UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 47-0790493
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(State of Incorporation) (IRS Employer
Identification No.)
Salton Sea Brine Processing L.P. California 33-0601721
Salton Sea Power Generation L.P. California 33-0567411
Fish Lake Power LLC Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Corporation Delaware 33-0268085
Salton Sea Royalty LLC Delaware 47-0790492
VPC Geothermal LLC Delaware 91-1244270
San Felipe Energy Company California 33-0315787
Conejo Energy Company California 33-0268500
Niguel Energy Company California 33-0268502
Vulcan/BN Geothermal Power Company Nevada 33-3992087
Leathers, L.P. California 33-0305342
Del Ranch, L.P. California 33-0278290
Elmore, L.P. California 33-0278294
Salton Sea Power L.L.C. Delaware 47-0810713
CalEnergy Minerals LLC Delaware 47-0810718
CE Turbo LLC Delaware 47-0812159
CE Salton Sea Inc. Delaware 47-0810711
Salton Sea Minerals Corp. Delaware 47-0811261
302 S. 36th Street, Suite 400, Omaha, Nebraska 68131
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(Address of principal executive offices of (Zip Code of
Salton Sea Funding Corporation) Salton Sea Funding Corporation)
Salton Sea Funding Corporation's
telephone number, including area code: (402) 341-4500
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Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of each of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).Yes [ ] No [X]
All common stock of Salton Sea Funding Corporation is held by Magma Power
Company. 100 shares of Common Stock were outstanding on February 27, 2004.
TABLE OF CONTENTS
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PART I
Item 1. Business..............................................................4
Item 2. Properties...........................................................11
Item 3. Legal Proceedings....................................................11
Item 4. Submission of Matters to a Vote of Security Holders..................12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................13
Item 6. Selected Financial Data..............................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................16
Results of Operations for the Years Ended December 2003 and 2002.....16
Results of Operations for the Years Ended December 2002 and 2001.....18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........26
Item 8. Financial Statements and Supplementary Data..........................27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................76
Item 9A. Controls and Procedures..............................................76
PART III
Item 10. Directors and Executive Officers of the Registrant...................77
Item 11. Executive Compensation...............................................78
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................78
Item 13. Certain Relationships and Related Transactions.......................79
Item 14. Principal Accountant Fees and Services...............................79
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......80
SIGNATURES....................................................................82
EXHIBIT INDEX................................................................102
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may", "will", "could", "project", "believe", "anticipate",
"expect", "estimate", "continue", "potential", "plan", "forecast", and similar
terms. These statements represent Salton Sea Funding Corporation's intentions,
plans, expectations and beliefs and are subject to risks, uncertainties and
other factors. Many of these factors are outside Salton Sea Funding
Corporation's control and could cause actual results to differ materially from
such forward-looking statements. These factors include, among others:
o general economic and business conditions in the jurisdictions in which
Salton Sea Funding Corporation's facilities are located;
o the financial condition and creditworthiness of our significant
customers and suppliers;
o governmental, statutory, regulatory or administrative initiatives or
ratemaking actions affecting Salton Sea Funding Corporation or the
power generation industries;
o weather effects on sales and revenue;
o general industry trends;
o increased competition in the power generation industry;
o fuel and power costs and availability;
o changes in business strategy, development plans or customer or vendor
relationships;
o availability of qualified personnel;
o unscheduled outages or repairs;
o financial or regulatory accounting principles or policies imposed by
the Public Company Accounting Oversight Board, the Financial
Accounting Standards Board, the Securities and Exchange Commission
("SEC") and similar entities with regulatory oversight;
o other risks or unforeseen events, including wars, the effects of
terrorism, embargos and other catastrophic events; and
o other business or investment considerations that may be disclosed from
time to time in SEC filings or in other publicly disseminated written
documents.
Salton Sea Funding Corporation undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The foregoing review of factors should not be
construed as exclusive.
In this Annual Report references to kW means kilowatts, MW means megawatts, kWh
means kilowatt hours, MWh means megawatt hours, and NMW means net megawatts.
-3-
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 769 MW of
electrical generating capacity in power plants in operation in the United States
of America, which have an aggregate net capacity of 829 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
("El Paso"). On January 29, 2003, El Paso 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, and the Royalty Guarantor (collectively, the "Guarantors").
The Salton Sea Guarantors include Salton Sea Brine Processing L.P., 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 Project, Salton Sea II
Project, Salton Sea III Project, Salton Sea IV Project and Salton Sea V Project
(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" and,
together with the Salton Sea Projects the "Imperial Valley 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") and
Salton Sea Minerals Corp. 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 Corp. owns Minerals.
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.
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Salton Sea Royalty LLC ("SSRC" or the "Royalty Guarantor") is the Royalty
Guarantor. The Royalty Guarantor 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.
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.
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.
FACILITY NET
CAPACITY NET MW COMMERICAL AGREEMENT POWER
POWER PROJECT (MW) (1) OWNED FUEL OPERATION EXPIRATION PURCHASER(2)
- ------------------------------- ------------- ------ ---------- --------- ---------- -----------------
Salton Sea Projects
Salton Sea I................. 10 10 Geothermal 1987 2017 Edison
Salton Sea II ............... 20 20 Geothermal 1990 2020 Edison
Salton Sea III............... 50 50 Geothermal 1989 2019 Edison
Salton Sea IV................ 40 40 Geothermal 1996 2026 Edison
Salton Sea V................. 49 49 Geothermal 2000 Varies TransAlta/Riverside/
--- --- Minerals(3)
Total Salton Sea Projects.. 169 169
--- ---
Partnership Projects
Vulcan....................... 34 34 Geothermal 1986 2016 Edison
Elmore....................... 38 34 Geothermal 1989 2018 Edison
Leathers..................... 38 34 Geothermal 1990 2019 Edison
Del Ranch.................... 38 34 Geothermal 1989 2019 Edison
CE Turbo..................... 10 10 Geothermal 2000 Varies TransAlta/Minerals(3)
--- ---
Total Partnership Projects...... 158 146
--- ---
Total power projects............ 327 315
=== ===
(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.
(2) Southern California Edison Company ("Edison"); TransAlta; City of
Riverside, California ("Riverside") and Minerals.
(3) Each contract governing power purchases by Minerals will expire 33 years
from the date of the initial power delivery under such contract. Deliveries
began in July 2000. Pursuant to a Transaction Agreement dated January 29,
2003, Salton Sea Power and CE Turbo began selling available power to
TransAlta on February 12,
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2003 based on percentages of the Dow Jones SP-15 Index. The Transaction
Agreement shall continue until the earlier of: (a) 30 days following a
written notice of termination; or (b) any other termination date mutually
agreed to by the parties. No such termination has been given by either
party. Each contract governing power purchases by Minerals will expire 33
years from the date of the initial power delivery under such contract.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea
Power which owns the Salton Sea V Project, and CE Turbo began selling
available power to TransAlta on February 12, 2003 based on percentages of
the Dow Jones SP-15 Index. The Transaction Agreement shall continue until
the earlier of: (a) 30 days following a written notice of termination; or
(b) any other termination date mutually agreed to by the parties. No such
notice of termination has been given by either party. Effective July 1,
2004, Salton Sea Power and CE Turbo will also be selling the environmental
attributes associated with up to 931,800 MWh to TransAlta Marketing (US)
Inc ("TransAlta Marketing") through December 31, 2008. Salton Sea Power
also entered into a 10-year power sales agreement for up to 20 MW with
Riverside in May 2003.
Each of the Imperial Valley Projects, excluding the Salton Sea V and the CE
Turbo Projects, sells electricity to 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 capacity
payments, capacity bonus payments and energy 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 under the SO4 Agreements, excluding the Salton Sea IV Project,
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 ("Edison's
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, 2003, 2002 and 2001, respectively, Edison's
Average Avoided Cost of Energy was 5.4 cents per kWh, 3.5 cents per kWh and 7.4
cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy
vary substantially from year-to-year, primarily based on the future cost of gas.
The Imperial Valley Projects, other than the Salton Sea I Project, 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 $1.78 per month per kW of service
provided for 2003 and recalculated annually. The transmission service and
interconnection agreements expire in 2015 for the Partnership Projects, 2019 for
the Salton Sea III Project, 2020 for the Salton Sea II Project and 2026 for the
Salton Sea IV Project. The Salton Sea V Project and the CE Turbo Project have
entered into 30-year agreements with similar terms with the IID. The Salton Sea
I Project delivers energy to Edison at the project site and has no transmission
service agreement with the IID.
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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 $158.71 per kW-year. The capacity payment was approximately
$1.5 million in 2003. 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 6.1 cents per kWh during 2003.
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. Pursuant to the
SO4 Agreement, the maximum annual capacity and bonus payments are approximately
$3.3 million. 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. Pursuant to the SO4 Agreement, the maximum annual contracted
capacity and bonus payments are approximately $9.7 million.
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 (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 2003, 2002 and 2001 were approximately $3.9 million, $5.5
million and $5.7 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 the Salton Sea IV Project
and is based on an energy payment schedule for 44.4% of the total energy
delivered by the Salton Sea IV Project. 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.
On May 20, 2003, Salton Sea Power entered into a power sales agreement with
Riverside. Under the terms of the agreement, Salton Sea Power sells up to 20 MW
of energy generated from the Salton Sea V Project to Riverside at 6.1 cents per
kWh. Sales under the agreement commenced June 1, 2003 and will terminate May 31,
2013. Pursuant to a 33-year power sales agreement, the Salton Sea V Project
sells a portion of its net output to Minerals for its full electrical energy
requirements currently estimated to be 19 MW. 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
under the TransAlta Transaction Agreement, as described below.
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 Project
to El Paso based on day-ahead price quotes received from El Paso under the
original agreement and based on percentages of the Dow Jones SP-15 Index
thereafter. Pursuant to a Transaction Agreement ("TransAlta 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. The Transaction Agreement shall continue until the
earlier of: (a) 30 days following a
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written notice of termination; or (b) any other termination date mutually agreed
to by the parties. No such termination has been given by either party.
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. Pursuant to
the SO4 Agreement, the maximum 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. Pursuant to the SO4 Agreement, the
maximum 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. Pursuant to the SO4
Agreement, the maximum annual capacity and bonus payments are approximately $7.5
million.
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. Pursuant to the SO4
Agreement, the maximum annual capacity and bonus payments are approximately $7.9
million.
The CE Turbo Project sells its available power under the TransAlta Transaction
Agreement. 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.
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. The plant has successfully produced
commercial quality zinc from the Imperial Valley Project's brine. 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 began limited production in December 2002
and continued limited production of non-high grade zinc during 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 Comico, Ltd. at
prevailing market prices. 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
-8-
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
PROJECT 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
RELIANCE ON SINGLE UTILITY CUSTOMER
Each of the Vulcan, Elmore, Leathers, Del Ranch, 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
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, the Zinc Recovery
Project 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 unsatisfactory operational issue of the Zinc Recovery
Project could have an adverse effect on the applicable Guarantors' results of
operations.
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.
-9-
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.
-10-
EMPLOYEES
Employees necessary for the operation of the Imperial Valley Projects are
provided by CEOC. As of December 31, 2003, CEOC employed 289 people. 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. PROPERTIES.
The Funding Corporation's most significant physical properties are its current
interest in operating power facilities and its related real property interests.
The Funding Corporation maintains an inventory of approximately 26,000 acres of
geothermal property leases in the Salton Sea area to support the Imperial Valley
Projects. Funding Corporation, as lessee, pays certain royalties and other fees
to the property owners and other royalty interest holders from the revenue
generated by the Imperial Valley Projects.
Lessors and royalty holders are generally paid a monthly or annual rental
payment during the term of the lease or mineral interest, unless and until the
acreage goes into production, in which case the rental typically stops and the
(generally higher) royalty payments begin. Leases of federal property are
transacted with the Department of Interior, Bureau of Land Management, pursuant
to standard geothermal leases under the Geothermal Steam Act and the regulations
promulgated thereunder, and are for a primary term of 10 years, extendible for
an additional 5 years if drilling is commenced within the primary term and is
diligently pursued for two successive 5-year periods upon certain conditions set
forth in the regulations. A secondary term of up to 40-years is available so
long as geothermal resources from the property are being produced or used in
commercial quantities. Leases of state lands may vary in form. Leases of private
lands vary considerably, since their terms and provisions are the product of
negotiations with the landowners.
ITEM 3. LEGAL PROCEEDINGS.
Due to reduced liquidity, Edison had failed to pay approximately $119 million
owed under the power Purchase Agreements with the certain Guarantors (excluding
the Salton Sea V and CE Turbo Projects) for power delivered in the fourth
quarter 2000 and the first quarter 2001. Due to Edison's failure to pay
contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $21.0 million as of December 31, 2001.
Pursuant to a settlement agreement, the final payment by Edison for past due
balances was received March 1, 2002. Following the receipt of Edison's payment
of past due balances, the Guarantors released the remaining allowance for
doubtful accounts.
Edison had disputed a portion of the settlement agreement and failed to pay
approximately $3.9 million of capacity bonus payments for the months from
October 2001 through May 2002. On December 10, 2001, certain Guarantors
(excluding the Salton Sea I, Salton Sea V and CE Turbo Projects) filed a lawsuit
against Edison in California's Imperial County Superior Court seeking a court
order requiring Edison to make the required capacity bonus payments under the
Power Purchase Agreements. Due to Edison's failure to pay these contractual
obligations, the certain Guarantors established an allowance for doubtful
accounts of approximately $2.7 million as of December 31, 2002. In connection
with the June 11, 2003 settlement discussed below, the receivables associated
with this allowance were written off during 2003.
On March 25, 2002, the Salton Sea II Project's 10 MW turbine went out of service
due to an uncontrollable force event. Such uncontrollable force event ended, and
the Salton Sea II Project returned to service, on December 17, 2002. Edison
failed to recognize the uncontrollable force event and as such did not pay
amounts otherwise due and
-11-
owing and improperly derated the Salton Sea II Project from 15 MW to 12.5 MW,
under the Salton Sea II Power Purchase Agreement. On January 29, 2003, SSPG,
owner of the Salton Sea II Project, served a complaint on Edison for such unpaid
amounts and to rescind such deration.
On June 11, 2003, certain Guarantors entered into a settlement agreement with
Edison. The settlement, which relates to the capacity bonus payment and the
Salton Sea II Project uncontrollable force event disputes, provides for an
$800,000 settlement payment from Edison, payment of amounts previously withheld
for the Salton Sea II Project deration and the rescission of such deration. The
amounts previously withheld for the Salton Sea II Project deration were received
in the second quarter of 2003. The $800,000 settlement payment is contingent
upon approval by the California Public Utilities Commission.
On July 10, 2003, the Salton Sea IV Project's 40 MW turbine went out of service
due to an uncontrollable force event. Such uncontrollable force event ended, and
the Salton Sea IV Project plant returned to service on September 17, 2003.
Edison failed to recognize the uncontrollable force event and as such has not
paid amounts otherwise due and owing under the Salton Sea IV Power Purchase
Agreement totaling approximately $2.3 million. SSPG, with Fish Lake Power, owner
of the Salton Sea IV Project has served notices of error to Edison for such
unpaid amounts. As a result, the Guarantors established allowance for doubtful
accounts of $1.7 million for capacity payments as of December 31, 2003.
On October 9, 2003, the Salton Sea III Project's 50 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended and the Salton Sea III Project plant returned to service on December 12,
2003. Edison failed to recognize the uncontrollable force event and as such has
not paid amounts otherwise due and owing under the Salton Sea III Power Purchase
Agreement totaling approximately $0.7 million. SSPG, owner of the Salton Sea III
Project, has served notices of error to Edison for such unpaid amounts. As a
result the Guarantors have established an allowance for doubtful accounts for
the full amount of this receivable.
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
On May 25, 2001, Minerals entered into a services agreement for engineering,
procurement and construction management services (the "AMEC Agreement") with
AMEC E&C Services, Inc. ("AMEC") in connection with the resolution of numerous
problems that affected the timely completion of Minerals' Zinc Recovery Project.
Under the AMEC Agreement, AMEC represented that it had certain licenses required
for its services which Minerals ultimately determined to be false. AMEC
submitted $2.8 million of invoices to Minerals that AMEC claims are due and
payable under the AMEC Agreement. Minerals filed a lawsuit against AMEC on June
13, 2003 for declaratory judgment that would (1) prevent collection by AMEC of
the $2.8 million it claimed to be due and payable and, (2) recover payments made
by Minerals to AMEC based on AMEC's lack of a contractor's license in
California. The lawsuit also included claims by Minerals against AMEC for breach
of contract and breach of duty of fiduciary responsibility. AMEC filed a motion
to compel arbitration of the dispute. The court ruled against the motion to
compel arbitration and AMEC has appealed this decision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA.
The 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):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002(1) 2001(2) 2000 1999
--------- --------- --------- -------- ---------
STATEMENT OF OPERATIONS DATA:
Total revenue ............................. $ 36,586 $ 39,755 $ 41,791 $ 43,718 $ 48,538
Income (loss) before cumulative effect of
change in accounting principle .......... (271) 85 (37) 174 1,123
Net income (loss) ......................... (271) (125) (137) 174 1,123
BALANCE SHEET DATA:
Total assets .............................. $ 490,415 $ 570,503 $ 540,580 $565,375 $585,648
Senior secured notes and bonds (3) ........ 463,592 491,678 520,250 543,908 568,980
Total stockholder's equity ................ 13,653 13,418 13,098 13,235 13,061
(1) 2002 net loss includes a $0.2 million goodwill impairment recognized
as a cumulative effect of change in accounting principle at the
Guarantors. Refer to Note 2 in "Item 8. Financial Statements and
Supplementary Data - Notes to Financial Statements" for additional
information.
(2) 2001 net loss includes $0.1 million loss on cumulative effect of
change in accounting principle at the Guarantors. Refer to Note 2 in
"Item 8. Financial Statements and Supplementary Data - Notes to
Financial Statements" for additional information.
(3) Includes current portion.
-13-
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):
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003(1) 2002(2) 2001(3) 2000(4) 1999
--------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Operating revenue ........................ $ 83,786 $ 84,176 $ 110,941 $ 98,057 $ 81,850
Total revenue ............................ 83,428 87,893 113,228 98,410 83,718
Income (loss) before cumulative effect of
change in accounting principle ......... (37,963) (12,957) (807) 28,323 23,045
Net income (loss) ........................ (37,963) (33,975) (9,550) 28,323 23,045
BALANCE SHEET DATA:
Total assets ............................. $ 527,439 $ 584,279 $ 629,950 $626,543 $633,014
Senior secured project note(5) ........... 223,647 246,419 266,899 284,217 293,954
Total guarantors' equity ................. 250,007 287,970 321,945 331,495 303,172
(1) 2003 net loss includes a $23.3 million impairment of goodwill. Refer
to Note 2 in "Item 8. Financial Statements and Supplementary Data -
Notes to Combined Financial Statements" for additional information.
(2) 2002 net loss includes a $21.0 million impairment of goodwill
recognized as a cumulative effect of change in accounting principle.
Refer to Note 2 in "Item 8. Financial Statements and Supplementary
Data - Notes to Combined Financial Statements" for additional
information.
(3) 2001 net loss includes a $15.0 million asset impairment. It also
includes a $8.7 million loss on a cumulative change in accounting
policy. Refer to Note 2 in "Item 8. Financial Statements and
Supplementary Data - Notes to Combined Financial Statements" for
additional information.
(4) The Salton Sea V Project commenced operations in the third quarter of
2000.
(5) Includes current portion.
-14-
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):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003(1) 2002(2) 2001(3) 2000(4) 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Operating revenue ........................ $ 95,254 $ 94,697 $ 119,738 $103,250 $105,921
Total revenue ............................ 96,825 96,440 126,318 108,184 114,988
Income (loss) before cumulative effect of
change in accounting principles ........ (39,698) (10,828) 22,975 27,180 25,481
Net income (loss) ........................ (39,698) (10,828) 16,085 27,180 25,481
BALANCE SHEET DATA:
Total assets ............................. $ 988,073 $ 970,197 $ 938,342 $921,701 $901,892
Senior secured project note (5) .......... 239,100 244,116 248,742 250,650 261,212
Total guarantors' equity ................. 612,204 601,288 567,579 551,494 524,314
(1) 2003 net loss includes a $21.2 million impairment of goodwill. Refer
to Note 2 in "Item 8. Financial Statements and Supplementary Data -
Notes to Combined Financial Statements" for additional information.
(2) During December 2002, the Zinc Recovery Project became partially
operational.
(3) 2001 net loss includes a $6.9 million loss on a cumulative effect of
change in accounting policy. Refer to Note 2 in "Item 8. Financial
Statements and Supplementary Data - Notes to Combined Financial
Statements" for additional information.
(4) CE Turbo commenced operations in the third quarter of 2000.
(5) Includes current portion.
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,
----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Total revenue ................... $12,509 $12,577 $16,882 $14,130 $26,274
Net income ...................... 8,199 8,171 10,092 7,352 19,222
BALANCE SHEET DATA:
Total assets .................... $91,884 $83,991 $79,300 $73,670 $71,116
Senior secured project note (1).. 845 1,147 4,607 9,041 13,814
Members' equity ................. 91,034 82,835 74,664 64,572 57,220
(1) Includes current portion.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
selected consolidated financial data and the financial statements included in
Items 6 and 8 herein.
FACTORS AFFECTING RESULTS OF OPERATIONS
The capacity factor for a particular project is determined by dividing the total
quantity of electricity sold by the product of the project's capacity and the
total hours in the year. At December 31, 2003, the capacity factors for the
Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea
IV Project, and Salton Sea V Project plants are based on capacity amounts of
approximately 10, 20, 50, 40, and 49 net MW, respectively. At December 31, 2003,
the capacity factors for the Vulcan Project, Elmore Project, Leathers Project,
Del Ranch Project, and CE Turbo Project plants are based on capacity amounts of
approximately 34, 38, 38, 38 and 10 net MW, respectively. Each plant possesses
an operating margin, which allows for production in excess of the amount 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 amount of revenues received by these projects is affected by the
extent to which they are able to operate and generate electricity. Accordingly,
the capacity and capacity factor figures provide information on operating
performance that has affected the revenues received by these projects.
For the years ended December 31, 2003, 2002 and 2001, Edison's Average Avoided
Cost of Energy was 5.4 cents per kWh, 3.5 cents per kWh and 7.4 cents per kWh,
respectively. Estimates of Edison's future Average Avoided Cost of Energy vary
substantially from year-to-year based primarily on the future cost of gas. 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
price was 3.25 cents per kWh from December 1, 2001 to April 30, 2002 and
increased to 5.37 cents per kWh commencing May 1, 2002 through April 30, 2007.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2003 AND 2002
The Salton Sea Guarantors' operating revenue decreased $0.4 million to $83.8
million for the year ended December 31, 2003 from $84.2 million for the same
period in 2002. The decrease was primarily due to the impact of a $6.0 million
adjustment to the Edison allowance for doubtful accounts in 2002 and lower
production due to extended overhauls and the Salton Sea III and IV Projects
uncontrollable force events in 2003, partially offset by higher average rates in
2003. The following operating data represents the aggregate capacity and
electricity production of the Salton Sea Projects:
YEARS
ENDED DECEMBER 31,
--------------------------
2003 2002
--------- ----------
Overall capacity factor ......... 70.32% 78.4%
Capacity NMW (weighted average).. 168.4 168.4
MWh produced .................... 1,037,300 1,156,800
The overall capacity factor for the Salton Sea Guarantors decreased in 2003
primarily due to the uncontrollable force events at the Salton Sea III and IV
Projects in 2003.
The Salton Sea Guarantors' interest and other income (loss) was $(0.4) million
for the year ended December 31, 2003 as compared to $3.7 million in 2002. The
2002 interest income was due primarily to a business interruption insurance
recovery for lost revenue at the Salton Sea II Project from an uncontrollable
force event
-16-
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses decreased $5.7 million, or 9.6% to $53.5
million for year ended December 31, 2003 from $59.2 million for the same period
in 2002. The decrease was primarily due to the second quarter 2003 warranty
claim settlement with Stone & Webster Inc. ("Stone and Webster"), which included
a $7.6 million reimbursement of incremental operating expenses related to legal,
other expenses and equipment write-offs. The decrease was also due to lower
brine pond and legal expenses in 2003, partially offset by repair costs
associated with the Salton Sea III and IV Projects uncontrollable force events.
The Salton Sea Guarantors' depreciation and amortization increased $4.3 million
to $25.5 million for the year ended December 31, 2003 from $21.2 million for the
same period in 2002. The increase was due to a change in salvage value
assumptions and higher depreciable asset balances in 2003.
The Salton Sea Guarantors' interest expense decreased $1.6 million to $18.8
million for the year ended December 31, 2003 from $20.4 million for the same
period in 2002. The decrease was due to reduced indebtedness.
In accordance with the Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the Salton Sea
Guarantors completed their annual goodwill impairment tests during the fourth
quarter of 2003, primarily using a discounted cash flow methodology as of
October 31, 2003. As a result of these tests the Salton Sea Guarantors
recognized a goodwill impairment of $23.3 million in the fourth quarter of 2003.
The Salton Sea Guarantors are comprised of partnerships or limited liability
companies. Income taxes are the responsibility of the partners or members and
the Salton Sea Guarantors have no obligation to provide funds to the partners or
members for payment of any tax liabilities. Accordingly, the Salton Sea
Guarantors have no tax obligations.
The Partnership Guarantors' operating revenue increased $0.6 million to $95.3
million for the year ended December 31, 2003 from $94.7 million for the same
period in 2002. The impact of a $14.1 million adjustment to the Edison allowance
for doubtful accounts in 2002 was partially offset by higher average rates under
the settlement agreement in 2003. The following operating data represents the
aggregate capacity and electricity production of the Partnership Projects:
YEARS
ENDED DECEMBER 31,
-------------------------
2003 2002
--------- ---------
Overall capacity factor ......... 99.7% 101.5%
Capacity NMW (weighted average) . 158.0 158.0
MWh produced .................... 1,380,400 1,405,000
The overall capacity factor for the Partnership Guarantors decreased marginally
in 2003 primarily due to scheduled maintenance outages.
The Zinc Recovery Project began limited production in December 2002 and
continued limited production of non-high grade zinc during 2003 resulting in
minimal revenue in both years.
The Partnership Guarantors' operating expenses decreased $7.6 million, or 8.6%,
to $80.4 million for year ended December 31, 2003, from $88.0 million for the
same period in 2002 primarily due to lower costs related to the Zinc Recovery
Project and lower legal expenses in 2003 as compared to 2002 in connection with
the Edison disputes.
The Partnership Guarantors' depreciation and amortization increased $9.9 million
to $33.1 million for the year ended December 31, 2003 from $23.2 million for the
same period in 2002. The increase is due to $7.1 million of depreciation on the
Zinc Recovery Project, which began limited production in December 2002, and a
change in salvage value assumptions.
-17-
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased $9.7 million to $18.8 million for the year ended December 31, 2003
from $9.1 million for the same period in 2002. The increase was due to the
discontinuance of capitalizing interest on the Zinc Recovery Project, partially
offset by reduced indebtedness.
In accordance with the SFAS No. 142 the Partnership Guarantors completed their
annual goodwill impairment tests during the fourth quarter of 2003, primarily
using a discounted cash flow methodology as of October 31, 2003. As a result of
these tests the Partnership Guarantors recognized a goodwill impairment of $21.2
million in the fourth quarter of 2003.
The Partnership Guarantors' income tax was a $17.0 million benefit for the year
ended December 31, 2003 as compared to a benefit of $13.1 million for the same
period in 2002. The effective tax rate was 30.0% and 54.8% in 2003 and 2002,
respectively. Changes in the effective rate are due primarily to the generation
of energy tax credits and changes to depletion deductions. Income taxes will be
paid by the parent of the Partnership Guarantors from distributions to the
parent company by the Partnership Guarantors, which occur after payment of
operating expenses and debt service.
The Royalty Guarantors are comprised of partnerships. Income taxes are the
responsibility of the partners and the Royalty Guarantors have no obligation to
provide funds to the partners for payment of any tax liabilities. Accordingly,
the Royalty Guarantors have no tax obligations.
The Funding Corporation's net loss was not significant for the years ended
December 31, 2003 and 2002. The net loss primarily represents interest income
and expense, net of applicable tax, and the Funding Corporation's 1% equity in
earnings of the Guarantors.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2002 AND 2001
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 the 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 was
$3.8 million. The following operating data represents the aggregate capacity and
electricity production of the Salton Sea Projects:
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
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 the Salton Sea II Project from an uncontrollable force event
partially offset by lower interest income due to fewer months of interest earned
on the past due balances from Edison compared to 2001.
The Salton Sea Guarantors' operating 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 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
-18-
bought in 2002 partially offset by the decrease in goodwill amortization of $1.3
million due the 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 Salton Sea Guarantors are substantially comprised of partnerships and
limited liability companies. Income taxes are the responsibility of the partners
or members and the Salton Sea Guarantors have no obligation to provide funds to
the partners or members for payment of any tax liabilities. Accordingly, the
Salton Sea Guarantors have no tax obligations.
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.
During 2001, the Salton Sea 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, net of
tax.
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 was $2.7 million. The
following operating data represents the aggregate capacity and electricity
production of the Partnership Projects:
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 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 Partnership Guarantors' operating 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 expenses
at the Zinc Recovery Project.
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
-19-
equipment bought in 2002 partially offset by the decrease in goodwill
amortization of $3.6 million due to the discontinuation of goodwill amortization
in 2002.
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 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 deductions.
Income taxes will be paid by the parent of the Partnership Guarantors from
distributions to the parent company by the Partnership 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 2001, the Partnership 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 Partnership
Guarantors recorded a cumulative effect of this change of $6.9 million, net of
tax.
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 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 Royalty Guarantors' 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 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 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.
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 El Paso. Under the terms of the agreement, El Paso purchased and sold
available power on behalf of Salton Sea Power and CE Turbo, into the California
Independent System Operator markets. The purchase price for the available power
was equivalent to the value actually received by El Paso 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 El Paso. Under the terms of the agreement, at the option of Salton
Sea Power and CE Turbo, El Paso purchased all available power from the Salton
Sea V Project and CE Turbo Project based on day ahead price quotes received from
El Paso.
-20-
On March 27, 2001 and May 1, 2001, the owners of the Guarantors entered into
Transaction Agreements to sell available power to El Paso based on percentages
of the Dow Jones SP-15 Index. On June 22, 2001, the owners of the Guarantors
(excluding Salton Sea Power and CE Turbo) ceased selling available power to El
Paso and resumed power sales to Edison under the SO4 Agreements and the
negotiated power purchase agreements. Effective September 16, 2002 Salton Sea
Power and CE Turbo entered into Transaction Agreements to sell available power
to El Paso at increased percentages of the Dow Jones SP-15 Index. Pursuant to
these agreements, sales to El Paso from the Guarantors totaled $1.2 million,
$8.9 million and $102.8 million in 2003, 2002 and 2001, respectively. At
December 31, 2003 and 2002, accounts receivable from El Paso were $- million and
$1.4 million, respectively.
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. The Transaction Agreement shall
continue until the earlier of: (a) 30 days following a written notice of
termination; or (b) any other termination date mutually agreed to by the
parties. No such termination has been given by either party. Pursuant to this
agreement, sales to TransAlta totaled $9.9 million in 2003. As of December 31,
2003, accounts receivable from TransAlta were $1.6 million.
On January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 MWh of generation, a "Green Tag") associated with
up to 931,800 MWh of available generation at the Salton Sea V Project and CE
Turbo Project through December 31, 2008 to TransAlta Marketing at a price of
$10.00 per Green Tag. Salton Sea Power and CE Turbo expect to commence sales
under the agreement in July 2004.
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.
Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled
$0.9 million, $0.4 million and $0.9 million for the years ended December 31,
2003, 2002 and 2001, respectively, and there were no sales to Minerals from CE
Turbo for the years ended December 31, 2003, 2002 and 2001. There were no
material accounts receivable balances at December 31, 2003 and 2002.
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 Minerals, which is indirectly 100%
owned by Salton Sea Minerals Corp., a MEHC affiliate. 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 and certain payments on the Imperial Valley Project Loans
up to the current principal amount of approximately $136.4 million.
On January 30, 2004, the Funding Corporation announced its election to redeem an
aggregate principal amount of approximately $136.4 million of its 7.475% Senior
Secured Series F Bonds due November 30, 2018, pro rata, at a redemption price of
100% of such aggregate outstanding principal amount, plus accrued interest to
the date of redemption. The trustee delivered a redemption notice to the holders
of the bonds on January 29, 2004. The record date for the redemption is February
15, 2004 and the redemption is expected to be completed on March 1, 2004. The
Corporation has made a demand on MEHC for the full amount remaining on MEHC's
guarantee of the Series F Bonds in order to fund the redemption. Upon the
expected payment under MEHC's guarantee, MEHC will no longer have any liability
with respect to its guarantee.
-21-
LIQUIDITY AND CAPITAL RESOURCES
The Salton Sea Guarantors generated cash flows from operations of $11.4 million
for the year ended December 31, 2003 compared with $24.6 million for the same
period in 2002. The decrease was primarily due to the timing and receipts of
past due balances from Edison in 2002.
The Partnership Guarantors generated cash flows from operations of $24.7 million
for the year ended December 31, 2003 compared with $59.3 million for the same
period in 2002. The decrease was primarily due to the timing of receipts of past
due balances from Edison in 2002.
The Royalty Guarantors generated cash flows from operations of $9.2 million for
the year ended December 31, 2003 compared with $9.0 million for the same period
in 2002.
The Salton Sea Guarantors' only source of revenue is payments received pursuant
to long-term power sales agreements with Edison, other than Salton Sea V Project
revenue and interest earned on funds on deposit. The 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.
The Salton Sea Guarantors cash flow used in investing was $3.8 million for the
year ended December 31, 2003 compared with $12.7 million for the same period in
2002. Capital expenditures for 2004 are expected to be approximately $10.7
million. Capital expenditures are the primary component of investing activities.
The Partnership Guarantors cash flows used in investing was $24.7 million for
the year ended December 31, 2003 compared with $29.2 million for the same period
in 2002. Capital expenditures for 2004 are expected to be approximately $10.7
million. Capital expenditures are the primary component of investing activities.
The Salton Sea V Project was constructed by Stone & Webster, pursuant to the
Salton Sea V Project EPC Contract. On March 7, 2002, Salton Sea Power the owner
of the Salton Sea V Project, filed a Demand for Arbitration against Stone &
Webster for breach of contract and breach of warranty arising from deficiencies
in Stone & Webster's design, engineering, construction and procurement of
equipment for the Salton Sea V Project pursuant to the Salton Sea V Project EPC
Contract. The demand for arbitration did not include a stated claim amount. On
April 25, 2003, Salton Sea Power entered into a settlement agreement with Stone
& Webster. The Settlement Agreement resulted in a total payment of $12.1 million
from Stone & Webster in the second quarter of 2003 and the arbitration was
dismissed. The settlement was recorded as a $4.5 million reduction of
incremental capital expenditures and a $7.6 million reduction of incremental
operating expenses related to legal, other expenses and equipment write-offs.
The CE Turbo Project was constructed by Stone & Webster, pursuant to the CE
Turbo Project EPC Contract. On March 7, 2002, Vulcan, Del Ranch, and CE Turbo,
the owners of the CE Turbo 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 CE Turbo Project pursuant to the CE Turbo
Project's EPC Contract. On November 25, 2002, Vulcan, Del Ranch, and CE Turbo
entered into a settlement agreement with Stone & Webster. The settlement
agreement resulted in a $3.5 million payment from Stone & Webster which was
recorded as a reduction of incremental capital expenditures.
The Salton Sea Guarantors cash flows used in financing was $7.6 million for the
year ended December 31, 2003 compared with $11.9 million for the same period in
2002. Cash flows used in financing reflects scheduled debt repayments and
changes in amounts due to affiliates.
-22-
The Partnership Guarantors cash flow used in financing was $- for the year ended
December 31, 2003 compared with $30.0 million for the same period in 2002. Cash
flows used in financing reflect scheduled debt repayments, equity contributions
related to the Zinc Recovery Project and changes in amounts due from affiliates.
The Royalty Guarantors generated cash flows used in financing was $9.2 million
for the year ended December 31, 2003 compared with $9.0 million for the same
period in 2002. Cash flows used in financing reflects scheduled debt repayments
and changes in amounts due from affiliates.
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, 2003 (in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------------------
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- --------- ------- ------- --------
Contractual cash obligations-
Long-term debt (1).......... $463,592 $165,215 $54,536 $53,157 $190,684
======== ======== ======= ======= ========
(1) Total less than one year includes $136.4 million expected to be
redeemed on March 1, 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. The plant has successfully produced
commercial quality zinc from the Imperial Valley Project's brine. 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 began limited production in December 2002
and continued limited production of non-high grade zinc during 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. at
prevailing market prices. The agreement expires in December 2005.
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. After the default termination of the Zinc
Recovery Project EPC Contract, Minerals entered into a time and materials
reimbursable engineer, procure and construction management contract with AMEC to
complete the Zinc Recovery Project. The contract with AMEC has expired.
-23-
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 were in excess of approximately $60
million; however, Minerals had 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.
On May 25, 2001, Minerals entered into a Services Agreement for engineering,
procurement and construction management services (the "AMEC Agreement") with
AMEC in connection with the resolution of numerous problems that affected the
timely completion of Minerals' Zinc Recovery Project. Under the AMEC Agreement,
AMEC represented that it had certain licenses required for its services which
Minerals ultimately determined to be false. AMEC submitted $2.8m of invoices to
Minerals that AMEC claims are due and payable under the AMEC Agreement. Minerals
filed a lawsuit against AMEC on June 13, 2003 for declaratory judgment that
would (1) prevent collection by AMEC of the $2.8 million it claimed to be due
and payable and, (2) recover payments made by Minerals to AMEC based on AMEC's
lack of a contractor's license in California. The lawsuit also included claims
by Minerals against AMEC for breach of contract and breach of duty of fiduciary
responsibility. AMEC filed a motion to compel arbitration of the dispute. The
court ruled against the motion to compel arbitration and AMEC has appealed this
decision.
OFF BALANCE SHEET ARRANGEMENTS
The Guarantors do not have any obligations which meet the definition of an
off-balance sheet arrangement and which have or are reasonably likely to have a
material effect on the financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which served to clarify guidance in FIN
46, "Consolidation of Variable Interest Entities" ("FIN 46") and provided
additional guidance surrounding the application of FIN 46. The adoption of FIN
46R as it relates to special purpose entities did not have a material effect on
the Company's financial position, results of operations or cash flows. The
Company will evaluate the provisions of FIN 46R related to non-special purpose
entities in the first quarter of 2004.
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
-24-
the accompanying balance sheets at their undiscounted amounts. As of December
31, 2003 and December 31, 2002, the Guarantors environmental liabilities
recorded on the balance sheet were not material.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles 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 for the year ended December 31, 2003 included in this
annual report describe 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, income taxes 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 properties, plants,
contracts and equipment. Depreciation is computed using the straight-line method
based on economic lives. The Guarantors believe the useful lives assigned to the
depreciable assets, which generally range from 3 to 30 years, are reasonable.
The Guarantors periodically evaluate long-lived assets, including properties,
plants, contracts and equipment, when events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. 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 that is based on discounted estimated cash flows from the future use
of the asset.
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 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.
In accordance with SFAS 142, the Guarantors determined their reporting units and
completed their transitional impairment testing of goodwill in the second
quarter of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill impairment
at the Salton Sea and Partnership Guarantors. During the fourth quarter of 2002,
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. The Funding Corporation recorded its share of
the Guarantors' cumulative effect of this change of approximately $0.2 million
as of January 1, 2002. Additionally, the Guarantors
-25-
completed the 2002 annual goodwill impairment tests as of October 31, 2002. The
annual impairment test indicated no goodwill impairment existed as of October
31, 2002.
The Guarantors completed their 2003 annual goodwill impairment tests in the
fourth quarter of 2003, primarily using a discounted cash flow methodology as of
October 31, 2003. The tests indicated goodwill impairment at the Salton Sea and
Partnership Guarantors. The Salton Sea and Partnership Guarantors completed
their assessment of the implied fair value of goodwill and as a result
recognized goodwill impairment as of October 31, 2003 of $23.3 million and $21.2
million, respectively. The Funding Corporation's share of this impairment is
approximately $0.5 million.
Income Taxes
- ------------
The Guarantors are included in the consolidated income tax returns of CE
Generation. CE Generation pays to each subsidiary an amount equal to the tax
benefits realized in the consolidated income tax returns from the utilization of
the subsidiary's net operating losses or tax credits, or each subsidiary will
pay to CE Generation an amount equal to the income tax computed on its separate
company taxable income less the tax benefits associated with the net operating
losses or tax credits generated by the subsidiary which are utilized in CE
Generation's consolidated income tax return.
Contingent Liabilities
- ----------------------
The Guarantors establish reserves for estimated loss contingencies, such as
environmental, legal and income taxes, when it is management's assessment that a
loss is probable and the amount of the loss can be reasonably estimated.
Revisions to contingent liabilities are reflected in operations in the period in
which different facts or information become known or circumstances change that
affect the previous assumptions with respect to the likelihood or amount of
loss. Reserves for contingent liabilities are based upon management's
assumptions and estimates, and advice of legal counsel or other third parties
regarding the probable outcomes of any matters. Should the outcomes differ from
the assumptions and estimates, revisions to the estimated reserves for
contingent liabilities would be required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
At December 31, 2003 and 2002, the Funding Corporation had fixed-rate long-term
debt of $463.6 million and $491.7 million, respectively, in principal amount and
having a fair value of $483.3 million and $464.6 million, respectively. 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 $23.3
million and $26.2 million if interest rates were to increase by 10% from their
levels at December 31, 2003 and 2002, 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.
-26-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SALTON SEA FUNDING CORPORATION
Independent Auditors' Report............................................28
Balance Sheets..........................................................29
Statements of Operations................................................30
Statements of Stockholder's Equity......................................31
Statements of Cash Flows................................................32
Notes to Financial Statements...........................................33
SALTON SEA GUARANTORS
Independent Auditors' Report............................................38
Combined Balance Sheets.................................................39
Combined Statements of Operations.......................................40
Combined Statements of Guarantors' Equity...............................41
Combined Statements of Cash Flows.......................................42
Notes to Combined Financial Statements..................................43
PARTNERSHIP GUARANTORS
Independent Auditors' Report............................................50
Combined Balance Sheets.................................................51
Combined Statements of Operations ......................................52
Combined Statements of Guarantors' Equity...............................53
Combined Statements of Cash Flows.......................................54
Notes to Combined Financial Statements..................................55
SALTON SEA ROYALTY LLC
Independent Auditors' Report............................................68
Balance Sheets..........................................................69
Statements of Operations................................................70
Statements of Members' Equity...........................................71
Statements of Cash Flows................................................72
Notes to Financial Statements...........................................73
-27-
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 (the "Company") as of December 31, 2003 and 2002, and the related
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 2003. 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, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, the equity method investees
of Salton Sea Funding Corporation changed their accounting policy for goodwill
and other intangible asset in 2002 and for overhaul and well rework costs in
2001.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 20, 2004
-28-
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Amounts in thousands, except share data)
AS OF DECEMBER 31,
--------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash .......................................................... $ 14,341 $ 19,583
Restricted cash ............................................... - 46,293
Accrued interest receivable and other current assets .......... 2,950 3,228
Current portion secured project notes from Guarantors ......... 165,215 28,086
-------- --------
Total current assets ........................................ 182,506 97,190
-------- --------
Secured project notes from Guarantors ........................... 298,377 463,592
Investment in 1% of net assets of Guarantors .................... 9,532 9,721
-------- --------
TOTAL ASSETS .................................................... $490,415 $570,503
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued interest .............................................. $ 2,945 $ 3,156
Current portion of long-term debt ............................. 165,215 28,086
-------- --------
Total current liabilities ................................... 168,160 31,242
-------- --------
Due to affiliates ............................................... 10,225 62,251
Senior secured notes and bonds .................................. 298,377 463,592
-------- --------
Total liabilities ............................................. 476,762 557,085
-------- --------
Commitments and contingencies (Note 4)
Stockholder's equity:
Common stock authorized - 1,000 shares,
par value $.01 per share; issued and outstanding 100 shares.. - -
Additional paid-in capital .................................... 6,317 5,811
Retained earnings ............................................. 7,336 7,607
-------- --------
Total stockholder's equity .................................. 13,653 13,418
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...................... $490,415 $570,503
======== ========
The accompanying notes are an integral part of these financial statements.
-29-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
-------- -------- ---------
REVENUE:
Interest income ......................... $ 37,281 $ 39,938 $ 41,389
Equity in earnings (loss) of Guarantors . (695) (183) 402
-------- -------- --------
Total revenue ......................... 36,586 39,755 41,791
COSTS AND EXPENSES:
General and administrative expenses ..... 283 720 1,089
Interest expense ........................ 36,763 38,891 40,765
-------- -------- --------
Total costs and expenses .............. 37,046 39,611 41,854
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ......... (460) 144 (63)
Provision (benefit) for income taxes .... (189) 59 (26)
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE ....... (271) 85 (37)
Cumulative effect of change in accounting
principle, net of tax (Note 2) .......... - (210) (100)
-------- -------- --------
NET LOSS .................................. $ (271) $ (125) $ (137)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-30-
SALTON SEA FUNDING CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(Amounts in thousands, except share amounts)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 2001 ............. 100 $ - $5,366 $ 7,869 $ 13,235
Net loss ........................... - - - (137) (137)
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 ........... 100 $ - $5,366 $ 7,732 $ 13,098
Net loss ........................... - - - (125) (125)
Adjustments resulting from capital
transactions of Guarantors ....... - - 445 - 445
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 ........... 100 $ - $5,811 $ 7,607 $ 13,418
Net loss ........................... - - - (271) (271)
Adjustments resulting from capital
transactions of Guarantors ....... - - 506 - 506
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 ........... 100 $ - $6,317 $ 7,336 $ 13,653
================================================================================================
The accompanying notes are an integral part of these financial statements.
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $ (271) $ (125) $ (137)
Adjustments to reconcile net loss to net
cash flows from operating activities -
Equity in loss (earnings) of Guarantors .... 695 393 (232)
Changes in assets and liabilities:
Prepaid expenses and other assets .......... 278 123 212
Accrued liabilities ........................ (211) (177) (146)
-------- -------- --------
Net cash flows from operating activities . 491 214 (303)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments of secured project note
from Guarantors ............................ 28,086 28,572 23,658
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured
notes and bonds ............................ (28,086) (28,572) (23,658)
Decrease (increase) in restricted cash ....... 46,293 (43,344) (2,949)
Due to affiliates ............................ (52,026) 58,352 (854)
-------- -------- --------
Net cash flows from financing activities ... (33,819) (13,564) (27,461)
-------- -------- --------
NET CHANGE IN CASH ............................. (5,242) 15,222 (4,106)
Cash at the beginning of year .................. 19,583 4,361 8,467
-------- -------- --------
CASH AT THE END OF YEAR ........................ $ 14,341 $ 19,583 $ 4,361
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................ $ 36,941 $ 39,058 $ 40,911
======== ======== ========
Income taxes paid ............................ $ - $ 36 $ -
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-32-
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, LLC ("CE Generation") and subsequently transferred its interest in
the Company and its power generation assets located in the Imperial Valley of
California 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 ("El Paso"). On January 29, 2003, El
Paso sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"),
an affiliate of TransAlta 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 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
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.
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.
-33-
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.
Goodwill
- --------
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 consisted solely of its share of the
goodwill amortization at the Guarantors, which has no income tax effect.
In accordance with SFAS 142, the Guarantors determined their reporting units and
completed their transitional impairment testing of goodwill in the second
quarter of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill impairment
at the Salton Sea and Partnership Guarantors. During the fourth quarter of 2002,
the Salton Sea Guarantors and the Partnership Guarantors completed their annual
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. The Funding Corporation recorded its share of
the Guarantors' cumulative effect of this change of approximately $0.2 million
as of January 1, 2002. Additionally, the Guarantors completed the 2002 annual
goodwill impairment tests as of October 31, 2002. The annual impairment test
indicated no goodwill impairment existed as of October 31, 2002.
In accordance with SFAS 142, the Guarantors completed their 2003 annual goodwill
impairment tests in the fourth quarter of 2003, primarily using a discounted
cash flow methodology as of October 31, 2003. The tests indicated goodwill
impairment at the Salton Sea and Partnership Guarantors. Due to changes in our
zinc price and capital expenditure forecasts the cash flow forecasts were
revised. As a result of these revisions and the changes in the fair value of
debt, the tests indicated goodwill impairment at the Salton Sea and Partnership
Guarantors. The Salton Sea and Partnership Guarantors completed their assessment
of the implied fair value of goodwill and as a result recognized goodwill
impairment as of October 31, 2003 of $23.3 million and $21.2 million,
respectively. The Funding Corporation's share of this impairment is
approximately $0.5 million.
Following is a reconciliation of net loss as originally reported for the years
ended December 31, 2003, 2002 and 2001 to adjusted net income (loss) assuming
SFAS 142 was in effect for all periods (in thousands):
2003 2002 2001
----- ----- -----
Reported net loss ................................... $(271) $(125) $(137)
Goodwill amortization ............................... - - 57
Cumulative effect of change in accounting principle.. - 210 -
----- ----- -----
Adjusted net income (loss) .......................... $(271) $ 85 $ (80)
===== ===== =====
-34-
Fair Values of Financial Instruments
- ------------------------------------
The fair value of a financial instrument is the amount in which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the Funding
Corporation could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Short-term debt - Due to the short-term nature of the short-term debt, the fair
value approximates the carrying value.
Debt-instruments - The fair value of all debt instruments has been estimated
based upon quoted market prices as supplied by third-party broker dealers, where
available, or at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risks.
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.
3. SENIOR SECURED NOTES AND BONDS
The Funding Corporation's debt securities (the "Notes and Bonds") are as follows
(in thousands):
SENIOR
SECURED DECEMBER 31,
DATE ISSUED SECURITIES FINAL MATURITY DATE RATE 2003 2002
- ---------------- ---------- ------------------- ------ ----------- --------
July 21, 1995 B Bonds May 30, 2005 7.370% $ 41,662 $ 56,662
July 21, 1995 C Bonds May 30, 2010 7.840% 102,014 109,250
June 20, 1996 E Bonds May 30, 2011 8.300% 43,322 46,322
October 13, 1998 F Bonds November 30, 2018 7.475% 276,594 279,444
-------- --------
$463,592 $491,678
======== ========
Principal and interest payments are made in semi-annual installments. Principal
maturities of the Senior Secured Notes and Bonds are expected to be as follows
(in thousands):
AMOUNT
--------
2004 .......... $165,215
2005 .......... 28,620
2006 .......... 25,917
2007 .......... 25,091
2008 .......... 28,065
Thereafter .... 190,684
--------
Total ......... $463,592
========
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
-35-
by Salton Sea Minerals Corp., a MEHC affiliate. The direct and indirect owners
of the Zinc Facility (the "Zinc Guarantors", which include Salton Sea Minerals
Corp. and CalEnergy Minerals, LLC ("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 and certain payments on the Secured Project Notes
including the current principal amount of approximately $136.4 million.
On January 30, 2004, the Funding Corporation announced its election to redeem an
aggregate principal amount of approximately $136.4 million of its 7.475% Senior
Secured Series F Bonds due November 30, 2018, pro rata, at a redemption price of
100% of such aggregate outstanding principal amount, plus accrued interest to
the date of redemption. The trustee delivered a redemption notice to the holders
of the bonds on January 29, 2004. The record date for the redemption is February
15, 2004 and the redemption is expected to be completed on March 1, 2004. The
Corporation has made a demand on MEHC for the full amount remaining on MEHC's
guarantee of the Series F Bonds in order to fund the redemption. Upon the
expected payment under MEHC's guarantee, MEHC will no longer have any liability
with respect to its guarantee.
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. As a result of uncertainties related to Southern California Edison Company
("Edison"), the letter of credit was not extended beyond its then existing July
2004 expiration date, and as such cash distributions were not available to CE
Generation until the Funding Corporation debt service reserve fund of
approximately $65.4 million had been funded or the letter of credit had been
extended beyond its July 2004 expiration date or replaced. At December 31, 2002,
the fund had a cash balance of $46.3 million.
In May 2003, the previous $65.4 million the Funding Corporation debt service
reserve letter of credit was replaced by a $32.7 million TransAlta letter of
credit which expires on May 30, 2004, and a $32.7 million MEHC letter of credit
which expires on June 6, 2006.
These new Funding Corporation debt service reserve letters of credit permitted
the cash, which was previously restricted, to be included in funds distributed
to CE Generation on May 29, 2003. During 2003, the Funding Corporation
distributed $69.8 million to CE Generation.
The estimated fair values of the Senior Secured Notes and Bonds at December 31,
2003 and 2002 were $483.3 million and $464.6 million, respectively.
4. COMMITMENTS AND CONTINGENCIES
Due to reduced liquidity, Edison had failed to pay approximately $119 million
owed under the power Purchase Agreements with the certain Guarantors (excluding
the Salton Sea V and CE Turbo Projects) for power delivered in the fourth
quarter 2000 and the first quarter 2001. Due to Edison's failure to pay
contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $21.0 million as of December 31, 2001.
Pursuant to a settlement agreement, the final payment by Edison for past due
balances was received March 1, 2002. Following the receipt of Edison's 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
(excluding the Salton Sea I, Salton Sea V and CE Turbo Projects) filed a lawsuit
against Edison in California's Imperial County Superior Court seeking a court
order requiring Edison to make the required capacity bonus payments under the
Power Purchase Agreements. Due to Edison's failure to pay these contractual
obligations, the certain Guarantors established an allowance for doubtful
accounts of approximately $2.7 million as
-36-
of December 31, 2002. In connection with the June 11, 2003 settlement discussed
below, the receivables associated with this allowance were written off during
2003.
On March 25, 2002, the Salton Sea II Project's 10 megawatt ("MW") turbine went
out of service due to an uncontrollable force event. Such uncontrollable force
event ended, and the Salton Sea II Project returned to service, on December 17,
2002. Edison failed to recognize the uncontrollable force event and as such did
not pay amounts otherwise due and owing and improperly derated the Salton Sea II
Project 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 the Salton Sea
II Project, served a complaint on Edison for such unpaid amounts and to rescind
such deration.
On June 11, 2003, certain Guarantors entered into a settlement agreement with
Edison. The settlement, which relates to the capacity bonus payment and the
Salton Sea II Project uncontrollable force event disputes, provides for an
$800,000 settlement payment from Edison, payment of amounts previously withheld
for the Salton Sea II Project deration and the rescission of such deration. The
amounts previously withheld for the Salton Sea II Project deration were received
in the second quarter of 2003. The $800,000 settlement payment is contingent
upon approval by the California Public Utilities Commission.
On July 10, 2003, the Salton Sea IV Project's 40 MW turbine went out of service
due to an uncontrollable force event. Such uncontrollable force event ended, and
the Salton Sea IV Project returned to service on September 17, 2003. Edison
failed to recognize the uncontrollable force event and as such has not paid
amounts otherwise due and owing under the Salton Sea IV Power Purchase Agreement
totaling approximately $2.3 million. Salton Sea Power Generation, L.P., with
Fish Lake Power Company, owner of Salton Sea IV has served notices of error to
Edison for such unpaid amounts. As a result, the Guarantors established
allowance for doubtful accounts of $1.7 million for capacity payments as of
December 31, 2003.
On October 9, 2003, Salton Sea III's 50 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
III returned to service on December 12, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea III Power Purchase Agreement totaling approximately
$0.7 million. Salton Sea Power Generation L.P., owner of Salton Sea III, has
served notices of error to Edison for such unpaid amounts. As a result the
Guarantors have established an allowance for doubtful accounts for the full
amount of this receivable.
In January 2001, the California Power Exchange 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
-37-
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, 2003 and 2002, and the related combined statements
of operations, Guarantors' equity and cash flows for each of the three years in
the period ended December 31, 2003. 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, 2003 and 2002 and the combined results of their operations
and their combined cash flows for each of the three years in the period ended
December 31, 2003 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, the Salton Sea
Guarantors changed their accounting policy for goodwill and other intangible
assets in 2002 and their accounting policy for overhaul and well rework costs in
2001.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 20, 2004
-38-
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Amounts in thousands)
AS OF DECEMBER 31,
--------------------
2003 2002
-------- --------
ASSETS
Current assets:
Trade accounts receivable, net of allowance of $5,477 and $3,800 respectively... $ 14,070 $ 19,420
Trade accounts receivable from affiliates ...................................... 1,131 1,104
Prepaid expenses and other current assets ...................................... 4,255 5,283
-------- --------
Total current assets ......................................................... 19,456 25,807
-------- --------
Properties, plants, contracts and equipment, net ................................. 507,983 535,220
Goodwill ......................................................................... - 23,252
-------- --------
TOTAL ASSETS ..................................................................... $527,439 $584,279
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 146 $ 328
Accrued interest ............................................................... 1,421 1,593
Other accrued liabilities ...................................................... 6,566 12,304
Current portion of long-term debt .............................................. 24,409 22,765
-------- --------
Total current liabilities .................................................... 32,542 36,990
-------- --------
Due to affiliates ................................................................ 45,652 35,665
Senior secured project note ...................................................... 199,238 223,654
-------- --------
Total liabilities .............................................................. 277,432 296,309
-------- --------
Commitments and contingencies (Note 6)
Guarantors' equity ............................................................... 250,007 287,970
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ......................................... $527,439 $584,279
======== ========
The accompanying notes are an integral part of these financial statements.
-39-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
REVENUE:
Operating revenue .......................................... $ 83,786 $ 84,176 $ 110,941
Interest and other (loss) income ........................... (358) 3,717 2,287
--------- --------- ---------
Total revenue ............................................ 83,428 87,893 113,228
--------- --------- ---------
COSTS AND EXPENSES:
Royalty, operating, general and administrative expense ..... 53,480 59,234 61,568
Depreciation and amortization .............................. 25,520 21,195 17,332
Interest expense ........................................... 18,810 20,421 21,827
Less capitalized interest .................................. - - (1,692)
Goodwill impairment ........................................ 23,252 - -
Asset impairment ........................................... 329 - 15,000
--------- --------- ---------
Total costs and expenses ................................. 121,391 100,850 114,035
--------- --------- ---------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE .......................... (37,963) (12,957) (807)
Cumulative effect of change in accounting principle (Note 2) . - (21,018) (8,743)
--------- --------- ---------
NET LOSS ..................................................... $ (37,963) $ (33,975) $ (9,550)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-40-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF GUARANTORS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(Amounts in thousands)
AMOUNT
---------
BALANCE, JANUARY 1, 2001 .......................................... $ 331,495
Net loss ........................................................ (9,550)
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 ........................................ 321,945
Net loss ........................................................ (33,975)
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 ........................................ $ 287,970
Net loss ........................................................ (37,963)
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 ........................................ $ 250,007
================================================================================
The accompanying notes are an integral part of these financial statements.
-41-
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................ $(37,963) $(33,975) $ (9,550)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ................................................. 25,520 21,195 17,332
Goodwill impairment ........................................................... 23,252 - -
Asset impairment .............................................................. 329 - 15,000
Cumulative effect of change in accounting principle ........................... - 21,018 8,743
Changes in assets and liabilities:
Accounts receivable, net ...................................................... 5,323 16,123 (12,251)
Prepaid expenses and other assets ............................................. 1,028 31 (5,358)
Accounts payable and accrued liabilities ...................................... (6,092) 228 63
-------- -------- --------
Net cash flows from operating activities .......................................... 11,397 24,620 13,979
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of warranty settlement ................................ (3,816) (12,696) (10,468)
Decrease in restricted cash ..................................................... - - 17
-------- -------- --------
Net cash flows from investing activities ...................................... (3,816) (12,696) (10,451)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of senior secured project note ....................................... (22,772) (20,480) (17,318)
Due to affiliates ............................................................... 15,191 8,556 13,790
-------- -------- --------
Net cash flows from financing activities ...................................... (7,581) (11,924) (3,528)
-------- -------- --------
NET CHANGE IN CASH ................................................................ - - -
Cash at beginning of year ......................................................... - - -
-------- -------- --------
CASH AT END OF YEAR ............................................................... $ - $ - $ -
SUPPLEMENTAL DISCLOSURE -
======== ======== ========
Cash paid for interest, net of capitalized interest ........................... $ 18,332 $ 19,893 $ 19,536
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-42-
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 (the Salton Sea I,
II, III, IV and V Projects) (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 located in the Imperial Valley of California 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 ("El Paso"). On January 29, 2003, El Paso sold all its interest
in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying financial statements of the Guarantors present the accounts 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. All intercompany balances and
transactions have been eliminated.
Reclassifications
- -----------------
Certain amounts in the fiscal 2002 and 2001 financial statements and supporting
note disclosures have been reclassified to conform to the fiscal 2003
presentation. Such reclassification did not impact previously reported net loss
or guarantors' equity.
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.
-43-
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 and equipment are recorded at historical cost. The cost of
major additions and betterments are capitalized, while replacements,
maintenance, and repairs that do not improve or extend the lives of the
respective assets are expensed.
Impairment of Long-Lived Assets
- -------------------------------
The Guarantors' long-lived assets consist primarily of properties, plants,
contracts and equipment. Depreciation of the operating power plant and equipment
costs, net of salvage value if applicable, is computed using the straight-line
method based on the estimated economic lives. The Guarantors believe the useful
lives assigned to the operating power plant assets, which generally range from 3
to 30 years, are reasonable. 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.
The Guarantors periodically evaluates long-lived assets, including properties,
plants and equipment, when events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. 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
that is based on discounted estimated cash flows from the future use of the
asset.
As a result of these impairment tests, the Guarantors wrote down $.03 million of
equipment in 2003 and $15.0 million, related to a steam turbine, in 2001.
Goodwill
- --------
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' 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 $9.9 million and $8.8 million at December 31, 2003 and 2002,
respectively. Amortization expense on the contracts was $1.2 million, for each
of the years ended December 31, 2003, 2002 and 2001. The Guarantors' expect
amortization expense on the contracts to be $1.2 million for each of the five
succeeding fiscal years.
In accordance with SFAS 142, the Guarantors determined their reporting units and
completed their transitional impairment testing of goodwill in the second
quarter of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill impairment
at the Guarantors. During the fourth quarter of 2002, the Guarantors completed
their assessment of the implied fair value of goodwill. As a
-44-
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 completed the 2002 annual goodwill impairment test
as of October 31, 2002. The annual impairment test indicated no goodwill
impairment existed as of October 31, 2002.
The Guarantors completed their 2003 annual goodwill impairment test in the
fourth quarter of 2003, primarily using a discounted cash flow methodology. Due
to changes in our zinc price and capital expenditure forecasts the cash flow
forecasts were revised. As a result of these revisions and the changes in the
fair value of debt, the tests indicated goodwill impairment at the Salton Sea
Guarantors. The test indicated goodwill impairment, therefore, the Guarantors
completed their assessment of the implied fair value of goodwill and as a result
recognized goodwill impairment of $23.3 million, as of October 31, 2003.
Following is a reconciliation of net loss as originally reported for the years
ended December 31, 2003, 2002 and 2001 to adjusted net loss (in thousands):
2003 2002 2001
-------- -------- -------
Reported net loss ................................... $(37,963) $(33,975) $(9,550)
Goodwill amortization ............................... - - 1,304
Cumulative effect of change in accounting principle.. - 21,018 -
-------- -------- -------
Adjusted net loss ................................... $(37,963) $(12,957) $(8,246)
======== ======== =======
The changes in the carrying amount of goodwill for the three years ended
December 31, 2003, are as follows (in thousands):
Balance, January 1, 2001............................ $45,574
Amortization expense................................ (1,304)
-------
Balance, December 31, 2001.......................... 44,270
Cumulative effect of change in accounting principle. (21,018)
-------
Balance, December 31, 2002.......................... $23,252
Impairment losses................................... (23,252)
-------
Balance, December 31, 2003.......................... $ -
=======
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.
Fair Values of Financial Instruments
- ------------------------------------
The fair value of a financial instrument is the amount in which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the
Guarantors could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Short-term debt - Due to the short-term nature of the short-term debt, the fair
value approximates the carrying value.
-45-
Debt-instruments - The fair value of all debt instruments has been estimated
based upon quoted market prices as supplied by third-party broker dealers, where
available, or at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risks.
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 the Salton Sea V Project, are to Southern California Edison Company
("Edison") under long-term power purchase contracts.
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.
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT
Properties, plants, contracts and equipment as of December 31 are as follows (in
thousands):
2003 2002
--------- ---------
Plant and equipment ............................. $ 452,763 $ 458,709
Power sale agreements ........................... 33,446 33,446
Mineral reserves ................................ 91,811 91,811
Wells and resource development .................. 66,824 63,975
--------- ---------
644,844 647,941
Accumulated depreciation and amortization ....... (136,861) (112,721)
--------- ---------
Property, plants, contracts and equipment, net... $ 507,983 $ 535,220
========= =========
The Salton Sea V Project was constructed by Stone & Webster Inc. ("Stone and
Webster"), pursuant to the Salton Sea V Project EPC Contract. On March 7, 2002,
Salton Sea Power the owner of the Salton Sea V Project, filed a Demand for
Arbitration against Stone & Webster for breach of contract and breach of
warranty arising from deficiencies in Stone & Webster's design, engineering,
construction and procurement of equipment for the Salton Sea V Project pursuant
to the Salton Sea V Project EPC Contract. The demand for arbitration did not
include a stated claim amount. On April 25, 2003, Salton Sea Power entered into
a settlement agreement with Stone & Webster. The Settlement Agreement resulted
in a total payment of $12.1 million from Stone & Webster in the second quarter
of 2003 and the arbitration was dismissed. The settlement was recorded as a $4.5
million
-46-
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
4. SENIOR SECURED PROJECT NOTE
The Guarantors' project note payable to Funding Corporation as of December 31
are as follows (in thousands):
Senior December 31,
Secured ----------------------------
Date issued Securities Final Maturity Date Rate 2003 2002
- ----------------- ---------- ------------------- ------ -------- --------
July 21, 1995 B Bonds May 30, 2005 7.370% $ 40,817 $ 55,520
July 21, 1995 C Bonds May 30, 2010 7.840% 102,014 109,250
October 13, 1998 F Bonds November 30, 2018 7.475% 80,816 81,649
-------- --------
$223,647 $246,419
======== ========
The Guarantors have also guaranteed, along with other guarantors, the debt of
Funding Corporation, which amounted to $463.6 million at December 31, 2003. 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
--------
2004 ............... $ 24,409
2005 ............... 23,917
2006 ............... 22,621
2007 ............... 22,131
2008 ............... 23,494
Thereafter ......... 107,075
--------
Total .............. $223,647
========
The estimated fair values of the senior secured projects notes at December 31,
2003 and 2002 were $230.4 million and $236.1 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, 2003, 2002
and 2001 was $3.4 million, $3.6 million and $4.4 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, 2003, 2002 and 2001 was $1.2 million, $1.2 million and $1.6
million, respectively.
-47-
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 2003,
2002 and 2001, the Guarantors reimbursed CEOC for expenses of $14.7
million, $13.8 million and $16.2 million, respectively.
o Commencing January 17, 2001, Salton Sea Power entered into a series of
transaction agreements to sell available power from the Salton Sea V
Project to El Paso, under which the purchase price was originally based on
day ahead price quotes received from El Paso, and subsequently based on
percentages of the Dow Jones SP-15 Index. Pursuant to these agreements,
sales to El Paso from the Guarantors totaled $0.8 million, $7.3 million and
$53.4 million in 2003, 2002 and 2001, respectively.
o Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea
Power began selling available power to TransAlta on February 12, 2003 based
on percentages of the Dow Jones SP-15 Index. The Transaction Agreement
shall continue until the earlier of: (a) 30 days following a written notice
of termination; or (b) any other termination date mutually agreed to by the
parties. No such termination has been given by either party. Sales to
TransAlta from the Guarantors totaled $7.7 million in 2003. As of December
31, 2003, accounts receivable from TransAlta were $1.1 million.
o On January 21, 2004, Salton Sea Power entered into a Green Energy Tag
Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 MWh of generation, a "Green Tag") associated
with up to 931,800 MWh of available generation at the Salton Sea V Project
through December 31, 2008 to TransAlta Energy Marketing (US) Inc. at a
price of $10.00 per Green Tag. Salton Sea Power expects to commence sales
under their agreement in July 2004.
6. COMMITMENTS AND CONTINGENCIES
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 excluding the Salton Sea V Project) for power delivered in
the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to
pay contractual obligations, the Guarantors had established an allowance for
doubtful accounts of approximately $6.8 million as of December 31, 2001.
Pursuant to a settlement agreement the final payment 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. In connection with the June 11, 2003 settlement discussed
below, the receivables associated with this allowance were written-off during
2003.
On March 25, 2002, Salton Sea II's 10 megawatt ("MW") turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended and Salton Sea II returned to service on December 17, 2002. Edison 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.
-48-
On June 11, 2003, certain Guarantors (excluding the Salton Sea I and Salton Sea
V projects) entered into a settlement agreement with Edison. The settlement,
which relates to the capacity bonus payment and Salton Sea II uncontrollable
force event disputes, provides for a $0.8 million settlement payment from
Edison, payment of amounts previously withheld for the Unit II deration and the
rescission of such deration. The amounts previously withheld for the Unit II
deration were received in the second quarter of 2003. The $0.8 million
settlement payment is contingent upon approval by the California Public
Utilities Commission.
On July 10, 2003, Salton Sea IV's 40 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totaling approximately
$2.3 million. Salton Sea Power Generation, L.P., with Fish Lake Power Company,
owner of Salton Sea IV, has served notices of error on Edison for such unpaid
amounts. As a result, the Guarantors established an allowance for doubtful
accounts of $1.7 million for capacity payments as of December 31, 2003.
On October 9, 2003, Salton Sea III's 50 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
III returned to service on December 12, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea III Power Purchase Agreement totaling approximately
$0.7 million. Salton Sea Power Generation, L.P., owner of Salton Sea III, has
served notices of error on Edison for such unpaid amounts. As a result, the
Guarantors have established an allowance for doubtful accounts for the full
amount of this receivable.
In January 2001, the California Power Exchange 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.
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, 2003 and December 31, 2002,
the environmental liabilities recorded on the balance sheet were not material.
-49-
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, 2003 and 2002, and the related combined statements
of operations, Guarantors' equity and cash flows for each of the three years in
the period ended December 31, 2003. 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, 2003 and 2002 and the combined results of their operations
and their combined cash flows for each of the three years in the period ended
December 31, 2003, 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, the Partnership
Guarantors changed their accounting policy for goodwill and other intangible
assets in 2002 and their accounting policy for overhaul and well rework costs in
2001.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 20, 2004
-50-
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Amounts in thousands)
AS OF DECEMBER 31,
--------------------
2003 2002
-------- --------
ASSETS
Current assets:
Trade accounts receivable, net of allowance of $791 and $2,696, respectively.... $ 13,500 $ 14,018
Trade accounts receivable from affiliate ....................................... 433 312
Prepaid expenses and other current assets ...................................... 23,257 19,516
-------- --------
Total current assets ......................................................... 37,190 33,846
-------- --------
Restricted cash .................................................................. 441 1
Properties, plants, contracts and equipment, net ................................. 636,710 644,951
Management fee ................................................................... 66,603 68,679
Due from affiliates .............................................................. 147,476 101,854
Goodwill ......................................................................... 99,653 120,866
-------- --------
TOTAL ASSETS ..................................................................... $988,073 $970,197
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 1,883 $ 2,903
Accrued interest ............................................................... 1,519 1,576
Other accrued liabilities ...................................................... 12,812 15,464
Current portion of long-term debt .............................................. 140,398 5,017
-------- --------
Total current liabilities .................................................... 156,612 24,960
-------- --------
Senior secured project note ...................................................... 98,702 239,099
Deferred income taxes ............................................................ 120,555 104,850
-------- --------
Total liabilities .............................................................. 375,869 368,909
-------- --------
Commitments and contingencies (Note 8)
Guarantors' equity:
Common stock ................................................................... 3 3
Additional paid-in capital ..................................................... 482,814 432,200
Retained earnings .............................................................. 129,387 169,085
-------- --------
Total guarantors' equity ..................................................... 612,204 601,288
-------- --------
TOTAL LIABILITIES AND GUARANTORS' EQUITY ......................................... $988,073 $970,197
======== ========
The accompanying notes are an integral part of these financial statements.
-51-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
REVENUE:
Operating revenue ........................................ $ 95,254 $ 94,697 $ 119,738
Interest and other income ................................ 1,571 1,743 6,580
--------- --------- ---------
Total revenue ............................................ 96,825 96,440 126,318
COSTS AND EXPENSES:
Royalty, operating, general and administrative costs ..... 80,386 88,048 62,749
Depreciation and amortization ............................ 33,129 23,209 22,773
Interest expense ......................................... 18,774 19,975 19,330
Less capitalized interest ................................ - (10,831) (13,237)
Goodwill impairment ...................................... 21,213 - -
--------- --------- ---------
Total costs and expenses ................................... 153,502 120,401 91,615
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .......................... (56,677) (23,961) 34,703
Provision (benefit) for income taxes ....................... (16,979) (13,133) 11,728
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ..................................... (39,698) (10,828) 22,975
Cumulative effect of accounting change, net of tax (Note 2) - - (6,890)
--------- --------- ---------
NET INCOME (LOSS) .......................................... $ (39,698) $ (10,828) $ 16,085
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-52-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF GUARANTORS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(Amounts in thousands, except share amounts)
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ---------
BALANCE, JANUARY 1, 2001 .... 3 $ 3 $387,663 $ 163,828 $ 551,494
Net income .................. - - - 16,085 16,085
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 .. 3 $ 3 $387,663 $ 179,913 $ 567,579
Net loss .................... - - - (10,828) (10,828)
Equity contribution ......... - - 44,537 - 44,537
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 .. 3 $ 3 $432,200 $ 169,085 $ 601,288
Net loss .................... - - - (39,698) (39,698)
Equity contribution ......... - - 50,614 - 50,614
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 .. 3 $ 3 $482,814 $ 129,387 $ 612,204
===========================================================================================
The accompanying notes are an integral part of these financial statements.
-53-
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................................................ $(39,698) $(10,828) $ 16,085
Adjustments to reconcile net (loss) income to net cash flows
from operating activities:
Depreciation and amortization ................................... 33,129 23,209 22,773
Deferred income taxes ........................................... 15,705 2,767 725
Cumulative effect of change in accounting principle, net of tax.. - - 6,890
Asset abandonment ............................................... 1,428 - -
Goodwill impairment ............................................. 21,213 - -
Changes in assets and liabilities:
Trade accounts receivable, net .................................. 397 45,054 (31,065)
Prepaid expenses and other current assets ....................... (3,741) (962) (4,326)
Accounts payable and accrued liabilities ...................... (3,729) 5 2,115
-------- -------- --------
Net cash flows from operating activities .................... 24,704 59,245 13,197
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures related to operating projects ............... (12,164) (7,425) (17,871)
Construction and other development ............................... (11,318) (42,360) (22,507)
Liquidated damages ............................................... - - 29,648
(Increase) decrease in restricted cash ........................... (440) 21,281 (21,176)
Management fee ................................................... (758) (706) (1,800)
-------- -------- --------
Net cash flows from investing activities ....................... (24,680) (29,210) (33,706)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in due from affiliates ....................... (45,622) (69,946) 22,417
Repayment of senior secured project notes ........................ (5,016) (4,626) (1,908)
Equity contribution .............................................. 50,614 44,537 -
-------- -------- --------
Net cash flows from financing activities ........................... (24) (30,035) 20,509
-------- -------- --------
NET CHANGE IN CASH ................................................. - - -
Cash at beginning of period ........................................ - - -
-------- -------- --------
CASH AT THE END OF PERIOD .......................................... $ - $ - $ -
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net capitalized interest ................ $ 18,831 $ 8,066 $ 5,863
======== ======== ========
Income taxes paid ............................................... $ - $ - $ 9,460
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-54-
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 constructed 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 Corp.
owns Minerals. Salton Sea Minerals Corp. is an indirect wholly-owned subsidiary
of MidAmerican Energy Holdings Company ("MEHC"). CE Salton Sea Inc. owns CE
Turbo.
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.
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 located in the Imperial Valley of California 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 ("El Paso"). On January 29, 2003, El Paso sold all its interest
in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.
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. The plant has successfully produced
commercial quality from the Imperial Valley Project's brine. 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 began limited production in December 2002
and continued limited production of non-high grade zinc during 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 Comico, Ltd. at
prevailing market prices. The agreement expires in December 2005.
-55-
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying financial statements of the Guarantors present the accounts of
CEOC, VPC, CE Turbo 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.
Reclassifications
- -----------------
Certain amounts in the fiscal 2002 and 2001 financial statements and supporting
note disclosures have been reclassified to conform to the fiscal 2003
presentation. Such reclassification did not impact previously reported net
income (loss) or retained earnings.
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.
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 and equipment are recorded at historical cost. The cost of
major additions and betterments are capitalized, while replacements,
maintenance, and repairs that do not improve or extend the lives of the
respective assets are expensed.
Impairment of Long-Lived Assets
- -------------------------------
The Guarantors' long-lived assets consist primarily of properties, plants,
contracts and equipment. Depreciation of the operating power plant and equipment
costs, net of salvage value if applicable, is computed using the straight-line
method based on the estimated economic lives. The Guarantors believe the useful
lives assigned to the operating power plant assets, which generally range from 3
to 30 years, are reasonable. 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.
The Guarantors periodically evaluates long-lived assets, including properties,
plants and equipment, when events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Upon the occurrence of a
triggering event, the carrying amount of a long-lived asset is reviewed to
assess whether the
-56-
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 that is based on discounted
estimated cash flows from the future use of the asset.
Goodwill
- --------
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 (loss) as originally reported for the years ended
December 31, 2003, 2002 and 2001, to adjusted net income (loss) (in thousands):
2003 2002 2001
-------- -------- -------
Reported net income (loss) . $(39,698) $(10,828) $16,085
Goodwill amortization ...... - - 3,564
-------- -------- -------
Adjusted net income (loss) . $(39,698) $(10,828) $19,649
======== ======== =======
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 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.
The Guarantors completed their 2003 annual goodwill impairment test as of
October 31, 2003. Due to changes in our zinc price and capital expenditure
forecasts the cash flow forecasts were revised. As a result of these revisions
and the changes in the fair value of debt, the tests indicated goodwill
impairment at the Partnership Guarantors. The test indicated potential
impairment, therefore, the Guarantors completed an assessment of the implied
fair value of goodwill and as a result recognized $21.2 million goodwill
impairment.
The changes in the carrying amount of goodwill for the three years ended
December 31, 2003, are as follows (in thousands):
Balance, January 1, 2001.......................... $124,430
Amortization expense.............................. (3,564)
--------
Balance, December 31, 2001........................ 120,866
Impairment losses................................. -
--------
Balance, December 31, 2002........................ $120,866
Impairment losses................................. (21,213)
--------
Balance, December 31, 2003........................ $ 99,653
========
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.
-57-
Fair Values of Financial Instruments
- ------------------------------------
The fair value of a financial instrument is the amount in which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the
Guarantors could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Short-term debt - Due to the short-term nature of the short-term debt, the fair
value approximates the carrying value.
Debt-instruments - The fair value of all debt instruments has been estimated
based upon quoted market prices as supplied by third-party broker dealers, where
available, or at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risks.
Contingent Liabilities
- ----------------------
The Guarantors establish reserves for estimated loss contingencies, such as
environmental and legal, when it is management's assessment that a loss is
probable and the amount of the loss can be reasonably estimated.
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 the CE Turbo Project, are to Southern California Edison Company
("Edison") under long-term power purchase contracts.
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.
-58-
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT AND INTANGIBLE ASSETS
Properties, plants, contracts and equipment as of December 31 are as follows (in
thousands):
2003 2002
--------- ----------
Cost:
Power plant and equipment .................... $ 232,256 $ 222,751
Zinc recovery project ........................ 209,726 202,269
Power sale agreements ........................ 123,588 123,588
Process license .............................. 46,290 46,290
Mineral reserves ............................. 162,487 162,487
Wells and resource development ............... 105,210 98,894
--------- ---------
879,557 856,279
Accumulated depreciation and amortization .... (242,847) (191,328)
--------- ---------
Property, plant, contracts and equipment, net. $ 636,710 $ 664,951
========= =========
The CE Turbo Project was constructed by Stone & Webster, Inc. ("Stone &
Webster"), pursuant to the CE Turbo Project EPC Contract. On March 7, 2002,
Vulcan, Del Ranch, and CE Turbo, the owners of the CE Turbo 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 CE Turbo Project pursuant to
the CE Turbo Project's EPC Contract. On November 25, 2002, Vulcan, Del Ranch,
and CE Turbo entered into a settlement agreement with Stone & Webster. The
settlement agreement resulted in a $3.5 million payment from Stone & Webster
which was recorded as a reduction of incremental capital expenditures
Intangible Assets
The following table summarizes the acquired intangible assets as of December 31
(in thousands):
2003
---------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts...... $123,002 $ 98,463
Patented Technology........... 46,290 17,314
-------- --------
Total....................... $169,292 $115,777
======== ========
2002
--------------------------------
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
======== ========
Amortization expense on acquired intangible assets was $3.8 million for the year
ended December 31, 2003 and $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.
-59-
4. SENIOR SECURED PROJECT NOTE
The Guarantors' project note payable to the Funding Corporation as of December
31 is as follows (in thousands):
SENIOR
SECURED DECEMBER 31,
DATE ISSUED SECURITIES FINAL MATURITY DATE RATE 2003 2002
- ---------------- ---------- ------------------- ------ -------- ------------
June 20, 1996 E Bonds May 30, 2011 8.300% $ 43,322 $ 46,322
October 13, 1998 F Bonds November 30, 2018 7.475% 195,778 197,794
-------- --------
$239,100 $244,116
======== ========
Principal maturities of the senior secured project note are as follows (in
thousands):
AMOUNT
--------
2004 .......... $140,398
2005 .......... 4,265
2006 .......... 3,296
2007 .......... 2,960
2008 .......... 4,572
Thereafter .... 83,609
--------
Total ......... $239,100
========
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. 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 and certain payments on the Senior Secured Project
Notes up to the current principal amount of approximately $136.4 million.
The Guarantors have also guaranteed, along with other guarantors, the debt of
the Funding Corporation, which amounted to $463.6 million at December 31, 2003.
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.
On January 30, 2004, the Funding Corporation announced its election to redeem an
aggregate principal amount of approximately $136.4 million of its 7.475% Senior
Secured Series F Bonds due November 30, 2018, pro rata, at a redemption price of
100% of such aggregate outstanding principal amount, plus accrued interest to
the date of redemption. The trustee delivered a redemption notice to the holders
of the bonds on January 29, 2004. The record date for the redemption is February
15, 2004 and the redemption is expected to be completed on March 1, 2004. The
Corporation has made a demand on MEHC for the full amount remaining on MEHC's
guarantee of the Series F Bonds in order to fund the redemption. Upon the
expected payment under MEHC's guarantee, MEHC will no longer have any liability
with respect to its guarantee.
The estimated fair values of the senior secured project note at December 31,
2003 and 2002 were $249.7 million and $227.4 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 amounted to $0.6
million, $0.7 million and $0.9 million for the years ended December 31, 2003,
2002 and 2001, respectively. Charges to the Guarantors related to operating fees
on a pro rata basis amounted to $0.6 million, $0.7 million and $0.8 million for
the years ended December 31, 2003, 2002 and 2001.
-60-
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
2003, 2002 and 2001 were $8.8 million, $8.5 million and $11.5 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 2003, 2002 and 2001 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 2003, 2002 and 2001 amounted to $2.1 million, $2.1
million and $2.6 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 2003, 2002 and 2001 reimbursed CEOC for expenses
of $17.4 million, $15.8 million and $14.6 million, respectively, and
accrued a guaranteed capacity payment of $1.6 million and $3.0 million at
December 31, 2002 and 2001, respectively. The Operating and Maintenance
Agreement was amended as of December 31, 2002 to remove the guaranteed
capacity payments.
o 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 El
Paso. On March 27, 2001 and May 1, 2001, the Guarantor entered into
transaction agreements to sell available power to El Paso. On June 28,
2001, the Guarantor (excluding the CE Turbo Project) ceased selling
available power to El Paso and resumed sales to Edison. The purchase price
for the available power under the various agreements was the value actually
received by El Paso for the sale of such power based upon day-ahead price
quotes received from El Paso and percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to El Paso from the Guarantors totaled
$0.4 million, $1.6 million and $49.4 million in 2003, 2002 and 2001,
respectively.
o Pursuant to a Transaction Agreement dated January 29, 2003, CE Turbo began
selling available power to TransAlta on February 12, 2003 based on
percentages of the Dow Jones SP-15 Index. The Transaction Agreement shall
continue until the earlier of (a) 30 days following a written notice of
termination or (b) any other termination date mutually agreed to by the
parties. No such notice of termination has been given by either party.
Pursuant to this agreement, sales to TransAlta were $2.2 million in 2003.
As of December 31, 2003, accounts receivable from TransAlta were $0.4
million.
o On January 21, 2004 CE Turbo entered into a Green Energy Tag Purchase and
Sale Agreement to sell the non-power attributes (the non-power attributes
made available by 1 MWh of generation, a "Green Tag") associated with up to
931,800 MWh of available generation at the CE Turbo Project through
December 31, 2008 to TransAlta Energy Marketing (U.S.) Inc. at a price of
$10.00 per Green Tag. CE Turbo expects to commence sales under their
agreement in July 2004.
-61-
6. CONDENSED FINANCIAL INFORMATION (IN THOUSANDS)
VULCAN
POWER CEOC ELMORE DEL RANCH LEATHERS
---------- ---------- ---------- ---------- ----------
December 31, 2003:
Assets:
Restricted cash .................... $ - $ - $ - $ - $ -
Accounts receivable and
other assets ..................... - 17,716 3,628 3,471 3,385
Due from affiliates ................ 33,628 48,297 58,832 59,179 54,883
Properties, plants, contracts
and equipment, net ............... 11,202 13,333 51,215 51,037 58,464
Management fee and Goodwill ........ - - - - -
Investments in partnerships ....... 121,136 341,755 - - -
---------- ---------- ---------- ---------- ----------
Total assets ......................... $ 165,966 $ 421,101 $ 113,675 $ 113,687 $ 116,732
========== ========== ========== ========== ==========
Liabilities and Guarantors' Equity:
Accounts payable, accrued
liabilities and deferred taxes .... 130 $ 3,802 $ 364 $ 1,304 $ 671
Senior secured project note ........ - - - - -
---------- ---------- ---------- ---------- ----------
Total liabilities ................ 130 3,802 364 1,304 671
---------- ---------- ---------- ---------- ----------
Guarantors' equity ................ 165,836 417,299 113,311 112,383 116,061
---------- ---------- ---------- ---------- ----------
Total liabilities and guarantors'
equity ............................ $ 165,966 $ 421,101 $ 113,675 $ 113,687 $ 116,732
========== ========== ========== ========== ==========
VULCAN ADJUSTMENTS/ COMBINED
BNG MINERALS TURBO ELIMINATIONS TOTAL
--------- ---------- ------- ----------- ----------
December 31, 2003:
Assets:
Restricted cash .................... $ - $ 441 $ - $ - $ 441
Accounts receivable and
other assets ..................... 3,452 4,749 681 108 37,190
Due from affiliates ................ 64,659 56,764 (2,684) (226,082) 147,476
Properties, plants, contracts
and equipment, net ............... 54,141 167,074 9,043 221,201 636,710
Management fee and Goodwill ........ - - - 166,256 166,256
Investments in partnerships ........ - - - (462,891) -
---------- ---------- ---------- --------- ----------
Total assets ......................... $ 122,252 $ 229,028 $ 7,040 $ (301,408) $ 988,073
========== ========== ========== ========== ==========
Liabilities and Guarantors' Equity:
Accounts payable, accrued
liabilities and deferred taxes ... $ 1,116 $ 22,833 $ 80 $ 106,469 $ 136,769
Senior secured project note ........ - 136,383 - 102,717 239,100
---------- ---------- ---------- ---------- ----------
Total liabilities ................ 1,116 159,216 80 209,186 375,869
---------- ---------- ---------- ---------- ----------
Guarantors' equity ................. 121,136 69,812 6,960 (510,594) 612,204
---------- ---------- ---------- ---------- ----------
Total liabilities and guarantors'
equity ............................. $ 122,252 $ 229,028 $ 7,040 $ (301,408) $ 988,073
========== ========== ========== ========== ==========
-62-
VULCAN
POWER CEOC ELMORE DEL RANCH LEATHERS
--------- --------- ------ --------- --------
December 31, 2002:
Assets:
Restricted cash .................... $ - $ - $ - $ - $ -
Accounts receivable and
other assets ..................... 3 16,910 3,633 3,767 3,789
Due from affiliates ................ (7,334) 40,232 54,076 49,828 47,652
Properties, plants, contracts
and equipment, net ............... 11,151 13,246 54,499 57,114 63,302
Management fee and
Goodwill ........................... - - - - -
Investments in partnerships ........ 115,261 334,937 - - -
--------- --------- --------- --------- ---------
Total assets ......................... $ 119,081 $ 405,325 $ 112,208 $ 110,709 $ 114,743
========= ========= ========= ========= =========
Liabilities and Guarantors' Equity:
Accounts payable, accrued
liabilities and deferred taxes .. $ 223 $ 2,512 $ 1,062 $ 1,129 $ 533
Senior secured project note ....... - - - - -
--------- --------- --------- --------- ---------
Total liabilities ............... 223 2,512 1,062 1,129 533
--------- --------- --------- --------- ---------
Guarantors' equity ................ 118,858 402,813 111,146 109,580 114,210
--------- --------- --------- --------- ---------
Total liabilities and guarantors'
equity ............................ $ 119,081 $ 405,325 $ 112,208 $ 110,709 $ 114,743
========= ========= ========= ========= =========
VULCAN ADJUSTMENTS/ COMBINED
BNG MINERALS TURBO ELIMINATIONS TOTAL
--------- --------- ------- ------------ --------
December 31, 2002:
Assets:
Restricted cash .................... $ - $ 1 $ - $ - $ 1
Accounts receivable and
other assets ..................... 3,715 1,150 621 258 33,846
Due from affiliates ................ 55,283 (17,026) (3,805) (117,052) 101,854
Properties, plants, contracts
and equipment, net ............... 57,554 166,771 9,314 212,000 644,951
Management fee and
Goodwill ........................... - - - 189,545 189,545
Investments in partnerships ........ - - - (450,198) -
--------- --------- --------- --------- ---------
Total assets ......................... $ 116,552 $ 150,896 $ 6,130 $(165,447) $ 970,197
========= ========= ========= ========= =========
Liabilities and Guarantors' Equity:
Accounts payable, accrued
liabilities and deferred taxes .. $ 1,291 $ (2,390) $ 1,670 $ 118,763 $ 124,793
Senior secured project note ....... - 137,790 - 106,326 244,116
--------- --------- --------- --------- ---------
Total liabilities ............... 1,291 135,400 1,670 225,089 368,909
--------- --------- --------- --------- ---------
Guarantors' equity ................ 115,261 15,496 4,460 (390,536) 601,288
--------- --------- --------- --------- ---------
Total liabilities and guarantors'
equity ............................ $ 116,552 $ 150,896 $ 6,130 $(165,447) $ 970,197
========= ========= ========= ========= =========
-63-
Condensed combining statements of operations including information of the
Guarantors' pro rata interest in the respective entities for the years ended
December 31, 2003, 2002 and 2001 are as follows (in thousands):
VULCAN
POWER CEOC ELMORE DEL RANCH LEATHERS
-------- -------- ------- --------- --------
December 31, 2003:
Revenue ................. $ 648 $ 5,071 $ 23,821 $ 23,204 $ 23,347
Costs and expenses ...... 908 470 21,656 20,402 21,496
-------- -------- -------- -------- --------
Net income (loss) ....... $ (260) $ 4,601 $ 2,165 $ 2,802 $ 1,851
======== ======== ======== ======== ========
December 31, 2002:
Revenue ................. $ 1,352 $ 4,214 $ 23,712 $ 23,702 $ 23,564
Costs and expenses ...... 689 - 21,104 19,812 23,705
-------- -------- -------- -------- --------
Net income (loss) ....... $ 663 $ 4,214 $ 2,608 $ 3,890 $ (141)
======== ======== ======== ======== ========
December 31, 2001:
Revenue ................. $ 1,757 $ 5,417 $ 31,165 $ 28,446 $ 30,591
Costs and expenses ...... 884 1,302 23,787 24,918 25,299
-------- -------- -------- -------- --------
Net income (loss) ....... $ 873 $ 4,115 $ 7,378 $ 3,528 $ 5,292
======== ======== ======== ======== ========
VULCAN ADJUSTMENTS/ COMBINED
BNG MINERALS TURBO ELIMINATIONS (1) TOTAL
-------- -------- -------- ---------------- --------
December 31, 2003:
Revenue ................. $ 21,615 $ 659 $ 3,388 $ (4,928) $ 96,825
Costs and expenses ...... 15,737 47,001 2,918 5,935 136,523
-------- -------- -------- -------- --------
Net income (loss) ....... $ 5,878 $(46,342) $ 470 $(10,863) $(39,698)
======== ======== ======== ======== ========
December 31, 2002:
Revenue ................. $ 22,222 $ 288 $ 2,246 $ (4,860) $ 96,440
Costs and expenses ...... 15,822 33,413 2,062 (9,339) 107,268
-------- -------- -------- -------- --------
Net income (loss) ....... $ 6,400 $(33,125) $ 184 $ 4,479 $(10,828)
======== ======== ======== ======== ========
December 31, 2001:
Revenue ................. $ 28,375 $ 847 $ 5,082 $ (5,362) $126,318
Costs and expenses ...... 18,170 5,271 2,797 7,805 110,233
-------- -------- -------- -------- --------
Net income (loss) ....... $ 10,205 $ (4,424) $ 2,285 $(13,167) $ 16,085
======== ======== ======== ======== ========
(1) Adjustments and eliminations include, among other items, the year's income
tax benefit or provision, interest expense on senior secured project notes
(excluding the Minerals debt) and the elimination of intercompany royalty
and administration charges. Additionally, the Guarantors completed their
2003 annual goodwill impairment test as of October 31, 2003 and, as a
result of the assessment, recognized an impairment of $21.2 million which
is included as an adjustment to costs and expenses above in 2003.
-64-
7. INCOME TAXES
The provision (benefit) for income tax for the years ended December 31, 2003,
2002 and 2001 was as follows (in thousands):
2003 2002 2001
-------- -------- ---------
Current:
Federal ....................... $(25,593) $(12,450) $ 8,190
State ......................... (7,091) (3,450) 2,813
-------- -------- --------
(32,684) (15,900) 11,003
-------- -------- --------
Deferred:
Federal ....................... 12,172 2,074 880
State ......................... 3,533 693 (155)
-------- -------- --------
15,705 2,767 725
-------- -------- --------
Total provision ............... $(16,979) $(13,133) $ 11,728
======== ======== ========
The net deferred tax liability at December 31, 2003 and 2002 was as follows (in
thousands):
2003 2002
--------- ----------
Deferred tax liabilities-
Properties, plant, contracts and equipment.. $ 133,041 $ 116,430
--------- ---------
Deferred tax assets:
Accruals not currently deductible
for tax purposes ......................... (4,287) (3,966)
Energy credits ............................. (6,142) (5,557)
AMT credit ................................. (2,057) (2,057)
--------- ---------
Total deferred tax assets ............... (12,486) (11,580)
--------- ---------
Net deferred tax liabilities .................. $ 120,555 $ 104,850
========= =========
The reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes is as follows:
2003 2002 2001
---- ---- ----
Federal statutory rate .................. 35.0% 35.0% 35.0%
Adjustments to taxes resulting from:
Percentage depletion ................. 4.0 14.5 (8.6)
Investment and energy tax credits .... 0.9 1.5 (1.2)
Goodwill impairment/amortization ..... (13.1) - 3.6
State taxes, net of federal benefit .. 4.1 5.6 5.0
Other ................................ (0.9) (1.8) -
---- ---- ----
Effective tax rate ...................... 30.0% 54.8% 33.8%
==== ==== ====
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.
-65-
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.
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 disputed a portion of the settlement agreement and 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. In connection
with the June 11, 2003 settlement discussed below, the receivables associated
with this allocation were written off during 2003.
On June 11, 2003, certain Guarantors (excluding the CE Turbo project) entered
into a settlement agreement with Edison. The settlement, which relates to the
capacity bonus payment and the Salton Sea II Project uncontrollable force event
disputes, provides for an $800,000 settlement payment from Edison, payment of
amounts previously withheld for the Salton Sea II Project deration and the
rescission of such deration. The amounts previously withheld for the Salton Sea
II Project deration were received in the second quarter of 2003. The $800,000
settlement payment is contingent upon approval by the California Public
Utilities Commission.
In January 2001, the California Power Exchange 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.
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 were accounted for as a reduction of the
capitalized costs of the project. After the default termination of the Zinc
Recovery Project EPC Contract, Minerals entered into a time and materials
reimbursable engineer, procure and construction management contract with AMEC
E&C Services, Inc. ("AMEC") to complete the Zinc Recovery Project. The contract
with AMEC has expired.
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
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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.
On May 25, 2001, Minerals entered into a Services Agreement for engineering,
procurement and construction management services (the "AMEC Agreement") with
AMEC in connection with the resolution of numerous problems that affected the
timely completion of Minerals' Zinc Recovery Project. Under the AMEC Agreement,
AMEC represented that it had certain licenses required for its services which
Minerals ultimately determined to be false. AMEC submitted $2.8 million of
invoices to Minerals that AMEC claims are due and payable under the AMEC
Agreement. Minerals filed a lawsuit against AMEC on June 13, 2003 for
declaratory judgment that would (1) prevent collection by AMEC of the $2.8
million it claimed to be due and payable and, (2) recover payments made by
Minerals to AMEC based on AMEC's lack of a contractor's license in California.
The lawsuit also included claims by Minerals against AMEC for breach of contract
and breach of duty of fiduciary responsibility. AMEC filed a motion to compel
arbitration of the dispute. The court ruled against the motion to compel
arbitration and AMEC has appealed this decision.
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, 2003 and 2002, the
environmental liabilities recorded on the balance sheet were not material.
-67-
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
(the "Company")as of December 31, 2003 and 2002, and the related statements of
operations, members' equity and cash flows for each of the three years in the
period ended December 31, 2003. 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, 2003 and 2002 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2003, 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
February 20, 2004
-68-
SALTON SEA ROYALTY LLC
BALANCE SHEETS
(Amounts in thousands, except per share data)
AS OF DECEMBER 31,
------------------
2003 2002
------- -------
ASSETS
Current assets-Prepaid expenses and other assets ......... $ 5 $ 13
Royalty stream, net ...................................... 13,002 14,011
Goodwill ................................................. 30,464 30,464
Due from affiliates ...................................... 48,413 39,503
------- -------
TOTAL ASSETS ............................................. $91,884 $83,991
======= =======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accrued liabilities .................................... $ 5 $ 7
Current portion of long-term debt ...................... 408 304
------- -------
Total current liabilities ............................ 413 311
Senior secured project note .............................. 437 845
------- -------
Total liabilities ...................................... 850 1,156
------- -------
Commitments and contingencies
Members' equity:
Common stock, par value $.01 per share; 100 shares
authorized, issued and outstanding ................... - -
Additional paid-in capital ............................. 1,561 1,561
Retained earnings ...................................... 89,473 81,274
------- -------
Total members' equity ................................ 91,034 82,835
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY .................... $91,884 $83,991
======= =======
The accompanying notes are an integral part of these financial statements.
-69-
SALTON SEA ROYALTY LLC
STATEMENTS OF OPERATIONS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002 2001
------- ------- -------
REVENUE - ROYALTY INCOME ......................... $12,509 $12,577 $16,882
COSTS AND EXPENSES:
Operating, general and administrative expenses.. 3,216 3,280 4,420
Amortization of royalty stream and goodwill .... 1,009 854 1,762
Interest expense ............................... 85 272 608
------- ------- -------
Total costs and expenses ..................... 4,310 4,406 6,790
------- ------- -------
NET INCOME ....................................... $ 8,199 $ 8,171 $10,092
======= ======= =======
The accompanying notes are an integral part of these financial statements.
-70-
SALTON SEA ROYALTY LLC
STATEMENTS OF MEMBERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(Amounts in thousands, except share amounts)
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 2001 .... 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
Net income .................. - - - 8,199 8,199
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 .. 100 $ - $ 1,561 $89,473 $91,034
================================================================================
The accompanying notes are an integral part of these financial statements.
-71-
SALTON SEA ROYALTY LLC
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
------- ------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .................................................. $ 8,199 $ 8,171 $ 10,092
Adjustments to reconcile net income to net cash provided by
operating activities -
Amortization of royalty stream and goodwill ............... 1,009 854 1,762
Changes in assets and liabilities:
Prepaid expenses and other assets ......................... 8 18 51
Accrued liabilities ....................................... (2) (22) (28)
------- ------- --------
Net cash flows from operating activities ................ 9,214 9,021 11,877
------- ------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Due from affiliates ......................................... (8,910) (5,561) (7,443)
Repayment of senior secured project note .................... (304) (3,460) (4,434)
------- ------- --------
Net cash flows from financing activities .................. (9,214) (9,021) (11,877)
------- ------- --------
NET CHANGE IN CASH ............................................ - - -
Cash at beginning of year ..................................... - - -
------- ------- --------
CASH AT END OF YEAR ........................................... $ - $ - $ -
======= ======= ========
SUPPLEMENTAL DISCLOSURE -
Interest paid ............................................... $ 43 $ 579 $ 585
======= ======= ========
The accompanying notes are an integral part of these financial statements.
-72-
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") 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
("El Paso"). On January 29, 2003, El Paso sold all its interest in CE Generation
to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.
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 located in the Imperial Valley of
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 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 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, 2003, 2002 and 2001, Edison's average Avoided
Cost of Energy was 5.4 cents, 3.5 cents and 7.4 cents per kWh, respectively.
Estimates of Edison's future Avoided Cost of Energy vary substantially from
year-to-year, primarily based on the future cost of gas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
-73-
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 amounts in the fiscal 2002 and 2001 financial statements and supporting
note disclosures have been reclassified to conform to the fiscal 2003
presentation. Such reclassification did not impact previously reported net
income or retained earnings.
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.
Goodwill
- --------
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 tests goodwill for impairment annually, 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, 2003, 2002 and 2001, to adjusted net income (in thousands):
2003 2002 2001
------ ------ -------
Reported net income .... $8,199 $8,171 $10,092
Goodwill amortization .. - - 908
------ ------ -------
Adjusted net income .... $8,199 $8,171 $11,000
====== ====== =======
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, 2003 and 2002, accumulated amortization was $47.5
million and $46.5 million, respectively.
The Royalty Company periodically evaluates long-lived assets and certain
identifiable assets whenever events or changes in circumstances indicate that
the carrying value of these assets may not be recoverable. 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
-74-
cash flows that the Royalty Company expects 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 that is based on discounted estimated cash flows from the
future use of the asset.
Fair Values of Financial Instruments
- ------------------------------------
The fair value of a financial instrument is the amount in which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the
Guarantors could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Short-term debt - Due to the short-term nature of the short-term debt, the fair
value approximates the carrying value.
Debt-instruments -- The fair value of all debt instruments has been estimated
based upon quoted market prices as supplied by third-party broker dealers, where
available, or at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risks.
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
-------
2004 .......... $408
2005 .......... 437
----
Total ......... $845
====
The estimated fair values of the senior secured project note at December 31,
2003 and 2002 were $0.9 million and $1.1 million, respectively.
The Royalty Company has also guaranteed, along with other guarantors, the debt
of Funding Corporation, which amounted to $463.6 million at December 31, 2003.
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.
-75-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Funding Corporation's and the Guarantors' management, including the
respective persons acting as chief executive officer and chief financial
officer, regarding the effectiveness of the design and operation of the Funding
Corporation's and the Guarantors' disclosure controls and procedures (as defined
in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of December 31, 2003. Based on that evaluation, the Funding
Corporation's and the Guarantors' management, including the respective persons
acting as chief executive officer and chief financial officer, concluded that
the Funding Corporation's and the Guarantors' disclosure controls and procedures
were effective. There have been no significant changes in the Funding
Corporation's and the Guarantors' internal controls or in other factors that
could significantly affect internal controls.
-76-
PART III
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
----------------- --------
Stefan A. Bird President
Gregory E. Abel* Director
Wayne F. Irmiter Vice President and Controller
Douglas L. Anderson Senior Vice President
Ian A. Bourne Director
J. Thomas Coyle Director
Patrick J. Goodman Director
Mitchell L. Pirnie Vice President, General Counsel
and Director
* Gregory E. Abel is Director of CalEnergy Minerals and Salton Sea
Minerals Corp. only.
STEFAN A. BIRD, 37, President of CE Generation, LLC ("CE Generation") and each
Guarantor subsidiary, is responsible for independent power plant operations and
construction in the United States. Mr. Bird joined MidAmerican Energy Holdings
Company ("MEHC") in January of 1998 as Project Development Manager and was
promoted to Vice President, Project Development in August 1999. Prior to joining
MEHC, Mr. Bird held various positions at Koch Industries from 1989 to 1997
including Director of Finance, Latin America for Koch Industries International
in Mexico City; Director of Marketing and Risk Manager for Koch Power Services
in Houston, Texas; Senior Financial Analyst for Koch International Finance
Services in Fribourg, Switzerland; Project Manager, Corporate Development for
Koch Industries in Wichita, Kansas; and Project Engineer and Maintenance Planner
for Koch Refining Company in St. Paul, Minnesota.
GREGORY E. ABEL, 41, 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, 38, 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, Senior Vice President. Mr. Anderson joined MEHC in
February 1993. Prior to that, Mr. Anderson was an attorney in private practice.
IAN A. BOURNE, 56, Executive Vice President and Chief Financial Officer of
TransAlta Corporation and a director of CE Generation and each Guarantor
subsidiary. Mr. Bourne joined TransAlta Corporation 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 Corporation, 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.
-77-
J. THOMAS COYLE, 56, 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 various positions 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, 37, Senior Vice President and Chief Financial Officer of
MEHC and Director of CE Generation and each Guarantor subsidiary. Mr. Goodman
joined MEHC in 1995 and served in various accounting positions including Senior
Vice President and Chief Accounting Officer. Prior to joining MEHC, Mr. Goodman
was a financial manager for National Indemnity Company and a senior associate at
Coopers & Lybrand.
MITCHELL L. PIRNIE, 45, Vice President, General Counsel and Director of CE
Generation and each Guarantor subsidiary. Mr. Pirnie joined MEHC in November
1997. Prior to joining MEHC, Mr. Pirnie was engaged in the private practice of
law in Omaha, Nebraska.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Funding Corporation and the Guarantors do not have a separately designated
audit committee. No member of their respective Board of Directors, as
applicable, has the qualifications required to be considered an independent
audit committee financial expert for purposes of the SEC rules and regulations.
Currently, the Funding Corporation and the Guarantors are not required to have
an audit committee or an audit committee financial expert under the
Sarbanes-Oxley Act of 2002 or any other applicable regulation.
CODE OF ETHICS
The Funding Corporation and the Guarantors have adopted a code of ethics that
applies to its principal executive officer, principal financial officer and to
its controller. The code of ethics is filed as an exhibit to this annual report
on Form 10-K.
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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Description of Capital Stock
- ----------------------------
As of December 31, 2003, 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, 2003, 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.
-78-
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. 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, TransAlta, CE Generation, Magma and any
other Affiliates of MEHC, El Paso, TransAlta, 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,
TransAlta, 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, TransAlta, CE Generation,
Magma or Affiliates thereof..
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
MEHC entered into an administrative services agreement with CE Generation. The
agreement includes principal accountant fees and services for CE Generation, the
Funding Corporation and the Guarantors. The Funding Corporation and the
Guarantors do not have preapproval policies and procedures and do not
specifically identify principal accountant fees and services as they are part of
the administrative fees paid to MEHC. The fees and services of the Funding
Corporation's and the Guarantors' principal accountant are preapproved by the
audit committee of MEHC.
-79-
PART IV
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 81.
Schedules not listed above have been omitted because
they are either not applicable, not required or the
information required to be set forth therein is
included in the consolidated financial statements or
notes thereto
b) Reports on Form 8-K
None.
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
-80-
SCHEDULE II
SALTON SEA FUNDING CORPORATION
COMBINED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
YEAR INCOME DEDUCTIONS END OF YEAR
------------ ---------- ---------- -----------
Allowance for doubtful accounts
Salton Sea Guarantors:
Year ended 2003 ............ $ 3,800 $ 2,433 $ 756 $ 5,477
Year ended 2002 ............ $ 9,829 $ 756 $ 6,785 $ 3,800
Year ended 2001 ............ $ - $ 9,829 $ - $ 9,829
Partnership Guarantors:
Year ended 2003 ............ $ 2,696 $ - $ 1,905 $ 791
Year ended 2002 ............ $14,925 $ 1,905 $14,134 $ 2,696
Year ended 2001 ............ $ - $14,925 $ - $14,925
-81-
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 February 27, 2004.
SALTON SEA FUNDING CORPORATION
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- --------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-82-
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 February 27, 2004.
SALTON SEA BRINE PROCESSING, L.P.,
a California limited partnership
By: Salton Sea Power Company, a California
corporation, its general partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- -----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- ------------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- --------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-83-
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 February 27, 2004.
SALTON SEA POWER GENERATION, L.P.,
a California limited partnership
By: Salton Sea Power Company, a California
corporation, its general partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-84-
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 February 27, 2004.
FISH LAKE POWER LLC
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-85-
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 February 27, 2004.
VULCAN POWER COMPANY
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- -----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-86-
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 February 27, 2004.
CALENERGY OPERATING CORPORATION
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-87-
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 February 27, 2004.
SALTON SEA ROYALTY LLC
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-88-
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 February 27, 2004.
LEATHERS, L.P., a California limited partnership
By: CalEnergy Operating Corporation,
a Delaware corporation, its general partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-89-
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 February 27, 2004.
ELMORE L.P., a California limited partnership
By: CalEnergy Operating Corporation,
a Delaware corporation, its general partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- ------------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- --------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-90-
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 February 27, 2004.
DEL RANCH L.P., a California limited partnership
By: CalEnergy Operating Corporation,
a Delaware corporation, its general partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-91-
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 February 27, 2004.
VPC GEOTHERMAL LLC., a Delaware corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-92-
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 February 27, 2004.
NIGUEL ENERGY COMPANY, a California corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-93-
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 February 27, 2004.
CONEJO ENERGY COMPANY, a California corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-94-
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 February 27, 2004.
SAN FELIPE ENERGY COMPANY, a California corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-95-
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 February 27, 2004.
VULCAN/BN GEOTHERMAL POWER COMPANY,
a Nevada general partnership
By: VULCAN POWER COMPANY,
a Nevada corporation, Partner
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-96-
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 February 27, 2004.
SALTON SEA POWER L.L.C.,
a Delaware Limited Liability Company
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-97-
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 February 27, 2004.
CE TURBO LLC, a Delaware Limited Liability Company
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director
-98-
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 February 27, 2004.
CE SALTON SEA INC., a Delaware Corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ---------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
/s/ Ian A. Bourne February 27, 2004
- -----------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- -------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February __, 2004
- ----------------------
Patrick J. Goodman
Director
-99-
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 February 27, 2004.
CALENERGY MINERALS LLC, a Delaware Limited Liability Company
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Gregory E. Abel February 27, 2004
- -------------------
Gregory E. Abel
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------
Patrick J. Goodman
Director, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
-100-
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 February 27, 2004.
SALTON SEA MINERALS CORP., a Delaware Corporation
By: /s/ Stefan A. Bird
------------------
Stefan A. Bird
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/ Stefan A. Bird February 27, 2004
- ------------------
Stefan A. Bird
President
(Principal Executive Officer
/s/ Gregory E. Abel February 27, 2004
- --------------------
Gregory E. Abel
Director
/s/ Patrick J. Goodman February 27, 2004
- -----------------------
Patrick J. Goodman
Director, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
/s/ Mitchell L. Pirnie February 27, 2004
- ------------------------
Mitchell L. Pirnie
Vice President, General Counsel
and Director
-101-
EXHIBIT INDEX
Exhibit No.
- -----------
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")).
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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).
-103-
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 FormS-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 Intentionally left blank.
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).
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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 Intentionally left blank.
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).
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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).
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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).
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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).
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).
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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).
-109-
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).
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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).
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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).
14.1 Salton Sea Funding Corporation - Code of Ethics for Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer.
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Accounting Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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