ITEM 1. BUSINESS.
GENERAL
Salton Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned subsidiary of CE Generation, LLC ("CE Generation"), is a Delaware corporation formed for the sole purpose of issuing securities in its individual capacity as principal and as agent acting on behalf of the Guarantors (as defined below). The principal executive office of the Funding Corporation is located at 302 South 36th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is (402) 341-4500.
CE Generation owns all of the capital stock of Magma Power Company ("Magma"), which owns all of the outstanding capital stock of Funding Corporation. Through its subsidiaries, CE Generation is primarily engaged in the development, ownership and operation of environmentally responsible independent power production facilities in the United States utilizing geothermal and natural gas resources. CE Generation has an aggregate net ownership interest of 757 MW of electrical generating capacity in power plants in operation in the United States, which have an aggregate net capacity of 817 MW (including its interests in the Salton Sea Projects and the Partnership Projects as defined below).
All of the outstanding stock of Magma was contributed by MidAmerican Energy Holdings Company ("MEHC") to CE Generation in February 1999. In March 1999, MEHC sold a 50% interest in CE Generation to El Paso CE Generation Holding Company, which was merged into El Paso Merchant Energy North American Company ("EPME") on
December 31, 2000, an affiliate of El Paso Corporation ("El Paso"). On January 29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.
Magma directly or indirectly owns all of the capital stock of or partnership interests in the Funding Corporation and the Guarantors, except for CalEnergy Minerals LLC ("Minerals") and Salton Sea Minerals Corp., which are owned by MEHC. The Guarantors are comprised of the Salton Sea Guarantors, the Partnership Guarantors (collectively, the "Imperial Valley Projects"), and the Royalty Guarantor (collectively, the "Guarantors").
The Salton Sea Guarantors include Salton Sea Brine Processing L.P. ("SSBP"), Salton Sea Power Generation L.P. ("SSPG"), Salton Sea Power L.L.C. (Salton Sea Power), and Fish Lake Power LLC ("Fish Lake") (collectively, the "Salton Sea Guarantors"), which own five operating geothermal power plants located in Imperial Valley, California known as Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV and Salton Sea V (the "Salton Sea Projects").
The Partnership Guarantors include the Vulcan/BN Geothermal Power Company ("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"), Del Ranch, L.P. ("Del Ranch"), and CE Turbo LLC ("CE Turbo"), each of which owns an operating geothermal power plant located in Imperial Valley, California known as the Vulcan Project, the Elmore Project, the Leathers Project, the Del Ranch Project and CE Turbo Project, respectively (the "Partnership Projects"). The Partnership Guarantors also include Minerals, which has constructed a zinc recovery project in the Imperial Valley, California. Finally, the Partnership Guarantors include CalEnergy Operating Corporation ("CEOC"), Vulcan Power Company ("VPC"), San Felipe Energy Company ("San Felipe"), Conejo Energy Company ("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC ("VPCG"), Salton Sea Minerals Corp. and CE Salton Sea Inc. VPC and VPCG, collectively own 100% of the partnership interests in Vulcan. CEOC and Niguel, San Felipe and Conejo, collectively own 90% partnership interests in Elmore, Leathers and Del Ranch, respectively. Salton Sea Minerals Corporation owns Minerals. CE Salton Sea Inc. owns Salton Sea Power and CE Turbo.
Magma owns the remaining 10% interest in each of Elmore, Leathers and Del Ranch. CEOC is entitled to receive from Magma, as payment for certain data and services provided by CEOC, all of the partnership distributions Magma receives with respect to its 10% ownership interests in each of the Elmore, Leathers and Del Ranch Projects and Magma's special distributions equal to 4.5% of total energy revenue from the Leathers Project.
Salton Sea Royalty LLC ("SSRC" or the "Royalty Guarantor") is the Royalty Guarantor. SSRC received an assignment of certain fees and royalties ("Royalties") paid by three Partnership Projects: Elmore, Leathers, and Del Ranch.
CEOC currently operates the Imperial Valley Projects. Affiliates of Magma control, through a variety of fee, leasehold, and royalty interests, rights to geothermal resources for power production in the Salton Sea Known Geothermal Resource Area ("SSKGRA"). The Funding Corporation believes that such resources will be sufficient to operate the Imperial Valley Projects at contract capacity under their respective power purchase agreements through the final maturity date of the securities described beginning on page 8.
The principal executive offices of the Salton Sea Guarantors are located at 302 South 36th Street, Suites 400-B, 400-D, 400-E, 400-K and 400-N, Omaha, Nebraska 68131. The principal executive offices of the Partnership Guarantors is 302 South 36th Street, Suite 400-F, 400-G, 400-I, 400-J, 400-L, 400-M, 400-N, 400-O, 400-P, 400-Q, 400-R, 400-S, 400-T, and 400-U, Omaha, Nebraska 68131. The principal executive office of the Royalty Guarantor is 302 South 36th Street, Suite 400-H, Omaha, Nebraska 68131.
In this Annual Report references to kW means kilowatt, kWh means kilowatt-hour, MW means megawatts, MWh means megawatt hours, MMBtus means million British thermal units, and NMW means net megawatts.
THE PROJECTS
Set forth below is a table describing certain characteristics of the Imperial Valley Projects, and the Guarantors' collective interests therein. All the projects are located in the Imperial Valley, California.
(1) Actual MW may vary depending on operating and reservoir conditions and plant design. Facility Net Capacity (in MW) represents facility gross capacity (in MW) less parasitic load. Parasitic load is electrical output used by the facility and not made available for sale to utilities or other outside purchasers. Net MW owned indicates current legal ownership, but, in some cases, does not reflect the current allocation of partnership distributions.
(2) Southern California Edison Company ("Edison"); El Paso Corporation ("El Paso"); and Minerals.
(3) Each contract governing power purchases by the Zinc Recovery Project will expire 33 years from the date of the initial power delivery under such contract. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and CE Turbo began selling available power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on October 31, 2003.
Each of the Imperial Valley Projects, excluding the Salton Sea V and the CE Turbo Projects, sells electricity to Southern California Edison ("Edison") pursuant to a separate Standard Offer No. 4 Agreement ("SO4 Agreement") or a negotiated power purchase agreement. Each power purchase agreement is independent of the others, and the performance requirements specified within one such agreement apply only to the Project, subject to the agreement. The power purchase agreements provide for energy payments, capacity payments and capacity bonus payments. Edison makes fixed annual capacity payments and capacity bonus payments to the applicable projects to the extent that capacity factors exceed certain benchmarks. Except as described, the price for capacity is fixed for the life of the SO4 Agreements and is significantly higher in the months of June through September.
Energy payments for the SO4 Agreements were at increasing fixed rates for the first ten years after firm operation and thereafter at a rate based on the cost that Edison avoids by purchasing energy from the project instead of obtaining the energy from other sources ("Avoided Cost of Energy"). In June and November 2001, the Imperial Valley Projects, which receive Edison's Avoided Cost of Energy entered into agreements that provide for amended energy payments under the SO4 Agreements. The amendments provide for fixed energy payments per kWh in lieu of Edison's Avoided Cost of Energy. The fixed energy payment was 3.25 cents per kWh from December 1, 2001 through April 30, 2002 and is 5.37 cents per kWh commencing May 1, 2002 for a five-year period. Following
the five-year period, the energy payments revert back to Edison's Avoided Cost of Energy.
For the years ended December 31, 2002, 2001 and 2000, respectively, Edison's Average Avoided Cost of Energy was 3.5 cents per kWh, 7.4 cents per kWh and 5.8 cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year.
The Imperial Valley Projects, other than Salton Sea I, receive transmission service from the Imperial Irrigation District ("IID"), to deliver electricity to Edison near Mirage, California. These projects pay a rate based on the IID's cost of service, which was $1.70 per month per kW of service provided for 2002 and recalculated annually. The transmission service and interconnection agreements expire in 2015 for the Partnership Projects, 2019 for Salton Sea III, 2020 for Salton Sea II and 2026 for Salton Sea IV. Salton Sea V and the CE Turbo Projects have entered into 30-year agreements with similar terms with the IID. Salton Sea I delivers energy to Edison at the project site and has no transmission service agreement with the IID.
SALTON SEA PROJECTS
The Salton Sea I Project contracts to sell electricity to Edison pursuant to a 30-year negotiated power purchase agreement, which commenced on July 1, 1987 (the "Salton Sea I PPA"). The contract capacity and contract nameplate are each 10 MW. The capacity payment is based on the firm capacity price, which adjusts quarterly based on a basket of energy indices for the term of the Salton Sea I PPA and is currently $154.45 per kW-year. The capacity payment is approximately $1.1 million per annum. The energy payment is calculated using a Base Price (defined as the initial value of the energy payment (4.7 cents per kWh for the second quarter of 1992)), which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Salton Sea I was 5.8 cents per kWh during 2002. As the Salton Sea I PPA is not an SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy.
The Salton Sea II Project contracts to sell electricity to Edison pursuant to a 30-year modified SO4 Agreement that commenced on April 5, 1990. The contract capacity and contract nameplate are 15 MW (16.5 MW during on-peak periods) and 20 MW, respectively. The price for contract capacity and contract capacity bonus payments is fixed for the life of the modified SO4 Agreement. The annual capacity and bonus payments are approximately $3.3 million. The energy payments for the first ten-year period, which period expired on April 4, 2000, were levelized at a time period weighted average of 10.6 cents per kWh. Thereafter, the monthly energy payment was based on Edison's Avoided Cost of Energy. Edison is entitled to receive, at no cost, 5% of all energy delivered in excess of 80% of contract capacity through September 30, 2004.
The Salton Sea III Project contracts to sell electricity to Edison pursuant to a 30-year modified SO4 Agreement that commenced on February 13, 1989. The contract capacity and contract nameplate are 47.5 MW and 49.8 MW, respectively. The price for contract capacity payments and capacity bonus payments is fixed at $175 per kW per year. The annual capacity and bonus payments are approximately $9.7 million. The energy payments for the first ten-year period, which period expired on February 12, 1999, were levelized at a time period weighted average of 9.8 cents per kWh. Thereafter, the energy payment has been based on Edison's Avoided Cost of Energy.
The Salton Sea IV Project contracts to sell electricity to Edison pursuant to a modified SO4 Agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea I PPA option (20 MW) and to the original Salton Sea IV SO4 Agreement ("Fish Lake PPA") (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The capacity and bonus payments in 2002, 2001 and 2000 were approximately $5.5 million, $5.7 million and $5.4 million, respectively. The energy payment (for deliveries up to a rate of 39.6 MW) is at a base price, adjusted quarterly based on specified indices, for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. The contract has a 30-year term but Edison is not required to purchase the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA option after September 30, 2017, the original termination date of the Salton Sea I PPA.
The Salton Sea V Project, which commenced operations in the third quarter of 2000, expects to sell up to 22 MW of its net output to Minerals, pursuant to a 33 year power sales agreement. The agreement provides for energy payments based on the market rates available to the Salton Sea V Project, adjusted for wheeling costs. The Salton Sea V Project sells its remaining output through other market transactions.
PARTNERSHIP PROJECTS
The Vulcan Project contracts to sell electricity to Edison under a 30-year SO4 Agreement that commenced on February 10, 1986. The Vulcan Project has a contract capacity and contract nameplate of 29.5 MW and 34 MW, respectively. The annual capacity and bonus payments are approximately $5.5 million.
The Elmore Project contracts to sell electricity to Edison under a 30-year SO4 Agreement that commenced on January 1, 1989. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. The annual capacity and bonus payments are approximately $7.9 million.
The Leathers Project contracts to sell electricity to Edison pursuant to a 30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. The annual capacity and bonus payments are approximately $7.5 million. The energy payment is based on Edison's Avoided Cost of Energy.
The Del Ranch Project contracts to sell electricity to Edison under a 30-year SO4 Agreement that commenced on January 2, 1989. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. The annual capacity and bonus payments are approximately $7.9 million.
The CE Turbo Project, which commenced commercial operation in the third quarter of 2000, sells its output through market transactions. The CE Turbo Project may sell its output to Minerals, pursuant to a 33 year power purchase agreement. The agreement provides for energy payments based on the market rates available to the CE Turbo Project, adjusted for wheeling costs.
Commencing January 17, 2001, Salton Sea Power and CE Turbo entered into a series of transaction agreements to sell available power from the Salton Sea V and CE Turbo Projects to EPME based on day ahead price quotes received from EPME under the original agreement and based on percentages of the Dow Jones SP-15 Index thereafter. Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and CE Turbo began selling available power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on October 31, 2003.
ZINC RECOVERY PROJECT
Minerals developed and owns the rights to proprietary processes for the extraction of zinc from elements in solution in the geothermal brine and fluids utilized at the company's Imperial Valley Projects. A plant has successfully produced commercial quality zinc at the projects. The affiliates of Minerals may develop facilities for the extraction of manganese, silica and other products as it further develops the extraction technology.
Minerals constructed the Zinc Recovery Project, which is recovering zinc from the geothermal brine (the "Zinc Recovery Project"). Facilities have been installed near the Imperial Valley Projects sites to extract a zinc chloride solution from the geothermal brine through an ion exchange process. This solution is being transported to a central processing plant where zinc ingots are being produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tons per year. Limited production began during December 2002 and full production is expected by late-2003. In September 1999, Minerals entered into a sales agreement whereby all high-grade zinc produced by the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the agreement expires in December 2005.
ROYALTY PROJECTS
The Royalty Guarantor has received an assignment from Magma of certain Royalties received from the Elmore Leathers and Del Ranch Projects in exchange for the provision to those projects of the rights to use certain geothermal resources. Substantially all of the assigned Royalties are based on a percentage of energy and capacity revenue of the respective projects. Pursuant to the assignment, the Royalty Guarantor is entitled to receive the aggregate percentages of such project's energy and capacity revenue as illustrated in the chart below. The Partnership Guarantors are also entitled to receive Royalties from the Partnership Projects as illustrated in the chart below. Royalties are subject to netting and reduction from time to time to reflect various operating costs, as reflected in the financial statements herein. All such Royalties (other than the various operating costs, as reflected in the financial statements) are payable from revenue which will constitute Partnership Guarantor's collateral.
ROYALTIES TO BE PAID TO ROYALTY ROYALTIES TO BE PAID TO GUARANTOR PARTNERSHIP GUARANTORS ------------------------------- --------------------------- % of Energy % of Capacity % of Energy % of Capacity Revenues Revenues Revenues Revenues ----------- ------------- ----------- ------------
Del Ranch....... 23.33% 1.00% 5.67% 3.00% Elmore.......... 23.33 1.00 5.67 3.00 Leathers........ 21.50 0.00 7.50 3.00 Vulcan.......... 0.00 0.00 4.17 0.00
DESCRIPTION OF THE SECURITIES
The Funding Corporation is a Delaware corporation formed for the sole purpose of issuing securities in its individual capacity as principal and as agent acting on behalf of its affiliates, which guarantee the securities described below.
The Funding Corporation has completed the following issuances and exchanges of securities (together, the "Securities"):
o On July 21, 1995, the Funding Corporation issued (1) $232.8 million of 6.69% Senior Secured Series A Notes Due 2000 (the "Series A Securities"), (2) $133.0 million of 7.37% Senior Secured Series B Bonds Due 2005 (the "Series B Securities") and (3) $109.3 million of 7.84% Senior Secured Series C Bonds Due 2010 (the "Series C Securities"). The Series A Securities were repaid in full on May 30, 2000.
o On June 20, 1996, the Funding Corporation issued (1) $70.0 million of 7.02% Senior Secured Series D Bonds Due 2000 (the "Series D Securities") and (2) $65.0 million of 8.30% Senior Secured Series E Bonds Due 2011 (the "Series E Securities"). The Series D Securities were repaid in full on May 30, 2000.
o On October 13, 1998, the Funding Corporation issued $285.0 million of 7.475% Senior Secured Series F Bonds Due 2018 (the "Series F Securities").
The Securities have received ratings of "Ba3" by Moody's Investors Service, Inc. ("Moody's") and "BB" by Standard & Poor's Ratings Group ("S&P"). The Securities will be equivalent in right of payment and in the right to share in the collateral. On December 31, 2002, the aggregate principal amount of all Securities outstanding was $491.7 million.
STRUCTURE OF AND COLLATERAL FOR THE SECURITIES
The Funding Corporation will make payments on the Securities with the principal of and interest paid on promissory notes issued by the Guarantors to the Funding Corporation (the "Project Notes"). The Securities are secured by a pledge of the Funding Corporation's common stock and are guaranteed by the Guarantors. These guarantees are secured by:
o in the case of the guarantee issued by the Salton Sea Guarantors, by a lien on substantially all of the assets of the Salton Sea Guarantors and a pledge of the equity interests in the Salton Sea Guarantors;
o in the case of the guarantee issued by the Partnership Guarantors, by a lien on substantially all of the assets of the Partnership Project Companies, a lien on the equity cash flows and royalties of the Initial Partnership Guarantors and a pledge of the common stock of and other equity interests in the Partnership Guarantors; and
o in the case of the guarantee issued by the Royalty Guarantor, by a lien on all royalties paid to the Royalty Guarantor and a pledge of the common stock of the Royalty Guarantor.
The guarantees issued by the Salton Sea Guarantors are unlimited. However, the guarantees issued by the Partnership Guarantors and the Royalty Guarantor are limited to the following amounts:
o for any Initial Partnership Guarantor or the Royalty Guarantor, the total equity cash flows and royalties received by the Guarantor, minus, without duplication, (1) any royalties paid, (2) all operating and maintenance costs, (3) all capital expenditures and (4) debt service;
o for any Additional Partnership Guarantor, the total revenue received by the Guarantor, minus, without duplication (1) any royalties paid, (2) all operating and maintenance costs, (3) all capital expenditures and (4) debt service.
The structure has been designed to cross-collateralize cash flows from each Guarantor without cross-collateralizing all of the Guarantors' assets. Therefore, if a Guarantor defaults under its guarantee or its promissory note issued to the Funding Corporation, without causing a payment default on the Securities, then the trustee may direct the collateral agent to exercise remedies only with respect to the collateral securing that Guarantor's obligations. If, however, the default causes a payment default on the Securities, then the trustee may accelerate the Securities and direct the collateral agent to exercise remedies against all of the collateral and, if different, the collateral pledged by the Salton Sea Guarantors.
The Funding Corporation is a special purpose finance subsidiary of Magma. Its ability to make payments on the Securities will be entirely dependent on the Guarantors' performance of their obligations under the Project Notes and the Guarantees. As is common in non-recourse, project finance structures, the assets and cash flows of the Guarantors are the sole source of repayment of the Project Notes and the Guarantees. The Salton Sea Guarantors conduct no other business and own no other significant assets except those related to the ownership or operation of the Salton Sea Projects. The Partnership Guarantors conduct no business other than owning their respective ownership interests in the Partnership Projects and providing operation, maintenance, administrative and technical services for Magma, and the Imperial Valley Projects. The Royalty Guarantor has been organized solely to receive royalty payments owed by the Partnership Projects and conducts no other business and owns no other assets. In the event of a default by any Guarantor under a Project Note, Credit Agreement or Guarantee, there is no assurance that the exercise of remedies under such Project Note, Credit Agreement or Guarantee, including foreclosure on the assets of such Guarantor, would provide sufficient funds to pay such Guarantor's obligation under the Project Notes and the Guarantees. Moreover, unless such default causes a payment default under the Indenture (in which case remedies may be exercised against the defaulting Guarantor's and the Salton Sea Guarantors' assets), remedies may be exercised only against the assets of the defaulting Guarantors. No shareholders, partners, or affiliates of the Funding Corporation (other than the Guarantors) and no directors, officers or employees of the Funding Corporation or the Guarantors will guarantee or be in any way liable for the payment of the Securities, the Project Notes or the Guarantees except the guarantee by MEHC for the direct and indirect owners of the Zinc Recovery Project of a specified portion of the scheduled debt service on the Series F Securities including the current principal amount of approximately $137.8 million and associated interest. In addition, the obligations of the Partnership Guarantors and the Royalty Guarantor under the Guarantees are limited to the available cash flows of such Guarantors. As a result, payment of amounts owed pursuant to the Project Notes, the Guarantees, and the Securities is dependent upon the availability of sufficient revenue and royalty payments from the Guarantors' businesses or holdings, after the payment of operating expenses and the satisfaction of certain other obligations.
PAYMENT OF INTEREST AND PRINCIPAL
The interest payment dates for the Securities are May 30 and November 30.
The remaining balance of the $133.0 million initial principal amount of the 7.37% Series B Securities due May 30, 2005 is payable in semiannual installments as follows:
PERCENTAGE OF PAYMENT INITIAL PRINCIPAL DATE AMOUNT PAYABLE -------------------- -----------------
May 30, 2003 ....... 5.64% November 30, 2003 .. 5.64% May 30, 2004 ....... 7.58% November 30, 2004 .. 7.58% May 30, 2005 ....... 16.17%
The $109.3 million initial principal amount of the 7.84% Series C Securities due May 30, 2010 is payable in semiannual installments, commencing May 30, 2003, as follows:
PERCENTAGE OF PAYMENT INITIAL PRINCIPAL DATE AMOUNT PAYABLE -------------------- ----------------- May 30, 2003 ....... 3.31% November 30, 2003 .. 3.31% May 30, 2004 ....... 1.66% November 30, 2004 .. 1.66% May 30, 2005 ....... 0.83% November 30, 2005 .. 0.83% May 30, 2006 ....... 9.86% November 30, 2006 .. 9.86% May 30, 2007 ....... 9.84% November 30, 2007 .. 9.84% May 30, 2008 ....... 10.09% November 30, 2008 .. 10.09% May 30, 2009 ....... 10.01% November 30, 2009 .. 10.01% May 30, 2010 ....... 8.81%
The remaining balance of the $65.0 million initial principal amount of the 8.30% Series E Securities due May 30, 2011 is payable in semiannual installments as follows:
PERCENTAGE OF PAYMENT INITIAL PRINCIPAL DATE AMOUNT PAYABLE -------------------- ----------------- May 30, 2003 ....... 2.31% November 30, 2003 .. 2.31% May 30, 2004 ....... 2.50% November 30, 2004 .. 2.50% May 30, 2005 ....... 2.69% November 30, 2005 .. 2.69% May 30, 2006 ....... 1.92% November 30, 2006 .. 1.92% May 30, 2007 ....... 1.92% November 30, 2007 .. 1.92% May 30, 2008 ....... 2.69% November 30, 2008 .. 2.69% May 30, 2009 ....... 2.50% November 30, 2009 .. 2.50% May 30, 2010 ....... 10.38% November 30, 2010 .. 10.38% May 30, 2011 ....... 17.42%
The remaining balance of the $285.0 million initial principal amount of the 7.475% Series F Securities due November 30, 2018 is payable in semiannual installments as follows:
PERCENTAGE OF PAYMENT INITIAL PRINCIPAL DATE AMOUNT PAYABLE -------------------- ----------------- May 30, 2003 ....... 0.50% November 30, 2003 .. 0.50% May 30, 2004 ....... 0.63% November 30, 2004 .. 0.63% May 30, 2005 ....... 0.63% November 30, 2005 .. 0.63% May 30, 2006 ....... 0.65% November 30, 2006 .. 0.65% May 30, 2007 ....... 0.38% November 30, 2007 .. 0.38% May 30, 2008 ....... 0.88% November 30, 2008 .. 0.88% May 30, 2009 ....... 0.38% November 30, 2009 .. 0.38% May 30, 2010 ....... 1.25% November 30, 2010 .. 1.25% May 30, 2011 ....... 3.00% November 30, 2011 .. 3.00% May 30, 2012 ....... 5.75% November 30, 2012 .. 5.75% May 30, 2013 ....... 5.08% November 30, 2013 .. 5.08% May 30, 2014 ....... 6.00% November 30, 2014 .. 6.00% May 30, 2015 ....... 6.55% November 30, 2015 .. 6.55% May 30, 2016 ....... 7.05% November 30, 2016 .. 7.05% May 30, 2017 ....... 6.88% November 30, 2017 .. 6.88% May 30, 2018 ....... 3.45% November 30, 2018 .. 3.45%
PRIORITY OF PAYMENTS
All revenue received by the Salton Sea Guarantors from the Salton Sea Projects, all revenue received by the Partnership Guarantors and all Royalties received by the Royalty Guarantor shall be paid into a Revenue Fund maintained by the depository agent. Amounts paid into the Revenue Fund shall be distributed in the following order of priority: (a) to pay operating and maintenance costs of the Guarantors; (b) to pay certain administrative costs of the agents for the secured parties under the Financing Documents; (c) to pay principal of, premium (if any) and interest on the Securities and the debt service reserve bonds, if any, and interest and certain fees payable to the debt service reserve letter of credit provider; (d) to pay principal of debt service reserve letter of credit loans and certain related fees and charges; (e) to replenish any shortfall in the Debt Service Reserve Fund; (f) to pay certain breakage costs in respect of debt service reserve letter of credit loans, and indemnification and other expenses to the secured parties, and (g) to the Distribution Fund or Distribution Suspense Fund, as applicable.
DEBT SERVICE RESERVE FUND
The Funding Corporation is obligated at all times to maintain a Debt Service Reserve Fund and/or an acceptable letter of credit. The Debt Service Reserve Fund is funded from available funds in accordance with the priority of payments until the aggregate amount of the fund and letter of credit are equal to:
o through December 31, 1999, the maximum semiannual principal and interest payments on the Securities for the remaining term of the Securities;
o after December 31, 1999 through payment in full of the Initial Securities and the Supplemental Securities, the maximum annual principal and interest payments on the Securities for the remaining term of the Securities; and
o after payment in full of the Initial Securities and the Supplemental Securities, (a) the maximum annual principal and interest payments on the Series F Securities for the remaining term or (b) if the Funding Corporation obtains a confirmation of the current ratings of the Securities, the maximum semiannual principal and interest payments on the Series F Securities.
The Debt Service Reserve Letter of Credit, which was being provided by Credit Suisse First Boston, must be issued by a financial institution rated at least "A" by S&P and "A2" by Moody's. As a result of the uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at Salton Sea Funding Corporation has not been extended beyond its current 2004 expiration date, and as such cash distributions are not available to CE Generation until the Salton Sea Funding Corporation debt service reserve fund of approximately $67.6 million, has been funded or the letter of credit and has been extended beyond its current 2004 expiration date or replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
OPTIONAL REDEMPTION
The Series B Securities, Series C Securities, Series E Securities and Series F Securities are subject to optional redemption, in whole or in part, pro rata at par plus accrued interest to the redemption date plus a premium calculated to "make whole" to comparable U.S. Treasury securities plus 50 basis points.
MANDATORY REDEMPTION
The Securities are subject to mandatory redemption, pro rata within each maturity, at par plus accrued interest to the redemption date, (a) if a permitted power contract buy-out occurs unless the rating agencies confirm the then current rating of the Securities; (b) upon the acceleration of a Project Note in an amount equal to the principal amount of such note plus accrued interest; (c) upon the occurrence of certain events of loss, condemnation, title defects or similar events related to the Salton Sea Projects or the Partnership Projects; or (d) in certain circumstances if any New Project fails to achieve substantial completion by the applicable guaranteed substantial completion date or receives certain net performance liquidated damages under the construction contract for such Project or (e) upon the foreclosure by the Collateral Agent of collateral securing the Guarantor's obligations under the Salton Sea Guarantee, the Partnership Guarantee or Royalty Guarantee.
DISTRIBUTIONS
Distributions may be made only from and to the extent of monies on deposit in the Distribution Fund. Such distributions are subject to the prior satisfaction of the following conditions:
(1) the amounts contained in the Principal Fund and the Interest Fund shall be equal to or greater than the aggregate scheduled principal and interest payments next due on the Securities;
(2) no default or event of default under the Indenture shall have occurred and be continuing;
(3) the debt service coverage ratio for the preceding four fiscal quarters, measured as one annual period, is equal to or greater than 1.4 to 1, if such distribution date occurs prior to the year 2000, and, if in or subsequent to the year 2000, is equal to or greater than 1.5 to 1, as certified by an officer of the Funding Corporation;
(4) the projected debt service coverage ratio of the Securities for the succeeding four fiscal quarters measured as one annual period is equal to or greater than 1.4 to 1, if such distribution date occurs prior to the year 2000, and, if such distribution date occurs in or subsequent to the year 2000, is equal to or greater than 1.5 to 1, as certified by an officer of the Funding Corporation;
(5) the debt service reserve fund shall have a balance equal to or greater than the debt service reserve fund required balance or one or more Debt Service Reserve Letter (or Letters) of Credit at least equal to (collectively with the balance, if any, in the Debt Service Reserve Fund) the debt service reserve fund required balance;
(6) an officer of the Funding Corporation provides a certificate (based on customary assumptions) that there are sufficient geothermal resources to operate the Salton Sea Projects and the Partnership Projects at contract capacity through the final maturity date of the Securities; and
(7) substantial completion of each New Project shall have occurred on or prior to such New Project's guaranteed substantial completion date unless the required amount of Securities shall have been redeemed as described above under "Mandatory Redemption" or (ii) the rating agencies shall have confirmed that no rating downgrade would result from such delay; provided that such condition will apply to a New Project only (x) after such New Project's guaranteed substantial completion date or (y) if such New Project has been abandoned.
INCURRENCE OF ADDITIONAL DEBT
The Funding Corporation shall not incur any debt other than "Permitted Debt". "Permitted Debt" means:
(1) The Securities;
(2) Debt incurred to acquire the East Mesa Project in whole or in part; provided that no such Debt may be incurred unless at the time of such incurrence (i) no default or event of default has occurred and is continuing and (ii) the rating agencies confirm that the incurrence of such debt will not result in a rating downgrade;
(3) Debt incurred to develop, construct, own, operate or acquire additional permitted facilities in the Imperial Valley ("Additional Projects"); provided that no such debt may be incurred unless at the time of such incurrence (i) no default or event of default has occurred and is continuing and (ii) the rating agencies confirm that the Securities will maintain an investment grade rating after giving effect to such debt;
(4) Debt incurred to finance the making of capital improvements to the Salton Sea Projects, the Partnership Projects or Additional Projects required to maintain compliance with applicable law or anticipated changes therein; provided that no such debt may be incurred unless at the time of such incurrence the independent engineer confirms as reasonable (i) a certification by the Funding Corporation (containing customary qualifications) that the proposed capital improvements are reasonably expected to enable such Project to comply with applicable or anticipated legal requirements and (ii) the calculations of the Funding Corporation that demonstrate, after giving effect to the incurrence of such debt, the minimum projected debt service coverage ratio (x) for the next four consecutive fiscal quarters, commencing with the quarter in which such debt is incurred, taken as one annual period, and (y) for each subsequent fiscal year through the final maturity date, will not be less than 1.2 to 1;
(5) Debt incurred to finance the making of capital improvements to the Salton Sea Projects, the Partnership Projects or Additional Projects not required by applicable law so long as after giving effect to the incurrence of such debt (i) no default or event of default has occurred and is continuing, and (ii) (A) the independent engineer confirms as reasonable (x) the calculations of the Funding Corporation that demonstrate that the minimum projected debt service coverage ratio for the next four consecutive quarters, taken as one annual period, and each subsequent fiscal year, will not be less than 1.4 to 1, and (y) the calculations of the Funding Corporation that demonstrate the average projected debt service coverage ratio for all succeeding fiscal years until the final maturity date will not be less than 1.7 to 1 or (B) the Rating Agencies confirm that the incurrence of such debt will not result in a rating downgrade;
(6) Working capital debt in an aggregate amount not to exceed $15,000,000;
(7) Debt incurred under the Debt Service Reserve LOC Reimbursement Agreement;
(8) Debt incurred in connection with certain permitted interest rate swap arrangements;
(9) Debt incurred by the Funding Corporation in an aggregate amount not to exceed $30,000,000, in connection with the development, construction, ownership, operation, maintenance or acquisition of Permitted Facilities; and
(10) Subordinated debt from affiliates in an aggregate amount not to exceed $200,000,000 which shall be used to finance capital, operating or other costs with respect to the Projects or Additional Projects.
All Permitted Debt incurred by the Funding Corporation shall be loaned to the Guarantors and guaranteed by the Guarantors.
PRINCIPAL INDENTURE COVENANTS
Principal covenants under the Indenture require the Funding Corporation to agree, except as permitted under the Indenture, (a) not to exercise any remedies or waive any defaults under the Credit Agreements and the Project Notes, except as otherwise permitted under the Indenture; (b) not to incur (i) any Debt except Permitted Debt or (ii) any Lien upon any of its properties except Permitted Liens and (c) not to enter into any transaction of merger or consolidation or change its form of organization or its business.
PRINCIPAL CREDIT AGREEMENT COVENANTS
Principal covenants under the Credit Agreements require each Guarantor to agree, subject to certain exceptions and qualifications, (a) not to enter into any transaction of merger or consolidation, change its form of organization, liquidate, wind-up or dissolve itself; (b) not to enter into non-arm's length transactions or agreements with Affiliates; (c) not to incur (i) any debt except Permitted Guarantor Debt and (ii) any liens except for permitted liens; (d) not to engage in any business other than as contemplated by the respective Credit Agreement; and (e) not to amend, terminate or otherwise modify the Project Documents to which they are a party except as permitted under the respective Credit Agreements. In addition to these principal covenants, in the Salton Sea Credit Agreement and the Partnership Credit Agreement, the Salton Sea Guarantors and the Partnership Guarantors have agreed (a) not to sell, lease or transfer any property or assets material to the Salton Sea Projects or the Partnership Projects, as applicable, except in the ordinary course of business; and (b) to maintain insurance as is generally carried by companies engaged in similar businesses and owning similar properties.
CONSIDERATIONS REGARDING LIMITATION ON REMEDIES
A significant portion of the proceeds of the Initial Offering were distributed to MEHC to repay certain non-recourse indebtedness incurred by MEHC in connection with the acquisition of Magma (including the Guarantors). The Royalty Guarantor has purchased an assignment of the royalties from Magma pursuant to the Magma Assignment Agreement. Magma has also agreed to make certain payments to CEOC pursuant to the Magma Services Agreement and to secure such payment obligation with a collateral assignment of certain cash flows. The Guarantors have executed Guarantees with respect to the entire amount of Securities. Under certain circumstances (including a proceeding under Title 11 of the United States Code or any similar proceeding), it is possible that a creditor of a Guarantor or Magma could make a claim, under federal or state fraudulent conveyance laws, that the Funding Corporation's claims under the Credit Agreements, the Security Holders' claims under the Guarantees, the Royalty Guarantor's interest pursuant to the Magma Assignment Agreement or CEOC's rights under the Magma Services Agreement should be subordinated or not enforced in accordance with such instruments' terms or that payments thereunder (including payments to the Holders of the Securities) should be recovered. In order to prevail on such a claim, a claimant would have to demonstrate that the obligations incurred under any Guarantor's Credit Agreement or Guarantee or the transfers made under the Magma Assignment Agreement or the Magma Services Agreement were not incurred in good faith or that any Guarantor or Magma did not receive fair consideration in connection with such obligations and transfers, and that any Guarantor or Magma is and was insolvent at the time of entering into the Credit Agreement, Guarantee, the Magma Assignment Agreement and/or the Magma Services Agreement or that it did not have and will not have sufficient capital for carrying on its business or was not and will not be able to pay its debts as they mature.
POWER PRICE AND SALES UNCERTAINTY
The Power Purchase Agreements pursuant to which each of the Vulcan, Del Ranch, Elmore, Leathers, Salton Sea II and Salton Sea III Projects sell electricity to Edison are SO4 Agreements. These agreements provide for both capacity payments and energy payments for a term of 30 years. While the basis for the capacity payment is fixed for the entire 30-year term, the price of energy payments is fixed only for the first ten years of the term. Thereafter, the required energy payment converted to Edison's Avoided Cost of Energy, as determined by a methodology approved by, and subject to change by, the California Public Utility Commission. In June and November 2001, the Imperial Valley Projects, which receive Edison's Avoided Cost of Energy entered into agreements that provide for amended energy payments under the SO4 Agreements. The amendments provide for fixed energy rate in lieu of Edison's Avoided Cost of Energy. The fixed energy payment was 3.25 cents per kW-hour from December 1, 2001 through April 30, 2002 and 5.37 cents per kW-hour commencing May 1, 2002 for a five-year period. Following the five-year period, the energy payments revert back to Edison's Avoided Cost of Energy.
For the year ended December 2002, 2001 and 2000, Edison's average avoided cost of energy was 3.5 cents, 7.4 cents and 5.8 cents per kWh, respectively. Estimates of Edison's future avoided cost of energy vary substantially from year to year. The Funding Corporation and the Guarantors cannot predict the likely level of avoided cost of energy prices under these agreements.
Although up to 22 MW of the net electrical output of Salton Sea V is expected to be sold for use by the Zinc Recovery Project pursuant to a power purchase agreement and power from the CE Turbo Project may also be used by the Zinc Recovery Project pursuant to a separate power purchase agreement, neither Salton Sea V nor the CE Turbo Project currently has any power sales agreements for any portion of the capacity of such Projects. The strategy for Salton Sea V and the CE Turbo Project is to sell output not needed by the Zinc Recovery Project in short term transactions through established energy markets or in such other transactions from time to time as may be found to be more advantageous than those conducted through established energy markets. Energy prices are expected to have the characteristics of short-term spot prices and to fluctuate from time to time in a manner that cannot be predicted with accuracy and is not within the control of the Funding Corporation, the Guarantors or any other person.
RELIANCE ON SINGLE UTILITY CUSTOMER
Each of the Vulcan, Del Ranch, Elmore, Leathers and Salton Sea I-IV Projects relies on an agreement with Edison to generate 100% of its operating revenue. The payments (excluding those for power sales from March 22 through June 22, 2001) under these agreements have constituted 100% of the operating revenue of each Project since its inception, and may do so for the life of the Securities. Any material failure of Edison to fulfill its contractual obligations under the Power Purchase Agreements could have a material adverse effect on the ability of the Funding Corporation to pay principal of and interest on the Securities.
ZINC PRICE AND SALES UNCERTAINTY
In September 1999, Minerals entered into a sales agreement whereby all high-grade zinc produced by the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the agreement expires in December 2005.
Because most of the Zinc Recovery Project's revenue are and will be derived from the sale of zinc, earnings are and will be directly related to the price of zinc in the domestic and world markets. However, zinc prices fluctuate and are affected by numerous factors, including expectations of inflation, speculative activities, currency exchange rates, interest rates, global and regional demand and production, political and economic conditions, discovery of new deposits, and production costs in major producing regions. The aggregate effect of these factors, all of which are beyond the control of the Funding Corporation or the Guarantors, is impossible for the Funding Corporation to predict.
OPERATIONAL UNCERTAINTY
Although several of the power projects have been operating for a number of years and the Zinc Recovery Project is producing limited quantities, full production at the Zinc Recovery Project is not expected until late-2003, and is subject to customary risks associated with the operation of metals processing plants including operational risks, cost overruns and failures to perform in accordance with contract terms. In addition, while each of the individual process steps to be utilized in the Zinc Recovery Project (including ion exchange, solvent extraction and electrowinning) has been in operation for more than twenty years and the demonstration plant at the SSKGRA has successfully recovered zinc through this integrated process, the integrated process for the production of zinc from geothermal brine has not been
attempted in a large scale commercial facility for an extended period of time. Any material unremedied,
UNCERTAINTIES RELATING TO EXPLORATION AND DEVELOPMENT OF GEOTHERMAL ENERGY RESOURCES
Geothermal exploration, development and operations are subject to uncertainties, which vary among different geothermal reservoirs and are similar to those typically associated with oil and gas exploration and development, including dry holes and uncontrolled releases. Because of the geological complexities of geothermal reservoirs, the geographic area and sustainable output of geothermal reservoirs can only be estimated and cannot be definitively established. There is, accordingly, a risk of an unexpected decline in the capacity of geothermal wells and a risk of geothermal reservoirs not being sufficient for sustained generation of the electrical power capacity desired.
In addition, both the cost of operations and the operating performance of geothermal power plants may be adversely affected by a variety of operating factors. Production and injection wells can require frequent maintenance or replacement. Corrosion caused by high-temperature and high-salinity geothermal fluids may require the replacement or repair of certain equipment, vessels or pipelines. New production and injection wells may be required for the maintenance of current operating levels, thereby requiring substantial capital expenditures.
INSURANCE
The Salton Sea Projects and the Partnership Projects currently possess property, business interruption, catastrophic and general liability insurance. Proceeds of insurance received in connection with the Salton Sea Projects will be payable to the Depositary for the account of the Salton Sea Guarantors and will be applied as required under the financing documents. There can be no assurance that such comprehensive insurance coverage will be available in the future at commercially reasonable costs or terms or that the amounts for which the Salton Sea Guarantors and the Partnership Guarantors are or will be insured will cover all potential losses.
Because geothermally active areas such as the area in which the Projects are located are subject to frequent low-level seismic disturbances, and serious seismic disturbances are possible, the power generating plants and other facilities at the Projects are designed and built to withstand relatively significant levels of seismic disturbance. However, there is no assurance that seismic disturbances of a nature and magnitude so as to cause material damage to the Projects or gathering systems or a material change in the nature of the geothermal resource will not occur, that insurance with respect to seismic disturbances will be maintained by or on behalf of all of the Projects, that insurance proceeds will be adequate to cover all potential losses sustained, or that insurance will continue to be available in the future in amounts adequate to insure against such seismic disturbances.
REGULATORY AND ENVIRONMENTAL MATTERS
The Guarantors are subject to a number of environmental laws and regulations affecting many aspects of their present and future operations, including the disposal of various forms of materials resulting from geothermal reservoir production and the drilling and operation of new wells. Such laws and regulations generally require the Guarantors to obtain and comply with a wide variety of licenses, permits and other approvals. In addition, regulatory compliance for the construction of new facilities is a costly and time-consuming process, and intricate and rapidly changing environmental regulations may require major expenditures for permitting and create the risk of expensive delays or material impairment of project value if projects cannot function as planned due to changing regulatory requirements or local opposition. The Guarantors and the Projects also remain subject to a varied and complex body of environmental and energy regulations that both public officials and private individuals may seek to enforce. There can be no assurance that existing regulations will not be revised or that new regulations will not be adopted or become applicable to the Guarantors and the Projects which could have an adverse impact on their operations. In particular, the independent power market in the United States is dependent on the existing energy regulatory structure, including the Public Utility Regulatory Policies Act and its implementation by utility commissions in the various states. The structure of such federal and state energy regulations has in the past, and may in the future, be the subject of various challenges and restructuring proposals by utilities and other industry participants. The implementation of regulatory changes in response to such challenges or restructuring proposals, or otherwise imposing more comprehensive or stringent requirements on the Guarantors and Projects, which would result in increased compliance costs could have a material adverse effect on the Guarantors' and the Projects' results of operations.
EMPLOYEES
Employees necessary for the operation of the Imperial Valley Projects are provided by CEOC. As of December 31, 2002, CEOC employed 276 people at the projects, collectively. CEOC maintains a qualified technical staff covering a broad range of disciplines including geology, geophysics, geochemistry, hydrology, volcanology, drilling technology, reservoir engineering, plant engineering, construction management, maintenance services, production management, and electric power operation. CEOC employees are not covered by any collective bargaining agreement. The Funding Corporation believes that CEOC's employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES.
See page 5 for a schedule of the Guarantors' facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In addition to the proceedings described below, some of the projects are currently parties to various minor items of litigation in the normal course of business none of which, if determined adversely, would have a material adverse effect on those projects financial position, results of operations or cash flows.
Edison/California Power Exchange - Past Due Amounts - ---------------------------------------------------
Edison, a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million owed under the power purchase agreements with certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and CE Turbo Projects) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $21.0 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at the Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay approximately $3.9 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 certain Guarantors filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay the contractual obligations, certain Guarantors have established an allowance for doubtful accounts of approximately $2.7 million as of December 31, 2002. The Project entities are vigorously pursuing collection of the capacity bonus payments.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an uncontrollable force event. Such uncontrollable force event ended and Salton Sea II returned to service on December 17, 2002. Edison has failed to recognize the uncontrollable force event and, as such, has not paid amounts otherwise due and owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power Generation L.P., owner of Salton Sea II, served a complaint on Edison for such unpaid amount and to rescind such deration.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V and CE Turbo Projects have not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.8 million. The Guarantors have established an allowance for doubtful accounts for the full amount of this receivable.
Kvaerner Arbitration - --------------------
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procure, construct and manage contract (the "Zinc Recovery Project EPC Contract"). On June 14, 2001, Minerals issued notices of default termination and demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC Contract due to failure to meet performance obligations. As a result of Kvaerner's failure to pay monetary obligations under the contract, the Guarantors drew $29.6 million under the EPC contract letter of credit on July 20, 2001. The liquidated damages have been accounted for as a reduction of the capitalized costs of the project. The Guarantors have entered into a time and materials reimbursable engineer, procure and construction management contract with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand for Arbitration against Minerals characterizing the nature of the dispute as concerns regarding change orders and performance penalties. Kvaerner did not state the amount of its claim. On August 7, 2001, Minerals filed an Answering Statement and Counterclaim against Kvaerner. Minerals denied all material allegations in Kvaerner's Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for breach of contract and specific performance. Minerals alleged that its total estimated damage for Kvaerner's breach of contract are in excess of approximately $60 million; however, Minerals has offset approximately $42.5 million of these damages by exercising its rights under the EPC Contract to claim the retainage and by drawing on a letter of credit.
On May 23, 2002, Minerals and Kvaerner entered into a Settlement Agreement. Under the terms of the agreement, Minerals retained the amounts drawn under the letter of credit, the EPC retainage amounts and the EPC contract balance and will pay to Kvaerner three equal installments of $2.25 million payable in January of 2003, 2004 and 2005.
Stone & Webster - ---------------
The Salton Sea V and CE Turbo Projects were constructed by Stone & Webster, Inc. (formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw Group ("Stone & Webster"), pursuant to date certain, fixed-price, turnkey engineering, procure, construct and manage contracts (collectively, the "Salton Sea V and CE Turbo Projects EPC Contracts"). On March 7, 2002, Power L.L.C., Vulcan, Del Ranch, and CE Turbo, (collectively, the "Salton Sea V and CE Turbo Project Owners", the owners of the Salton Sea V and CE Turbo Projects, filed a Demand for Arbitration against Stone & Webster for breach of contract and breach of warranty arising from deficiencies in Stone & Webster's design, engineering, construction and procurement of equipment for the Salton Sea V and CE Turbo Projects pursuant to the Salton Sea V and CE Turbo Projects EPC Contracts. On November 25, 2002, the CE Turbo Project Owner entered into a Settlement Agreement with Stone & Webster. The breach of contract and breach of warranty claims made by the owners of the Salton Sea V Project are still pending and the hearing is scheduled to commence in April 2003.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Not applicable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Salton Sea Funding Corporation - ------------------------------
The following tables set forth selected historical financial and operating data of the Funding Corporation. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K (in thousands).
(1) On October 13, 1998 Funding Corporation issued additional securities of $285.0 million of Salton Sea Notes and Bonds Series F.
Salton Sea Guarantors - ---------------------
The following tables set forth selected historical combined financial and operating data of the Salton Sea Guarantors. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K (in thousands).
(1) 2002 net loss includes a $21.0 million impairment of goodwill recognized as a cumulative effect of change in accounting principle. (2) Salton Sea V commenced operations in the third quarter of 2000. (3) In 1999 the fixed price period for the Salton Sea III project expired.
Partnership Guarantors - ----------------------
The following tables set forth selected historical combined financial and operating data of the Partnership Guarantors. The data should be read in conjunction with the financial statements and related notes, and other financial information appearing elsewhere in this Form 10-K (in thousands).
(1) During December 2002, the Zinc Recovery Project became partially operational.
(2) CE Turbo commenced operations in the third quarter of 2000.
(3) The decrease in revenue and net income in 1999 was primarily due to the expiration of the fixed price periods for the Elmore and Del Ranch Projects.
Royalty Guarantor - -----------------
The following tables set forth selected historical financial and operating data of the Royalty Guarantor. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K (in thousands).
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 2000 1999 1998(1) ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Total revenue ............... $12,577 $16,882 $14,130 $26,274 $51,703 Net income .................. 8,171 10,092 7,352 19,222 19,497
BALANCE SHEET DATA: Total assets ................ $83,989 $79,300 $73,670 $71,116 $77,432 Senior secured project note . 1,147 4,607 9,041 13,814 23,210 Total liabilities ........... 1,154 4,636 9,098 13,896 39,434
(1) In 1998, the Royalty Guarantor received $25.0 million in a settlement related to the Geo East Mesa payments.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is management's discussion and analysis of certain significant factors which have affected the Funding Corporation and Guarantors financial condition and results of operations during the periods included in the accompanying statements of operations. This discussion should be read in conjunction with "Selected Consolidated Financial and Operating Data" and the Funding Corporation and Guarantors historical financial statements and the notes to those statements included elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes. Note 2 to the Financial Statements in this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, impairment of long-lived assets and contingent liabilities. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used by management in the preparation of the Financial Statements.
Allowance for Doubtful Accounts - -------------------------------
The allowance for doubtful accounts is based on the Guarantors' assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than the Guarantors' historical experience, estimates of the recoverability of amounts due could be adversely affected.
Impairment of Long-Lived Assets - -------------------------------
The Guarantors' long-lived assets consist primarily of property, plant and equipment and intangible assets with useful lives that range from 3 to 40 years, and acquired goodwill. The Guarantors' believe the useful lives of its long-lived assets are reasonable. The Guarantors' also evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Triggering events include a significant change in the extent or manner in which long-lived assets are being used or in its physical condition, in legal factors, or in the business climate that could affect the value of the long-lived assets, including changes in regulation. The interpretation of such events requires judgment from management as to whether such an event has occurred and is required. If an event occurs that could effect the carrying value of the asset and management does not identify it as a triggering event, future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived asset is reviewed to assess whether the recoverable amount has declined below its carrying amount. The recoverable amount is the estimated net future cash flows that the Guarantor's expect to recover from the future use of the asset, undiscounted and without interest, plus the asset's residual value on disposal. Where the recoverable amount of the long-lived asset is less than the carrying value, an impairment loss would be recognized to write down the asset to its fair value, which is based on discounted estimated cash flows from the future use of the asset.
The estimated cash flows arising from future use of the asset that are used in the impairment analysis requires judgment regarding what the Guarantors' would expect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use of the asset or the residual value of the asset on disposal based on changes in the market conditions, changes in the use of the assets, management's plans, the determination of the useful life of the assets and technology change in the industry could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss, which could significantly affect the results of operations.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2002 AND 2001
For purposes of consistency in financial presentation, plant capacity factors for the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV, and Salton Sea V plants, are based on nominal capacity amounts of 10, 20, 50, 40 and 49 net MW, respectively and for the Vulcan, Elmore, Leathers, Del Ranch, and CE Turbo plants are based on capacity amounts of 34, 38, 38, 38, and 10 net MW, respectively. Each plant possesses an operating margin, which allows for production in excess of the amounts listed above. Utilization of this operating margin is based upon a variety of factors and can be expected to vary throughout the year under normal operating conditions.
The following operating data represents the aggregate capacity and electricity production of Salton Sea I and II, Salton Sea III, Salton Sea IV and Salton Sea V: YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 --------- --------- Overall capacity factor ........... 78.4% 80.1% Capacity NMW (weighted average) ... 168.4 168.4 MWh produced ...................... 1,156,800 1,180,900
Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 --------- --------- Overall capacity factor ........... 101.5% 100.0% Capacity NMW (weighted average) ... 158.0 158.0 MWh produced ...................... 1,405,000 1,384,700
The Salton Sea Guarantors' operating revenue decreased to $84.2 million for the year ended December 31, 2002 from $110.9 million for the same period in 2001. The decrease was primarily due to lower energy rates and lower production due to more overhauls in 2002. Due to uncertainties associated with Edison's financial condition, Edison's failure to pay and the bankruptcy of PX, the Salton Sea Guarantors established an allowance for doubtful accounts of approximately $9.8 million in the year ended December 31, 2001 as a reduction in operating revenue. As of December 31, 2002, the balance of the allowance for doubtful accounts is $3.8 million.
The Salton Sea Guarantors' interest and other income increased to $3.7 million for the year ended December 31, 2002 from $2.3 million for the same period in 2001. The increase was due to a business interruption insurance recovery for lost revenue at Unit 2 from an equipment failure partially offset by lower interest income due to fewer months of interest earned on the past due balances from Edison compared to 2001.
The Partnership Guarantors' operating revenue decreased to $94.7 million for the year ended December 31, 2002 from $119.7 million for the same period in 2001. The decrease was due to lower rates offset by higher production in 2002. Due to uncertainties associated with Edison's financial condition, Edison's failure to pay and the bankruptcy of PX, the Partnership Guarantors' established an allowance for doubtful accounts of approximately $14.9 million in the year ended December 31, 2001 as a reduction in operating revenue. As of December 31, 2002, the balance of the allowance for doubtful accounts is $2.7 million.
The Partnership Guarantors' interest and other income for the year ended December 31, 2002 decreased to $1.7 million from $6.6 million for the same period in 2001. The decrease was due to lower interest income due to fewer months interest earned on the past due balances from Edison compared to 2001.
The Royalty Guarantors' revenue decreased to $12.6 million for the year ended December 31, 2002 from $16.9 million for the same period in 2001. The decrease was the result of lower energy revenue at the Partnership Projects resulting in lower royalty income.
The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, decreased to $59.2 million for the year ended December 31, 2002, from $61.6 million for the same period in 2001 primarily due to lower royalty costs due to lower revenue.
The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $88.0 million for the year ended December 31, 2002, from $62.7 million for the same period in 2001. The increase in expenses from 2001 to 2002 was primarily due to start up expenses at the Zinc plant.
The Royalty Guarantors' operating expenses decreased to $3.3 million for the year ended December 31, 2002 from $4.4 million for the year ended December 31, 2001. The decrease in expenses from 2001 to 2002 was primarily due to lower royalty revenue from the Partnership Projects.
The Salton Sea Guarantors' depreciation and amortization increased to $21.2 million for the year ended December 31, 2002 from $17.3 million for the year ended December 31, 2001. The increase was due to additional equipment
bought in 2002 partially offset by the decrease in goodwill amortization of $1.3 million due the discontinuation of goodwill amortization in 2002.
The Partnership Guarantors' depreciation and amortization increased to $23.2 million for the year ended December 31, 2002 from $22.8 million for the year ended December 31, 2001. The increase was due primarily to additional equipment bought in 2002 partially offset by the decrease in goodwill amortization of $3.6 million due the discontinuation of goodwill amortization in 2002.
The Royalty Guarantors' depreciation and amortization decreased to $0.9 million for the year ended December 31, 2002 from $1.8 million for the year ended December 31, 2001. The decrease was due to discontinuation of goodwill amortization in 2002.
The Salton Sea Guarantors' interest expense increased to $20.4 million for the year ended December 31, 2002 from $20.1 million for the year ended December 31, 2001. The increase was due primarily to the discontinuance of capitalizing interest on the minerals extraction process partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts, increased to $9.1 million for the year ended December 31, 2002 from $6.1 million for the year ended December 31, 2001. The increase was due to the discontinuance of capitalizing interest on the minerals extraction process partially offset by reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $0.3 million for the year ended December 31, 2002 from $0.6 million for the year ended December 31, 2001. The decrease was due to lower indebtedness.
The asset impairment at the Salton Sea Guarantors in 2001 reflects the write off of the book value of a steam turbine. The Salton Sea Guarantors determined that the turbine, which had been held in storage for use in new development projects, no longer had any significant value.
The Salton Sea Guarantors are substantially comprised of partnerships. Income taxes are the responsibility of the partners and Salton Sea Guarantors have no obligation to provide funds to the partners for payment of any tax liabilities. Accordingly, the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' income tax provision, decreased to a benefit of $13.1 million for the year ended December 31, 2002 from an expense of $11.7 million for the year ended December 31, 2001. The decrease was due to lower pre-tax income. The effective tax rate was 54.8% and 33.8% in 2002 and 2001, respectively. The changes from year to year in the effective rate are due primarily to the generation and utilization of energy tax credits, the resolution of certain tax issues, primarily related to depletion, and depletion deductions. Income taxes will be paid by the parent of the Guarantors from distributions to the parent company by the Guarantors, which occur after payment of operating expenses and debt service. During 2002, the Partnership Guarantors made considerable progress on several significant income tax examination matters for prior tax years, including percentage of depletion, which resulted in a decrease in income tax expense of $3.1 million in 2002.
During 2002, the Guarantors adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. In accordance with SFAS 142, the Guarantors' completed their transitional and annual goodwill impairment test during the second and fourth quarters of 2002, primarily using a discounted cash flow methodology as of January 1, 2002 and October 31, 2002, respectively. The transitional impairment test indicated a potential goodwill impairment at the Salton Sea Guarantors and the Partnership Guarantors. During the fourth quarter, the Salton Sea Guarantors and the Partnership Guarantors completed their assessment of the implied fair value of goodwill. As a result, an impairment of goodwill was recognized as a cumulative effect of change in accounting principle of $21.0 million at the Salton Sea Guarantors as of January 1, 2002. However, as a result of this test, no goodwill impairment was recognized at the Partnership Guarantors as of January 1, 2002. Additionally, the Guarantors annual goodwill impairment tests indicated no goodwill impairment existed at October 31, 2002.
During 2001, the Guarantors changed their policy of accounting for overhaul and well rework costs. These costs, which had historically been accounted for using deferral methods, are now expensed as incurred. The new policy went into effect January 1, 2001 and during 2001, the Salton Sea Guarantors recorded a cumulative effect of this change of $8.7 million and the Partnership Guarantors recorded a cumulative effect of this change of $6.9 million, net of tax.
The Funding Corporation's net loss was $0.1 million for the year ended December 31, 2002 compared to a net loss of $0.1 million for the year ended December 31, 2001, which represented interest income and expense, net of applicable tax, and the Funding Corporation's 1% equity in earnings of the Guarantors.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2001 AND 2000
For purposes of consistency in financial presentation, plant capacity factors for the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV, and Salton Sea V plants, are based on nominal capacity amounts of 10, 20, 50, 40 and 49 net MW, respectively and for the Vulcan, Elmore, Leathers, Del Ranch, and CE Turbo plants are based on capacity amounts of 34, 38, 38, 38, and 10 net MW, respectively. Each plant possesses an operating margin, which allows for production in excess of the amounts listed above. Utilization of this operating margin is based upon a variety of factors and can be expected to vary throughout the year under normal operating conditions.
The following operating data represents the aggregate capacity and electricity production of Salton Sea I and II, Salton Sea III, Salton Sea IV and Salton Sea V:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 --------- --------- Overall capacity factor ........... 80.1% 76.1% Capacity NMW (weighted average) ... 168.4 146.1 MWh produced ...................... 1,180,900 976,500
Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 --------- --------- Overall capacity factor ........... 100.0% 98.8% Capacity NMW (weighted average) ... 158.0 152.1 MWh produced ...................... 1,384,700 1,320,300
The Salton Sea Guarantors' operating revenue increased to $110.9 million for the year ended December 31, 2001 from $98.1 million for the same period in 2000. The increase was primarily due to higher energy rates in 2001, the start up of Salton Sea V in the third quarter of 2000 and scheduled overhauls in 2000, which were more extensive compared to 2001. Due to uncertainties associated with Edison's financial condition and failure to pay and the bankruptcy of PX, the Salton Sea Guarantors established an allowance for doubtful accounts of approximately $9.8 million in the year ended December 31, 2001.
The Salton Sea Guarantors' interest and other income increased to $2.3 million in 2001 from $0.4 million in 2000. The increase was due to interest income earned on past due balances from Edison in 2001.
The Partnership Guarantors' operating revenue increased to $119.7 million for the year ended December 31, 2001 from $103.3 million for the same period in 2000. The increase was due to higher energy rates, the start up of CE Turbo in the third quarter of 2000 and more production due to fewer outages compared to 2000. Due to uncertainties associated with Edison's financial condition and failure to pay and the bankruptcy of PX, the Partnership Guarantors' established an allowance for doubtful accounts of approximately $14.9 million in the year ended December 31, 2001.
The Partnership Guarantors interest and other income for the year ended December 31, 2001 increased to $6.6 million from $4.9 million for the same period in 2000. The increase was due to interest income earned on past due balances from Edison in 2001.
The Royalty Guarantor revenue increased to $16.9 million for the year ended December 31, 2001 from $14.1 million for the same period in 2000. The increase was the result of higher energy revenue at the Partnership Projects resulting in higher royalties.
The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $61.6 million for the year ended December 31, 2001, from $40.8 million for the same period in 2000. The increase in expenses from 2000 to 2001 was primarily due to higher operating costs resulting from Salton Sea V costs for an entire year, higher brine disposal costs and higher royalty costs due to higher revenue.
The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $62.7 million for the year ended December 31, 2001, from $53.0 million for the same period in 2000. The increase in costs from 2000 to 2001 was due primarily to higher royalty expense due to higher revenue, start up of the CE Turbo Project in the third quarter of 2000 and higher brine disposal costs.
The Royalty Guarantors' operating expenses increased to $4.4 million for the year ended December 31, 2001 from $3.9 million for the year ended December 31, 2000. The increase from 2000 to 2001 was due to higher royalties from higher energy revenue from the Partnership projects.
The Salton Sea Guarantors' depreciation and amortization increased to $17.3 million for the year ended December 31, 2001 from $16.0 million for the year ended December 31, 2000. The increase was due to a full year of depreciation at Salton Sea V.
The Partnership Guarantors' depreciation and amortization increased to $22.8 million for the year ended December 31, 2001 from $19.7 million for the same period in 2000. The increase was primarily due to the upgraded brine handling system and the start up of the CE Turbo Project in the third quarter of 2000.
The Royalty Guarantor's amortization decreased to $1.8 million for the year ended December 31, 2001 from $2.0 million for the same period in 2000. The changes are consistent with the Company's scheduled amortization of the royalty stream and the excess of cost over fair value related to the Magma acquisition.
The Salton Sea Guarantors' interest expense, net of capitalized amounts, increased to $20.1 million for the year ended December 31, 2001 from $13.3 million for the same period in 2000. The increase was due primarily to the discontinuance of capitalizing interest on the minerals extraction process and Salton Sea V partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts, increased to $6.1 million for the year ended December 31, 2001 from $0.6 million for the same period in 2000. The increase is a result of the discontinuance of capitalizing interest on the minerals extraction process partially offset by reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $0.6 million for the year ended December 31, 2001 from $1.0 million for the same period in 2000. The decrease was due to the repayment of debt.
The asset impairment at the Salton Sea Guarantors in 2001 reflects the write off of the book value of a steam turbine. The Salton Sea Guarantors determined that the turbine, which had been held in storage for use in new development projects, no longer had any significant value.
The Salton Sea Guarantors are substantially comprised of partnerships. Income taxes are the responsibility of the partners and Salton Sea Guarantors have no obligation to provide funds to the partners for payment of any tax liabilities. Accordingly, the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' income tax provision increased to $11.7 million for the year ended December 31, 2001 from $7.7 million for the same period in 2000. The effective tax rate was 33.8% and 22.1% in 2001 and 2000, respectively. The changes from year to year in the effective rate are due primarily to the generation and utilization of energy tax credits and depletion deductions. Income taxes will be paid by the parent of the Guarantors from distributions to the parent company by the Guarantors, which occur after payment of operating expenses and debt service.
During 2001, the Guarantors changed their policy of accounting for overhaul and well rework costs. These costs, which had historically been accounted for using deferral methods, are now expensed as incurred. The new policy went into effect January 1, 2001 and during 2001, the Salton Sea Guarantors recorded a cumulative effect of this change of $8.7 million and the Partnership Guarantors recorded a cumulative effect of this change of $6.9 million,
net of tax. If Salton Sea Guarantors and Partnership Guarantors had adopted the policy as of January 1, 2000, net income would have been $1.1 million lower and $4.9 million higher, respectively, in 2000 on a proforma basis.
The Funding Corporation's net loss was $0.1 million for the year ended December 31, 2001 compared to a net income of $0.2 million for the year ended December 31, 2000, which represented interest income and expense, net of applicable tax, and the Funding Corporation's 1% equity in earnings of the Guarantors.
RELATED PARTY TRANSACTIONS
On September 29, 2000, Salton Sea Power and CE Turbo entered into an agreement to sell all available power from the Salton Sea V Project and CE Turbo Project to EPME. Under the terms of the agreement, EPME purchased and sold available power on behalf of Salton Sea Power and CE Turbo, into the California ISO markets. The purchase price for the available power was equivalent to the value actually received by EPME for the sale of such power, including renewable premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction Agreement to sell available power from the Salton Sea V Project and CE Turbo Project to EPME. Under the terms of the agreement, at the option of Salton Sea Power and CE Turbo, EPME purchased all available power from the Salton Sea V Project and CE Turbo Project based on day ahead price quotes received from EPME.
On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into Transaction Agreements to sell available power to EPME based on percentages of the Dow Jones SP-15 Index. On June 22, 2001, the Imperial Valley Projects (excluding the Salton Sea V Project and CE Turbo Project) ceased selling available power to EPME and resumed power sales to Edison under the Power Purchase Agreements ("PPAs"). Effective September 16, 2002 Salton Sea Power and CE Turbo entered into Transaction Agreements to sell available power to EPME at increased percentages of the Dow Jones SP-15 Index.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and CE Turbo and began selling available power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on October 15, 2003.
Pursuant to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea Power and CE Turbo are to provide Minerals with its full electrical energy requirements at the market rates available to them, less wheeling costs.
Effective August 1, 2002, Salton Sea Power and CE Turbo amended their respective power sale agreements with Minerals to provide for a fixed price of $31.00 per megawatt hour for all hours of August 1, 2002 through December 31, 2002. Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled $0.4 million and $0.9 million for the years ended December 31, 2002 and 2001, respectively, and there were no sales to Minerals from CE Turbo for the years ended December 31, 2002 and 2001, respectively. There were no material accounts receivable balances at December 31, 2002 and 2001.
On October 13, 1998, Funding Corporation completed a sale to institutional investors of $285.0 million aggregate amount of 7.475% Senior Secured Series F bonds due November 30, 2018. A portion of the proceeds were used to fund the cost of construction of, and was advanced to, the Zinc Recovery Project, which is indirectly 100% owned by Salton Sea Minerals Corp., a MEHC affiliate not owned by CE Generation. The direct and indirect owners of the Zinc Facility (the "Zinc Guarantors", which include Salton Sea Minerals Corp. and Minerals) are among the guarantors of the Funding Corporation debt. In connection with the divestiture of CE Generation in 1999, MEHC guaranteed the payment by the Zinc Guarantors of a specified portion of the scheduled debt service on the Imperial Valley Project Loans including the current principal amount of approximately $137.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The operating Salton Sea Guarantors' only source of revenue is payments received pursuant to long-term power sales agreements with Edison, other than Salton Sea V Project revenue and interest earned on funds on deposit. The operating Partnership Guarantors' primary source of revenue is payments received pursuant to long term power sales agreements with Edison, other than CE Turbo Project and Zinc Recovery Project revenue and interest earned on funds on deposit. The Royalty Guarantor's only source of revenue is royalties received pursuant to resource lease agreements with the Partnership Projects. Because of the Guarantor's dependence on Edison, if Edison fails to fulfill
its obligations to the projects, it could significantly impair the ability, of the Guarantors, to fund operating and maintenance expenses, payments of interest and principal on the Securities, projected capital expenditures and debt service reserve fund requirements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Funding Corporation has contractual obligations and commercial commitments that may affect its financial condition. Contractual obligations to make future payments arise primarily from long-term debt. Contractual obligations that could make future payments arise primarily from lines of credit and standby letters of credit. The following tables identify material obligations and commitments as of December 31, 2002 (in thousands):
(1) The line of credit represent the unused borrowing capacity available to the Funding Corporation, as of December 31, 2002.
(2) The Standby Letter of Credit matures in July 2004.
Zinc Recovery Project - ---------------------
Minerals developed and owns the rights to proprietary processes for the extraction of zinc from elements in solution in the geothermal brine and fluids utilized at the Imperial Valley Projects. A plant has successfully produced commercial quality zinc at the projects. The affiliates of Minerals may develop facilities for the extraction of manganese, silica and other products as it further develops the extraction technology.
Minerals constructed the Zinc Recovery Project, which is recovering zinc from the geothermal brine (the "Zinc Recovery Project"). Facilities have been installed near the Imperial Valley Projects sites to extract a zinc chloride solution from the geothermal brine through an ion exchange process. This solution is being transported to a central processing plant where zinc ingots are being produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tons per year. Limited production began during December 2002 and full production is expected by late-2003. In September 1999, Minerals entered into a sales agreement whereby all high-grade zinc produced by the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the agreement expires in December 2005.
Total capital costs, excluding interest during construction, of the Zinc Recovery Project are approximately $151.6 million, net of payments for liquidated damages, through December 31, 2002. Minerals anticipates incurring $16.3 million in capital expenditures during 2003 to optimize production.
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procure, construct and manage contract (the "Zinc Recovery Project EPC Contract"). On June 14, 2001, Minerals issued notices of default termination and demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC Contract due to failure to meet performance obligations. As a result of Kvaerner's failure to pay monetary obligations under the contract, the Guarantors drew $29.6 million under the EPC contract letter of credit on July 20, 2001. The liquidated damages have been accounted for as a reduction of the capitalized costs of the project. The Guarantors have entered into a time and materials reimbursable engineer,
procure and construction management contract with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand for Arbitration against Minerals characterizing the nature of the dispute as concerns regarding change orders and performance penalties. Kvaerner did not state the amount of its claim. On August 7, 2001, Minerals filed an Answering Statement and Counterclaim against Kvaerner. Minerals denied all material allegations in Kvaerner's Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for breach of contract and specific performance. Minerals alleged that its total estimated damage for Kvaerner's breach of contract are in excess of approximately $60 million; however, Minerals has offset approximately $42.5 million of these damages by exercising its rights under the EPC Contract to claim the retainage and by drawing on a letter of credit.
On May 23, 2002, Minerals and Kvaerner entered into a Settlement Agreement. Under the terms of the agreement, Minerals retained the amounts drawn under the letter of credit, the EPC retainage amounts and the EPC contract balance and will pay to Kvaerner three equal installments of $2.25 million payable in January of 2003, 2004 and 2005.
Edison/California Power Exchange - Past Due Amounts - ---------------------------------------------------
Edison, a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million owed under the power purchase agreements with certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and CE Turbo Projects) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $21.0 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at the Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay approximately $3.9 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 certain Guarantors filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay the contractual obligations, certain Guarantors have established an allowance for doubtful accounts of approximately $2.7 million as of December 31, 2002. The Project entities are vigorously pursuing collection of the capacity bonus payments.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an uncontrollable force event. Such uncontrollable force event ended and Salton Sea II returned to service on December 17, 2002. Edison has failed to recognize the uncontrollable force event and, as such, has not paid amounts otherwise due and owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power Generation L.P., owner of Salton Sea II, served a complaint on Edison for such unpaid amount and to rescind such deration.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V and CE Turbo Projects have not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.8 million. The Guarantors have established an allowance for doubtful accounts for the full amount of this receivable.
ENVIRONMENTAL LIABILITIES
The Guarantors are subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of the Guarantors' existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing the Guarantors' cost of waste disposal and (vi) reducing the reliability of service provided by the Guarantors and the amount of energy available from the Guarantors' facilities. Any of such items could have a substantial impact on amounts required to be expended by the Guarantors in the future. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other social and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating sites, other companies' clean-up experience and data released by the Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new circumstances, and are included in the accompanying balance sheets at their undiscounted amounts. As of December 31, 2002 and December 31, 2001, the Guarantors environmental liabilities recorded on the balance sheet were not material.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Funding Corporation and Guarantors have a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The Funding Corporation and Guarantors do not expect the adoption of SFAS 143 to have a material effect on its financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Funding Corporation and Guarantors do not expect the adoption of FIN 45 will have a material effect on its financial position, results of operations, or cash flows.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion of the Guarantors' exposure to various market risks contains "forward-looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in the circumstances and in light of information currently available to the Guarantors. Actual results could differ materially from those projected in the forward-looking information.
INTEREST RATE RISK
At December 31, 2002 and 2001, respectively, the Funding Corporation had fixed-rate long-term debt of $491.7 million and $520.3 million in principal amount and having a fair value of $464.6 million and $478.8 million. These instruments are fixed-rate and therefore do not expose the Funding Corporation to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease by approximately $26.2 million and $28.1 million if interest rates were to increase by 10% from their levels at December 31, 2002 and 2001, respectively. In general, such a decrease in fair value would impact earnings and cash flows only if the Funding Corporation were to reacquire all or a portion of these instruments prior to their maturity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SALTON SEA FUNDING CORPORATION
Independent Auditors' Report............................................ 33
Balance Sheets as of December 31, 2002 and 2001 ........................ 34
Statements of Operations for the Three Years Ended December 31, 2002.... 35
Statements of Stockholder's Equity for the Three Years Ended December 31, 2002..................................................... 36
Statements of Cash Flows for the Three Years Ended December 31, 2002 ... 37
Notes to Financial Statements........................................... 38
SALTON SEA GUARANTORS
Independent Auditors' Report............................................ 42
Combined Balance Sheets as of December 31, 2002 and 2001................ 43
Combined Statements of Operations for the Three Years Ended December 31, 2002..................................................... 44
Combined Statements of Guarantors' Equity for the Three Years Ended December 31, 2002..................................................... 45
Combined Statements of Cash Flows for the Three Years Ended December 31, 2002..................................................... 46
Notes to Combined Financial Statements.................................. 47
PARTNERSHIP GUARANTORS
Independent Auditors' Report............................................ 55
Combined Balance Sheets as of December 31, 2002 and 2001................ 56
Combined Statements of Operations for the Three Years Ended December 31, 2002..................................................... 57
Combined Statements of Guarantors' Equity for the Three Years Ended December 31, 2002............................................... 58
Combined Statements of Cash Flows for the Three Years Ended December 31, 2002............................................... 59
Notes to Combined Financial Statements.................................. 60
SALTON SEA ROYALTY LLC
Independent Auditors' Report............................................ 73
Balance Sheets as of December 31, 2002 and 2001......................... 74
Statements of Operations for the Three Years Ended December 31, 2002.... 75
Statements of Equity for the Three Years Ended December 31, 2002........ 76
Statements of Cash Flows for the Three Years Ended December 31, 2002.... 77
Notes to Financial Statements........................................... 78
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder Salton Sea Funding Corporation Omaha, Nebraska
We have audited the accompanying balance sheets of Salton Sea Funding Corporation as of December 31, 2002 and 2001, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Salton Sea Funding Corporation as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, in 2002 the equity method investees of Salton Sea Funding Corporation changed their accounting policy for goodwill and other intangible asset and in 2001 the equity method investees of Salton Sea Funding Corporation changed their accounting policy for overhaul and well rework costs.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP Omaha, Nebraska January 24, 2003 (January 29, 2003 as to Note 6)
SALTON SEA FUNDING CORPORATION BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (Amounts in thousands, except per share amounts)
2002 2001 -------- --------
ASSETS Current assets: Cash ................................................... $ 19,583 $ 4,361 Restricted cash ........................................ 46,293 2,949 Accrued interest receivable and other assets ........... 3,228 3,351 Current portion secured project notes from Guarantors .. 28,086 28,572 -------- -------- Total current assets ................................. 97,190 39,233 -------- -------- Secured project notes from Guarantors .................... 463,592 491,678 Investment in 1% of net assets of Guarantors ............. 9,721 9,669 -------- -------- TOTAL ASSETS ............................................. $570,503 $540,580 ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accrued liabilities .................................... $ 3,156 $ 3,333 Current portion of long-term debt ...................... 28,086 28,572 -------- -------- Total current liabilities ............................ 31,242 31,905 -------- -------- Due to affiliates ........................................ 62,251 3,899 Senior secured notes and bonds ........................... 463,592 491,678 -------- -------- Total liabilities ...................................... 557,085 527,482 -------- --------
Commitments and contingencies (Note 3, 4 and 5)
Stockholder's equity: Common stock authorized - 1,000 shares, par value $.01 per share; issued and outstanding 100 shares .................... -- -- Additional paid-in capital ............................. 5,811 5,366 Retained earnings ...................................... 7,607 7,732 -------- -------- Total stockholder's equity ........................... 13,418 13,098 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ............... $570,503 $540,580 ======== ========
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
2002 2001 2000 -------- -------- ------- REVENUE: Interest income ....................... $ 39,938 $ 41,389 $43,128 Equity in earnings (loss) of Guarantors (183) 402 590 -------- -------- ------- Total revenue ....................... 39,755 41,791 43,718 COSTS AND EXPENSES: General and administrative expenses ... 720 1,089 971 Interest expense ...................... 38,891 40,765 42,452 -------- -------- ------- Total costs and expenses ............ 39,611 41,854 43,423 -------- -------- ------- INCOME (LOSS) BEFORE INCOME TAXES ....... 144 (63) 295 Provision (benefit) for income taxes .. 59 (26) 121 -------- -------- ------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ..... 85 (37) 174 Cumulative effect of change in accounting principle, (Note 2) ................... (210) (100) -- -------- -------- ------- NET INCOME (LOSS) ....................... $ (125) $ (137) $ 174 ======== ======== =======
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands, except share amounts)
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Salton Sea Funding Corporation (the "Funding Corporation"), which was formed on June 20, 1995, is a special purpose Delaware corporation and was organized for the sole purpose of acting as issuer of senior secured notes and bonds. On July 21, 1995, June 20, 1996 and October 31, 1998, the Funding Corporation issued $475 million, $135 million and $285 million, respectively, of Senior Secured Notes and Bonds (collectively, the "Securities").
The Funding Corporation is a wholly-owned subsidiary of Magma Power Company (the "Company"), which in turn was wholly-owned by MidAmerican Energy Holdings Company ("MEHC"). On February 8, 1999, MEHC created a new subsidiary, CE Generation and subsequently transferred its interest in the Company and its power generation assets in the Imperial Valley to CE Generation, LLC ("CE Generation"), with certain assets being retained by MEHC. On March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE Generation to El Paso CE Generation Holding Company, which was ultimately merged into El Paso Merchant Energy North America Company ("EPME"), an indirect subsidiary of El Paso Corporation.
The Securities are payable from the proceeds of payments made of principal and interest on the Secured Project Notes from the Guarantors to the Funding Corporation. The Securities are also guaranteed on a joint and several basis by the Salton Sea Guarantors, the Partnership Guarantors and Salton Sea Royalty, LLC (collectively the "Guarantors"). The Guarantors are affiliates of Magma Power Company and the Salton Sea Funding Corporation who collectively own ten operating geothermal power plants and a related zinc recovery plant located in Imperial Valley, California. The guarantees of the Partnership Guarantors and the Royalty Guarantor are limited to available cash flow. The Funding Corporation does not conduct any operations apart from issuing the Securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash - ---------------
The restricted cash balance is composed of a debt service fund that is legally restricted as to its use and requires the maintenance of a specific minimum balance.
Overhaul and Well Rework Costs - ------------------------------
During 2001 the Guarantors changed their accounting policy for overhaul and well rework costs. These costs, which had historically been accounted for using the deferral method, are now expensed as incurred. The new policy went into effect January 1, 2001, and during 2001, the Funding Corporation recorded its share of the Guarantors' cumulative effect of this change of approximately $0.1 million, net of tax.
Investment in Guarantors - ------------------------
Since the Funding Corporation has the ability to assert significant influence over the operations of the Guarantors, it accounts for its one percent investment in the Guarantors using the equity method of accounting.
Excess of Cost over Fair Value of Net Assets Acquired - -----------------------------------------------------
On January 1, 2002, the Funding Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired goodwill and other intangible assets and provides goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. The Funding Corporation's related amortization consists solely of its share of the goodwill amortization at the Guarantors, which has no income tax effect.
In accordance with SFAS 142, the Guarantors have determined their reporting units and completed their transitional impairment and annual impairment testing of goodwill in the second and fourth quarters, respectively, primarily using a discounted cash flow methodology as of January 1, 2002 and October 31, 2002, respectively. The results of the transitional impairment tests indicated goodwill impairment at the Salton Sea and Partnership Guarantors. During the fourth quarter, the Salton Sea Guarantors and the Partnership Guarantors completed their assessment of the implied fair value of goodwill. As a result, an impairment of goodwill was recognized as a cumulative effect of change in
accounting principle of $21.0 million at the Salton Sea Guarantors as of January 1, 2002. However, as a result of this test, no goodwill impairment was recognized at the Partnership Guarantors as of January 1, 2002. Additionally, the Guarantors annual goodwill impairment tests indicated no goodwill impairment existed at October 31, 2002. The Funding Corporation recorded its share of the Guarantors' cumulative effect of this change of approximately $0.2 million as of January 1, 2002. Following is a reconciliation of net income as originally reported for the years ended December 31, 2002, 2001 and 2000, to adjusted net income (in thousands):
2002 2001 2000 ----- ----- ---- Reported net income (loss) ... $(125) $(137) $174 Goodwill amortization ........ -- 57 57 Cumulative effect of change in accounting principle ......... 210 -- -- ----- ----- ----
Adjusted net income (loss) ... $ 85 $ (80) $231 ===== ===== ====
Fair Values of Financial Instruments - ------------------------------------
Fair values have been estimated based on quoted market prices for debt issues listed on exchanges. Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values.
Income Taxes - ------------
The Funding Corporation is included in the consolidated income tax returns with its parent and affiliates. Income taxes are provided on a separate return basis; however, tax obligations of the Funding Corporation will be remitted to the parent only to the extent of cash flows available after operating expenses and debt service.
Reclassifications - -----------------
Certain reclassifications were made to the 2001 and 2000 financial statements to conform to the 2002 presentation.
Use of Estimates - ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - -----------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Funding Corporation has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The Funding Corporation does not expect the adoption of SFAS 143 to have a material effect on its financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods ending after December 15, 2002. The Funding Corporation does not expect the adoption of FIN 45 will have a material effect on its financial position, results of operations, or cash flows.
3. SENIOR SECURED NOTES AND BONDS
The Funding Corporation's debt securities (the "Notes and Bonds") are as follows (in thousands):
SENIOR DECEMBER 31, SECURED ------------------- Date issued SECURITIES FINAL MATURITY DATE RATE 2002 2001 - ---------------- ---------- ------------------- ------ -------- --------
July 21, 1995 B Bonds May 30, 2005 7.370% $ 56,662 $ 79,360 July 21, 1995 C Bonds May 30, 2010 7.840% 109,250 109,250 June 20, 1996 E Bonds May 30, 2011 8.300% 46,322 47,922 October 13, 1998 F Bonds November 30, 2018 7.475% 279,444 283,718 -------- -------- $491,678 $520,250 ======== ========
Principal and interest payments are made in semi-annual installments. Principal maturities of the Senior Secured Notes and Bonds are as follows (in thousands):
AMOUNT --------
2003...... $ 28,086 2004...... 30,588 2005...... 30,374 2006...... 27,744 2007...... 26,146 Thereafter 348,740 -------- Total $491,678 ========
On October 13, 1998, Funding Corporation completed a sale to institutional investors of $285.0 million aggregate amount of 7.475% Senior Secured Series F bonds due November 30, 2018. A portion of the proceeds were used to fund the cost of construction of, and was advanced to, the Zinc Recovery Project, which is indirectly 100% owned by Salton Sea Minerals Corp., a MEHC affiliate not owned by CE Generation. The direct and indirect owners of the Zinc Facility (the "Zinc Guarantors", which include Salton Sea Minerals Corp. and Minerals) are among the guarantors of the Funding Corporation debt. In connection with the divestiture of CE Generation in 1999 MEHC guaranteed the payment by the Zinc Guarantors of a specified portion of the scheduled debt service on the Imperial Valley Project Loans including the current principal amount of approximately $137.8 million.
Pursuant to a depository agreement, Funding Corporation established a debt service reserve fund in the form of a letter of credit in the amount of $67.6 million from which scheduled interest and principal payments could have been made. The letter of credit has not been renewed. The Funding Corporation is restricted from making distributions until it has reserved $67.6 million as a debt service reserve fund.
The estimated fair values of the Senior Secured Notes and Bonds at December 31, 2002 and 2001 were $464.6 million and $478.8 million, respectively.
4. CONTINGENCY
Edison, a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million owed under the power purchase agreements with certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V and CE Turbo Projects) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $21.0 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at the Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay approximately $3.9 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 certain Guarantors filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay the contractual obligations, certain Guarantors have established an allowance for doubtful accounts of approximately $2.7 million as of December 31, 2002. The Project entities are vigorously pursuing collection of the capacity bonus payments.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an uncontrollable force event. Such uncontrollable force event ended and Salton Sea II returned to service on December 17, 2002. Edison has failed to recognize the uncontrollable force event and, as such, has not paid amounts otherwise due and owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the Salton Sea II power purchase agreement.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V and CE Turbo Projects have not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.8 million. The Guarantors have established an allowance for doubtful accounts for the full amount of this receivable.
5. REVOLVING CREDIT AGREEMENT
In connection with the issuance of the Notes and Bonds, the Funding Corporation also obtained a $15 million seven-year revolving credit agreement between Credit Suisse as bank and agent and other lenders. The interest rate is at the Adjusted Base Rate plus .375% or at the LIBOR rate plus 100 basis points. There were no borrowings outstanding as of December 31, 2002 or 2001.
6. SUBSEQUENT EVENTS
On January 29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder Magma Power Company Omaha, Nebraska
We have audited the accompanying combined balance sheets of the Salton Sea Guarantors as of December 31, 2002 and 2001, and the related combined statements of operations, Guarantors' equity and cash flows for each of the three years in the period ended December 31, 2002. The combined financial statements include the accounts of the companies discussed in Note 1, which are under common ownership and management. Our audits also included the combined financial statement schedule listed in Item 15. These financial statements and financial statement schedule are the responsibility of the Salton Sea Guarantors' management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all material respects, the combined financial position of the Salton Sea Guarantors as of December 31, 2002 and 2001 and the combined results of their operations and their combined cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such combined financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the combined financial statements, in 2002 the Salton Sea Guarantors changed their accounting policy for goodwill and other intangible assets and in 2001 the Salton Sea Guarantors changed their accounting policy for overhaul and well rework costs.
/s/ Deloitee & Touche LLP
DELOITTE & TOUCHE LLP Omaha, Nebraska January 24, 2003 (January 29, 2003 as to Note 7)
SALTON SEA GUARANTORS COMBINED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (Amounts in thousands)
2002 2001 -------- --------
ASSETS Current assets: Accounts receivable, net of allowance of $3,800 and $9,829, respectively ............................. $ 20,524 $ 36,647 Prepaid expenses and other assets ...................... 5,283 5,314 -------- -------- Total current assets ................................. 25,807 41,961 -------- -------- Properties, plants, contracts and equipment, net ......... 535,220 543,719 Excess of cost over fair value of net assets acquired .... 23,252 44,270 -------- -------- TOTAL ASSETS ............................................. $584,279 $629,950 ======== ========
LIABILITIES AND GUARANTORS' EQUITY Current liabilities: Accounts payable ....................................... $ 328 $ 2,862 Accrued liabilities .................................... 13,897 11,135 Current portion of long-term debt ...................... 22,765 20,487 -------- -------- Total current liabilities ............................ 36,990 34,484 -------- -------- Due to affiliates ........................................ 35,665 27,109 Senior secured project note .............................. 223,654 246,412 -------- -------- Total liabilities ...................................... 296,309 308,005 -------- --------
Commitments and contingencies (Notes 4, 5 and 6)
Guarantors' equity ....................................... 287,970 321,945 -------- -------- TOTAL LIABILITIES AND GUARANTORS' EQUITY ................. $584,279 $629,950 ======== ========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS COMBINED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS COMBINED STATEMENTS OF GUARANTORS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
Amount ---------
BALANCE, JANUARY 1, 2000 ..... $ 303,172
Net income ................. 28,323 ---------
BALANCE, DECEMBER 31, 2000 ... 331,495
Net loss .................. (9,550) ---------
BALANCE, DECEMBER 31, 2001 ... 321,945
Net loss .................. (33,975)
--------- BALANCE, DECEMBER 31, 2002 ... $ 287,970 =========
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
SALTON SEA GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Salton Sea Guarantors (the "Guarantors") (not a legal entity) own 100% interests in five operating geothermal electric power generating plants (Salton Sea I, II, III, IV and V) (collectively, the "Salton Sea Projects"). All five plants are located in the Imperial Valley of California. The Salton Sea Guarantors guarantee loans from Salton Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned subsidiary of Magma Power Company ("Magma"), which in turn was wholly-owned by MidAmerican Energy Holdings Company ("MEHC").
On February 8, 1999, MEHC created a new subsidiary, CE Generation, LLC ("CE Generation") and subsequently transferred its interest in Magma and its power generation assets in the Imperial Valley to CE Generation, with certain assets being retained by MEHC. On March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE Generation to El Paso CE Generation Holding Company, which was ultimately merged into El Paso Merchant Energy North America Company ("EPME"), an indirect subsidiary of El Paso Corporation ("El Paso").
The financial statements consist of the combination of (1) Salton Sea Brine Processing, L.P., a California limited partnership between Magma as a 99% limited partner and Salton Sea Power Company ("SSPC"), a wholly-owned subsidiary of Magma, as a 1% general partner, (2) Salton Sea Power Generation, L.P., a California limited partnership between Salton Sea Brine Processing, L.P., as a 99% limited partner, and Salton Sea Power Company, as a 1% general partner, (3) assets and liabilities attributable to Salton Sea IV which are held 99% by Salton Sea Power Generation, L.P. and 1% by Fish Lake Power LLC and (4) Salton Sea Power L.L.C., a Delaware limited liability company. Funding Corporation owns 1% interests in Salton Sea Power Company and Fish Lake Power LLC. All of the entities in the combination are affiliates of Magma and indirect subsidiaries of CE Generation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash - ---------------
The restricted cash balance primarily includes commercial paper, money market securities and mortgage backed securities and is composed of amounts deposited in restricted accounts, which the Guarantors will use to fund capital expenditures and debt service obligations.
Allowance for Doubtful Accounts - -------------------------------
The allowance for doubtful accounts is based on the Guarantors' assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than the Guarantors' historical experience, estimates of the recoverability of amounts due could be adversely affected.
Properties, Plants, Contracts and Equipment - -------------------------------------------
Properties, plants, contracts and equipment are carried at cost less accumulated depreciation. The Guarantors provide depreciation and amortization of properties, plants, contracts and equipment upon the commencement of revenue production over the estimated useful life of the assets.
Depreciation of the operating power plant costs, net of salvage value, is computed on the straight-line method over the estimated useful lives, between 10 and 30 years. Depreciation of furniture, fixtures and equipment is computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years.
Power sale agreements have been assigned values separately for each of (1) the remaining portion of the fixed price periods of the power sales agreements and (2) the 20-year avoided cost periods of the power sales agreements and are being amortized separately over such periods using the straight-line method.
The Salton Sea reservoir contains commercial quantities of extractable minerals. The carrying value of the mineral reserves are being amortized based upon the units of production method.
Capitalization of Interest and Deferred Financing Costs - -------------------------------------------------------
Prior to the commencement of operations, interest is capitalized on the costs of the plants and geothermal resource development to the extent incurred. Capitalized interest and other deferred charges are amortized over the lives of the related assets.
Deferred financing costs are amortized over the term of the related financing using the effective interest method.
Overhaul and Well Rework Costs ------------------------------
During 2001, the Guarantors changed their accounting policy for the overhaul and well rework costs. These costs, which had historically been accounted for using the deferral method, are now expensed as incurred. The new policy went into effect January 1, 2001 and during 2001, the Guarantors recorded a cumulative effect of this change of approximately $8.7 million. If the Guarantors had adopted the policy as of January 1, 2000, net income would have been $1.1 million lower in 2000 on a proforma basis.
Impairment of Long-Lived Assets - -------------------------------
The Guarantors evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Triggering events include a significant change in the extent or manner in which long-lived assets are being used or in its physical condition, in legal factors, or in the business climate that could affect the value of the long-lived assets, including changes in regulation. The interpretation of such events requires judgment from management as to whether such an event has occurred and is required. If an event occurs that could effect the carrying value of the asset and management does not identify it as a triggering event, future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived asset is reviewed to assess whether the recoverable amount has declined below its carrying amount. The recoverable amount is the estimated net future cash flows that the Guarantors expect to recover from the future use of the asset, undiscounted and without interest, plus the asset's residual value on disposal. Where the recoverable amount of the long-lived asset is less than the carrying value, an impairment loss would be recognized to write down the asset to its fair value, which is based on discounted estimated cash flows from the future use of the asset.
The estimated cash flows arising from future use of the asset that are used in the impairment analysis requires judgment regarding what the Guarantors would expect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use of the asset or the residual value of the asset on disposal based on changes in the market conditions, changes in the use of the assets, management's plans, the determination of the useful life of the assets and technology change in the industry could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss, which could significantly affect the results of operations.
Fair Values of Financial Instruments - ------------------------------------
Fair values have been estimated based on quoted market prices for debt issues listed on exchanges. Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values.
Excess of Cost over Fair Value of Net Assets Acquired - -----------------------------------------------------
On January 1, 2002, the Guarantors adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. The Guarantors' related amortization consists solely of goodwill amortization, which has no income tax effect.
The Guarantors' acquired intangible assets consist of power purchase contracts (the "contracts") with a cost of $33.4 million and $33.4 million and accumulated amortization of $8.8 million and $7.6 million at December 31, 2002 and 2001, respectively. Amortization expense on the contracts was $1.2 million for the year ended December 31, 2002. the Guarantors' expect amortization expense on the contracts to be $1.2 million for each of the five succeeding fiscal years.
In accordance with the SFAS No. 142, the Guarantors completed their transitional impairment and annual goodwill impairment test of goodwill during the second and fourth quarters of 2002, respectively, primarily using a discounted cash flow methodology as of January 1, 2002 and October 31, 2002, respectively. The transitional impairment test indicated a potential goodwill impairment at the Guarantors. During the fourth quarter, the Guarantors completed their assessment of the implied fair value of goodwill. As a result, an impairment of goodwill was recognized as a cumulative effect of change in accounting principle of $21.0 million as of January 1, 2002. Additionally, the Guarantors annual goodwill impairment tests indicated no goodwill impairment existed at October 31, 2002. Following is a reconciliation of net income as originally reported for the years ended December 31, 2002, 2001 and 2000, to adjusted net income (in thousands):
2002 2001 2000 -------- ------- -------- Reported net income (loss) ... $(33,975) $(9,550) $28,323 Goodwill amortization ........ -- 1,304 1,304 Cumulative effect of change in accounting principle ......... 21,018 -- -- -------- ------- ------- Adjusted net income (loss) ... $(12,957) $(8,246) $29,627 ======== ======= =======
Contingent Liabilities - ----------------------
The Guarantors are subject to the possibility of various loss contingencies arising in the ordinary course of business. The Guarantors consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as the ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Guarantors regularly evaluate current information available to determine whether such accruals should be adjusted.
Revenue Recognition - -------------------
The Guarantors recognize revenue and related accounts receivable from sales of electricity on an accrual basis. All of the Guarantors' sales of electricity, except for Salton Sea V, are to Southern California Edison Company ("Edison") under long-term power purchase contracts.
Each of the Salton Sea Projects, except for Salton Sea V, sells electricity to Edison pursuant to a separate Standard Offer No. 4 Agreement ("SO4 Agreements") or a negotiated power purchase agreement. Each power purchase agreement is independent of the others, and the performance requirements specified within one such agreement apply only to the Project, which is subject to the agreement. These power purchase agreements provide for capacity payments, capacity bonus payments and energy payments. Edison makes fixed annual capacity payments to the projects, and to the extent that capacity factors exceed certain benchmarks is required to make capacity bonus payments. The price for capacity and capacity bonus payments is fixed for the life of the SO4 Agreements. Energy payments for the SO4 Agreements were at increasing fixed rates for the first ten years of each contract and thereafter at a rate based on the cost that Edison avoids by purchasing energy from the project instead of obtaining the energy from other sources ("Avoided Cost of Energy"). In June and November 2001, the Salton Sea Projects which receive Edison's Avoided Cost of Energy entered into agreements that provide for a fixed energy payment per kW-hour in lieu of Edison's Avoided Cost of Energy. The fixed energy payments were 3.25 cents per kWh from December 1, 2001 through April 30, 2002 and 5.37 cents per kWh commencing May 1, 2002 for a five-year period. Following the five-year period, the energy payment reverts back to Edison's Avoided Cost of Energy.
For the years ended December 31, 2002, 2001 and 2000, respectively, Edison's Average Avoided Cost of Energy was 3.5 cents per kWh, 7.4 cents per kWh and 5.8 cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year.
The Salton Sea I Project contracts to sell electricity to Edison pursuant to a 30-year negotiated power purchase agreement, which commenced on July 1, 1987 (the "Salton Sea I PPA"). The contract capacity and contract nameplate are each 10 megawatt ("MW"). The capacity payment is based on the firm capacity price, which adjusts quarterly based on a basket of energy indices for the term of the Salton Sea I PPA and is currently $148 per kW-year. The capacity payment is approximately $1.1 million per annum. The energy payment is calculated using a Base Price (defined as the initial value of the energy payment (4.7 cents per kWh for the second quarter of
1992)), which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Salton Sea I was 5.8 cents per kWh during 2002. As the Salton Sea I PPA is not an SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy.
The Salton Sea II Project contracts to sell electricity to Edison pursuant to a 30-year modified SO4 Agreement that commenced on April 5, 1990. The contract capacity and contract nameplate are 15 MW (16.5 MW during on-peak periods) and 20 MW, respectively. The price for contract capacity and contract capacity bonus payments is fixed for the life of the modified SO4 Agreement. The combined annual capacity and bonus payments are approximately $3.3 million. The energy payments for the first ten-year period, which period expired on April 4, 2000, were levelized at a time period weighted average of 10.6 cents per kWh. Thereafter, the monthly energy payment was based on Edison's Avoided Cost of Energy. Edison is entitled to receive, at no cost, 5% of all energy delivered in excess of 80% of contract capacity through September 30, 2004.
The Salton Sea III Project contracts to sell electricity to Edison pursuant to a 30-year modified SO4 Agreement that commenced on February 13, 1989. The contract capacity and contract nameplate are 47.5 MW and 49.8 MW, respectively. The price for contract capacity payments and capacity bonus payments is fixed at $175 per kW-year. The combined annual capacity and bonus payments are approximately $9.7 million. The energy payments for the first ten-year period, which period expired on February 12, 1999, were levelized at a time period weighted average of 9.8 cents per kWh. Thereafter, the energy payment was based on Edison's Avoided Cost of Energy.
The Salton Sea IV Project contracts to sell electricity to Edison pursuant to a modified SO4 Agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea I PPA option (20 MW) and to the original Salton Sea IV SO4 Agreement ("Fish Lake PPA") (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The capacity included bonus payments in 2002 that were approximately $5.5 million. The energy payment (for deliveries up to a rate of 39.6 MW) is at a base price adjusted quarterly based upon specified indices for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. The contract has a 30-year term but Edison is not required to purchase the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA option after September 30, 2017, the original termination date of the Salton Sea I PPA.
The Salton Sea V Project, which commenced operations in the third quarter of 2000, expects to sell up to 22 MW of its net output to Minerals, a zinc facility owned by a subsidiary of MEHC, pursuant to a 33-year Power Sales Agreement. The agreement provides for energy payments based on prices available to the Salton Sea V project for short-term sales of electricity, less transmission line losses. The Salton Sea V Project sells its remaining output through other market transactions.
Commencing January 17, 2001, Salton Sea Power entered into a series of transaction agreements to sell available power from Salton Sea V to EPME, under which the purchase price was originally based on day ahead price quotes received from EPME, and subsequently based on percentages of the Dow Jones SP-15 Index.
The Imperial Valley Projects, other than Salton Sea I, receive transmission service from the Imperial Irrigation District ("IID") to deliver electricity to Edison near Mirage, California. These projects pay a rate based on the IID's cost of service, which was $1.70 per month per kilowatt of service provided for 2002 and recalculated annually. The transmission service and interconnection agreements expire in 2015 for the Partnership Projects, 2019 for Salton Sea III, 2020 for Salton Sea II and 2026 for Salton Sea IV. The Salton Sea V projects entered into a 30-year agreement with similar terms with the IID. Salton Sea Unit I delivers energy to Edison at the project site and has no transmission service agreement with the IID.
Income Taxes - ------------
The Guarantors are comprised substantially of partnership interests. The income or loss of each partnership for income tax purposes, along with any associated tax credits, is the responsibility of the individual partners. Accordingly, no recognition has been given to federal or state income taxes in the accompanying combined financial statements.
Statements of Cash Flows - ------------------------
For purposes of the statements of cash flows, the Guarantors consider only demand deposits at banks to be cash.
Reclassifications - -----------------
Certain reclassifications were made to the 2001 and 2000 financial statements to conform to the 2002 presentation.
Use of Estimates - ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - -----------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Guarantors have a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The Guarantors do not expect the adoption of SFAS 143 to have a material effect on its financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Guarantors do not expect the adoption of FIN 45 will have a material effect on its financial position, results of operations, or cash flows.
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment as of December 31 are as follows (in thousands):
2002 2001 --------- --------- Cost: Plant and equipment ..................... $ 458,709 $ 446,107 Power sale agreements ................... 33,446 33,446 Mineral reserves ........................ 91,811 91,811 Wells and resource development .......... 63,975 63,881 --------- --------- 647,941 635,245 Accumulated depreciation and amortization . (112,721) (91,526) --------- --------- $ 535,220 $ 543,719 ========= =========
The asset impairment in 2001 reflects the write off of the book value of a steam turbine. In 2001, the Guarantors made the decision to dispose of the turbine. The Guarantors have determined that the the turbine, which had been held in storage for use in new construction at the Salton Sea Projects, no longer had any significant value.
4. SENIOR SECURED PROJECT NOTE
The Guarantors' project note payable to Funding Corporation as of December 31 are as follows (in thousands):
The Guarantors have also guaranteed, along with other guarantors, the debt of Funding Corporation, which amounted to $491.7 million at December 31, 2002. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of the equity interests in the Guarantors. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets.
Principal maturities of the senior secured project note are as follows (in thousands):
AMOUNT --------
2003............ $ 22,765 2004............ 24,409 2005............ 23,917 2006............ 22,620 2007............ 22,132 Thereafter ..... 130,576 -------- Total .......... $246,419 ========
The estimated fair values of the senior secured projects notes at December 31, 2002 and 2001 were $236.1 million and $253.0 million, respectively.
5. RELATED PARTY TRANSACTIONS
The Guarantors have entered into the following agreements:
o Amended and Restated Easement Grant Deed and Agreement Regarding Rights for Geothermal Development dated February 23, 1994, as amended, whereby the Guarantors acquired from Magma Land I, a wholly-owned subsidiary of Magma, rights to extract geothermal brine from the geothermal lease rights property which is necessary to operate the Salton Sea Power Generation, L.P. facilities in return for 5% of all electricity revenue received by the Guarantors. The amount expensed for the years ended December 31, 2002, 2001 and 2000 was $3.6 million, $4.4 million and $4.1 million, respectively.
o Administrative Services Agreement dated April 1, 1993 with Magma, whereby Magma will provide administrative and management services to the Guarantors, excluding Salton Sea IV and V. Fees payable to Magma amount to 3% of total electricity revenue. The amount expensed for the years ended December 31, 2002, 2001 and 2000 was $1.2 million, $1.6 million and $1.4 million, respectively.
o Operating and Maintenance Agreement dated April 1, 1993 with CalEnergy Operating Corporation ("CEOC"), whereby the Guarantors retain CEOC to operate the Salton Sea facilities for a period of 32 years. Payment is made to CEOC in the form of reimbursements of expenses incurred. During 2002, 2001 and 2000, the Guarantors reimbursed CEOC for expenses of $13.8 million, $16.2 million and $7.4 million, respectively.
Commencing January 17, 2001, Salton Sea Power entered into a series of transaction agreements to sell available power from Salton Sea V to EPME, under which the purchase price was originally based on day ahead price quotes received from EPME, and subsequently based on percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to EPME from the Guarantors totaled $7.3 million, $53.4 million and $16.1 million in 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, accounts receivable from EPME were $1.1 million and $11.8 million, respectively.
6. CONTINGENCY
Edison is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $42.3 million owed under the power purchase agreements with certain Guarantors (Imperial Valley Projects, excluding the Salton Sea V Project) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $6.8 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at the Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay approximately $1.1 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 certain Guarantors (except the Salton Sea V Project) filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay the contractual obligations, certain Guarantors have established an allowance for doubtful accounts of approximately $0.8 million as of December 31, 2002. The Project entities are vigorously pursuing collection of the capacity bonus payments.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an uncontrollable force event. Such uncontrollable force event ended and Salton Sea II returned to service on December 17, 2002. Edison has failed to recognize the uncontrollable force event and, as such, has not paid amounts otherwise due and owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power Generation L.P., owner of Salton Sea II served a complaint on Edison for such unpaid amount and to rescind such deration.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V Project has not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.0 million. The Guarantors have established an allowance for doubtful accounts for the full amount of this receivable.
Stone & Webster - ---------------
The Salton Sea V Project was constructed by Stone & Webster, Inc. (formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw Group ("Stone & Webster"), pursuant to date certain, fixed-price, turnkey engineering, procure, construct and manage contract (the "Salton Sea V Project EPC Contract"). On March 7, 2002, Salton Sea Power L.L.C., the owner of the Salton Sea V Project, filed a Demand for Arbitration against Stone & Webster for breach of contract and breach of warranty arising from deficiencies in Stone & Webster's design, engineering, construction and procurement of equipment for the Salton Sea V Project pursuant to the Salton Sea V Project EPC Contract. The demand for arbitration did not include a stated claim amount.
The breach of contract and breach of warranty claims made by the owners of the Salton Sea V Project are still pending and the hearing is scheduled to commence in April 2003.
Environmental Liabilities - -------------------------
The Guarantors are subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of the Guarantors' existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing the Guarantors' cost of waste disposal and (vi) reducing the reliability of service provided by the Guarantors and the amount of energy available from the Guarantors' facilities. Any of such items could have a substantial impact on amounts required to be expended by the Guarantors in the future. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other social and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating sites, other companies' clean-up experience and data released by the Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new circumstances, and are included in the accompanying balance sheets at their undiscounted amounts. As of December 31, 2002 and December 31, 2001, the environmental liabilities recorded on the balance sheet were not material.
7. SUBSEQUENT EVENTS
On January 29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation. Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power began selling power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on October 31, 2003.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder Magma Power Company Omaha, Nebraska
We have audited the accompanying combined balance sheets of the Partnership Guarantors as of December 31, 2002 and 2001, and the related combined statements of operations, Guarantors' equity and cash flows for each of the three years in the period ended December 31, 2002. The combined financial statements include the accounts of the companies discussed in Note 1, which are under common ownership and management. Our audits also included the combined financial statement schedule listed in Item 15. These financial statements and financial statement schedule are the responsibility of the Partnership Guarantors' management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all material respects, the combined financial position of the Partnership Guarantors as of December 31, 2002 and 2001 and the combined results of their operations and their combined cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such combined financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the combined financial statements, in 2002 the Partnership Guarantors changed their accounting policy for goodwill and other intangible assets and in 2001 the Partnership Guarantors changed their accounting policy for overhaul and well rework costs.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP Omaha, Nebraska January 24, 2003 (January 29, 2003 as to Note 9)
PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (Amounts in thousands, except per share amounts)
2002 2001 -------- --------
ASSETS Current assets: Accounts receivable, net of allowance of $2,696 and $14,925, respectively ........................... $ 14,330 $ 59,384 Prepaid expenses and other assets ..................... 19,516 19,358 -------- -------- Total current assets ................................ 33,846 78,742 -------- -------- Restricted cash ......................................... 1 21,282 Properties, plants, contracts and equipment, net ........ 664,722 633,574 Management fee .......................................... 68,679 70,806 Due from affiliates ..................................... 82,083 13,072 Excess of fair value over net assets acquired ........... 120,866 120,866 -------- -------- TOTAL ASSETS ............................................ $970,197 $938,342 ======== ========
LIABILITIES AND GUARANTORS' EQUITY Current liabilities: Accounts payable ...................................... $ 2,903 $ 5,480 Accrued liabilities ................................... 17,040 14,458 Current portion of long-term debt ..................... 5,017 4,625 -------- -------- Total current liabilities ........................... 24,960 24,563 -------- -------- Senior secured project note ............................. 239,099 244,117 Deferred income taxes ................................... 104,850 102,083 -------- -------- Total liabilities ..................................... 368,909 370,763 -------- --------
Commitments and contingencies (Notes 4, 5 and 8)
Guarantors' equity: Common stock .......................................... 3 3 Additional paid-in capital ............................ 432,200 387,663 Retained earnings ..................................... 169,085 179,913 -------- -------- Total guarantors' equity ............................ 601,288 567,579 -------- -------- TOTAL LIABILITIES AND GUARANTORS' EQUITY ................ $970,197 $938,342 ======== ========
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF GUARANTORS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands, except share amounts)
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
PARTNERSHIP GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
The Partnership Guarantors (the "Guarantors") (not a legal entity) include the Vulcan/BN Geothermal Power Company ("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"), Del Ranch, L.P. ("Del Ranch") and CE Turbo LLC ("CE Turbo"), each of which owns an operating geothermal power plant located in Imperial Valley, California known as the Vulcan Project, the Elmore Project, the Leathers Project, the Del Ranch Project and CE Turbo Project, respectively (the "Partnership Projects"). The Partnership Guarantors also include CalEnergy Minerals LLC ("Minerals"), which is constructing a zinc recovery project in the Imperial Valley, California. Finally, the Partnership Guarantors include CalEnergy Operating Corporation ("CEOC"), Vulcan Power Company ("VPC"), both 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation") San Felipe Energy Company ("San Felipe"), Conejo Energy Company ("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC ("VPCG"), Salton Sea Minerals Corp. and CE Salton Sea Inc. VPC and VPCG, collectively own 100% of the partnership interests in Vulcan. CEOC and Niguel, San Felipe and Conejo, collectively own 90% partnership interests in each of Elmore, Leathers and Del Ranch, respectively. Salton Sea Minerals Corporation owns Minerals. Minerals is an indirect wholly-owned subsidiary of MidAmerican Energy Holdings Company ("MEHC"). CE Salton Sea Inc. owns CE Turbo LLC.
Magma owns all of the remaining 10% interests in each of Elmore, Leathers and Del Ranch. CEOC is entitled to receive from Magma, as payment for certain data and services provided by CEOC, all of the partnership distributions Magma receives with respect to its 10% ownership interests in each of the Elmore, Leathers and Del Ranch Projects and Magma's special distributions equal to 4.5% of total energy revenue from the Leathers Project.
Magma is a wholly-owned subsidiary of CE Generation, LLC ("CE Generation"), which is owned equally by MEHC and El Paso CE Generation Holding Company, which was merged into El Paso Merchant Energy North America Company ("EPME") on December 31, 2000, an indirect subsidiary of El Paso Corporation ("El Paso").
Minerals developed and owns the rights to proprietary processes for the extraction of zinc from elements in solution in the geothermal brine and fluids utilized at the Imperial Valley Projects. A plant has successfully produced commercial quality zinc at the projects. The affiliates of Minerals may develop facilities for the extraction of manganese, silica and other products as it further develops the extraction technology.
Minerals constructed the Zinc Recovery Project, which is recovering zinc from the geothermal brine (the "Zinc Recovery Project"). Facilities have been installed near the Imperial Valley Projects sites to extract a zinc chloride solution from the geothermal brine through an ion exchange process. This solution is being transported to a central processing plant where zinc ingots are being produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tons per year. Limited production began during December 2002 and full production is expected by late-2003. In September 1999, Minerals entered into a sales agreement whereby all high-grade zinc produced by the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the agreement expires in December 2005.
2. SUMMARY OF SIGNIFICANT POLICIES
Basis of Presentation - ---------------------
The accompanying financial statements of the Guarantors present the accounts of CEOC, VPC, CE Turbo LLC and Minerals and their proportionate share of the Partnerships in which they have an undivided interest in the assets and are proportionately liable for their share of the liabilities. All intercompany balances and transactions have been eliminated.
The financial statements reflect the acquisition of Magma and the resulting push down to the Guarantors of the accounting as a purchase business combination.
Restricted Cash - ---------------
The restricted cash balance primarily includes commercial paper, money market securities and mortgage backed securities and is composed of amounts deposited in restricted accounts, which the Guarantors will use to fund capital expenditures and debt obligations.
Allowance for Doubtful Accounts - -------------------------------
The allowance for doubtful accounts is based on the Guarantors' assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than the Guarantors' historical experience, estimates of the recoverability of amounts due could be adversely affected.
Properties, Plants, Contracts and Equipment - -------------------------------------------
Properties, plants, contracts and equipment are carried at cost less accumulated depreciation. The Guarantors provide depreciation and amortization of properties, plants, contracts and equipment upon the commencement of revenue production over the estimated useful life of the assets.
Depreciation of the operating power plant costs, net of salvage value, is computed on the straight-line method over the estimated useful lives, between 10 and 30 years. Depreciation of furniture, fixtures and equipment is computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years.
Power sale agreements have been assigned values separately for each of (1) the remaining portion of the fixed price periods of the power sales agreements and (2) the 20-year avoided cost periods of the power sales agreements and are amortized separately over such periods using the straight-line method.
The Salton Sea reservoir contains commercial quantities of extractable minerals. The carrying value of the mineral reserves are being amortized based upon the units of production method.
The process license represents the economic benefits expected to be realized from the installation of the license and related technology at the Imperial Valley. The carrying value of the process license is amortized using the straight-line method over 24 years, the remaining estimated useful life of the license.
Capitalization of Interest and Deferred Financing Costs - -------------------------------------------------------
Prior to the commencement of operations, interest is capitalized on the costs of the plants and geothermal resource development to the extent incurred. Capitalized interest and other deferred charges are amortized over the lives of the related assets.
Deferred financing costs are amortized over the term of the related financing using the effective interest method.
Overhaul and Well Rework Costs - ------------------------------
During 2001 the Guarantors changed their accounting policy for overhaul and well rework costs. These costs, which had historically been accounted for using the deferral method, are now expensed as incurred. The new policy went into effect January 1, 2001 and during 2001, the Guarantors recorded a cumulative effect of this change of approximately $6.9 million, net of tax of $4.7 million. If the Guarantors had adopted the policy as of January 1, 2000, net income would have been $4.9 million higher in 2000 on a proforma basis.
Impairment of Long-Lived Assets - -------------------------------
The Guarantors evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Triggering events include a significant change in the extent or manner in which long-lived assets are being used or in its physical condition, in legal factors, or in the business climate that could affect the value of the long-lived assets, including changes in regulation. The interpretation of such events requires judgment from management as to whether such an event has occurred and is required. If an event occurs that could effect the carrying
value of the asset and management does not identify it as a triggering event, future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived asset is reviewed to assess whether the recoverable amount has declined below its carrying amount. The recoverable amount is the estimated net future cash flows that the Guarantors expect to recover from the future use of the asset, undiscounted and without interest, plus the asset's residual value on disposal. Where the recoverable amount of the long-lived asset is less than the carrying value, an impairment loss would be recognized to write down the asset to its fair value, which is based on discounted estimated cash flows from the future use of the asset.
The estimated cash flows arising from future use of the asset that are used in the impairment analysis requires judgment regarding what the Guarantors would expect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use of the asset or the residual value of the asset on disposal based on changes in the market conditions, changes in the use of the assets, management's plans, the determination of the useful life of the assets and technology change in the industry could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss, which could significantly affect the results of operations.
Excess of Cost over Fair Value of Net Assets Acquired - -----------------------------------------------------
On January 1, 2002, the Guarantors adopted SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. The Guarantors' related amortization consists solely of goodwill amortization, which has no income tax effect. Following is a reconciliation of net income as originally reported for the years ended December 31, 2002, 2001 and 2000, to adjusted net income (in thousands):
2002 2001 2000 -------- ------- -------- Reported net income (loss) ... $(10,828) $16,085 $27,180 Goodwill amortization ........ -- 3,564 3,564 -------- ------- ------- Adjusted net income .......... $(10,828) $19,649 $30,774 ======== ======= =======
In accordance with SFAS No. 142, the Guarantors completed their initial transitional and annual goodwill impairment tests during the second and the fourth quarters of 2002, respectively, primarily using a discounted cash flow methodology as of January 1, 2002 and October 31, 2002, respectively. The transitional impairment test indicated a potential goodwill impairment at the Guarantors. During the fourth quarter, the Guarantors completed their assessment of the implied fair value of goodwill. As a result of this test, no goodwill impairment was recognized at the Guarantors as of January 1, 2002. Additionally, the Guarantors annual goodwill impairment tests indicated no goodwill impairment existed at October 31, 2002.
Intangible Assets - -----------------
The following table summarizes the acquired intangible assets as of December 31 (in thousands):
------------------------------- Gross Carrying Accumulated Amount Amortization -------------- ------------
Amortized Intangible Assets: Power Purchase Contracts ..... $123,002 $ 96,894 Patented Technology .......... 46,290 15,385 -------- -------- Total ...................... $169,292 $112,279 ======== ========
------------------------------- Gross Carrying Accumulated Amount Amortization -------------- ------------
Amortized Intangible Assets: Power Purchase Contracts ..... $123,002 $ 95,194 Patented Technology .......... 46,290 13,456 -------- -------- Total ...................... $169,292 $108,650 ======== ========
Amortization expense on acquired intangible assets was $3.6 million for the years ended December 31, 2002 and 2001. The Guarantors expect amortization expense on acquired intangible assets to be $3.5 million for each of the five succeeding fiscal years.
Fair Values of Financial Instruments - ------------------------------------
Fair values have been estimated based on quoted market prices for debt issues listed on exchanges. Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values.
Contingent Liabilities - ----------------------
The Guarantors' are subject to the possibility of various loss contingencies arising in the ordinary course of business. The Guarantors' consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as the ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Guarantors' regularly evaluate current information available to determine whether such accruals should be adjusted.
Revenue Recognition - -------------------
The Guarantors recognize revenue and related accounts receivable from sales of electricity on an accrual basis. All of the Guarantors' sales of electricity, except for CE Turbo, are to Southern California Edison Company ("Edison") under long-term power purchase contracts.
Each of the Partnership Projects, except for CE Turbo, sells electricity generated by the respective plants pursuant to four long-term power purchase agreements ("SO4 Agreements") between the projects and Edison. These SO4 Agreements provide for capacity payments, capacity bonus payments and energy payments. Edison makes fixed annual capacity payments to the projects, and to the extent that capacity factors exceed certain benchmarks is required to make capacity bonus payments. The price for capacity and capacity bonus payments is fixed for the life of the SO4 Agreements. Energy is sold at increasing fixed rates for the first ten years of each contract and thereafter at a rate based on the cost that Edison avoids by purchasing energy from the project instead of obtaining the energy from other sources ("Avoided Cost of Energy"). The fixed energy price periods of the Partnership Project SO4 Agreements extended until February 1996 for Vulcan, December 1998 for Del Ranch and Elmore, and December
1999 for the Leathers Partnership. In June and November 2001, the Partnership Projects which receive Edison's Avoided Cost of Energy entered into agreements that provide for a fixed energy payment per kW-hour in lieu of Edison's Avoided Cost of Energy. The fixed energy payments were 3.25 cents per kWh from December 1, 2001 through April 30, 2002 and 5.37 cents per kWh commencing May 1, 2002 for a five-year period. Following the five-year period, the energy payment reverts back to Edison's Avoided Cost of Energy.
For the years ended December 31, 2002, 2001 and 2000, Edison's average Avoided Cost of Energy was 3.5 cents, 7.4 cents, 5.8 cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Guarantors cannot predict the likely level of Avoided Cost of Energy prices.
The CE Turbo Project, which commenced commercial operation in the third quarter of 2000, sells its output through other market transactions. The CE Turbo Project may sell its output to the Zinc Recovery Project, which is owned by a subsidiary of MEHC and commenced partial commercial operations in 2002.
Management Fee - --------------
Pursuant to the Magma Services Agreement, Magma has agreed to pay CEOC all equity cash flows and certain royalties payable by the Guarantors in exchange for providing data and services to Magma. As security for the obligations of Magma under the Magma Services Agreement, Magma has collaterally assigned to CEOC its rights to such equity cash flows and certain royalties.
Income Taxes - ------------
The entities comprising the Guarantors are included in consolidated income tax returns with their parent and affiliates; however, income taxes are provided on a separate return basis. Tax obligations of the Guarantors will be remitted to the parent only to the extent of cash flows available after operating expenses and debt service.
Statements of Cash Flows - ------------------------
For purposes of the statement of cash flows, the Guarantors consider only demand deposits at banks to be cash.
Reclassifications - -----------------
Certain reclassifications were made to the 2001 and 2000 financial statements to conform to the 2002 presentation.
Use of Estimates - ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - -----------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Guarantors have a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The liability is then accreted over time by applying an interest method of allocation to the liability. Cumulative accretion and accumulated depreciation will be recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. The Guarantors does not expect the adoption of SFAS 143 to have a material effect on its financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation
assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Guarantors do not expect the adoption of FIN 45 will have a material effect on its financial position, results of operations, or cash flows.
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment as of December 31 are as follows (in thousands):
2002 2001 --------- --------- Cost: Power plant and equipment ................. $ 222,522 $ 221,065 Zinc recovery project ..................... 202,269 159,909 Power sale agreements ..................... 123,588 123,588 Process license ........................... 46,290 46,290 Mineral reserves .......................... 162,487 162,487 Wells and resource development ............ 98,894 91,187 --------- --------- 856,050 804,526 Accumulated depreciation and amortization ... (191,328) (170,952) --------- --------- 664,722 633,574 ========= =========
4. SENIOR SECURED PROJECT NOTE
The Guarantors' project note payable to Salton Sea Funding Corporation as of December 31 is as follows (in thousands):
Principal maturities of the senior secured project note are as follows (in thousands):
AMOUNT -------- 2003........... $ 5,017 2004........... 5,771 2005........... 6,022 2006........... 5,124 2007........... 4,014 Thereafter .... 218,168 -------- Total ......... $244,116 ========
On October 13, 1998, Funding Corporation completed a sale to institutional investors of $285.0 million aggregate amount of 7.475% Senior Secured Series F bonds due November 30, 2018. A portion of the proceeds were used to fund the cost of construction of, and was advanced to, the Zinc Recovery Project, which is indirectly 100% owned by Salton Sea Minerals Corp., a MEHC affiliate not owned by CE Generation. The direct and indirect owners of the Zinc Facility (the "Zinc Guarantors", which include Salton Sea Minerals Corp. and Minerals) are among the guarantors of the Funding Corporation debt. In connection with the divestiture of CE Generation in 1999 MEHC guaranteed the payment by the Zinc Guarantors of a specified portion of the scheduled debt service on the Imperial Valley Project Loans including the current principal amount of approximately $137.8 million.
The Guarantors have also guaranteed, along with other guarantors, the debt of Salton Sea Funding Corporation, which amounted to $491.7 million at December 31, 2002. The guarantee is collateralized by a lien on the available cash flow of and a pledge of stock in the Guarantors. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets.
The estimated fair values of the senior secured project note at December 31, 2002 and 2001 were $227.4 million and $221.2 million, respectively.
5. RELATED PARTY TRANSACTIONS
The Guarantors are party to a 30-year brine supply agreement through the Vulcan partnership and a technology license agreement for the rights to use the technology necessary for the construction and operation of the Vulcan Plant. Under the brine supply agreement, the Guarantors will pay VPC 4.167% of the contract energy component of the price of electricity provided by the Vulcan Plant. In addition, VPC has been designated as operator of the Vulcan Plant and receives agreed-upon compensation for such services.
Charges to the Guarantors related to the brine supply agreement and operator's fees on a pro rata basis amounted to $0.7 million each for the year ended December 31, 2002, $0.9 million and $0.8 million, respectively, for the year ended December 31, 2001, $0.7 million each for the year ended December 31, 2000.
In addition, the Guarantors entered into the following agreements:
o Easement Grant Deed and Agreement Regarding Rights for Geothermal Development, whereby the Guarantors acquired from Magma rights to extract geothermal brine from the geothermal lease rights property which is necessary to operate the Leathers, Del Ranch and Elmore Plants in return for 17.333%, on a pro rata basis, of all energy revenue received by each plant. The Guarantors' share of amounts expensed under this agreement for 2002, 2001 and 2000 were $8.5 million, $11.5 million and $9.6 million, respectively.
o Ground Leases dated March 15 and August 15, 1988 with Magma whereby the Guarantors lease from Magma for 32 years the surface of the land as described in the Imperial County Assessor's official records. Amounts expensed under the ground leases for 2002, 2001 and 2000 were $70,000 per year.
o Administrative Services Agreements whereby CEOC will provide to the Partnerships administrative and management services for a period of 32 years through 2020. Fees payable to CEOC amount to the greater of 3% of total electricity revenue or $60,000 per month. The minimum monthly payments for years subsequent to 1989 are increased based on the consumer price index of the Bureau of Labor and Statistics. Amounts expensed related to these agreements for 2002, 2001 and 2000 amounted to $2.1 million, $2.6 million and $2.3 million, respectively.
o Operating and Maintenance Agreements whereby the Guarantors retain CEOC to operate the plants for a period of 32 years through 2020. Payment is made to CEOC in the form of reimbursements of expenses incurred and a guaranteed capacity payment ranging from 10% to 25% of energy revenue over stated amounts. The Guarantors in 2002, 2001 and 2000 reimbursed CEOC for expenses of $15.8 million, $14.6 million and $10.6 million, respectively, and accrued a guaranteed capacity payment of $1.6 million, $3.0 million and $1.9 million at December 31, 2002, 2000 and 1999, respectively.
From September 2000 through September 2002, CE Turbo entered into a series of agreements to sell all available power from the CE Turbo Project to EPME. The purchase price for the available power under various agreements has been the value actually received by EPME for the sale of such power, day ahead price quotes received from EPME, and percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to EPME from the Guarantors totaled $1.6 million, $49.4 million and $3.4 million in 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, accounts receivable from EPME were $0.3 million and $2.4 million, respectively.
6. CONDENSED FINANCIAL INFORMATION (IN THOUSANDS)
Condensed combining statements of operations including information of the Guarantors' pro rata interest in the respective entities for the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands):
7. INCOME TAXES
The provision (benefit) for income tax for the years ended December 31, 2002, 2001 and 2000 was as follows (in thousands):
2002 2001 2000 -------- -------- ------ Current: Federal ..... $(12,450) $ 8,190 $3,956 State ....... (3,450) 2,813 911 -------- -------- ------ (15,900) 11,003 4,867 -------- -------- ------
Deferred: Federal ..... 2,074 880 946 State ....... 693 (155) 1,881 -------- -------- ------ 2,767 725 2,827 -------- -------- ------ Total provision $(13,133) $ 11,728 $7,694 ======== ======== ======
The net deferred tax liability at December 31, 2002 and 2001 was as follows (in thousands):
2002 2001 --------- --------- Deferred tax liabilities- Properties, plant, contracts and equipment ....... $ 116,430 $ 115,843 --------- --------- Deferred tax assets: Accruals not currently deductible for tax purposes (3,966) (6,577) Energy credits ................................... (5,557) (5,126) AMT credit ....................................... (2,057) (2,057) --------- --------- Total deferred tax assets ...................... (11,580) (13,760) --------- --------- --------- --------- Net deferred tax liabilities ....................... $ 104,850 $ 102,083 ========= =========
The reconciliation of the federal statutory tax rate to the effective tax rate applicable to income before provision for income taxes is as follows:
2002 2001 2000 ------ ------ ------ Federal statutory rate ................ 35.0 % 35.0 % 35.0 % Adjustments to taxes resulting from: Percentage depletion .............. 14.5 (8.6) (9.5) Investment and energy tax credits . 1.5 (1.2) (12.2) Goodwill amortization ............. -- 3.6 3.3 State taxes, net of federal benefit 5.6 5.0 5.2 Other ............................. (1.8) -- -- ---- ---- ---- Effective tax rate .................... 54.8 % 33.8 % 21.8 % ==== ==== ====
During 2002, the Partnership Guarantors made considerable progress on several significant income tax examination matters for prior tax years, including percentage of depletion, which resulted in a decrease in income tax expense of $3.1 million in 2002.
8. COMMITMENTS AND CONTINGENCIES
Edison, a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $76.9 million owed under the power purchase agreements with certain Guarantors (excluding CE Turbo Project) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $14.1 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at the Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $48.5 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay approximately $2.7 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 certain Guarantors filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay the contractual obligations, certain Guarantors have established an allowance for doubtful accounts of approximately $1.9 million as of December 31, 2002. The Project entities are vigorously pursuing collection of the capacity bonus payments.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the CE Turbo Project has not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $0.8 million. The Guarantors have established an allowance for doubtful accounts for the full amount of this receivable.
Stone & Webster - ---------------
The CE Turbo Project was constructed by Stone & Webster, Inc. (formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw Group ("Stone & Webster"), pursuant to date certain, fixed-price, turnkey engineering, procure, construct and manage contract ( the "CE Turbo Project EPC Contract"). On March 7, 2002, Vulcan, Del Ranch, and CE Turbo (collectively the ("CE Turbo Owners"), filed a Demand for Arbitration against Stone & Webster for breach of contract and breach of warranty arising from deficiencies in Stone & Webster's design, engineering, construction and procurement of equipment for the CE Turbo Project pursuant to the CE Turbo Project EPC Contract. On November 25, 2002 and the CE Turbo Owners entered into a Settlement Agreement with Stone & Webster. The Settlement Agreement resulted in a $3.5 million payment from Stone & Webster.
Minerals - --------
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procure, construct and manage contract (the "Zinc Recovery Project EPC Contract"). On June 14, 2001, Minerals issued notices of default termination and demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC Contract due to failure to meet performance obligations. As a result of Kvaerner's failure to pay monetary obligations under the contract, the Guarantors drew $29.6 million under the EPC contract letter of credit on July 20, 2001. The liquidated damages have been accounted for as a reduction of the capitalized costs of the project. The Guarantors have entered into a time and materials reimbursable engineer, procure and construction management contract with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand for Arbitration against Minerals characterizing the nature of the dispute as concerns regarding change orders and performance penalties. Kvaerner did not state the amount of its claim. On August 7, 2001, Minerals filed an Answering Statement and Counterclaim against Kvaerner. Minerals denied all material allegations in Kvaerner's Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for breach of contract and specific performance. Minerals alleged that its total estimated damage for Kvaerner's breach of contract are in excess of approximately $60 million; however, Minerals has offset approximately $42.5 million of these damages by exercising its rights under the EPC Contract to claim the retainage and by drawing on a letter of credit.
On May 23, 2002, Minerals and Kvaerner entered into a Settlement Agreement. Under the terms of the agreement, Minerals retained the amounts drawn under the letter of credit, the EPC retainage amounts and the EPC contract balance and will pay to Kvaerner three equal installments of $2.25 million payable in January of 2003, 2004 and 2005.
Environmental Liabilities - -------------------------
The Guarantors are subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of the Guarantors' existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing the Guarantors' cost of waste disposal and (vi) reducing the reliability of service provided by the Guarantors and the amount of energy available from the Guarantors' facilities. Any of such items could have a substantial impact on amounts required to be expended by the Guarantors in the future. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other social and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating sites, other companies' clean-up experience and data released by the Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new circumstances, and are included in the accompanying balance sheets at their undiscounted amounts. As of December 31, 2002 and 2001, the environmental liabilities recorded on the balance sheet were not material.
9. SUBSEQUENT EVENTS
On January 29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation. Pursuant to a Transaction Agreement dated January 29, 2003, CE Turbo began selling power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. Such agreement will expire on October 31, 2003.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder Magma Power Company Omaha, Nebraska
We have audited the accompanying balance sheets of the Salton Sea Royalty LLC as of December 31, 2002 and 2001, and the related statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Salton Sea Royalty LLC as of December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, in 2002 the Salton Sea Royalty LLC changed its accounting for goodwill and other intangible assets.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP Omaha, Nebraska January 24, 2003 (January 29, 2003 as to Note 5)
SALTON SEA ROYALTY LLC BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (Amounts in thousands, except per share amounts)
2002 2001 ------- -------
ASSETS Current assets - Prepaid expenses and other assets ......................................... $ 13 $ 31 Royalty stream, net .................................... 14,011 14,865 Excess of cost over fair value of net assets acquired .. 30,464 30,464 Due from affiliates .................................... 39,501 33,940 ------- ------- TOTAL ASSETS ........................................... $83,989 $79,300 ======= =======
LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accrued liabilities .................................. $ 7 $ 29 Current portion of long-term debt .................... 304 3,460 ------- ------- Total current liabilities .......................... 311 3,489 Senior secured project note ............................ 843 1,147 ------- ------- Total liabilities ................................... 1,154 4,636 ------- -------
Commitments and contingencies (Note 3 and 4)
Members' equity: Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding ................. -- -- Additional paid-in capital ........................... 1,561 1,561 Retained earnings .................................... 81,274 73,103 ------- ------- Total members' equity .............................. 82,835 74,664 ------- ------- TOTAL LIABILITIES AND MEMBERS' EQUITY .................. $83,989 $79,300 ======= =======
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
2002 2001 2000 ------- ------- -------
REVENUE - ROYALTY INCOME ....................... $12,577 $16,882 $14,130 COSTS AND EXPENSES: Operating, general and administrative expenses 3,280 4,420 3,859 Amortization of royalty stream and goodwill .. 854 1,762 1,965 Interest expense ............................. 272 608 954 ------- ------- ------- Total costs and expenses ................... 4,406 6,790 6,778 ------- ------- ------- NET INCOME ..................................... $ 8,171 $10,092 $ 7,352 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC STATEMENTS OF MEMBERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands, share amounts)
COMMON STOCK ADDITIONAL ---------------- PAID-IN RETAINED TOTAL SHARES AMOUNT CAPITAL EARNINGS EQUITY ------- ------ ---------- -------- -------
Balance, January 1, 2000 ... 100 $ -- $1,561 $55,659 $57,220
Net income ............... -- -- -- 7,352 7,352 ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 2000 .. 100 -- 1,561 63,011 64,572
Net income ............... -- -- -- 10,092 10,092 ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 2001 .. 100 -- 1,561 73,103 74,664
Net income ............... -- -- -- 8,171 8,171 ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 2002 .. 100 $ -- $1,561 $81,274 $82,835 ====== ====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (Amounts in thousands)
The accompanying notes are an integral part of these financial statements.
SALTON SEA ROYALTY LLC NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Salton Sea Royalty LLC (the "Royalty Company") is a special-purpose entity, 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation"). Magma is a wholly-owned subsidiary of CE Generation, LLC ("CE Generation") which is owned equally by MidAmerican Energy Holdings Company ("MEHC") and El Paso Merchant Energy North America Company ("EPME") an indirect subsidiary of El Paso Corporation ("El Paso").
The Royalty Company receives an assignment of royalties and certain fees paid by three partnership projects, Del Ranch, Elmore and Leathers (collectively, the "Partnership Projects"). All of the Partnership Projects are engaged in the operation of geothermal power plants in the Imperial Valley in Southern California. Substantially all of the assigned royalties are based on a percentage of energy and capacity revenue of the Partnership Projects.
Each of the Partnership Projects, sells electricity generated by the respective plants pursuant to four long-term power purchase agreements ("SO4 Agreements") between the projects and Southern California Edison Company ("Edison"). These SO4 Agreements provide for capacity payments, capacity bonus payments and energy payments. Edison makes fixed annual capacity payments to the projects, and to the extent that capacity factors exceed certain benchmarks is required to make capacity bonus payments. The price for capacity and capacity bonus payments is fixed for the life of the SO4 Agreements. Energy is sold at increasing fixed rates for the first ten years of each contract and thereafter at a rate based on the cost that Edison avoids by purchasing energy from the project instead of obtaining the energy from other sources ("Avoided Cost of Energy"). The fixed energy price periods of the Partnership Project SO4 Agreements extended until February 1996, December 1998 for Del Ranch and Elmore, and December 1999 for the Leathers Partnership. In June and November 2001, the Partnership Projects entered into agreements that provide for a fixed energy payment per kilowatt-hour ("kWh") in lieu of Edison's Avoided Cost of Energy. The fixed energy payments were 3.25 cents per kWh from December 1, 2001 through April 30, 2002 and 5.37 cents per kWh commencing May 1, 2002 for a five-year period. Following the five-year period, the energy payment reverts back to Edison's Avoided Cost of Energy.
For the year ended December 31, 2002, 2001 and 2000, Edison's average Avoided Cost of Energy was 3.5 cents, 7.4 cents and 5.8 cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Royalty Company cannot predict the likely level of Avoided Cost of Energy prices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impairment of Long-Lived Assets - -------------------------------
The Royalty Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized, based on discounted cash flows or various models, whenever evidence exists that the carrying value is not recoverable.
Excess of Cost over Fair Value of Net Assets Acquired - -----------------------------------------------------
On January 1, 2002, the Royalty Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. The Royalty Company's related amortization consists solely of goodwill amortization, which has no income tax effect. In accordance with SFAS 142, the Royalty Company completed its initial goodwill impairment test, as of January 1, 2002, and its annual goodwill impairment test, as of October 31, 2002, during the fourth quarter of 2002, primarily using a discounted cash flow methodology. No impairment was indicated as a result of the impairment tests.
Following is a reconciliation of net income as originally reported for the years ended December 31, 2002, 2001 and 2000, to adjusted net income (in thousands):
2002 2001 2000 ------ ------- ------
Reported net income ..... $8,171 $10,092 $7,352 Goodwill amortization -- 908 908 ------ ------- ------ Adjusted net income ..... $8,171 $11,000 $8,260 ====== ======= ======
Fair Values of Financial Instruments - ------------------------------------
Fair values have been estimated based on quoted market prices for debt issues listed on exchanges. Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values.
Royalty Stream - --------------
The Royalty Company's policy is to provide amortization expense beginning upon the commencement of revenue production over the estimated remaining useful life of the identifiable assets.
The royalty streams have been assigned values separately for each of (1) the remaining portion of the fixed price periods of the Projects' power sales agreements and (2) the 20-year avoided cost periods of the Projects' power sales agreements and are amortized separately over such periods using the straight line method. At December 31, 2002 and 2001, accumulated amortization was $46.5 million and $45.8 million, respectively.
Basis of Presentation - ---------------------
The accompanying statement of operations presents revenue and expenses, which have been assigned to the Royalty Company under the arrangements described above on the accrual method of accounting. This presentation is a "carve out" of information from Magma and certain of its affiliates. Such revenue, net of related expenses, guarantee loans from the Funding Corporation, a wholly-owned subsidiary of Magma.
The financial statements reflect the acquisition of Magma and the resulting push down to the Royalty Company of the accounting as a purchase business combination.
Income taxes are the responsibility of the partners and the Royalty Company has no obligation to provide funds to the partners for payment of any tax liabilities. Accordingly, the Royalty Company has no tax obligations.
Reclassifications - -----------------
Certain reclassifications were made to the 2001 and 2000 financial statements to conform to the 2002 presentation.
Use of Estimates - ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - -----------------------------
In August 2001, the Financial Accounting Standards Board ("FASB"), issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Additionally, at the time an asset retirement obligation ("ARO"), is recognized, an ARO asset of the same amount is recorded and depreciated. This pronouncement is effective for fiscal years beginning after June 15, 2002. The Royalty Company does not expect the adoption of SFAS 143 to have a material effect on its financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Royalty Company does not expect the adoption of FIN 45 will have a material effect on its financial position, results of operations, or cash flows.
3. SENIOR PROJECT NOTE
The Royalty Company has a project note payable to Funding Corporation at an interest rate of 7.37%. Principal maturities of the senior secured project note are as follows (in thousands):
AMOUNTS ------
2003....... $ 304 2004....... 408 2005....... 435 ------ Total ..... $1,147 ======
The estimated fair values of the senior secured project note at December 31, 2002 and 2001 were $1.1 million and $4.6 million, respectively.
The Royalty Company has also guaranteed, along with other guarantors, the debt of Funding Corporation, which amounted to $491.7 million at December 31, 2002. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of stock in the Royalty Company. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets.
4. CONTINGENCY
Edison is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million owed under the power purchase agreements with certain Guarantors Partnership Projects for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Guarantors had established an allowance for doubtful accounts of approximately $21.0 million as of December 31, 2001.
The final payment of past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Guarantors released the remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at Salton Sea Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such cash distributions are not available to CE Generation until the Salton Sea Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. The fund has a cash balance of $48.5 million as of December 31, 2002.
5. SUBSEQUENT EVENTS
On January 29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the current executive officers of the Funding Corporation and the Guarantors and their positions with the Funding Corporation and each of the Guarantors (or general partner thereof):
EXECUTIVE OFFICER POSITION
Edward J. Heinrich President Gregory E. Abel* Director and President Wayne F. Irmiter Vice President and Controller Douglas L. Anderson Director and Senior Vice President Ian A. Bourne Director J. Thomas Coyle Director Patrick J. Goodman Director
* Gregory E. Abel is Director of CalEnergy Minerals and Salton Sea Minerals Corp. only.
EDWARD J. HEINRICH, 49, President of CE Generation and each Guarantor subsidiary, is responsible for independent power plant operations and construction in the United States. Mr. Heinrich joined the company in November 1993. From December 1987 to October 1993, he was site manager for Sithe Energies U.S.A., Inc., a non-utility developer of power facilities. Prior to that, Mr. Heinrich worked in engineering for the U.S. Navy, with a focus on turbine-powered ships. Mr. Heinrich has also served as a project manager for Sundt Corporation, a construction and construction management company.
GREGORY E. ABEL, 40, Director for CalEnergy Minerals and Salton Sea Minerals Corp. only. Mr. Abel joined MEHC in 1992. Mr. Abel is a Chartered Accountant and from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the San Francisco office of Price Waterhouse, he was responsible for clients in the energy industry.
WAYNE F. IRMITER, 37, Vice President and Controller. Mr. Irmiter joined MEHC as Vice President and Chief Accounting Officer in November 2002. Mr. Irmiter is a Certified Public Accountant and from 1988 to 1993 he worked in public accounting. Most recently, Mr. Irmiter was with Gateway, Inc. in various management positions including Director-Strategic Initiatives and Director-Finance.
DOUGLAS L. ANDERSON, 45, Director, Senior Vice President and General Counsel of CalEnergy Minerals and Salton Sea Minerals Corp and Director, Senior Vice President and General Counsel of the other Guarantor subsidiaries. Mr. Anderson joined MEHC in February 1993. From 1990 to 1993, Mr. Anderson was a business attorney with Fraser, Stryker in Omaha. Prior to that Mr. Anderson was a principal in the firm Anderson & Anderson.
IAN A. BOURNE, 55, Executive Vice President and Chief Financial Officer of TransAlta and a director of CE Generation and each Guarantor subsidiary. Mr. Bourne joined TransAlta in January 1998 as senior vice president and chief financial officer and was appointed to his current position June 1, 1998. Immediately prior to joining TransAlta, Mr. Bourne had been senior vice- president and chief financial officer of Canada Post Corporation from 1992. Prior to 1992 Mr. Bourne gained extensive financial experience with General Electric, including positions as European treasurer, based in London; chief financial officer for GE Canada, and chief financial officer for GE Medical Systems Europe, based in Paris.
J. THOMAS COYLE, 55, President of TransAlta Energy Marketing U.S. Inc. and a director of CE Generation and each assigning subsidiary. Mr. Coyle joined TransAlta in 1998 as Director, Risk Portfolio Management, Energy Marketing. Prior to joining TransAlta, Mr. Coyle held variouspositions at Petro-Canada from 1986 to 1997 including Portfolio Manager - Natural Gas Marketing, Manager Market Development - Natural Gas Marketing and Risk Manager.
PATRICK J. GOODMAN, 36, Director. Mr. Goodman joined MEHC in June 1995, and served in various accounting positions including Senior Vice President and Chief Accounting Officer. Mr. Goodman was promoted to Chief Financial Officer in April 1999. Prior to joining MEHC, Mr. Goodman was a financial manager for National Indemnity Company and a senior associate at Coopers & Lybrand.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Funding Corporation's and the Guarantors' directors and executive officers receive no remuneration for serving in such capacities.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Description of Capital Stock - ----------------------------
As of December 31, 2002, the authorized capital stock of the Funding Corporation consisted of 1,000 shares of common stock, par value $0.01 per share (the "Common Stock"), of which 100 shares were outstanding. There is no public trading market for the Common Stock. As of December 31, 2002, there was one holder of record of the Common Stock. Holders of Common Stock are entitled to one vote per share on any matter coming before the stockholders for a vote.
The Funding Corporation does not expect in the foreseeable future to pay any dividends on the Common Stock. The Indenture contains certain restrictions on the payment of dividends with respect to the Common Stock.
Principal Holders - -----------------
Since the formation of the Funding Corporation in June 1995, all of the outstanding shares of Common Stock have been owned by Magma. Magma directly or indirectly owns all of the capital stock of or partnership interests in the Funding Corporation and the Guarantors.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other Relationships and Related Transactions - --------------------------------------------
The Salton Sea Projects' and the Partnership Projects' geothermal power plants are owned, administered and operated by Magma or subsidiaries of Magma. Geothermal fluid supplying these facilities is provided from Magma's (or a subsidiary's) geothermal resource holdings in the SSKGRA.
In providing rights to geothermal resources and/or geothermal fluids, administering and operating the geothermal power plants, and disposing of solids from these facilities, Magma (directly and through subsidiaries) receives certain royalties, cost reimbursements and fees for its services and the rights it provides. See the financial statements in Item 8.
The Funding Corporation believes that the transactions with related parties described above, taking into consideration all of the respective terms and conditions of each of the relevant contracts and agreements, are at least as favorable to the Guarantors as those which could have been obtained from unrelated parties in arms' length negotiations.
Relationship of the Funding Corporation and the Guarantors to Magma and MEHC - ----------------------------------------------------------------------------
The Funding Corporation is a wholly owned direct subsidiary of Magma organized for the sole purpose of acting as issuer of the Securities. The Funding Corporation is restricted, pursuant to the terms of the Indenture, to acting as
issuer of the Securities and other indebtedness as permitted under the Indenture, making loans to the Guarantors pursuant to the Credit Agreements, and transactions related thereto. The Funding Corporation and each of the Guarantors (and, in the case of SSBP, SSPG, Elmore, Leathers, Del Ranch and Vulcan, the general partners thereof) have been organized and are operated as legal entities separate and apart from MEHC, El Paso, CE Generation, Magma and any other Affiliates of MEHC, El Paso, CE Generation or Magma, and, accordingly, the assets of the Funding Corporation and the Guarantors (and, in the case of SSBP, SSPG, Elmore, Leathers, Del Ranch and Vulcan, the general partners thereof) will not be generally available to satisfy the obligations of MEHC, El Paso, CE Generation, Magma or any other Affiliates of MEHC, El Paso, CE Generation or Magma; provided, however, that unrestricted cash of the Funding Corporation and the Guarantors or other assets which are available for distribution may, subject to applicable law and the terms of financing arrangements of such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to MEHC, El Paso, CE Generation, Magma or Affiliates thereof.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
a) Evaluation of disclosure controls and procedures: Based on the Company's evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) Financial Statements and Schedules
(i) Financial Statements
Financial Statements are included in Part II of this Form 10-K
(ii) Financial Statement Schedules
See schedule II on page 109.
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on November 14, 2002.
c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of this Annual Report.
For the purposes of complying with the amendments to the rules governing Form S-4 effective July 13, 1990 under the Securities Act of 1933, the undersigned hereby undertakes as follows, which undertaking shall be incorporated by reference into the Funding Corporation's currently effective Registration Statements on Form S-4.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
d) Financial statements required by Regulations S-X, which are excluded from the Annual Report by Rule 14a-3(b).
Not Applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA FUNDING CORPORATION
By:/s/ Edward J. Heinrich ------------------------ Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA BRINE PROCESSING, L.P. a California limited partnership
By: Salton Sea Power Company, a California corporation, its general partner
By:/s/ Edward J. Heinrich ------------------------ Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA POWER GENERATION, L.P., a California limited partnership
By: Salton Sea Power Company, a California corporation, its general partner
By:/s/ Edward J. Heinrich ------------------------ Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
FISH LAKE POWER LLC
By:/s/ Edward J. Heinrich ------------------------ Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
VULCAN POWER COMPANY
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
CALENERGY OPERATING CORPORATION
By:/s/ Edward J. Heinrich ---------------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA ROYALTY LLC
By:/s/ Edward J. Heinrich ------------------------ Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
LEATHERS, L.P., a California limited partnership
By: CalEnergy Operating Corporation, a Delaware corporation, its general partner
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
ELMORE L.P., a California limited partnership
By: CalEnergy Operating Corporation, a Delaware corporation, its general partner
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
DEL RANCH L.P., a California limited partnership
By: CalEnergy Operating Corporation, a Delaware corporation, its general partner
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ------------------------ Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------ Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - ------------------------ J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
VPC GEOTHERMAL LLC., a Delaware corporation
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
NIGUEL ENERGY COMPANY, a California corporation
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
CONEJO ENERGY COMPANY, a California corporation
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SAN FELIPE ENERGY COMPANY, a California corporation
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
VULCAN/BN GEOTHERMAL POWER COMPANY, a Nevada general partnership
By: VULCAN POWER COMPANY, a Nevada corporation, Partner
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA POWER L.L.C., a Delaware Limited Liability Company
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
CE TURBO LLC, a Delaware Limited Liability Company
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
CE SALTON SEA INC., a Delaware Corporation
By:/s/ Edward J. Heinrich ----------------------- Edward J. Heinrich President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - -------------------------------------------------------------------------- /s/ Edward J. Heinrich March 28, 2003 - ----------------------- Edward J. Heinrich President (Principal Executive Officer)
/s/ Wayne F. Irmiter March 28, 2003 - ---------------------- Wayne F. Irmiter Vice President and Controller (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director
/s/ Ian A Bourne* March 28, 2003 - ----------------- Ian A. Bourne Director
/s/ J. Thomas Coyle* March 28, 2003 - --------------------------- J. Thomas Coyle Director
/s/ Patrick J. Goodman March 28, 2003 - ------------------------ Patrick J. Goodman Director
* By: /s/ Douglas L. Anderson Douglas L. Anderson Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
CALENERGY MINERALS LLC, a Delaware Limited Liability Company
By: /s/ Gregory E. Abel ---------------------- Gregory E. Abel Director and President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Gregory E. Abel March 28, 2003 - ------------------- Gregory E. Abel Director and President (Principal Executive Officer)
/s/ Patrick J. Goodman March 28, 2003 - ----------------------- Patrick J. Goodman Director, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director, Senior Vice President and General Counsel
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 28, 2003.
SALTON SEA MINERALS CORP., a Delaware Corporation
By: /s/ Gregory E. Abel ---------------------- Gregory E. Abel Director and President
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated.
Signature Date - --------------------------------------------------------------------------
/s/ Gregory E. Abel March 28, 2003 - ------------------- Gregory E. Abel Director and President (Principal Executive Officer)
/s/ Patrick J. Goodman March 28, 2003 - ----------------------- Patrick J. Goodman Director, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)
/s/ Douglas L. Anderson March 28, 2003 - ------------------------- Douglas L. Anderson Director, Senior Vice President and General Counsel
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Edward J. Heinrich, certify that:
1. I have reviewed this annual report on Form 10-K of Salton Sea Funding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Edward J. Heinrich ----------------------------- Edward J. Heinrich President (principal executive officer)
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Wayne F. Irmiter, certify that:
1. I have reviewed this annual report on Form 10-K of Salton Sea Funding Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Wayne F. Irmiter ----------------------------- Wayne F. Irmiter Vice President and Controller (principal financial officer)
SCHEDULE II
SALTON SEA FUNDING CORPORATION CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------- ---------- --------- --------- -------- Balance at Additions Beginning Charged to Balance at Year Income Deductions End of Year ---------- ---------- ---------- ---------- Allowance for doubtful accounts Salton Sea Guarantors:
Year ended 2002 ............ $ 9,829 $ -- $ 6,029 $ 3,800 ======== ======== ======== ========
Year ended 2001 ............ $ -- $ 9,829 $ -- $ 9,829 ======== ======== ======== ========
Year ended 2000 ............ $ -- $ -- $ -- $ -- ======== ======== ======== ========
Partnership Guarantors:
Year ended 2002 .............. $ 14,925 $ -- $ 12,229 $ 2,696 ======== ======== ======== ========
Year ended 2001 .............. $ -- $ 14,925 $ -- $ 14,925 ======== ======== ======== ========
Year ended 2000 .............. $ -- $ -- $ -- $ -- ======== ======== ======== ========
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit - ----------- -----------------------
3.1 Articles of Incorporation of the Funding Corporation (incorporated by reference to Exhibit 3.1 to the Funding Corporation Registration Statement on Form S-4 dated August 9, 1995, 33-95538 ("Form S-4")).
3.2 By-laws of the Funding Corporation (incorporated by reference to Exhibit 3.2 to the Funding Corporation Form S-4).
3.3 Limited Partnership Agreement of SSBP (incorporated by reference to Exhibit 3.3 to the Funding Corporation Form S-4).
3.4 Limited Partnership Agreement of SSPG (incorporated by reference to Exhibit 3.4 to the Funding Corporation Form S-4).
3.5 Certificate of Formation of Fish Lake, LLC (incorporated by reference to Exhibit 3.5 to the Amendment No. 1 dated June 29, 1999 of the Funding Corporation Form S-4 ("99 Form S 4)).
3.6 Limited Liability Company Agreement of Fish Lake (incorporated by reference to Exhibit 3.6 to the Funding Corporation Form 99 Form S-4).
3.7 Articles of Incorporation of VPC (incorporated by reference to Exhibit 3.7 to the Funding Corporation Form S-4).
3.8 By-laws of VPC (incorporated by reference to Exhibit 3.8 to the Funding Corporation Form S-4).
3.9 Articles of Incorporation of CEOC (incorporated by reference to Exhibit 3.9 to the Funding Corporation Form S-4).
3.10 By-laws of CEOC (incorporated by reference to Exhibit 3.10 to the Funding Corporation Form S-4).
3.11 Certificate of Formation of the Royalty Guarantor (incorporated by reference to Exhibit 3.11 to the Funding Corporation 99 Form S-4).
3.12 Limited Liability Company Agreement of the Royalty Guarantor (incorporated by reference to Exhibit 3.12 to the Funding Corporation 99 Form S-4).
3.13 Certificate of Formation of VPC Geothermal (incorporated by reference to Exhibit 3.13 to the Funding Corporation 99 Form S 4).
3.14 Limited Liability Company Agreement of VPG Geothermal (incorporated by reference to Exhibit 3.14 to the Funding Corporation 99 Form S-4).
3.15 Articles of Incorporation of San Felipe (incorporated by reference to Exhibit 3.15 to the Funding Corporation Registration Statement of Form S-4 dated July 2, 1996, 333-07527 ("Funding Corporation II Form S-4")).
3.16 By-laws of San Felipe (incorporated by reference to Exhibit 3.16 to the Funding Corporation II Form S-4).
3.17 Articles of Incorporation of Conejo (incorporated by reference to Exhibit 3.17 to the Funding Corporation II Form S-4).
3-18 By-laws of Conejo (incorporated by reference to Exhibit 3.18 to the Funding Corporation II Form S-4).
3.19 Articles of Incorporation of Niguel (incorporated by reference to Exhibit 3.19 to the Funding Corporation II Form S-4).
3.20 By-laws of Niguel (incorporated by reference to Exhibit 3.20 to the Funding Corporation II Form S-4).
3.21 General Partnership Agreement of Vulcan (incorporated by reference to Exhibit 3.21 to the Funding Corporation II Form S-4).
3.22 Limited Partnership Agreement of Leathers (incorporated by reference to Exhibit 3.22 to the Funding Corporation II Form S-4).
3.23 Amended and Restated Limited Partnership Agreement of Del Ranch (incorporated by reference to Exhibit 3.23 to the Funding Corporation II Form S-4).
3.24 Amended and Restated Limited Partnership Agreement of Elmore (incorporated by reference to Exhibit 3.24 to the Funding Corporation II Form S-4).
3.25 Certificate of Formation of CalEnergy Minerals LLC (incorporated by reference to Exhibit 3.25 to the Funding Corporation 99 Form S-4)
3.26 Limited Liability Company Agreement of CalEnergy Minerals LLC (incorporated by reference to Exhibit 3.26 to the Funding Corporation 99 Form S-4).
3.27 Certificate of Formation of CE Turbo LLC (incorporated by reference to Exhibit 3.27 to the Funding Corporation 99 Form S-4).
3.28 Limited Liability Company Agreement of CE Turbo LLC (incorporated by reference to Exhibit 3.28 to the Funding Corporation 99 Form S-4).
3.29 Articles of Incorporation of CESS (incorporated by reference to Exhibit 3.29 to the Funding Corporation 99 Form S-4).
3.30 By-laws of CESS (incorporated by reference to Exhibit 3.30 to the Funding Corporation 99 Form S-4).
3.31 Articles of Incorporation of SSMC (incorporated by reference to Exhibit 3.31 to the Funding Corporation 99 Form S-4).
3.32 By-laws of SSMC (incorporated by reference to Exhibit 3.32 to the Funding Corporation 99 Form S-4).
3.33 Certificate of Formation of Power LLC (incorporated by reference to Exhibit 3.33 to the Funding Corporation 99 Form S-4).
3.34 Limited Liability Company Agreement of Power LLC (incorporated by reference to Exhibit 3.34 to the Funding Corporation 99 Form S-4).
4.1(a) Indenture, dated as of July 21, 1995, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(a) to the Funding Corporation Form S-4).
4.1(b) First Supplemental Indenture, dated as of October 18, 1995, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(b) to the Funding Corporation Form S-4).
4.1(c) Second Supplemental Indenture, dated as of June 20, 1996, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(c) to the Funding Corporation II Form S-4).
4.1(d) Third Supplemental Indenture between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(d) to the Funding Corporation II Form S-4).
4.1(e) Fourth Supplemental Indenture between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(e) to the Funding Corporation Form 10-K/A for the year ending December 31, 1998).
4.2 Amended and Restated Salton Sea Secured Guarantee, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.2 to the Funding Corporation Form S-4).
4.3 Second Amended and Restated Partnership Secured Limited Guarantee, dated as of October 13, 1998 by CEOC, and VPC, Conejo, Niguel, Sal Felipe, BNG, Del Ranch, Elmore, Leathers and Vulcan in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.3(c) to the Funding Corporation Form 10-K/A for the year ending December 31, 1998).
4.4 Royalty Guarantor Secured Limited Guarantee, dated as of July 21, 1995, by the Royalty Guarantor in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.4 to the Funding Corporation Form S-4).
4.5(a) Exchange and Registration Rights Agreement, dated July 21, 1995, by and among CS First Boston Corporation, Lehman Brothers Inc. and the Funding Corporation (incorporated by reference to Exhibit 4.5 to the Funding Corporation Form S-4).
4.5(b) Exchange and Registration Rights Agreement, dated June 20, 1996, by and between CS First Boston Corporation and the Funding Corporation (incorporated by reference to Exhibit 4.5 to the Funding Corporation II Form S-4).
4.5(c) Exchange and Registration Rights Agreement, dated October 13, 1998 by and among CS First Boston Corporation, Goldman Sachs & Co., and the Funding Corporation (incorporated by reference to Exhibit 4.5(c) of the 99 Form S-4).
4.6(a) Collateral Agency and Intercreditor Agreement, dated as of July 21, 1995, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.6 to the Funding Corporation Form S-4).
4.6(b) First Amendment to the Collateral Agency and Intercreditor Agreement, dated as of June 20, 1996, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.6(b) to the Funding Corporation II Form S-4).
4.6(c) Second Amendment to the Collateral Agency and Intercreditor Agreement, dated as of October 13, 1998, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.6(c) to the Funding Corporation Form 10-K/A for the year ending December 31, 1998).
4.7 Stock Pledge Agreement, dated as of July 21, 1995, by Magma Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.7 to the Funding Corporation Form S-4).
4.8(a) Purchase Agreement, dated July 18, 1995, by and among CS First Boston Corporation, Lehman Brothers Inc., the Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.8 to the Funding Corporation Form S-4).
4.8(b) Purchase Agreement, dated June 17, 1996, by and among CS First Boston Corporation, the Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.8 to the Funding Corporation II Form S-4).
4.8(c) Purchase Agreement, dated October 13, 1998 by and among CS First Boston Corporation, the Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.8(c) to the Funding Corporation Form 10-K/A for the year ending December 31, 1998).
4.9 Support Letter, dated as of July 21, 1995, by and among Magma Power Company, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.9 to the Funding Corporation Form S-4).
4.10 Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated as of July 21, 1995, by and among the Funding Corporation, certain banks and Credit Suisse, as agent (incorporated by reference to Exhibit 4.10 to the Funding Corporation Form S-4).
4.10(a) Amendment to Notes and to Amended Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated October 13, 1998, by and among the Funding Corporation, certain banks and Credit Suisse, as agent (incorporated by reference to Exhibit 4.10(a) to the Funding Corporation Form 10-K/A for the year ending December 31, 1998).
4.11 Revolving Credit Agreement, dated as of July 21, 1995, by and among Credit Suisse and the Funding Corporation (incorporated by reference to Exhibit 4.11 to the Funding Corporation Form S-4).
4.12 Amended and Restated Salton Sea Credit Agreement, dated October 13, 1998, by and among SSBP, SSPG, Power LLC and Fish Lake (incorporated by reference to Exhibit 4.12 to the Funding Corporation 99 Form S-4).
4.13 Salton Sea Project Note (SSI), dated October 13, 1998, by SSBP, SSPG, Power LLC and Fish Lake in favor of the Funding Corporation (incorporated by reference to Exhibit 4.13 to the Funding Corporation 99 Form S-4).
4.13a Salton Sea Project Note (SSIII), dated October 13, 1998, by SSBP, SSPG, Power LLC and Fish Lake in favor of the Funding Corporation (incorporated by reference to Exhibit 4.13(a) to the Funding Corporation 99 Form S-4).
4.14 Amended and Restated Deposit and Disbursement Agreement, dated as of October 13, 1998, by and among the Funding Corporation, Chemical Trust Company of California and the Guarantors. (incorporated by reference to Exhibit 4.14 to the Funding Corporation 99 Form S-4).
4.15 Partnership Interest Pledge Agreement, dated as of July 21, 1995, by Magma Power Company and Salton Sea Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.15 to the Funding Corporation Form S-4).
4.16 Partnership Interest Pledge Agreement, dated as of July 21, 1995, by SSBP and Salton Sea Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.16 to the Funding Corporation Form S-4).
4.17 Stock Pledge Agreement (Pledge of Stock of Fish Lake by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.17 to the Funding Corporation Form S-4).
4.18 Cost Overrun Commitment, dated as of July 21, 1995, between MidAmerican, SSPG, SSBP and Fish Lake (incorporated by reference to Exhibit 4.18 to the Funding Corporation Form S-4).
4.19 Second Amended and Restated Partnership Guarantors Credit Agreement, dated October 13, 1998, by and among the Partnership Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.19(c) to the Funding Corporation Form 10-K/A).
4.20 Partnership Guarantors Security Agreement and Assignment of Rights, dated as of July 21, 1995, by CEOC and VPC in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.20 to the Funding Corporation Form S-4).
4.21 Stock Pledge Agreement (Pledge of Stock of CEOC by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.21 to the Funding Corporation Form S-4).
4.22 Stock Pledge Agreement (Pledge of Stock of VPC by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.22 to the Funding Corporation Form S-4).
4.23 Royalty Guarantor Credit Agreement, among the Royalty Guarantor and the Funding Corporation, dated as of July 21, 1995 (incorporated by reference to Exhibit 4.23 to the Funding Corporation Form S-4).
4.24 Royalty Project Note, dated as of July 21, 1995, by the Royalty Guarantor in favor of the Funding Corporation (incorporated by reference to Exhibit 4.24 to the Funding Corporation Form S-4).
4.25 Royalty Security Agreement and Assignment of Revenues, dated as of July 21, 1995, by the Royalty Guarantor in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.25 to the Funding Corporation Form S-4).
4.26 Royalty Deed of Trust, dated as of July 21, 1995, by the Royalty Guarantor to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.26 to the Funding Corporation Form S-4).
4.27 Stock Pledge Agreement (Pledge of Stock of Royalty Guarantor by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.27 to the Funding Corporation Form S-4).
4.28 Collateral Assignment of the Imperial Irrigation District Agreements, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.28 to the Funding Corporation Form S-4).
4.29 Collateral Assignments of Certain Salton Sea Agreements, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.29 to the Funding Corporation Form S-4).
4.30 Debt Service Reserve Letter of Credit by Credit Suisse in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.30 to the Funding Corporation Form S-4).
4.31 Partnership Project Note (SSI), dated October 13, 1998, by VPC and CEOC, Conejo, San Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation (incorporated by reference to Exhibit 4.31(a) to the Funding Corporation Form 10-K/A).
4.31(a) Partnership Project Note (SSII), dated October 13, 1998, by VPC and CEOC, Conejo, San Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation (incorporated by reference to Exhibit 4.31(b) to the Funding Corporation Form 10-K/A).
4.31(b) Partnership Project Note (SSIII), dated October 13, 1998, by VPC and CEOC, Conejo, San Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation (incorporated by reference to Exhibit 4.31(c) to the Funding Corporation Form 10-K/A).
4.32 Collateral Assignment of the Imperial Irrigation District Agreements, dated as of June 20, 1996, by Vulcan, Elmore, Leathers, VPC and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.29 to the Funding Corporation II Form S-4).
4.33 Collateral Assignments of Certain Partnership Agreements, dated as of June 20, 1996, by Vulcan Elmore, Leathers and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.31 to the Funding Corporation II Form S-4).
4.34 Debt Service Reserve Letter of Credit by Credit Suisse in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.32 to the Funding Corporation II Form S-4).
4.35 Intentionally Omitted
4.36 Intentionally Omitted
4.37 Deed of Trust, dated as of June 20, 1996, by Vulcan to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.35 to the Funding Corporation II Form S-4).
4.37(a) First Amendment to Deed of Trust, dated October 13, 1998 by Vulcan to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.37(a) to the Form 10-K/A).
4.38 Deed of Trust, dated as of June 20, 1996, by Elmore to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.36 to the Funding Corporation II Form S-4).
4.38(a) First Amendment to Deed of Trust, dated October 13, 1998, by Elmore to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.38(a) to the Form 10-K/A).
4.39 Deed of Trust, dated as of June 20, 1996, by Leathers to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.37 to the Funding Corporation II Form S-4).
4.39(a) First Amendment to Deed of Trust, dated October 13, 1998, by Leathers to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.39(a) to the Form 10-K/A).
4.40 Deed of Trust, dated as of June 20, 1996, by Del Ranch to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.38 to the Funding Corporation II Form S-4).
4.40(a) First Amendment to Deed of Trust, dated October 13, 1998, by Del Ranch to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.40(a) to the Form 10-K/A).
4.41 Stock Pledge Agreement, Dated as of June 20, 1996, by CEOC, pledging the stock of Conejo, Niguel and San Felipe in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.39 to the Funding Corporation II Form S-4).
4.42 Stock Pledge Agreement, dated as of June 20, 1996, by VPC, pledging the stock of BNG in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.40 to the Funding Corporation II Form S-4).
4.43 Partnership Interest Pledge Agreement, dated as of June 20, 1996, by VPC and BNG, pledging the partnership interests in Vulcan in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.41 to the Funding Corporation II Form S-4).
4.44 Partnership Interest Pledge Agreement, dated as of June 20, 1996, by Magma, CEOC and each of Conejo, Niguel, San Felipe, respectively, pledging the partnership interests in Del Ranch, Elmore and Leathers, respectively, in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.42 to the Funding Corporation II Form S-4).
4.45 Agreement regarding Security Documents, dated as of June 20, 1996, by and among the Initial Guarantors, Magma, SSPC, the Funding Corporation and Chemical Trust Company of California (incorporated by reference to Exhibit 4.45 to the Funding Corporation II Form S-4).
5.1 Opinion of Willkie Farr & Gallagher (incorporated by reference to Exhibit 5.1 of the 99 Form S-4).
5.2 Opinion of Latham & Watkins (incorporated by reference to Exhibit 5.2 of the 99 Form S-4).
5.3 Opinion of Lionel Sawyer & Collines (incorporated by reference to Exhibit 5.3 of the 99 Form S-4).
10.1(a) Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 10.1 to the Funding Corporation Form S-4) .
10.1(b) First Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixed Filing, dated as of June 20, 1996, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 10.2 to the Funding Corporation II Form S-4).
10.1(c) Second Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixed Filing, dated as of October 13, 1998, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 10.1(c) to the Form 10-K/A).
10.2 Collateral Assignment of Southern California Edison Company Agreements, dated as of July 21, 1995, by SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 10.3 to the Funding Corporation Form S-4).
10.3 Contract for the Purchase and Sale of Electric Power from the Salton Sea Geothermal Facility, dated May 9, 1987 (the "Unit 1 Power Purchase Agreement"), between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.4 to the Funding Corporation Form S-4).
10.4 Amendment No. 1 to the Unit 1 Power Purchase Agreement, dated as of March 30, 1993, between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.5 to the Funding Corporation Form S-4).
10.5 Amendment No. 2 to Unit 1 Power Purchase Agreement, dated November 29, 1994, between Southern California Edison Company and SSPG (incorporated by reference to Exhibit 10.6 to the Funding Corporation Form S-4).
10.6 Contract for the Purchase and Sale of Electric Power, dated April 16, 1985 (the "Unit 2 Power Purchase Agreement"), between Southern California Edison Company and Westmoreland Geothermal Associates (incorporated by reference to Exhibit 10.7 to the Funding Corporation Form S-4).
10.7 Amendment No. 1 to Unit 2 Power Purchase Agreement, dated as of December 18, 1987, between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.8 to the Funding Corporation Form S-4).
10.8 Power Purchase Contract, dated April 16, 1985 (the "Unit 3 Power Purchase Agreement"), between Southern California Edison Company and Union Oil Company of California (incorporated by reference to Exhibit 10.9 to the Funding Corporation Form S-4).
10.9 Power Purchase Contract (the "Unit 4 Power Purchase Agreement"), dated November 29, 1994, between Southern California Edison Company, SSPG and Fish Lake (incorporated by reference to Exhibit 10.10 to the Funding Corporation Form S-4).
10.10 Plant Connection Agreement (Unit 2), dated October 3, 1989, between the Imperial Irrigation District and Earth Energy, Inc. (incorporated by reference to Exhibit 10.11 to the Funding Corporation Form S-4).
10.11 Plant Connection Agreement, dated August 2, 1988 (Unit 3), between the Imperial Irrigation District and Desert Power Company (incorporated by reference to Exhibit 10.12 to the Funding Corporation Form S-4).
10.12 Imperial Irrigation District Funding and Construction Agreements as amended (Units 2 and 3), dated as of June 29, 1987, among the Imperial Irrigation District, Earth Energy, Inc., Chevron Geothermal Company of California, Geo East Mesa No. 3, Inc., Magma Power Company, Desert Power Company, Geo East Mesa No. 2, Inc., Heber Geothermal Company, Ormesa Geothermal, Ormesa Geothermal II, Vulcan/BN Geothermal Power Company, Union Oil Company of California, Del Ranch L.P., Elmore L.P., Leathers L.P., Geo East Mesa Limited Partnership and Imperial Resource Recovery Associates, L.P. (incorporated by reference to Exhibit 10.13 to the Funding Corporation Form S-4).
10.13 Transmission Service Agreement, dated as of October 3, 1989 (Unit 2), between the Imperial Irrigation District and Earth Energy, Inc. (incorporated by reference to Exhibit 10.14 to the Funding Corporation Form S-4).
10.14 Transmission Service Agreement, dated as of August 2, 1988 (Unit 3), between the Imperial Irrigation District and Desert Power Company (incorporated by reference to Exhibit 10.15 to the Funding Corporation Form S-4).
10.15 Plant Connection Agreement (Unit 4), dated as of July 14, 1995, by and between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.16 to the Funding Corporation Form S-4).
10.16 Letter Agreement, dated February 2, 1995, between Magma Power Company and the Imperial Irrigation District (incorporated by reference to Exhibit 10.17 to the Funding Corporation Form S-4).
10.17 Transmission Service Agreement (Unit 4), dated as of July 14, 1995, by and between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.18 to the Funding Corporation Form S-4).
10.18 Transmission Line Construction Agreement (Unit 4), dated July 14, 1995, between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.19 to the Funding Corporation Form S-4).
10.19 Funding Agreement, dated June 15, 1988 (Unit 2), between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.20 to the Funding Corporation Form S-4).
10.20 Second Amended and Restated Administrative Services Agreement, by and among CEOC, SSBP, SSPG and Fish Lake, dated as of July 15, 1995 (incorporated by reference to Exhibit 10.21 to the Funding Corporation Form S-4).
10.21 Second Amended and Restated Operating and Maintenance Agreement, dated as of July 15, 1995, by and among Magma Power Company, SSBP, SSPG and Fish Lake (incorporated by reference to Exhibit 10.22 to the Funding Corporation Form S-4).
10.22 Intentionally Omitted.
10.23 Collateral Assignment of Southern California Edison Company Agreements, dated as of June 20, 1996, by Vulcan, Elmore, Leathers and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 10.23 to the Funding Corporation II Form S-4).
10.24 Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Vulcan (incorporated by reference to Exhibit 10.24 to the Funding Corporation II Form S-4).
10.25 Amended and Restated Construction, Operating and Accounting Agreement, dated as of June 17, 1996, between VPC and Vulcan (incorporated by reference to Exhibit 10.25 to the Funding Corporation II Form S-4).
10.26 Long Term Power Purchase Contract, dated March 1, 1984, as amended, between SCE and Vulcan, as successor to Magma Electric Company (incorporated by reference to Exhibit 10.26 to the Funding Corporation II Form S-4).
10.27 Transmission Service Agreement, dated December 1, 1988, between VPC and IID (incorporated by reference to Exhibit 10.27 to the Funding Corporation II Form S-4).
10.28 Plant Connection Agreement, dated as of December 1, 1988, between VPC and IID (incorporated by reference to Exhibit 10.28 to the Funding Corporation II Form S-4).
10.29 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996 between CEOC and Elmore (incorporated by reference to Exhibit 10.29 to the Funding Corporation II Form S-4).
10.30 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Elmore (incorporated by reference to Exhibit 10.30 to the Funding Corporation II Form S-4).
10.31 Long Term Power Purchase Contract, dated June 15, 1984, as amended, between SCE and Elmore, as successor to Magma Electric Company (incorporated by reference to Exhibit 10.31 to the Funding Corporation II Form S-4).
10.32 Transmission Service Agreement, dated as of August 2, 1988, as amended, between Elmore and IID (incorporated by reference to Exhibit 10.32 to the Funding Corporation II Form S-4).
10.33 Plant Connection Agreement, dated as of August 2, 1988, between Elmore and IID (incorporated by reference to Exhibit 10.33 to the Funding Corporation II Form S-4).
10.34 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Leathers (incorporated by reference to Exhibit 10.34 to the Funding Corporation II Form S-4).
10.35 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Leathers (incorporated by reference to Exhibit 10.35 to the Funding Corporation II Form S-4).
10.36 Long Term Power Purchase Contract, dated August 16, 1985, as amended, between SCE and Leathers, as successor to Imperial Energy Corporation (incorporated by reference to Exhibit 10.36 to the Funding Corporation II Form S-4).
10.37 Transmission Service Agreement, dated as of October 3, 1989, as amended, between Leathers and IID (incorporated by reference to Exhibit 10.37 to the Funding Corporation II Form S-4).
10.38 Plant Connection Agreement, dated as of October 3, 1989, between Leathers and IID (incorporated by reference to Exhibit 10.38 to the Funding Corporation II Form S-4).
10.39 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Del Ranch (incorporated by reference to Exhibit 10.39 to the Funding Corporation II Form S-4).
10.40 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Del Ranch (incorporated by reference to Exhibit 10.40 to the Funding Corporation II Form S-4).
10.41 Long Term Power Purchase Contract, dated February 22, 1984, as amended, between SCE and Del Ranch, as successor to Magma (incorporated by reference to Exhibit 10.41 to the Funding Corporation II Form S-4).
10.42 Transmission Service Agreement, dated as of August 2, 1988, as amended, between Del Ranch and IID (incorporated by reference to Exhibit 10.42 to the Funding Corporation II Form S-4).
10.43 Plant Connection Agreement, dated as of August 2, 1988, between Del Ranch and IID (incorporated by reference to Exhibit 10.43 to the Funding Corporation II Form S-4).
10.44 Funding Agreement, dated May 18, 1990, between SCE and Del Ranch (incorporated by reference to Exhibit 10.44 to the Funding Corporation II Form S-4).
10.45 Funding Agreement, dated May 18, 1990, between SCE and Elmore (incorporated by reference to Exhibit 10.45 to the Funding Corporation II Form S-4).
10.46 Funding Agreement, dated June 15, 1990, between SCE and Leathers (incorporated by reference to Exhibit 10.46 to the Funding Corporation II Form S-4).
10.47 Funding Agreement, dated May 18, 1990, between SCE and Leathers (incorporated by reference to Exhibit 10.47 to the Funding Corporation II Form S-4).
10.48 Funding Agreement, dated May 18, 1990, between SCE and Vulcan (incorporated by reference to Exhibit 10.48 to the Funding Corporation II Form S-4).
24.1 Power of Attorney
99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certificat Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.