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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-50828
CEDAR BRAKES I, L.L.C.
(Exact Name of Registrant as Specified in its Charter)
<Table>
DELAWARE 76-0613738
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</Table>
Registrant's Telephone Number, Including Area Code: (713) 420-2600
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Member interests, par value $100 per share. Shares outstanding on August
13, 2001: 10
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CEDAR BRAKES I, L.L.C.
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
-------------- ----------------
Operating revenues
Electricity sales......................................... $15,634 $30,393
------- -------
Operating expenses
Electricity purchases..................................... 6,437 12,557
Change in mark-to-market valuation of power agreements.... 354 9,813
Administrative fees to affiliate.......................... 25 50
Other..................................................... -- 6
------- -------
6,816 22,426
------- -------
Operating income............................................ 8,818 7,967
------- -------
Other (income) expense
Interest income........................................... (247) (508)
Interest and debt expense................................. 6,524 13,270
------- -------
6,277 12,762
------- -------
Net income (loss) before cumulative effect of accounting
change.................................................... 2,541 (4,795)
Cumulative effect of accounting change...................... -- 89,368
------- -------
Net income.................................................. $ 2,541 $84,573
======= =======
</Table>
See accompanying notes.
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CEDAR BRAKES I, L.L.C.
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 17,099 $ 8,692
Accounts receivable -- Public Service Electric & Gas
Company................................................ 5,513 5,272
Power purchase agreement.................................. 31,549 --
-------- --------
Total current assets.............................. 54,161 13,964
-------- --------
Power purchase agreement.................................... 359,549 283,893
Restricted cash............................................. 13,201 13,201
Deferred financing costs, net............................... 4,814 5,060
-------- --------
Total assets...................................... $431,725 $316,118
======== ========
LIABILITIES AND MEMBER'S CAPITAL
Current liabilities
Accounts payable
Trade.................................................. $ 41 $ 12
Affiliate.............................................. 2,312 1,743
Accrued interest payable.................................. 9,680 6,894
Power services agreement.................................. 1,331 --
Current maturities of long-term debt...................... 5,858 --
-------- --------
Total current liabilities......................... 19,222 8,649
-------- --------
Power services agreement.................................... 26,319 --
Long-term debt, less current maturities..................... 304,742 310,600
Commitments
Member's capital............................................ 81,442 (3,131)
-------- --------
Total liabilities and member's capital............ $431,725 $316,118
======== ========
</Table>
See accompanying notes.
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CEDAR BRAKES I, L.L.C.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2001
----------------
Cash flows from operating activities
Net income................................................ $84,573
Adjustments to reconcile net income to net cash from
operating activities
Cumulative effect of accounting change................. (89,368)
Change in mark-to-market valuation of power
agreements............................................ 9,813
Amortization of deferred financing costs............... 246
Working capital changes
Accounts receivable -- Public Service Electric....... (241)
Accounts payable -- trade and affiliate.............. 598
Accrued interest payable............................. 2,786
-------
Net cash provided by operating activities......... 8,407
-------
Increase in cash and cash equivalents....................... 8,407
Cash and cash equivalents
Beginning of period....................................... 8,692
-------
End of period............................................. $17,099
=======
Supplemental disclosure of cash flow information
Interest paid............................................. $10,414
=======
</Table>
See accompanying notes.
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CEDAR BRAKES I, L.L.C.
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We are a single member Delaware limited liability company organized in
March 2000, pursuant to the terms of a limited liability company agreement. We
are owned indirectly by Chaparral Investors, L.L.C., who is owned by the
Limestone Electron Trust and a subsidiary of El Paso Corporation. We began
operations on September 27, 2000, when we acquired a long-term power purchase
agreement to sell electric energy and provide electric capacity to Public
Service Electric & Gas Company.
Our December 31, 2000, audited financial statements, as presented in our
registration statement on Form S-4, include a summary of our significant
accounting policies and other disclosures. You should read those financial
statements in conjunction with this Quarterly Report on Form 10-Q. The financial
statements at June 30, 2001, and for the quarter and six months ended June 30,
2001, are unaudited. The balance sheet at December 31, 2000, is derived from our
audited financial statements. These financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and do not include all disclosures required by accounting principles generally
accepted in the United States. In our opinion, we have made all adjustments, all
of which are of a normal, recurring nature, to fairly present our interim period
results. Information for interim periods may not necessarily indicate the
results of operations for the entire year due to the seasonal nature of our
business.
Our accounting policies are consistent with those discussed in our Form
S-4, except as discussed below.
Intangible Assets and Derivative Instruments
As of December 31, 2000, our intangible assets represented the unamortized
acquisition cost of a power purchase agreement with Public Service Electric.
Upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, on
January 1, 2001, we adjusted this power purchase agreement to its fair value
since it met the definition of a derivative. The difference between the fair
value and the unamortized cost on January 1, 2001, was recorded as a cumulative
effect of an accounting change in our income statement.
We record all derivative instruments on our balance sheet at their fair
value. Our derivative instruments consist of our power purchase agreement and
power services agreement. Changes in the fair value of these agreements are
reported in current period earnings. We estimate the fair value of these
agreements based upon the expected cash receipts and payments derived from these
agreements compared to our estimate of future power prices. Our estimates of the
timing of cash receipts and payments are based on the estimated timing of power
delivered under our power purchase and power services agreements. These
estimates also consider the minimum and maximum delivery requirements under
those agreements. Estimates of the future prices of power are based upon the
forward pricing curve of the appropriate power delivery and receipt points, and
this curve is derived from actual prices observed in the market, price quotes
from brokers and extrapolating models. See Note 4 for additional information on
the power purchase and power services agreements.
2. LIMITED LIABILITY COMPANY
As a limited liability company, our members are not personally obligated
for our debt, obligations, or other liabilities simply because they are our
members.
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3. ACCOUNTING FOR DERIVATIVE ACTIVITIES
On January 1, 2001, we adopted SFAS No. 133, and recorded a cumulative
effect of accounting change of approximately $89.4 million. The fair value of
the power agreements reflected on our balance sheet is as follows:
<Table>
<Caption>
JUNE 30,
2001
--------------
(IN THOUSANDS)
Power purchase agreement.................................... $391,098
Power services agreement.................................... (27,650)
--------
Total............................................. $363,448
========
</Table>
4. POWER AGREEMENTS
Power Purchase Agreement
We have a power purchase agreement with Public Service Electric that
extends through August 2013. Under this agreement, we are required to sell and
deliver energy to Public Service Electric at fixed prices and at specified
delivery points. The prices under the agreement are specified on an annual
basis, and escalate each year over the contract term. For 2001, the price is
$72.17 per megawatt hour, increasing annually to $92.43 per megawatt hour in
2013. The amount of energy delivered under this agreement is subject to an
annual minimum and maximum requirement. We must deliver a minimum of 394,000
megawatt hours annually, with 40,000 megawatt hours required in each of the
months of June through September. The remainder of the minimum requirements must
be met during the other months in the year. During any one year, total
deliveries cannot exceed the specified maximum amounts, which range from 788,954
megawatt hours to 855,779 megawatt hours over the life of the contract.
If we fail to deliver all or part of the scheduled energy or fail to
schedule sufficient deliveries to meet the minimum energy delivery requirements
for reasons within our control, Public Service Electric's payment to us will be
reduced by a credit. Generally the credit would equal the excess price paid, if
any, for energy purchased by Public Service Electric over the prices stated in
our power purchase agreement.
In addition to energy deliveries, we are required to provide 123 megawatts
per day of capacity to Public Service Electric. If we fail to provide all or
part of this capacity for reasons within our control, we are required to pay
Public Service Electric an amount equal to its cost to acquire this capacity
from third parties.
Power Services Agreement
In order to meet our energy delivery commitments under the power purchase
agreement, we entered into a power services agreement with El Paso Merchant
Energy, L.P., an affiliate of El Paso. The power services agreement has the same
term as the power purchase agreement. Under this agreement, we purchase energy
at a fixed price and at quantities sufficient to meet our obligations to Public
Service Electric under the power purchase agreement. The fixed prices under the
power services agreement escalate each year, and range from $29.71 per megawatt
hour in 2001 to $33.75 per megawatt hour in 2013.
If El Paso Merchant Energy fails to deliver all or part of the scheduled
energy to us for any reason within their control, our payment to them will be
reduced by a credit calculated in the same manner as the credit to Public
Service Electric described in the power purchase agreement.
The power services agreement also provides that El Paso Merchant Energy
deliver sufficient amounts of capacity to meet our capacity requirements under
the power purchase agreement. If El Paso Merchant Energy fails to provide all or
part of the capacity, for any reason within their control, our payment to them
will be reduced by a credit calculated in the same manner as our payment to
Public Service Electric if we fail to provide capacity under the power purchase
agreement.
Because our power purchase and power services agreements are similar in
terms of quantities of energy bought and sold, and since prices under these
agreements are fixed, the execution of these agreements results
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in our ability to earn a fixed margin. Assuming that minimum energy delivery
requirements are met and all capacity requirements are made available, this
margin will range from $42.46 to $59.99 per megawatt hour sold over the life of
the agreements.
5. RELATED PARTY TRANSACTIONS
Administrative Services Agreement
We have an administrative services agreement with El Paso Merchant Energy
to provide project management, finance and accounting services to us for a fee
of $100,000 per year through 2013. In addition to the base fee, we are obligated
to reimburse El Paso Merchant Energy for direct expenses other than project
management, finance and accounting services that may be incurred on our behalf.
Fees and expenses under this agreement are due and payable only to the extent
that we have sufficient cash after paying obligations under our bond indenture.
Affiliated Accounts Payable
Affiliated accounts payable primarily represents the liability for energy
purchased by us from El Paso Merchant Energy as well as administrative services
fees due to El Paso Merchant Energy.
See Note 4 for additional discussion on commitments with related parties.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 2001 and December 31, 2000, the carrying amounts of our
financial instruments including cash, cash equivalents, and trade receivables
and payables are representative of fair value because of their short-term
maturity. The fair value of our long-term debt was $329.6 million as of June 30,
2001, and $310.6 million as of December 31, 2000. The fair value of our
long-term debt has been estimated based on quoted market prices for the same or
similar issues.
Our power purchase and power services agreements meet the definition of
derivatives under the provisions of SFAS No. 133, and are recorded at their fair
value. The fair value of these agreements at June 30, 2001, was estimated based
on the forward pricing curve of the appropriate delivery or receipt point for
power bought and sold under these agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and you should read it in
conjunction with information disclosed in our registration statement on Form S-4
(Registration No. 333-50828) dated May 2, 2001, in addition to the financial
statements and notes presented in Item 1 of this Quarterly Report on Form 10-Q.
GENERAL
Our company has no employees, and we rely upon El Paso Merchant Energy to
perform our responsibilities under our material agreements. Our material assets
are comprised of the power purchase agreement, receivables that are generated
by, or accrue under that agreement, the proceeds of such receivables, our
interest in amounts held in accounts described in this report and our material
agreements. We have no material obligations other than those under our bonds,
our bond indenture, and our power services and administrative services
agreements.
RESULTS OF OPERATIONS
We were formed in March 2000, but did not begin operations until September
27, 2000, when we acquired the power purchase agreement from Newark Bay
Cogeneration Partnership L.P. As a result, our discussion of financial condition
and results of operations only encompasses those periods in which we had
operations.
For the quarter ended June 30, 2001, our net income was $2.5 million.
During the quarter, we generated revenues of $15.6 million from sales of
electricity and capacity to Public Service Electric. Operating expenses totaled
$6.8 million, including $6.4 million in expenses related to power purchased from
El Paso Merchant Energy and $0.4 million of non-cash losses as a result of
changes in the fair values of our power purchase and power services agreements,
both of which are reflected in our June 30, 2001 financial statements at their
fair value. Our operating expenses also include fees to El Paso Merchant Energy
under our administrative services agreement. The annual fee to El Paso Merchant
Energy under this agreement is $0.1 million. These fees accrue annually, but are
only payable to the extent that there are amounts on deposit in the collections
account after payment of all current and past due amounts having a payment
priority ranking above these fees. Interest and debt expense for the quarter
ended June 30, 2001, was $6.5 million.
For the six months ended June 30, 2001, we had net income of $84.6 million,
including income of $89.4 million as a result of our adoption of SFAS No. 133 on
January 1, 2001. Prior to this item, our net loss was $4.8 million. During the
first six months of 2001, we generated revenues of $30.4 million from sales of
electricity and capacity to Public Service Electric. Operating expenses totaled
$22.4 million, including $12.6 million in expenses related to power purchased
from El Paso Merchant Energy and $9.8 million of non-cash losses as a result of
changes in the fair value of our power purchase and power services agreements.
Our operating expenses also include fees accrued under our administrative
services agreement with El Paso Merchant Energy. Interest and debt expense for
the six months ended June 30, 2001, was $13.3 million.
LIQUIDITY AND CAPITAL RESOURCES
We have no capital requirements, either short or long term since our
primary purpose is to administer the terms of our power purchase and power
services agreements. We believe that cash flows from our operations will be
sufficient to satisfy our cash and liquidity requirements, including payments of
interest and principal on our bonds and the payment of our operating expenses.
Annual energy deliveries under our power purchase agreement with Public
Service Electric may be scheduled and delivered at any time during the calendar
year subject to the minimum requirements and maximum limits called for under the
agreement. Since annual delivery requirements will be within these minimum and
maximum delivery amounts, our revenues and net cash flows, determined on an
annual basis, should remain relatively stable. However, our monthly and
quarterly revenues and net cash flows will vary significantly, particularly
during peak summer months (June through September) due to the cyclical nature of
our operations. Payments on power sold to Public Service Electric are due in the
month following delivery.
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Interest payments on our bonds are made semi-annually, each February 15 and
August 15 of each year, and principal payments are made annually on February 15
of each year.
In order to offset any timing differences between our cash flows from
energy bought and sold and our interest and principal payments, we funded a
liquidity account in an amount equal to the amount of our next interest payment.
The purpose of the liquidity account is to provide the trustee additional cash,
if needed, to fund interest payments.
During the period from the inception of operations in September 2000 to the
end of June 2001, we generated funds of approximately $28.2 million available
for debt service from the sale of power. Interest for this period was
approximately $20.3 million, providing an interest coverage ratio of 1.39.
Including the proportionate principal payment for the same period of
approximately $3.2 million, the debt service coverage ratio was 1.20.
MANAGEMENT
Pursuant to our limited liability company agreement, management powers of
our company are managed by a committee comprised of five managers. Three of
these managers are appointed by Mesquite Investors, L.L.C., a subsidiary of
Chaparral Investors, L.L.C., our parent company, and two managers are
independent. Our day-to-day operations are managed by officers and employees of
El Paso Merchant Energy under our administrative services agreement with them.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is exposure to changing interest rates. The table
below shows cash flows and weighted average interest rates of our interest
bearing securities, by expected maturity date. The fair value of fixed rate
long-term debt was estimated based on quoted market prices for the same or
similar issues.
<Table>
<Caption>
EXPECTED MATURITY DATE OF CARRYING VALUE AS OF JUNE 30,
------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
---- ------ ------ ------- ------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
LIABILITIES:
Long-term debt, including current
portion -- fixed rate.................... $-- $5,858 $7,872 $11,026 $15,254 $270,590 $310,600 $329,586
Average interest rate................ 8.5% 8.5% 8.5% 8.5% 8.5%
</Table>
Our power purchase agreement and power services agreement meet the
definition of derivatives under the provisions of SFAS No. 133, and are carried
at their fair value. The fair value of these agreements at June 30, 2001, was
estimated based on the forward pricing curve of the appropriate delivery or
receipt point for power we buy and sell.
<Table>
<Caption>
10% INCREASE 10% DECREASE
--------------------- ---------------------
FAIR FAIR INCREASE FAIR INCREASE
VALUE VALUE (DECREASE) VALUE (DECREASE)
-------- -------- ---------- -------- ----------
(IN THOUSANDS)
Power purchase agreement............... $391,098 $371,392 $(19,706) $410,603 $ 19,505
Power services agreement............... (27,650) (9,966) 17,684 (45,170) (17,520)
-------- -------- -------- -------- --------
Total........................ $363,448 $361,426 $ (2,022) $365,433 $ 1,985
======== ======== ======== ======== ========
</Table>
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None.
Undertaking
We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of our long-term debt not filed herewith for the reason that the
total amount of securities authorized under any of such instruments does
not exceed 10 percent of our total consolidated assets.
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.
CEDAR BRAKES I, L.L.C.
<Table>
Date: August 14, 2001 /s/ JOHN L. HARRISON
-----------------------------------------
John L. Harrison
Vice President, Senior
Managing Director
(Principal Financial Officer)
Date: August 14, 2001 /s/ CECILIA T. HEILMANN
-----------------------------------------
Cecilia T. Heilmann
Vice President, Managing
Director and Controller
(Principal Accounting Officer)
</Table>
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