UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2005
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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: 333-83815
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Caithness Coso Funding Corp.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3328762
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Coso Finance Partners California 68-0133679
Coso Energy Developers California 94-3071296
Coso Power Developers California 94-3102796
--------------------- ---------- ----------
(Exact names of Registrants as (State or other jurisdiction (IRS Employer
specified in their charters) of incorporation) Identification No.)
565 Fifth Avenue, 29th Floor, New York, New York 10017-2478
------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(212) 921-9099
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former
fiscal year, if changed since last report.)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
300 shares in Caithness Coso Funding Corp. as of August 12, 2005
----------------------------------------------------------------
CAITHNESS COSO FUNDING CORP.
Form 10-Q
For the Quarter Ended June 30, 2005
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Financial Statements
Caithness Coso Funding Corp.
Unaudited balance sheets at June 30, 2005 and December 31, 2004 4
Unaudited statements of operations for the three-months ended
June 30, 2005, the three-months ended June 30, 2004, the six-months
ended June 30, 2005 and the six-months ended June 30, 2004 5
Unaudited condensed statements of cash flows for the six-months
ended June 30, 2005 and the six-months ended June 30, 2004 6
Notes to the unaudited financial statements 7
Coso Finance Partners and Subsidiary
Unaudited consolidated balance sheets at June 30, 2005 and
December 31, 2004 8
Unaudited consolidated statements of operations for the three-months
months ended June 30, 2005, the three-months ended June 30, 2004,
the six-months ended June 30, 2005 and the six-months ended
June 30, 2004 9
Unaudited consolidated condensed statements of cash flows for the
six-months ended June 30, 2005 and the six-months ended
June 30, 2004 10
Notes to the unaudited consolidated financial statements 11
Coso Energy Developers
Unaudited balance sheets at June 30, 2005 and December 31, 2004 13
Unaudited statements of operations for the three-months ended
months ended June 30, 2005, the three-months ended June 30, 2004,
the six-months ended June 30, 2005 and the six-months ended
June 30, 2004 14
Unaudited condensed statements of cash flows for the six-months
ended June 30, 2005 and the six-months ended June 30, 2004 15
Notes to the unaudited financial statements 16
Coso Power Developers and Subsidiary
Unaudited consolidated balance sheets at June 30, 2005 and
December 31, 2004 18
Unaudited consolidated statements of operations for the three-months
months ended June 30, 2005, the three-months ended June 30, 2004,
the six-months ended June 30, 2005 and the six-months ended
June 30, 2004 19
Unaudited consolidated condensed statements of cash flows for the
six-months ended June 30, 2005 and the six-months ended
June 30, 2004 20
Notes to the unaudited consolidated financial statements 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 29
2
ITEM 4. Controls and Procedures 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
ITEM 3. Defaults upon Senior Securities 30
ITEM 4. Submission of Matters to a Vote of Security Holders 30
ITEM 5. Other Information 30
ITEM 6. Exhibits 30
3
CAITHNESS COSO FUNDING CORP.
UNAUDITED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets:
Current Assets:
Accrued interest receivable.................................................. $ 762 $ 883
Current portion of project loan from Coso Finance Partners................... 15,524 15,100
Current portion of project loan from Coso Energy Developers.................. 9,365 8,683
Current portion of project loan from Coso Power Developers................... 11,713 11,697
------ ------
Total current assets 37,364 36,363
Project loan from Coso Finance Partners...................................... 65,286 71,750
Project loan from Coso Energy Developers..................................... 62,062 66,217
Project loan from Coso Power Developers...................................... 44,135 48,830
------ ------
Total assets $ 208,847 $ 223,160
======= =======
Liabilities and Stockholders' Equity:
Current Liabilities:
Senior secured notes:
Accrued interest payable.................................................... $ 762 $ 883
Current portion on project loans............................................ 36,602 35,480
------ ------
Total current liabilities 37,364 36,363
9.05% notes due December 15, 2009............................................ 171,483 186,797
Stockholders' equity......................................................... - -
------- -------
Total liabilities & stockholders' equity $ 208,847 $ 223,160
======= =======
See accompanying notes to the unaudited financial statements
4
CAITHNESS COSO FUNDING CORP.
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Interest income..................... $ 4,962 $ 5,689 $ 9,937 $ 11,364
Interest expense.................... (4,962) (5,689) (9,937) (11,364)
----- ----- ----- ------
Net income.................... $ - $ - $ - $ -
===== ===== ===== ======
See accompanying notes to the unaudited financial statements
5
CAITHNESS COSO FUNDING CORP.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six-Months Six-Months
Ended Ended
June 30, June 30,
2005 2004
Cash flows from investing activities - repayment of project loans........ $ 14,313 $ 12,646
Cash flows from financing activities - repayment of 9.05% notes.......... (14,313) (12,646)
------ ------
Net changes in cash...................................................... $ - $ -
====== ======
Supplemental cash flow disclosure:
Cash paid for interest.............................................. $ 10,058 $ 11,476
====== ======
See accompanying notes to the unaudited condensed financial statements
6
CAITHNESS COSO FUNDING CORP.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Organization and Operations
Caithness Coso Funding Corp. (Funding Corp.), which was incorporated on April
22, 1999, is a single-purpose Delaware corporation formed to issue senior
secured notes (Notes) for its own account and as an agent acting on behalf of
Coso Finance Partners (CFP), Coso Energy Developers (CED), and Coso Power
Developers (CPD), collectively, the "Coso Partnerships." The Coso Partnerships
are California general Partnerships.
On May 28, 1999, Funding Corp. sold $413,000 of Notes. The Notes have been
refinanced (See Note 3 below). Pursuant to separate credit agreements between
Funding Corp. and each Coso Partnership, the net proceeds from the offering of
the Notes were loaned to the Coso Partnerships. Payment of the Notes is provided
for by payments made by the Coso Partnerships under their respective project
loans. Funding Corp. has no material assets other than the project loans, and
does not conduct any operations apart from having issued the Notes and making
the project loans to the Coso Partnerships.
(2) Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules. Management
believes that the disclosures are adequate to make the information presented not
misleading when read in conjunction with the financial statements and the notes
thereto in the audited financial statements for the year ended December 31,
2004.
The preparation of unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America requires Funding
Corp. to make certain estimates and assumptions for the reporting periods
covered by the financial statements. These estimates and assumptions affect the
reported amounts of assets, liabilities, income and expenses during the
reporting period. Actual results could differ from these estimates. The
financial information herein presented reflects all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for interim periods presented. The
results for the interim periods are not necessarily indicative of results to be
expected for the full year.
(3) Subsequent Events
On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due
June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014
(collectively, the "Securities"). The proceeds of the Securities were put into
an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and the Coso Partnerships will be
defeased, and the related security agreements and pledge agreements of Funding
Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be
satisfied in full and will no longer be enforceable against Funding Corp. or the
Coso Partnerships.
7
COSO FINANCE PARTNERS
AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets:
Current Assets:
Cash......................................................................... $ 265 $ 791
Restricted cash and cash equivalents......................................... 13,329 13,298
Accounts receivable, (net of allowances of $216)............................. 9,221 7,502
Prepaid expenses & other assets.............................................. 93 702
Inventory.................................................................... 5,402 5,357
Amounts due from related parties............................................. 1,759 1,583
------ ------
Total current assets 30,069 29,233
Restricted cash and investments................................................. 15,151 14,894
Property, plant & equipment, (net of accumulated depreciation
of $124,790 and $119,157, respectively)...................................... 130,833 133,624
Power purchase contract, (net of accumulated amortization
of $7,268 and $6,694, respectively).......................................... 7,076 7,650
Deferred financing costs, (net of accumulated amortization
of $2,703 and $2,545, respectively).......................................... 1,420 1,578
----- -----
Total assets $ 184,549 $ 186,979
======= =======
Liabilities and Partners' Capital:
Current Liabilities:
Accounts payable and accrued liabilities..................................... 2,749 4,601
Amounts due to related parties............................................... 349 606
Current portion of project loan.............................................. 15,524 15,100
------ ------
Total current liabilities 18,622 20,307
Other liabilities............................................................... 15,937 15,648
Deferred revenue................................................................ 1,012 --
Amounts due to related parties.................................................. 2,344 2,382
Project loan.................................................................... 65,286 71,750
------ ------
Total liabilities 103,201 110,087
Partners' capital............................................................... 81,348 76,892
------ ------
Total liabilities & partners' capital $ 184,549 $ 186,979
======= =======
See accompanying notes to the unaudited consolidated financial statements
8
COSO FINANCE PARTNERS
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Revenue:
Energy revenues................................... $ 11,389 $ 11,046 $ 23,139 $ 22,902
Capacity revenues................................. 3,567 3,537 4,822 4,792
------ ------ ------ ------
Total revenue.............................. 14,956 14,583 27,961 27,694
Operating expenses:
Plant operating expenses.......................... 2,473 2,886 4,575 5,621
Royalty expense................................... 2,345 2,801 4,279 5,027
Depreciation and amortization..................... 3,135 2,850 6,207 5,698
----- ----- ------ ------
Total operating expenses................... 7,953 8,537 15,061 16,346
Operating income........................... 7,003 6,046 12,900 11,348
Other (income)/expenses:
Interest and other income........................ (299) (120) (458) (211)
Interest expense................................. 1,937 2,188 3,880 4,372
Noncash interest expense......................... 79 79 158 158
----- ----- ----- -----
Total other expenses....................... 1,717 2,147 3,580 4,319
----- ----- ----- -----
Net income................................ $ 5,286 $ 3,899 $ 9,320 $ 7,029
===== ===== ===== =====
See accompanying notes to the unaudited consolidated financial statements
9
COSO FINANCE PARTNERS
AND SUBSIDIARY
UNAUDITED CONSOLIDATED AND CONDENSED
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six-Months Six-Months
Ended Ended
June 30, June 30,
2005 2004
Net cash provided by (used in) operating activities...... $ 13,508 $ 10,835
Net cash provided by (used in) investing activities...... (3,130) (2,757)
Net cash provided by (used in) financing activities...... (10,904) (7,931)
------ -----
Net change in cash....................................... $ (526) $ 147
====== =====
Supplemental cash flow disclosure:
Cash paid for interest.......................... $ 3,930 $ 4,414
===== =====
See accompanying notes to the unaudited consolidated and condensed financial statements
10
COSO FINANCE PARTNERS
AND SUBSIDIARY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Organization and Operation
Coso Finance Partners (CFP), a general partnership, is engaged in the operation
of a 80 MW power generation facility located at the China Lake Naval Air Weapons
Station, China Lake, California. CFP sells all electricity produced to Southern
California Edison (Edison) under a 24-year power purchase contract expiring in
2011.
(2) Basis of Presentation
The accompanying unaudited consolidated and condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules.
Management believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the financial statements
and the notes thereto in the audited financial statements for the year ended
December 31, 2004.
The preparation of unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America requires CFP to
make certain estimates and assumptions for the reporting periods covered by the
financial statements. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting
period. Actual results could differ from these estimates. The financial
information herein presented reflects all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results for interim periods presented. The results for the
interim periods are not necessarily indicative of results to be expected for the
full year. CFP has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in energy revenues, expenses and
net income will continue.
The data for the balance sheets presented herein for June 30, 2005 and December
31, 2004 were derived from CFP's financial statements for the interim period and
fiscal year then ended and includes the effect of consolidating New CLPSI
Company, LLC ("CLPSI") as a result of the adoption of Financial Accounting
Standards Board (FASB) Interpretation No. 46 (revised December 2003), (FIN 46R)
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
(3) Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for electricity
delivered and sold under a power purchase contract. Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison.
(4) Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(5) Asset Retirement Obligations
In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
11
retirement of tangible long-lived assets and the associated asset retirement
costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. The Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of a fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. The Statement is effective for consolidated financial
statements issued for fiscal years beginning after June 15, 2002. On January 1,
2003, CFP adopted SFAS No. 143 and estimated the restoration costs CFP expects
to incur when the land lease with the Navy expires. Under the land lease, CFP is
required to remove all property, plant, and equipment to restore the land to its
original state. As of June 30, 2005 and December 31, 2004, the accumulated
liability associated with the restoration costs were $955 and $910,
respectively, and are included in other liabilities.
(6) Commitments and Contingencies
CFP is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water
Bond), which would be used in the event of noncompliance of the remediation
obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the
fair value of the Water Bond that is reported as a noncurrent restricted
investment is $156.
Settlement Agreement Between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth Circuit
(Ninth Circuit) issued an opinion and order on appeal from the district court's
stipulated judgment which affirmed the stipulated judgment in part and referred
questions based on California state law to the California Supreme Court. The
appeals court stated that if the settlement agreement violated California state
law then the appeals court would be required to void the stipulated judgment.
The California Supreme Court accepted the Ninth Circuit's request to address the
issues referred to in the September 23, 2002 ruling. On August 21, 2003, the
California Supreme Court found that state laws were not violated as a result of
the settlement agreements. On December 19, 2003, the Ninth Circuit fully
affirmed the district court's stipulated judgment based on the reply from the
California Supreme Court. No appeal of this order was taken and it is now final.
Court of Appeals' Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC decision,
claiming that the "floor" line loss factor of 0.95 for renewable generators
violated the Public Utility Regulatory Policies Act of 1978. Subsequently, the
California Court of Appeals issued a decision on August 20, 2002 in response to
the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor,"
which it rejected as an abuse of discretion by the CPUC. While this matter was
appealed to the California Supreme Court, the petition for review was denied.
CFP is currently evaluating potential actions to redress this issue. CFP's
Agreement set the loss factor at 1.0 for energy sold between May 2002 through
May 2007. After April 2007, CFP will have a line loss factor of less than 1.0,
effectively decreasing revenues if Edison's challenge to the CPUC ruling stands.
CFP cannot predict whether any subsequent action on this matter will be
successful.
(7) Subsequent Events
On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due
June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014
(collectively, the "Securities"). The proceeds of the Securities were put into
an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and CFP, Coso Energy Developers, and
Coso Power Developers, collectively, the "Coso Partnerships" will be defeased,
and the related security agreements and pledge agreements of Funding Corp. and
the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in
full and will no longer be enforceable against Funding Corp. or the Coso
Partnerships.
12
COSO ENERGY DEVELOPERS
UNAUDITED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets:
Current Assets:
Cash......................................................................... $ 397 $ 496
Restricted cash and cash equivalents......................................... 10,122 10,850
Accounts receivable.......................................................... 8,544 6,636
Prepaid expenses and other assets............................................ 87 930
Amounts due from related parties............................................. 496 485
------ ------
Total current assets 19,646 19,397
Restricted investments.......................................................... 221 221
Investment in Coso Transmission Line Partners................................... 2,374 2,430
Advances to New CLPSI Company, LLC.............................................. 433 459
Property, plant and equipment, (net of accumulated depreciation
of $131,156 and $127,451, respectively)...................................... 121,633 123,903
Power purchase contract, (net of accumulated amortization
of $6,758 and $6,222, respectively).......................................... 14,685 15,221
Deferred financing costs, (net of accumulated amortization
of $1,884 and $1,757, respectively).......................................... 1,148 1,275
------- -------
Total assets $ 160,140 $ 162,906
======= =======
Liabilities and Partners' Capital:
Current Liabilities:
Accounts payable and accrued liabilities..................................... $ 1,797 $ 1,710
Amounts due to related parties............................................... 1,485 1,648
Current portion of project loan.............................................. 9,365 8,683
------ ------
Total current liabilities 12,647 12,041
Other liabilities.......................................................... 1,327 1,263
Amounts due to related parties............................................. 26,685 26,449
Project loan............................................................... 62,062 66,217
------- -------
Total liabilities 102,721 105,970
Partners' capital............................................................... 57,419 56,936
------- -------
Total liabilities & partners' capital $ 160,140 $ 162,906
======= =======
See accompanying notes to the unaudited financial statements
13
COSO ENERGY DEVELOPERS
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Revenue:
Energy revenues................................. $ 7,360 $ 7,550 $ 14,875 $ 15,422
Capacity revenues............................... 3,448 3,484 4,674 4,711
----- ----- ------ ------
Total revenue............................ 10,808 11,034 19,549 20,133
Operating expenses:
Plant operating expenses........................ 4,295 4,785 7,658 8,222
Royalty expense................................. 662 686 844 653
Depreciation and amortization................... 2,109 2,358 4,241 4,715
----- ----- ------ ------
Total operating expenses................. 7,066 7,829 12,743 13,590
Operating income......................... 3,742 3,205 6,806 6,543
Other (income)/expenses:
Interest and other income....................... (418) (230) (697) (541)
Interest expense................................ 1,677 1,903 3,353 3,801
Noncash interest expense........................ 63 63 127 127
----- ----- ----- -----
Total other expenses..................... 1,322 1,736 2,783 3,387
----- ----- ----- -----
Net income.............................. $ 2,420 $ 1,469 $ 4,023 $ 3,156
===== ===== ===== =====
See accompanying notes to the unaudited financial statements
14
COSO ENERGY DEVELOPERS
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six-Months Six-Months
Ended Ended
June 30, June 30,
2005 2004
Net cash provided by (used in) operating activities....... $ 7,565 $ 6,900
Net cash provided by (used in) investing activities....... (651) (390)
Net cash provided by (used in) financing activities....... (7,013) (7,096)
----- -----
Net change in cash........................................ $ (99) $ (586)
===== =====
Supplemental cash flow disclosure:
Cash paid for interest........................... $ 3,389 $ 3,838
===== =====
See accompanying notes to the unaudited condensed financial statements
15
COSO ENERGY DEVELOPERS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Organization and Operation
Coso Energy Developers (CED), a general partnership, is engaged in the operation
of a 80 MW power generation facility located at the Coso Hot Springs, China
Lake, California. CED sells all electricity produced to Southern California
Edison (Edison) under a 30-year power purchase contract expiring in 2019.
(2) Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules. Management
believes that the disclosures are adequate to make the information presented not
misleading when read in conjunction with the financial statements and the notes
thereto in the audited financial statements for the year ended December 31,
2004.
The preparation of unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America requires CED to
make certain estimates and assumptions for the reporting periods covered by the
financial statements. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting
period. Actual results could differ from these estimates. The financial
information herein presented reflects all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results for interim periods presented. The results for the
interim periods are not necessarily indicative of results to be expected for the
full year. CED has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in energy revenues, expenses and
net income will continue.
(3) Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for electricity
delivered and sold under a power purchase contract. Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison.
(4) Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(5) Asset Retirement Obligations
In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. The Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of a fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. The Statement is effective for consolidated financial
statements issued for fiscal years beginning after June 15, 2002. On January 1,
16
2003, CED adopted SFAS No. 143 and estimated the restoration costs CED expects
to incur when the land lease expires. Under the land lease, CED is required to
remove all property, plant, and equipment to restore the land to its original
state. As of June 30, 2005 and December 31, 2004, the accumulated liability
associated with the restoration costs were $1,327 and $1,263, respectively, and
are included in other liabilities.
(6) Commitments and Contingencies
CED is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water
Bond), which would be used in the event of noncompliance of the remediation
obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the
fair value of the Water Bond that is reported as a noncurrent restricted
investment is $142.
Settlement Agreement between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth Circuit
(Ninth Circuit) issued an opinion and order on appeal from the district court's
stipulated judgment which affirmed the stipulated judgment in part and referred
questions based on California state law to the California Supreme Court. The
Ninth Circuit stated that if the settlement agreement violated California state
law, then the appeals court would be required to void the stipulated judgment.
The California Supreme Court accepted the Ninth Circuit's request to address the
issues referred to in the September 23, 2002 ruling. On August 21, 2003, the
California Supreme Court found that state laws were not violated as a result of
the settlement agreements. On December 19, 2003, the Ninth Circuit fully
affirmed the district court's stipulated judgment based on the reply from the
California Supreme Court. No appeal of this order was taken and it is now final.
Court of Appeals Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC decision,
claiming that the "floor" line loss factor of 0.95 for renewable generators
violated the Public Utility Regulatory Policies Act of 1978. Subsequently, the
California Court of Appeals issued a decision on August 20, 2002 in response to
the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor,"
which it rejected as an abuse of discretion by the CPUC. While this matter was
appealed to the California Supreme Court, the petition for review was denied.
CED is currently evaluating potential actions to redress this issue. CED's
Agreement set the loss factor at 1.0 for energy sold between May 2002 through
May 2007. After April 2007, CED will have a line loss factor of less than 1.0,
effectively decreasing revenues if Edison's challenge to the CPUC ruling stands.
CED cannot predict whether any subsequent action regarding this matter will be
successful.
(7) Subsequent Events
On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due
June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014
(collectively, the "Securities"). The proceeds of the Securities were put into
an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and CED, Coso Finance Partners and
Coso Power Developers, collectively the "Coso Partnerships" will be defeased,
and the related security agreements and pledge agreements of Funding Corp. and
the Partnerships pertaining to the Notes will be deemed to be satisfied in full
and will no longer be enforceable against Funding Corp. or the Coso
Partnerships.
17
COSO POWER DEVELOPERS
AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets:
Current Assets:
Cash......................................................................... $ 525 $ 507
Restricted cash and cash equivalents......................................... 10,093 8,474
Accounts receivable, (net of allowances of $82).............................. 9,374 7,693
Prepaid expenses and other assets............................................ 90 634
Amounts due from related parties............................................. 6,522 6,421
------ ------
Total current assets 26,604 23,729
Restricted investments....................................................... 135 135
Advances to New CLPSI Company, LLC........................................... 1,911 1,923
Property, plant and equipment, (net of accumulated depreciation
of $114,509 and $111,198, respectively)................................... 110,385 113,696
Power purchase contract, (net of accumulated amortization
of $17,698 and $16,301, respectively)..................................... 13,040 14,437
Deferred financing costs, (net of accumulated amortization
of $3,199 and $3,090, respectively)....................................... 976 1,085
------- -------
Total assets $ 153,051 $ 155,005
======= =======
Liabilities and Partners' Capital:
Current Liabilities:
Accounts payable and accrued liabilities..................................... $ 1,844 $ 2,372
Amounts due to related parties............................................... 1,432 1,313
Current portion of project loan.............................................. 11,713 11,697
------ ------
Total current liabilities 14,989 15,382
Other liabilities............................................................ 877 835
Project loan................................................................. 44,135 48,830
------ ------
Total liabilities 60,001 65,047
Minority interest............................................................... 2,374 2,431
Partners' capital............................................................... 90,676 87,527
------- -------
Total liabilities & partners' capital $ 153,051 $ 155,005
======= =======
See accompanying notes to the unaudited consolidated financial statements
18
COSO POWER DEVELOPERS
AND SUBSIDARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Revenue:
Energy revenues.................................... $ 7,236 $ 7,939 $ 15,386 $ 16,361
Capacity revenues.................................. 3,506 3,504 4,738 4,738
------ ------ ------ ------
Total revenue............................... 10,742 11,443 20,124 21,099
Operating expenses:
Plant operating expenses........................... 2,680 2,445 4,914 5,248
Royalty expense.................................... 1,670 1,962 3,160 3,606
Depreciation and amortization...................... 2,564 2,556 5,127 5,118
----- ----- ------ ------
Total operating expenses.................... 6,914 6,963 13,201 13,972
Operating income............................ 3,828 4,480 6,923 7,127
Other (income)/expenses:
Interest and other income.......................... (267) (140) (429) (268)
Interest expense................................... 1,349 1,595 2,703 3,189
Noncash interest expense........................... 55 55 109 109
----- ----- ----- -----
Total other expenses........................ 1,137 1,510 2,383 3,030
----- ----- ----- -----
Net income................................. $ 2,691 $ 2,970 $ 4,540 $ 4,097
===== ===== ===== =====
See accompanying notes to the unaudited consolidated financial statements
19
COSO POWER DEVELOPERS
AND SUBSIDIARY
UNAUDITED CONSOLIDATED AND CONDENSED
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six-Months Six-Months
Ended Ended
June 30, June 30,
2005 2004
Net cash provided by (used in) operating activities........ $ 8,183 $ 8,449
Net cash provided by (used in) investing activities........ (2,038) (1,727)
Net cash provided by (used in) financing activities........ (6,127) (6,607)
----- -----
Net change in cash......................................... $ 18 $ 115
===== =====
Supplemental cash flows disclosure:
Cash paid for interest............................ $ 2,739 $ 3,224
===== =====
See accompanying notes to the unaudited consolidated and condensed financial statements
20
COSO POWER DEVELOPERS
AND SUBSIDIARY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Organization and Operation
Coso Power Developers (CPD), a general partnership, is engaged in the operation
of a 80 MW power generation facility located at the Coso Hot Springs, China
Lake, California. CPD sells all electricity produced to Southern California
Edison (Edison) under a 20-year power purchase contract expiring in 2010.
(2) Basis of Presentation
The accompanying unaudited consolidated and condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules.
Management believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the financial statements
and the notes thereto in the audited financial statements for the year ended
December 31, 2004.
The preparation of unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America requires CPD to
make certain estimates and assumptions for the reporting periods covered by the
financial statements. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting
period. Actual results could differ from these estimates. The financial
information herein presented reflects all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results for interim periods presented. The results for the
interim periods are not necessarily indicative of results to be expected for the
full year. CPD has experienced significant quarterly fluctuations in operating
results and it expects that these fluctuations in energy revenues, expenses and
net income will continue.
The data for the balance sheets presented herein for June 30, 2005 and December
31, 2004 were derived from CPD's financial statements for the interim period and
fiscal year then ended and includes the effect of consolidating Coso
Transmission Line Partners ("CTLP") as a result of the adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003),
(FIN 46R) Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
(3) Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for electricity
delivered and sold under a power purchase contract. Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison.
(4) Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
21
(5) Asset Retirement Obligation
In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. The Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of a fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. The Statement is effective for consolidated financial
statements issued for fiscal years beginning after June 15, 2002. On January 1,
2003, CPD adopted SFAS No. 143 and estimated the restoration costs CPD expects
to incur when the land lease with the Navy expires. Under the land lease CPD is
required to remove all property, plant, and equipment to restore the land to its
original state. As of June 30, 2005 and December 31, 2004, the accumulated
liability associated with the restorations costs were $876 and $835,
respectively, and are included in other liabilities.
(6) Commitments and Contingencies
CPD is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water
Bond), which would be used in the event of noncompliance of the remediation
obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the
fair value of the Water Bond that is reported as a noncurrent restricted
investment is $135.
Settlement Agreement between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth Circuit
(Ninth Circuit) issued an opinion and order on appeal from the district court's
stipulated judgment which affirmed the stipulated judgment in part and referred
questions based on California state law to the California Supreme Court. The
Ninth Circuit stated that if the settlement agreement violated California state
law, then the appeals court would be required to void the stipulated judgment.
The California Supreme Court accepted the Ninth Circuit's request to address the
issues referred to in the September 23, 2002 ruling. On August 21, 2003, the
California Supreme Court found that state laws were not violated as of result of
the settlement agreements. On December 19, 2003, the Ninth Circuit fully
affirmed the district court's stipulated judgment based on the reply from the
California Supreme Court.
Court of Appeals Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC decision,
claiming that the "floor" line loss factor of 0.95 for renewable generators
violated the Public Utility Regulator Policies Act of 1978. Subsequently, the
California Court of Appeals issued a decision on August 20, 2002 in response to
the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor,"
which it rejected as an abuse of discretion by the CPUC. While this matter was
appealed to the California Supreme Court, the petition for review was denied.
CPD is currently evaluating potential actions to redress this issue. CPD's
Agreement set the loss factor at 1.0 for energy sold between May 2002 through
May 2007. After April 2007, CPD will have a line loss factor of less than 1.0,
effectively decreasing revenues if Edison's challenge to the CPUC ruling stands.
CPD cannot predict whether any subsequent action regarding this matter will be
successful.
(7) Subsequent Events
On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due
June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014
(collectively, the "Securities"). The proceeds of the Securities were put into
an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and CPD, Coso Finance Partners and
Coso Energy Developers, collectively the "Coso Partnerships", will be defeased,
and the related security agreements and pledge agreements of Funding Corp. and
the Partnerships pertaining to the Notes will be deemed to be satisfied in full
and will no longer be enforceable against Funding Corp. or the Coso
Partnerships.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for financial information contained herein, the matters discussed in
this quarterly report may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and subject to the safe
harbor created by the Securities Litigation Reform Act of 1995. Such statements
include declarations regarding the intent, belief or current expectations of
Caithness Coso Funding Corp. (Funding Corp.), Coso Finance Partners and
Subsidiary (the Navy I Partnership), Coso Energy Developers (the BLM
Partnership), and Coso Power Developers and Subsidiary (the Navy II
Partnership), collectively, (the Coso Partnerships) and their respective
management. Such statements may be identified by terms such as expected,
anticipated, may, will, believe or other terms or variations of such words. Any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties; actual results could differ
materially from those indicated by such forward-looking statements. Among the
important factors that could cause future operating results to differ materially
from those anticipated include, but are not limited to: (i) risks relating to
the uncertainties in the California energy market, (ii) the financial viability
of Southern California Edison (Edison), (iii) risks related to the operation of
geothermal power plants, (iv) the impact of avoided cost pricing along with
other pricing variables, (v) general operating risks, including resource
availability and regulatory oversight, (vi) changes in government regulation and
(vii) the effects of competition.
General
Each Coso Partnership owns an 80MW geothermal power plant, and its
respective transmission lines, wells, gathering systems and other related
facilities. The Coso Partnerships are located near one another near Coso
Junction, California. The Navy I Partnership owns Navy I and its related
facilities. The BLM Partnership owns BLM and its related facilities. The Navy II
Partnership owns Navy II and its related facilities.
Each Coso partnership sells 100% of the electrical energy generated at its
plant to Edison under a long-term Standard Offer No.4 power purchase agreement.
The Edison power purchase agreements will expire in August 2011 for the Navy I
Partnership, in March 2019 for the BLM Partnership, and in January 2010 for the
Navy II Partnership.
Each Coso partnership is entitled to the following payments under its power
purchase agreement:
* capacity payments for being able to produce electricity at certain levels.
Capacity payments are fixed throughout the life of each power purchase
agreement;
* capacity bonus payments if the Coso partnership is able to produce
electricity above a specified level. The maximum annual capacity bonus
payment available is also fixed throughout the life of each power purchase
agreement; and
* energy payments which are based on the amount of electricity the Coso
Partnership's plant actually produces.
Edison is required to make energy payments to the Coso Partnerships based
on its avoided cost of energy, which is its cost to generate electricity if it
were to produce electricity itself or buy it from another power producer rather
than buy it from the Coso Partnerships.
Edison entered into an agreement (Agreement) with the Coso Partnerships on
June 19, 2001 that addressed renewable energy pricing and issues concerning
California's energy crisis. The Agreement, which was amended on November 30,
23
2001, established May 1, 2002 as the date the Coso Partnerships began receiving
a fixed energy rate of 5.37 cents per kWh for five (5) years in lieu of the rate
calculated based on the avoided cost of energy. Subsequent to the five year
period that expires in April 2007, Edison will be required to make energy
payments to the Coso Partnerships based on its avoided cost of energy until each
partnership's power purchase agreement expires. The California Public Utilities
Commission (CPUC) has initiated a hearing to re-evaluate the methodology of
calculating the avoided cost of energy in the future. It is not possible to
predict with accuracy the likely level of future avoided cost of energy prices.
Factors which may impact the future avoided cost of energy prices include, among
other things, the volatility of natural gas markets and regulatory issues.
Edison filed a petition for a writ of review of a January 2001 CPUC
decision, claiming that the "floor" line loss factor of 0.95 for renewable
generators violated the Public Utility Regulatory Policies Act of 1978 (PURPA).
Subsequently, the California Court of Appeals issued a decision on August 20,
2002 in response to the writs affirming the January 2001 CPUC decision, except
for the 0.95 "floor", which it rejected as an abuse of discretion by the CPUC.
While this matter was appealed to the California Supreme Court, the petition for
review was denied. The Coso Partnerships are currently evaluating potential
actions to redress this issue. Their Agreements set the line loss factor at 1.0
for all energy sold between May 2002 through April 2007. After April 2007, the
Coso Partnerships will have a line loss factor of less than 1.0, effectively
decreasing revenues if Edison's challenge to the CPUC ruling stands. The Coso
Partnerships cannot predict whether any subsequent action regarding this matter
will be successful.
In 1994, the Coso Partnerships implemented a steam-sharing program, under
the Coso Geothermal Exchange Agreement. The purpose of the steam-sharing program
is to enhance the management of the Coso geothermal resource and to optimize the
resource's overall benefits to the Coso Partnerships by transferring steam among
the Coso Partnerships. Under the steam sharing program, the partnership
receiving the steam transfer splits revenue earned from electricity generated
with the partnership that transferred the steam.
The Coso Partnerships are required to make royalty payments to the U.S.
Navy and the Bureau of Land Management. On November 1, 2004 the Navy I and Navy
II Partnerships' entered into a new agreement ("New Contract") with the United
States Navy terminating the existing contract that was due to expire on December
31, 2009. Under the terms of the New Contract, the royalty paid to the U.S. Navy
was restructured so that the Navy I and Navy II Partnerships pay at a rate of
15% of gross revenues received up to an annual base revenue amount. Beyond the
annual base revenue amount, the U.S. Navy and the Navy I and Navy II
Partnerships will split the additional revenues, on a 50/50 basis, until the
U.S. Navy receives a maximum of 20% of all gross revenue.
Under the terminated contract with the U. S. Navy, the Navy I Partnership
was obligated to pay royalties for Units 2 and 3 at 20% of gross revenue through
2009 and the Navy II Partnership was obligated to pay royalties at 18% of gross
revenue through 2004, and then increase to 20% through 2009. Additionally, the
Navy I Partnership was obligated to pay a royalty for Unit I consisting of the
payment of the U.S. Navy's electric bill for the China Lake Weapons Facility,
subject to an indexed reimbursement from the U.S. Navy. The reimbursement was
based on a pricing formula for tariff rates charged by Edison. Additionally,
under the terms of the terminated agreement, the Navy was compensated annually
for any savings in electrical usage at the U.S. Navy's Facility below a baseline
amount ("Conserved Power"). Upon termination of the Navy Contract, the Navy was
paid $1.2 million for Conserved Power from January 1, 2004 through October 31,
2004. The terminated contract also obligated the Navy I Partnership to fund an
escrow account so that the Navy I Partnership would pay the U.S. Navy $25
million on December 31, 2009. Accordingly, $111,000 was deposited monthly
through October 31, 2004. That provision was also terminated and a new escrow
arrangement was entered into and the amount the Navy I Partnership owes the U.S.
Navy is now $18 million. That payment is secured by the existing funds on
deposit so that funds plus accrued interest are expected to aggregate $18.0
million by December 31, 2009. Finally, in the terminated contracts the U.S. Navy
had the right to terminate the contracts at any time for their convenience.
Under the New Contract that right was eliminated.
24
The BLM Partnerships geothermal lease initially had a term of ten years
ending in 1998 with automatic extensions until October 31, 2035, so long as
geothermal steam is commercially produced. The royalty paid to the Bureau of
Land Management is 10% of the net value of steam produced based on a calculation
known as the netback, which is estimated and paid monthly with an annual true-up
after year-end.
The Coso Partnerships also pay other royalties at various rates which in
the aggregate are not material.
Funding Corp. is a special purpose corporation and is equally owned by each
of the Coso Partnerships. It was formed for the purpose of issuing the senior
secured notes (Notes) on behalf of the Coso Partnerships who have jointly,
severally, and unconditionally guaranteed repayment of the Notes.
On May 28, 1999, Funding Corp. issued $110.0 million of 6.80% Notes that
were due in 2001 and paid off on December 15, 2001, and $303.0 million of 9.05%
Notes due in 2009. The proceeds from the Notes were loaned to the Coso
Partnerships and are payable to Funding Corp. from payments of principal and
interest on the Notes. Funding Corp. does not conduct any other operations apart
from serving as the issuer of the Notes.
On August 5, 2005, Funding Corp. issued $375 million of senior secured
bonds due June 15, 2019 and $90 million of subordinated secured notes due June
15, 2014 (collectively, the "Securities"). The proceeds of the Securities were
put into an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and the Coso Partnerships will be
defeased, and the related security agreements and pledge agreements of Funding
Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be
satisfied in full and will no longer be enforceable against Funding Corp. or the
Coso Partnerships.
Capacity Utilization
For purposes of consistency in financial presentation, the plant capacity
factor for each of the Coso Partnerships is based on a nominal capacity amount
of 80MW (240MW in the aggregate). The Coso Partnerships have a gross operating
capacity that allows for the production of electricity in excess of their
nominal capacity amounts. Utilization of this operating margin is based upon a
number of factors and can be expected to vary throughout the year under normal
operating conditions.
The following data includes the operating capacity factor, capacity and
electricity production (in kWh) for each Coso Partnership on a stand-alone
basis:
Three-Months Ended Six-Months Ended
June 30 June 30
2005 2004 2005 2004
---- ---- ---- ----
Navy I Partnership (stand alone)
Operating capacity factor 96.4% 94.0% 98.9% 98.6%
Capacity (MW) (average) 77.12 75.24 79.08 78.86
kWh produced (000s) 168,440 164,321 343,530 344,471
BLM Partnership (stand alone)
Operating capacity factor 82.1% 85.7% 84.5% 87.0%
Capacity (MW) (average) 65.65 68.57 67.59 69.63
kWh produced (000s) 143,386 149,749 293,610 304,159
25
Navy II Partnership (stand alone)
Operating capacity factor 97.7% 102.8% 102.4% 105.6%
Capacity (MW) (average) 78.16 82.21 81.90 84.51
kWh produced (000s) 170,700 179,549 355,780 369,129
Total energy production for the Navy I Partnership and the BLM Partnership
remained consistent for the three-months ended June 30, 2005 as compared to the
same period in 2004. Total energy production for the Navy II Partnership
decreased for the three-months ended June 30, 2005, as compared to the same
period in 2004, primarily due to lower steam production resulting from high gas
content and bridging in two production wells. Modifications are currently being
made to both wells and it is anticipated they will return to service before the
end of the third quarter. Total energy production for the Coso Partnerships
remained consistent for the six-months ended June 30, 2005 as compared to the
same period in 2004. The overall effort continues to maximize production through
well maintenance and capital improvements, including improvements to existing
production wells and additional steam-field piping modifications. The Coso
Partnerships continue to work on enhancing the steam utilization and efficiency
of the projects through a turbine enhancement program and additional steam-field
piping modifications. With respect to the reservoir, an injection augmentation
program, aimed at improving reservoir pressure and minimizing resource decline,
is currently in the engineering design and permitting phase. The funds necessary
to implement the capital improvement program are expected to be available from
reserves established under the Notes and from excess cash flow generated after
debt service.
Results of Operations for the Three and Six-months ended June 30, 2005 and 2004
The following discusses the results of operations of the Coso Partnerships
for the three and six-months ended June 30, 2005 and 2004 (dollar amounts in
tables are in thousands, except per kWh data):
Revenue
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
$ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh
- --------- - --------- - --------- - ---------
Total Operating Revenues
including steam transfers
Navy I Partnership 14,956 8.9 14,583 8.9 27,961 8.1 27,694 8.0
BLM Partnership 10,808 7.5 11,034 7.4 19,549 6.7 20,133 6.6
Navy II Partnership 10,742 6.3 11,443 6.4 20,124 5.7 21,099 5.7
The Coso Partnerships sell all electricity generated to Edison under their
respective power purchase agreement. Total operating revenues consist of
capacity payments, capacity bonus payments, and energy payments, including steam
transfers discussed above. Total operating revenues for the Navy II Partnership
decreased for the three-month period ended June 30, 2005 as compared to the same
period in 2004, due to the lower steam production discussed above.
Plant Operating Expense
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
$ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh
- --------- - --------- - --------- - ---------
Navy I Partnership 2,473 1.5 2,886 1.8 4,575 1.3 5,621 1.6
BLM Partnership 4,295 3.0 4,785 3.2 7,658 2.6 8,222 2.7
Navy II Partnership 2,680 1.6 2,445 1.4 4,914 1.4 5,248 1.4
Plant operating expense consists of labor and related expenses, supplies
and maintenance, property taxes, insurance, workovers and administrative
expense. Plant operating expense for the Navy I and BLM Partnerships decreased
for the three and six-months ended June 30, 2005, as compared to the same period
in 2004, primarily due to decreased well workover costs which are scheduled to
occur later this year. Plant operating expense for the Navy II Partnership
increased for the three-month period ended June 30, 2005, as compared to the
26
same period in 2004, primarily due to the acceleration of well workover costs in
the current period. Plant operating expense for the Navy II Partnership
decreased for the six-month period ended June 30, 2005 as compared to the same
period in 2004 primarily due to lower well workover costs in the first quarter
that started to occur in the second quarter.
Royalty Expense
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
$ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh
- --------- - --------- - --------- - ---------
Navy I Partnership 2,345 1.4 2,801 1.7 4,279 1.2 5,027 1.5
BLM Partnership 662 0.5 686 0.5 844 0.3 653 0.2
Navy II Partnership 1,670 1.0 1,962 1.1 3,160 0.9 3,606 1.0
Royalty expense for the Navy I and Navy II Partnerships decreased for the
three and six-months ended June 30, 2005, as compared to the same period in
2004, primarily due to the change in royalty structure under the terms of the
New Contract with the U.S. Navy discussed above. Royalty expense for the BLM
Partnership increased for the six-months ended June 30, 2005, as compared to the
same period in 2004, due to a large favorable adjustment in 2004 resulting from
the annual reconciliation performed in the first quarter under the netback
royalty calculation.
Depreciation and Amortization
Depreciation and amortization expense for the Navy I Partnership increased
by $285 and $509 for the three and six-months ended June 30, 2005 respectively,
as compared to the same periods in 2004, due to an increase in capitalized
assets associated with a new well placed in service in December of 2004. The
effect of the Financial Accounting Standards Board (FASB) Interpretation No. 46
(revised December 2003) (FIN 46R) resulted in an increase to depreciation and
amortization expense for the Navy I Partnership for the three and six-months
ended June 30, 2005 and June 30, 2004, of $60 and $122, respectively, for both
periods. Depreciation and amortization expense for the BLM Partnership decreased
by $249 and $474 for the three and six-months ended June 30, 2005 respectively,
as compared to the same periods in 2004, due to the older wells and plant
overhauls being fully depreciated during 2004. Depreciation and amortization
expense for the Navy II Partnership remained relatively constant for the three
and six-months ended June 30, 2005 respectively, as compared to the same periods
in 2004. The effect of FIN 46R resulted in an increase to depreciation and
amortization expense for the Navy II Partnership for the three and six-months
ended June 30, 2005 and June 30, 2004, of $60 and $121, respectively, for both
periods.
Interest and Other Income
Interest and other income for the Navy I, BLM and Navy II Partnerships
increased by $179, $188 and $127, respectively for the three-months ended June
30, 2005 and $247, $156 and $161, respectively for the six-months ended June 30,
2005, as compared to the same periods in 2004, due to higher market rates for
fixed income investments during those periods in 2005. The effect of FASB FIN
46R resulted in an increase to interest and other income for the Navy I
Partnership for the three and six-months ended June 30, 2005 and June 30, 2004,
of $40 and $81, respectively for both periods. The effect of FIN 46R on interest
and other income for the Navy II Partnership for the three and six-months ended
June 30, 2005 and June 30, 2004, was an increase of $28 and $56, respectively,
for both periods.
27
Interest Expense
Interest expense for the Navy I, BLM and Navy II Partnerships decreased by
$251, $226 and $246, respectively, for the three-months ended June 30, 2005 and
decreased by $492, $448 and $486, respectively for the six-months ended June 30,
2005, as compared to the same periods in 2004, due to the reduction in the
principal amount of the project loan from Funding Corp.
Liquidity and Capital Resources
Each of the Coso Partnerships derive substantially all of their cash flow
from Edison under their power purchase agreements and from interest income
earned on funds on deposit. The Coso Partnerships have used their cash primarily
for capital expenditures for power plant improvements, resource and operating
costs, distributions to partners and payments with respect to the project loan.
The Coso Partnerships' cash flow obligations over the next several years
consist of debt service payments to Funding Corp. as they come due under the
Securities as discussed below. The Coso Partnerships expect to be able to meet
these obligations from operating cash flow. Historically, any excess cash after
debt service has either been reserved for capital improvements or distributed to
the partners.
The Coso Partnerships' ability to meet their obligations as they come due
will depend upon the ability of Edison to meet its obligations under the terms
of the standard offer No. 4 power purchase agreements and the Coso Partnerships'
ability to continue to generate electricity. Edison's failure to pay its future
obligations may have a material adverse effect on the Coso Partnerships' ability
to make debt service payments to Funding Corp. as they come due under the
Securities.
On August 5, 2005, Funding Corp. issued $375 million of senior secured
bonds due June 15, 2019 and $90 million of subordinated secured notes due June
15, 2014 (collectively, the "Securities"). The proceeds of the Securities were
put into an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and the Coso Partnerships will be
defeased, and the related security agreements and pledge agreements of Funding
Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be
satisfied in full and will no longer be enforceable against Funding Corp. or the
Coso Partnerships.
Net cash from operating activities for the Navy I Partnership increased by
$2,673 for the six-months ended June 30, 2005, as compared to the same period in
2004, primarily due to increased net income partially offset by increased trade
payables. Net cash used in investing activities for the Navy I Partnership
increased by $373 for the six-months ended June 30, 2005, as compared to the
same period in 2004, primarily due to increased capital expenditures partially
offset by a decrease in restricted cash requirements associated with the Notes.
Net cash used in financing activities for the Navy I Partnership increased by
$2,973 for the six-months ended June 30, 2005, as compared to the same period in
2004, due to an increase in debt payments and partner distributions.
Net cash from operating activities for the BLM Partnership increased by
$665 for the six-months ended June 30, 2005, as compared to the same period in
2004, primarily due to increased net income. Net cash used in investing
activities for the BLM Partnership increased by $261 for the six-months ended
June 30, 2005, as compared to the same period in 2004, primarily due to
increased capital expenditures partially offset by a decrease in restricted cash
requirements associated with the Notes.
Net cash from operating activities for the Navy II Partnership remained
consistent for the six-months ended June 30, 2005, as compared to the same
period in 2004. Net cash used in investing activities for the Navy II
Partnership increased by $311 for the six-months ended June 30, 2005, as
compared to the same period in 2004, primarily due to an increase in capital
expenditures. Net cash used in financing activities for the Navy II Partnership
decreased by $480 for the six-months ended June 30, 2005, as compared to the
same period in 2004, primarily due to decreased partners distributions partially
offset by increased debt payments.
28
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Risk Factors
Operating the Coso projects involves, among other things, general economic,
financial, competitive, legislative, legal, regulatory and other factors that
are beyond management's control. Changes in these factors could make it more
expensive to operate the Coso projects, or require additional capital
expenditures, or reduce certain benefits currently available to the Coso
Partnerships. There are a variety of other risks that affect the Coso projects,
some of which are beyond management's control, including:
o one or more of the Coso projects could perform below expected levels
of output or efficiency which would reduce revenue;
o in light of the uncertainty of the Western energy markets, Edison's
financial viability may be considered uncertain and accounts
receivable from Edison could be reduced or eliminated;
o the Coso geothermal resource could be interrupted or unavailable;
o operating costs could increase;
o changes in the regulatory structure which govern the current
operations of the Coso Partnerships.
o future competition may lead to an accelerated depletion of the
resource;
o energy prices paid by Edison could decrease or terminate;
o delivery of electrical energy to Edison could be disrupted;
o environmental problems or regulation changes could arise which could
lead to fines or a shutdown of one or more plants;
o plant units and equipment have broken down or failed in the past and
could break down or fail in the future;
o the operators of the Coso projects could suffer labor disputes;
o the government could change permit or governmental approval
requirements restricting operations;
o third parties could fail to perform their contractual obligations to
the Coso Partnerships; and
o catastrophic events, such as fires, earthquakes, explosions, floods,
severe storms or other occurrences including terrorism or war, could
affect one or more of the Coso projects, the Navy or Edison.
In addition, the Coso Partnerships must meet specified performance
requirements under their respective power purchase agreements during the months
of June through September to continue to qualify for the maximum capacity and
capacity bonus payments. If one or more of the events listed above occur and
substantially affect the performance of one or more of the plants during these
months, operating revenues would be significantly decreased.
Item 4. Controls and Procedures
The Registrant's Chief Executive Officer and Chief Financial Officer (the
Registrant's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of June 30, 2005,
that the design and operation of the Registrant's "disclosure controls and
procedures" (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act")) are effective to ensure that information
29
required to be disclosed by the Registrant in the reports filed or submitted by
the Registrant under the Exchange Act is accumulated, recorded, processed,
summarized and reported to the Registrant's management, including the
Registrant's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding whether or not disclosure is
required.
During the quarter ended June 30, 2005, there were no changes in the
Registrant's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal controls over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General
The Coso Partnerships are currently parties to various items of litigation
relating to day-to-day operations, none of which, if determined adversely, would
be material to the financial condition and results of operations of the Coso
Partnerships, either individually or taken as a whole.
Item 2. Unregistered Sales of Equity 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
31.1 Section 15d-14(a) Certification of Chief Executive Officer
31.2 Section 15.d-14(a)Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
99.1 Supplemental Consolidated and Combined Financial Information
for the Coso Partnerships and Subsidiaries
30
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION
302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, James D. Bishop, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Caithness Coso
Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy
Developers, and Coso Power Developers and Subsidiary (collectively, the
Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 12, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ JAMES D. BISHOP, SR.
------------------------
James D. Bishop, Sr.
Director, Chairman &
Chief Executive Officer
31
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION
302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher T. McCallion, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Caithness Coso
Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy
Developers, and Coso Power Developers and Subsidiary (collectively, the
Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 12, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President
& Chief Financial Officer
Principal Financial &
Accounting Officer
32
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Caithness Coso Funding Corp., Coso
Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power
Developers and Subsidiary (collectively, the Registrant) on Form 10-Q for the
period ended June 30, 2005 as filed with the Securities and Exchange Commission
on the date hereof (the Report), I, James D. Bishop, Sr., Chief Executive
Officer of the Registrant, certify, to the best of my knowledge and belief,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Registrant.
Date: August 12, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ JAMES D. BISHOP, SR.
------------------------
James D. Bishop, Sr.
Director, Chairman &
Chief Executive Officer
33
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Caithness Coso Funding Corp., Coso
Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power
Developers and Subsidiary (collectively, the Registrant) on Form 10-Q for the
period ended June 30, 2005 as filed with the Securities and Exchange Commission
on the date hereof (the Report), I, Christopher T. McCallion, Chief Financial
Officer of the Registrant, certify, to the best of my knowledge and belief,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Registrant.
Date: August 12, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President
& Chief Financial Officer
Principal Financial &
Accounting Officer
34
Exhibit 99.1
Supplemental Consolidated and Combined Financial Information
for the Coso Partnerships and Subsidiaries
The following information presents unaudited consolidated and combined
financial statements of the Coso Partnerships and Subsidiaries. These financial
statements represent a consolidation and combination of the financial statements
of Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers,
Coso Power Developers, New CLPSI Company, LLC and Coso Transmission Line
Partners for the periods indicated. This supplemental financial information is
not required by accounting principles generally accepted in the United States of
America and has been provided to facilitate a more comprehensive understanding
of the financial position, operating results and cash flows of the Coso
Partnerships and Subsidiaries as a whole, which jointly and severally guarantee
the repayment of the Notes. The unaudited consolidated and combined financial
statements should be read in conjunction with each individual Coso Partnership's
and Subsidiaries financial statements and their accompanying notes.
The financial information herein presented reflects all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for interim periods
presented. The results for the interim periods are not necessarily indicative of
results to be expected for the full year.
35
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets:
Current Assets:
Cash......................................................................... $ 1,187 $ 1,794
Restricted cash and cash equivalents......................................... 33,544 32,622
Accounts receivable, (net of allowances of $298)............................. 27,139 21,831
Prepaid expenses and other assets............................................ 270 2,266
Inventory.................................................................... 5,402 5,357
Amounts due from related parties............................................. 6,954 6,787
------ ------
Total current assets 74,496 70,657
Restricted cash and investments.............................................. 15,507 15,250
Property, plant and equipment, (net of accumulated depreciation
of $370,455 and $357,806, respectively)................................... 362,851 371,223
Power purchase contract, (net of accumulated amortization
of $31,724 and $29,217, respectively)..................................... 34,801 37,308
Deferred financing costs, (net of accumulated amortization
of $7,786 and $7,392, respectively)....................................... 3,544 3,938
------- -------
Total assets $ 491,199 $ 498,376
======= =======
Liabilities and Partners' Capital:
Current Liabilities:
Accounts payable and accrued liabilities..................................... $ 6,390 $ 8,684
Amounts due to related parties.............................................. 1,443 1,865
Current portion of project loans............................................. 36,602 35,480
------ ------
Total current liabilities 44,435 46,029
Other liabilities............................................................ 18,141 17,746
Deferred revenue............................................................. 1,012 --
Amounts due to related parties............................................... 26,685 26,449
Project loans................................................................ 171,483 186,797
------- -------
Total liabilities 261,756 277,021
Partners' capital............................................................... 229,443 221,355
------- -------
Total liabilities & partners' capital $ 491,199 $ 498,376
======= =======
See accompanying notes to the unaudited consolidated and combined financial statements.
36
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS
(Dollars in thousands)
Three-Months Three-Months Six-Months Six-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
Revenue:
Energy revenues...................................... $ 25,985 $ 26,535 $ 53,400 $ 54,685
Capacity revenues.................................... 10,521 10,525 14,234 14,241
------ ------ ------ ------
Total revenue................................. 36,506 37,060 67,634 68,926
Operating expenses:
Plant operating expenses............................. 9,380 10,032 17,010 18,943
Royalty expense...................................... 4,677 5,449 8,283 9,286
Depreciation and amortization........................ 7,808 7,764 15,575 15,531
------ ------ ------ ------
Total operating expenses...................... 21,865 23,245 40,868 43,760
Operating income ............................. 14,641 13,815 26,766 25,166
Other (income)/expenses:
Interest and other income............................ (916) (406) (1,447) (872)
Interest expense..................................... 4,963 5,686 9,936 11,362
Noncash interest expense............................. 197 197 394 394
----- ----- ----- ------
Total other expenses.......................... 4,244 5,477 8,883 10,884
----- ----- ----- ------
Net income.................................... $ 10,397 $ 8,338 $ 17,883 $ 14,282
====== ===== ====== ======
See accompanying notes to the unaudited consolidated and combined financial statements.
37
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED COMBINED AND CONDENSED
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six-Months Six-Months
Ended Ended
June 30, June 30,
2005 2004
Net cash provided by (used in) operating activities...... $ 29,256 $ 26,184
Net cash provided by (used in) investing activities...... (5,819) (4,874)
Net cash provided by (used in) financing activities...... (24,044) (21,634)
------ ------
Net change in cash....................................... $ (607) $ (324)
====== ======
Supplemental cash flow disclosure:
Cash paid for interest.......................... $ 10,058 $ 11,476
====== ======
See accompanying notes to the unaudited consolidated, combined and condensed financial statements.
38
COSO PARTNERSHIPS
NOTES TO THE UNAUDITED
CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Basis of Presentation
The accompanying unaudited consolidated and combined financial statements were
derived from the stand alone unaudited financial statements of Caithness Coso
Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers and
Coso Power Developers and Subsidiary ("the Coso Partnerships"). All intercompany
accounts and transactions were eliminated. This financial information has been
provided to facilitate a more comprehensive understanding of the financial
position, operating results and cash flows of the Coso Partnerships as a whole.
The unaudited consolidated and combined financial statements should be read in
conjunction with each individual Partnership's unaudited financial statements.
The preparation of unaudited financial statements in accordance with accounting
principles generally accepted in the United States of America requires the Coso
Partnerships to make certain estimates and assumptions for the reporting periods
covered by the financial statements. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses during the
reporting period. Actual results could differ from these estimates. The
financial information herein presented reflects all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for interim periods presented. The
results for the interim periods are not necessarily indicative of results to be
expected for the full year. The Coso Partnerships have experienced significant
quarterly fluctuations in operating results and it expects that these
fluctuations in energy revenues, expenses and net income will continue.
The data for the consolidated and combined balance sheets presented herein for
June 30, 2005 and December 31, 2004 were derived from the Coso Partnership's
financial statements for the interim period and fiscal year then ended and
includes the effect of consolidating New CLPSI Company, LLC ("CLPSI") and Coso
Transmission Line Partners ("CTLP") as a result of the adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003),
(FIN 46R) Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
(2) Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for electricity
delivered and sold under a power purchase contract. Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison.
(3) Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(4) Asset Retirement Obligations
In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. The Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of a fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset. The Statement is effective for consolidated financial
statements issued for fiscal years beginning after June 15, 2002. On January 1,
39
2003, the Coso Partnerships adopted SFAS No. 143 and estimated the restoration
costs the Coso Partnerships expect to incur when the land lease expires. Under
the land lease, the Coso Partnerships are required to remove all property,
plant, and equipment to restore the land to its original state. As of June 30,
2005 and December 31, 2004, the accumulated liability associated with the
restoration costs were $3,158 and $3,008, respectively, and are included in
other liabilities.
(5) Commitments and Contingencies
The Coso Partnerships are required to obtain a "Financial Guarantee Bond for
Closure Costs" (Water Bonds), which would be used in the event of noncompliance
of the remediation obligation for waste discharge. As of June 30, 2005 and
December 31, 2004, the fair value of the Water Bonds that are reported as a
noncurrent restricted investments are $433.
Settlement Agreement between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth Circuit
(Ninth Circuit) issued an opinion and order on appeal from the district court's
stipulated judgment which affirmed the stipulated judgment in part and referred
questions based on California state law to the California Supreme Court. The
Ninth Circuit stated that if the settlement agreement violated California state
law, then the appeals court would be required to void the stipulated judgment.
The California Supreme Court accepted the Ninth Circuit's request to address the
issues referred to in the September 23, 2002 ruling. On August 21, 2003, the
California Supreme Court found that state laws were not violated as of result of
the settlement agreements. On December 19, 2003, the Ninth Circuit fully
affirmed the district court's stipulated judgment based on the reply from the
California Supreme Court.
Court of Appeals Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC decision,
claiming that the "floor" line loss factor of 0.95 for renewable generators
violated the Public Utility Regulator Policies Act of 1978. Subsequently, the
California Court of Appeals issued a decision on August 20, 2002 in response to
the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor,"
which it rejected as an abuse of discretion by the CPUC. While this matter was
appealed to the California Supreme Court, the petition for review was denied.
The Coso Partnerships are currently evaluating potential actions to redress this
issue. The Coso Partnerships' Agreements set the loss factor at 1.0 for energy
sold between May 2002 through May 2007. After April 2007, the Coso Partnerships
will have a line loss factor of less than 1.0, effectively decreasing revenues
if Edison's challenge to the CPUC ruling stands. The Coso Partnerships cannot
predict whether any subsequent action regarding this matter will be successful.
(6) Subsequent Events
On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due
June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014
(collectively, the "Securities"). The proceeds of the Securities were put into
an escrow account for the benefit of the holders of the Notes, and on
approximately September 6, 2005, the proceeds of the escrow account will be
released to the holders of the Notes to repay the Notes in full. Effective
August 5, 2005, under the terms of the Indenture under which the Notes are
outstanding, the covenants of Funding Corp. and the Coso Partnerships will be
defeased, and the related security agreements and pledge agreements of Funding
Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be
satisfied in full and will no longer be enforceable against Funding Corp. or the
Coso Partnerships.
40
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.
CAITHNESS COSO FUNDING CORP.,
a Delaware corporation
Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
COSO FINANCE PARTNERS AND SUBSIDIARY
a California general partnership
By: New CLOC Company, LLC,
its Managing General Partner
Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
COSO ENERGY DEVELOPERS
a California general partnership
By: New CHIP Company, LLC,
its Managing General Partner
Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
COSO POWER DEVELOPERS AND SUBSIDIARY
a California general partnership
By: New CTC Company, LLC,
its Managing General Partner
Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)