash totaling $7.5 million for the nine-month period ended September 30, 2003
and use of cash totaling $19.3 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. The Transaction
Agreement shall continue until the earlier of (a) 30 days following a written
notice of termination after October 1, 2003 or (b) any other termination date
mutually agreed to by the parties. No such notice of termination has been given
by either party. Sales to TransAlta from the Partnership and Salton Sea
Guarantors totaled $2.4 million and $7.5 million for the three-month and
nine-month periods ended September 30, 2003, respectively.
Sales to EPME totaled $2.7 million and $6.1 million during the three-month and
nine-month periods ended September 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.
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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 September 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.
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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.
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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: November 6, 2003 /s/ Wayne F. Irmiter
----------------------------------
Wayne F. Irmiter
Vice President & Controller
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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.
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