CEDAR BRAKES I LLC - 10-Q Quarterly Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-50828

CEDAR BRAKES I, L.L.C.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 76-0613738
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 420-2600

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of May 12, 2003, 100 percent of the membership interest of Cedar Brakes
I, L.L.C. is owned directly by Mesquite Investors, L.L.C. Such membership
interest is not publicly traded and therefore has no separate, quantifiable
market value.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CEDAR BRAKES I, L.L.C.

CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

1

CEDAR BRAKES I, L.L.C.

CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

2

CEDAR BRAKES I, L.L.C.

CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

3

CEDAR BRAKES I, L.L.C.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

We are a Delaware limited liability company organized in March 2000, under
the terms of a limited liability company agreement. We are a wholly owned
subsidiary of Mesquite Investors, L.L.C., an entity which is indirectly owned by
the Limestone Electron Trust and a subsidiary of El Paso Corporation. El Paso
Chaparral Management, L.P., a wholly owned indirect subsidiary of El Paso,
manages the operations of Mesquite Investors. We began operations on September
27, 2000 when we acquired a long-term power purchase agreement to sell electric
energy and provide electric capacity to Public Service Electric and Gas Company.

We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States Securities and Exchange Commission. Because
this is an interim period filing presented using a condensed format, it does not
include all of the disclosures required by generally accepted accounting
principles. You should read it along with our 2002 Annual Report on Form 10-K
which includes a summary of our significant accounting policies and other
disclosures. The condensed financial statements as of March 31, 2003, and for
the quarters ended March 31, 2003 and 2002, are unaudited. We derived the
condensed balance sheet as of December 31, 2002 from the audited balance sheet
filed in our 2002 Form 10-K. We believe we have made all adjustments, all of
which are of a normal, recurring nature, to fairly present our interim period
results. Due to the seasonal nature of our business, information for interim
periods may not necessarily indicate the results of operations for the entire
year.

Our accounting policies are consistent with those discussed in our 2002
Form 10-K.

Potential Changes in Mesquite Investors' Ownership

Chaparral Investors, L.L.C. is the parent of Mesquite Investors, our sole
member. Prior to March 17, 2003, Chaparral was owned approximately 20 percent by
a wholly owned subsidiary of El Paso and 80 percent by Limestone Electron Trust,
an unaffiliated third party. On March 17, 2003, El Paso contributed $1 billion
to Limestone in exchange for a non-controlling interest which increased El
Paso's effective ownership in Chaparral to approximately 90 percent. Also in
March 2003, El Paso notified Limestone that it would exercise its rights to
purchase all of the outstanding third party equity in Limestone on May 31, 2003.
If El Paso acquires the remaining Limestone equity interest in Chaparral, we
would become a wholly owned, indirect subsidiary of El Paso.

2. COMMITMENTS AND CONTINGENCIES

Power Purchase Agreement

We have a power purchase agreement with Public Service Electric that
extends through August 2013. Under this agreement, we are required to arrange
for 123 megawatts per day of electric capacity to be made available to Public
Service Electric, and we are required to sell and deliver electric energy to
Public Service Electric at established prices and at any delivery point within
the Pennsylvania-New Jersey-Maryland power system. The prices under the
agreement are specified on an annual basis and escalate each year over the
contract term. For 2002, the price was $73.53 per megawatt hour, and for 2003,
the price is $74.64 per megawatt hour, increasing annually to $92.43 per
megawatt hour in 2013. The amount of energy delivered under this agreement is
subject to an annual minimum and maximum requirement. We must deliver a minimum
of 394,000 megawatt hours annually, with 40,000 megawatt hours required in each
of the months of June through September during the on-peak hours. The remainder
of the minimum requirements must be met during the other months in the year.
During any one year, total deliveries cannot exceed the specified maximum
amounts, which range from 788,954 megawatt hours to 855,779 megawatt hours over
the life of the agreement.

4

If we fail to deliver all or part of the scheduled energy or fail to
schedule sufficient deliveries to meet the minimum energy delivery requirements
for reasons within our control, Public Service Electric's payment to us may be
reduced by a credit, if any, for energy purchased by Public Service Electric
over the prices stated in our power purchase agreement. No credits were applied
during the quarters ended March 31, 2003 or 2002.

If we fail to provide all or part of the required electric capacity for
reasons within our control, Public Service Electric must use reasonable efforts
to purchase replacement capacity in the amount of the shortfall. We must
reimburse Public Service Electric for all costs associated with the replacement
capacity. If Public Service Electric is unable to replace this capacity
shortfall, Public Service Electric's payment to us will be reduced by a credit
as specified in the power purchase agreement. Generally, the credit would equal
the deficiency charge, if any, payable by Public Service Electric as a direct
result of our failure to provide the required electric capacity. No credits were
applied during the quarters ended March 31, 2003 or 2002.

Power Services Agreement

In order to meet our electric energy delivery and electric capacity
commitments under the power purchase agreement, we entered into a power services
agreement with El Paso Merchant. The power services agreement has the same term
as the power purchase agreement. Under this agreement, we purchase energy at an
established price and at quantities sufficient to meet our obligations to Public
Service Electric. The price under the power services agreement was $29.30 per
megawatt hour in 2002, is $28.56 per megawatt hour in 2003 and will be $27.94
per megawatt hour in 2004. Beyond 2004, these prices escalate each year to
$33.75 per megawatt hour in 2013.

Under the power services agreement, El Paso Merchant must schedule and
deliver to us during each year both the minimum hourly electric energy
deliveries and the full amount of electric energy deliveries that we are
obligated to deliver under our power purchase agreement with Public Service
Electric and El Paso Merchant must also make available to us capacity credits
equal to the electric capacity we are required to provide under our power
purchase agreement with Public Service Electric. If El Paso Merchant fails to
deliver all or part of the scheduled energy to us for any reason within their
control, our payment to El Paso Merchant will be reduced by a credit calculated
in the same manner as the credit to Public Service Electric described above. No
credits were taken during the quarters ended March 31, 2003 or 2002.

The power services agreement also provides that El Paso Merchant deliver
sufficient amounts of electric capacity to meet our capacity requirements under
the power purchase agreement. If El Paso Merchant fails to provide all or part
of the capacity, for any reason within their control, our payment to El Paso
Merchant will be reduced by a credit calculated in the same manner as our
payment to Public Service Electric as a direct result of our failure to provide
capacity under the power purchase agreement. No credits were taken during the
quarters ended March 31, 2003 or 2002. El Paso Merchant's performance under this
agreement has been guaranteed by El Paso Corporation under a performance
guaranty (see Note 3).

3. RELATED PARTY TRANSACTIONS

Power Services Agreement

El Paso Merchant provides electric energy and electric capacity to us under
the power services agreement as discussed above. Purchases under this agreement
were based on market rates at the time the agreement was negotiated. Total
purchases during 2003 and 2002 are reflected as electricity
purchases -- affiliate in our condensed statements of operations. Amounts owed
under the agreement are included in accounts payable -- affiliate on our
condensed balance sheets. See Note 2 for further discussion.

Administrative Services Agreement

We have an administrative services agreement with El Paso Merchant to
provide project management, finance and accounting services to us for a fee of
$100,000 per year through 2013. In addition to the base fee, we are obligated to
reimburse El Paso Merchant for direct expenses other than project management,
finance and accounting services that may be incurred on our behalf. Fees and
expenses under this agreement are due

5

and payable only to the extent that we have sufficient cash after paying
obligations under our bond indenture. Total fees incurred under this agreement
during 2003 and 2002 are reflected as administrative fees -- affiliate in our
condensed statements of operations. Amounts owed under this agreement are
included in accounts payable -- affiliate on our condensed balance sheets.

El Paso Corporation Performance Guaranty

El Paso Corporation, the parent company of El Paso Merchant, entered into a
performance guaranty with us on September 27, 2000, which expires after the
expiration of El Paso Merchant's obligations under the power services and
administrative services agreements. Under the performance guaranty, El Paso
Corporation guarantees to us the punctual performance of all of El Paso
Merchant's obligations under the power services and administrative services
agreements.

On February 7, 2003, Standard and Poor's Ratings Services downgraded El
Paso's senior unsecured debt to a rating of "B" and on February 11, 2003,
Moody's Investors Service downgraded El Paso's senior unsecured debt ratings to
"Caa1". Both rating agencies maintain a negative outlook on El Paso's credit
ratings, indicating the possibility of further ratings downgrades.

Distributions

As permitted by the senior secured bond indenture and our limited liability
company agreement, cash distributions may be made to our member on February 15
of each year for all excess cash, provided that no event of default or defaults
have occurred and the debt coverage ratio calculated as of that date for the
most recently ended six-month period equals or exceeds 1.03 to 1.00. A
distribution of $1.2 million was paid to our member during February 2002. No
distribution was payable or paid in February 2003.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of March 31, 2003 and December 31, 2002, the carrying amounts of our
financial instruments including cash, cash equivalents and trade receivables and
payables are representative of fair value because of their short-term nature.
The fair value of our long-term debt was $244.0 million as of March 31, 2003,
and $228.6 million as of December 31, 2002. The fair value of our long-term debt
has been estimated based on quoted market prices for the same or similar issues.
The fair values of our derivative instruments are reflected on our condensed
balance sheets.

On February 10, 2003, Standard and Poor's downgraded its ratings on our
bonds to "B" and on February 12, 2003, Moody's downgraded its ratings on our
bonds to "Caa1". In January 2003, Fitch Ratings downgraded its ratings on our
bonds to "BB+" and on February 14, 2003, Fitch cut its rating further to "B".
The downgrades by all of the rating agencies are the result of previous actions
taken by the rating agencies on the credit ratings of El Paso, which guarantees
El Paso Merchant's performance under our power services and administrative
services agreements. All of the rating agencies maintain a negative outlook on
our credit ratings, indicating the possibility of further downgrades. These
downgrades and further downgrades of El Paso credit ratings could indirectly
have a negative impact on the fair value of our long-term debt.

In May 2002, Standard and Poor's lowered the senior unsecured credit rating
of our only customer, Public Service Electric, from "BBB+" to "BBB-". Although
our credit rating is not directly related to the credit rating of Public Service
Electric, an indirect result of this downgrade was a reduction in the credit
rating of our bonds in June 2002 by Standard and Poor's from "BBB" to "BBB-".
Further downgrades of Public Service Electric could indirectly have a negative
impact on the fair value of our long-term debt.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in our 2002 Form 10-K dated March 31,
2003, in addition to the condensed financial statements and notes presented in
Item 1 of this Quarterly Report on Form 10-Q.

6

RECENT DEVELOPMENTS

Downgrade of Our Bonds

On February 10, 2003, Standard and Poor's downgraded its ratings on our
bonds to "B" and on February 12, 2003, Moody's downgraded its ratings on our
bonds to "Caa1". In January 2003, Fitch Ratings downgraded its ratings on our
bonds to "BB+" from "BBB" and, on February 14, 2003, Fitch cut its ratings
further to "B". The downgrades by all of the rating agencies are the result of
previous actions taken by the rating agencies on the credit ratings of El Paso,
which guarantees El Paso Merchant's performance under our power services and
administrative services agreements. All of the rating agencies maintain a
negative outlook on our credit ratings indicating the possibility of further
downgrades.

Potential Changes in Mesquite Investors' Ownership

Chaparral Investors, L.L.C. is the parent of Mesquite Investors, our sole
member. Prior to March 17, 2003, Chaparral was owned approximately 20 percent by
a wholly owned subsidiary of El Paso and 80 percent by Limestone Electron Trust,
an unaffiliated third party. On March 17, 2003, El Paso contributed $1 billion
to Limestone in exchange for a non-controlling interest which increased El
Paso's effective ownership in Chaparral to approximately 90 percent. Also in
March 2003, El Paso notified Limestone that it would exercise its rights to
purchase all of the outstanding third party equity in Limestone on May 31, 2003.
If El Paso acquires the remaining Limestone equity interest in Chaparral, we
would become a wholly owned, indirect subsidiary of El Paso.

Downgrade of El Paso Corporation's Credit Ratings

On February 7, 2003, Standard and Poor's downgraded El Paso's senior
unsecured debt to a rating of "B." On February 11, 2003, Moody's downgraded El
Paso's senior unsecured debt ratings to "Caa1." Both rating agencies maintain a
negative outlook on El Paso's credit ratings, indicating the possibility of
further ratings downgrades. El Paso is the parent of El Paso Merchant. The
credit rating downgrades of El Paso may impact El Paso Merchant's ability to
perform under the provisions of the power services or administrative services
agreements.

El Paso Corporation Announces Exit of Energy Trading Activities

El Paso's credit downgrades in the third and fourth quarters of 2002 and
the deterioration of the energy trading environment led to its decision in
November 2002 to exit the energy trading business and pursue an orderly
liquidation of its trading portfolio. El Paso anticipates this liquidation may
occur through 2004. If El Paso seeks to assign its obligations under the power
services and administrative services agreements to another party, our indenture
requires the consent of the bondholders to any such assignment. El Paso has
guaranteed to us the punctual performance of all of El Paso Merchant's
obligations under the power services and administrative services agreements. We
are in the process of evaluating what impact, if any, this announcement will
have on these agreements. If El Paso Merchant ceases to perform its obligations
under its agreements with us and El Paso fails to meet its obligations under the
guaranty, there can be no assurance that we will be able to make payments of
principal and interest on our debt. In such event, we would be able to seek a
replacement power provider and administrative services provider and to pursue
our remedies under the contracts with El Paso Merchant and the guaranty issued
by El Paso.

El Paso Proxy Contest

On February 18, 2003, Selim Zilkha, a stockholder of El Paso, announced his
intention to initiate a proxy solicitation to replace El Paso's entire board of
directors with his own nominees and on May 12, 2003, Mr. Zilkha filed his
definitive proxy statement to that effect with the SEC. This proxy contest may
be highly disruptive and may negatively impact El Paso's ability to achieve the
stated objectives of its 2003 Operational and Financial Plan. In addition, El
Paso may have difficulty attracting and retaining key personnel until such proxy
contest is resolved. Therefore, this proxy contest, whether or not successful,
could have a material

7

adverse effect on El Paso's liquidity and financial condition, which, in turn,
could adversely affect our liquidity and financial condition.

GENERAL

Power Contract Restructurings

Our sole business is to sell electric energy and provide electric capacity
to Public Service Electric under our power purchase agreement with them. We were
formed in March 2000, but did not begin operations until September 27, 2000 when
we acquired a power purchase agreement from our affiliate, Newark Bay
Cogeneration Partnership L.P. This power purchase agreement was acquired as part
of the process of what has become known in the power industry as a "power
contract restructuring." Many domestic power plants have long-term power sales
contracts with regulated utilities that were entered into under the Public
Utility Regulatory Policies Act of 1978 (PURPA). The power sold to the utility
under these PURPA contracts is required to be delivered from a specified power
generation plant at power prices that are usually significantly higher than the
cost of power in the wholesale power market. The cost of generating power at
these PURPA power plants is typically higher than the cost that would be
incurred by obtaining the power in the wholesale power market, principally
because the PURPA power plants are less efficient than newer power generation
facilities.

In a power contract restructuring, the PURPA power purchase agreement is
amended so that the power sold to the utility does not have to be provided from
the specific power plant. Because we are able to buy lower cost power in the
wholesale power market, we have the ability to reduce the cost paid by the
utility, thereby inducing the utility to enter into the power contract
restructuring transaction. Following the contract restructuring, the power plant
operates on a merchant basis, which means that it is no longer dedicated to one
buyer and will operate only when power prices are high enough to make operations
economical. Prior to a power contract restructuring, the power plant and its
related PURPA power purchase agreement are accounted for at their historical
cost, which is either the cost of construction or, if acquired, the acquisition
cost. Revenues and expenses prior to restructuring are, in most cases, accounted
for on an accrual basis as power is generated and sold to the utility. As part
of the restructuring, any related fuel supply and steam contracts are generally
amended or terminated, the value of the remaining merchant plant is evaluated
for possible impairment, and the restructured power purchase agreements are
adjusted to their estimated fair value. The restructured power agreement can
then be sold or we can enter into an offsetting power services agreement. In
cases when we enter into a power services agreement, we use the restructured
power purchase agreement and the power services agreement, along with the
fixed-price spread between these contracts as collateral to obtain financing.
The offsetting power services agreement requires the power supplier, which can
be an affiliate or third-party, to provide long-term fixed price power in
amounts sufficient for us to meet our obligations under the restructured power
agreement.

Under the original power purchase agreement, Newark Bay sold generating
capacity and associated energy from the Newark Bay facility to Public Service
Electric and the Newark Bay facility was required to be a qualifying facility
under PURPA. Newark Bay and Public Service Electric sought to amend the original
power purchase agreement in order to achieve a number of benefits, including the
elimination of the requirement that the capacity and energy sold under the
original power purchase agreement be sourced only from the Newark Bay facility.
The elimination of this requirement benefited us because now we can source
energy from any source connected to the Pennsylvania-New Jersey-Maryland (PJM)
market, and the cost of energy sourced in this manner may be less expensive than
the cost to produce such energy at the Newark Bay facility. The benefits of the
amended power purchase agreement also include significantly more flexibility in
scheduling energy deliveries, including a greater degree of daily delivery
flexibility. From the perspective of Public Service Electric, our ability to
source lower cost power in the market allowed us to provide Public Service
Electric with a substantial reduction in the price of the energy and capacity
rates under the amended power purchase agreement compared to the prices under
the original power purchase agreement.

We purchased the original power purchase agreement from Newark Bay on
September 27, 2000, for $289.8 million. We simultaneously amended the original
power purchase agreement and began operating

8

under the restructured power purchase agreement on September 27, 2000. In order
to meet our energy delivery and electric capacity commitments under the power
purchase agreement, we entered into a power services agreement with El Paso
Merchant. The power services agreement has the same term as the power purchase
agreement and we purchase energy at an established price and at quantities
sufficient to meet our obligations to Public Service Electric.

In September 2000, we issued 8 1/2% Series A Senior Secured Bonds, due
2014, with an aggregate principal amount of $310.6 million. We completed an
exchange of the Series A bonds for registered 8 1/2% Series B Senior Secured
Bonds, due 2014, in May 2001. The terms of the Series B bonds and the Series A
bonds are substantially the same in all material respects, except that the
Series B bonds are registered with the Securities and Exchange Commission.
Scheduled payments of principal and interest on the bonds are expected to be
paid from the positive margin created between the sales of electric energy and
capacity to Public Service Electric and purchases of electric energy and
capacity from El Paso Merchant.

We account for our power purchase agreement and our power services
agreement as derivative instruments under the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. As a
result, the power purchase and power services agreements are recorded on our
condensed balance sheets at their estimated fair values, with changes in those
estimated fair values recorded in our condensed statements of operations.

As of March 31, 2003, these agreements had an estimated net fair value of
$319.6 million. For the quarter ended March 31, 2003, the change in estimated
net fair value of these agreements was a decrease of $7.0 million and was
recorded as a component of operating expenses in our condensed statement of
operations. The fair values of these agreements are calculated based on expected
cash receipts and payments under the agreements compared to the estimated future
market prices of power. These estimated market prices for power consider a
combination of available market data and pricing information supplied by a third
party. The differences between market and contractual prices are then discounted
using discount rates that consider the counterparty credit risk and current and
anticipated market conditions as reflected in the United States treasury rate.
We make adjustments to this discount rate when we believe that market changes in
the rates result in changes in fair values that can be realized. As of March 31,
2003 and 2002, the discount rates used to calculate the fair value of the power
purchase agreement were 6.44 percent and 7.70 percent and the rates used to
calculate the fair value of the power services agreement were 13.35 percent and
7.63 percent. The discount rate used in March 2003 of 13.35 percent for the
power services agreement decreased from the rate of 15.35 percent used at
December 31, 2002 due to a decrease in the counterparty credit spread.

RESULTS OF OPERATIONS

First Quarter 2003 Compared to First Quarter 2002

For the quarter ended March 31, 2003, we had a net loss of $5.4 million
compared to net income of $2.7 million for the quarter ended March 31, 2002. The
loss for the quarter ended March 31, 2003 was primarily the result of a decrease
in the volume of megawatt hours delivered and a decrease in the estimated fair
value of our power agreements. During the first quarter of 2003, we generated
operating revenues of $13.3 million from the sale of approximately 175,200
megawatt hours of electric energy and from providing electric capacity to Public
Service Electric, compared to revenues of $16.1 million from the sale of
approximately 220,000 megawatt hours of electric energy and providing electric
capacity for the same period in 2002. The decrease of approximately 44,800
megawatt hours delivered is primarily the result of higher electric energy
market prices in 2003 over 2002. As market prices for electric energy increase,
El Paso Merchant has the ability, under the power services agreement, to reduce
the megawatt hours delivered to Public Service Electric to a level no lower than
the required minimum energy deliveries under the agreement. Operating expenses
were approximately $12.2 million for the first quarter of 2003 and $7.0 million
for the first quarter of 2002. The increase in operating expenses was primarily
due to a larger decrease in the estimated fair value of our power agreements in
2003. The larger decrease in the fair value of our power agreements during 2003
was primarily due to the increase in the discount rate used to estimate the fair
value of our power services agreement and a decrease in the discount rate used
to estimate the fair value of our power purchase agreement

9

from March 2002 to March 2003. Our operating expenses also include fees incurred
under our administrative services agreement with El Paso Merchant.

LIQUIDITY AND CAPITAL RESOURCES

Cash from Operating Activities

Net cash used in operating activities was $8.3 million for the quarter
ended March 31, 2003 compared to net cash used in operating activities of $6.3
million for the same period in 2002. The increase in cash used was primarily due
to decreases in electric energy and electric capacity sales to Public Service
Electric partially offset by decreases in electricity purchases.

Cash from Financing Activities

Net cash used in financing activities was $7.5 million for the quarter
ended March 31, 2003 and consisted primarily of a $7.9 million principal payment
on our long-term debt made on February 15, 2003, partially offset by a decrease
in restricted cash.

Distributions and Debt Service

Under our bond indenture, cash distributions may be made to our member on
February 15 of each year for all excess cash, provided that no event of default
or defaults have occurred and the debt coverage ratio calculated as of that date
for the most recently ended six-month period equals or exceeds 1.03 to 1.00. A
distribution of $1.2 million was paid to our member during February 2002. No
distributions were made in February 2003.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The fair value of our debt is exposed to changing interest rates and
underlying credit risks. The fair value of our long-term, fixed rate debt was
$244.0 million as of March 31, 2003 and $228.6 million as of December 31, 2002.
The fair value of our long-term debt was estimated based on quoted market prices
for the same or similar issues.

On February 10, 2003, Standard and Poor's downgraded its ratings on our
bonds to "B" and on February 12, 2003, Moody's downgraded its ratings on our
bonds to "Caa1". In January 2003, Fitch downgraded its ratings on our bonds to
"BB+" and, on February 14, 2003, Fitch cut its ratings to "B". The downgrades by
all of the rating agencies are the results of previous actions taken by the
rating agencies on the credit ratings of El Paso, which guarantees El Paso
Merchant's performance under our power services and administrative services
agreements. All of the rating agencies maintain a negative outlook on our credit
ratings, and El Paso's credit ratings, indicating the possibility of further
downgrades. Further downgrades of El Paso's credit ratings could indirectly have
a negative impact on the fair value of our long-term debt.
10

Our power agreements are also sensitive to interest rate fluctuations since
the anticipated cash flows from these agreements are discounted at a United
States Treasury rate, adjusted for credit risk, to arrive at their fair value.
Changes in these rates impact our fair value estimates. The sensitivity of the
fair value of our power agreements to changes in interest rates is as follows:

COMMODITY PRICE RISK

Our power purchase agreement and power services agreement meet the
definition of derivatives under the provisions of SFAS No. 133, as amended, and
are carried at their estimated fair value. The fair value of these agreements at
March 31, 2003 was estimated considering the expected estimated cash receipts
and payments under these agreements using contractual prices under these
agreements compared to anticipated future power prices discounted at a
risk-adjusted rate commensurate with the term of each contract and the credit
risk of the counterparty. Our estimates of the timing of cash receipts and
payments are based on the anticipated timing of power delivery under these
agreements. These estimates also consider the minimum and maximum energy
delivery requirements under those agreements. Estimates of the future prices of
power consider the forward pricing curve of the appropriate power delivery and
receipt points, and this curve is derived from the actual prices observed in the
market and pricing information supplied by a third party. Changes in future
prices impact the fair value of these agreements.

The sensitivity of the fair value of our power agreements to changes in
commodity prices is as follows:

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures. Under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (Disclosure Controls)
and internal controls (Internal Controls) within 90 days of the filing date of
this quarterly report pursuant to Rules 13a-15 and 15d-15 under the Securities
Exchange Act of 1934 (Exchange Act).

Definition of Disclosure Controls and Internal Controls. Disclosure
Controls are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified under the Exchange Act. Disclosure Controls include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that (1)
our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper

11

use; and (3) our transactions are properly recorded and reported, all to permit
the preparation of our financial statements in conformity with generally
accepted accounting principles.

Limitations on the Effectiveness of Controls. Our management, including the
principal executive officer and principal financial officer, does not expect
that our Disclosure Controls and Internal Controls will prevent all error and
all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

No Significant Changes in Internal Controls. We have sought to determine
whether there were any "significant deficiencies" or "material weaknesses" in
our Internal Controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in our Internal Controls. This
information was important both for the controls evaluation generally and because
the principal executive officer and principal financial officer are required to
disclose that information to our Board and our independent auditors and to
report on related matters in this section of the Quarterly Report. The principal
executive officer and principal financial officer note that, from the date of
the controls evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Effectiveness of Disclosure Controls. Based on the controls evaluation, our
principal executive officer and principal financial officer have concluded that,
subject to the limitations discussed above, the Disclosure Controls are
effective to ensure that material information relating to us is made known to
management, including the principal executive officer and principal financial
officer, particularly during the period when our periodic reports are being
prepared.

Officer Certifications. The certifications from the principal executive
officer and principal financial officer required under Sections 302 and 906 of
the Sarbanes-Oxley Act of 2002 have been included herein, or as Exhibits to this
Quarterly Report, as appropriate.

12

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Each exhibit identified below is filed as part of this report. Exhibits not
incorporated by reference to a prior filing are designated by an "*"; all
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the United States Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of our long-term debt not filed herewith for the reason that the
total amount of securities authorized under any of such instruments does
not exceed 10 percent of our total consolidated assets.

b. Reports on Form 8-K

None.

13

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

CEDAR BRAKES I, L.L.C.

Date: May 15, 2003 /s/ JOHN L. HARRISON
-----------------------------------------
John L. Harrison
Senior Vice President,
Chief Financial Officer,
Treasurer and
Class A Manager
(Principal Financial Officer)

Date: May 15, 2003 /s/ BRYAN E. SEAS
-----------------------------------------
Bryan E. Seas
Vice President and Controller
(Principal Accounting Officer)

14

CERTIFICATION

I, Robert W. Baker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cedar Brakes I,
L.L.C.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 15, 2003
/s/ ROBERT W. BAKER
----------------------------------------
Robert W. Baker
President
(Principal Executive Officer)
Cedar Brakes I, L.L.C.

15

CERTIFICATION

I, John L. Harrison, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cedar Brakes I,
L.L.C.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 15, 2003
/s/ JOHN L. HARRISON
----------------------------------------
John L. Harrison
Senior Vice President,
Chief Financial Officer,
Treasurer and Class A Manager
(Principal Financial Officer)
Cedar Brakes I, L.L.C.

16

INDEX TO EXHIBITS

Each exhibit identified below is filed as part of this report. Exhibits not
incorporated by reference to a prior filing are designated by an "*"; all
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.