UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________to_________________________
Commission File Number 333-83815
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Caithness Coso Funding Corp.
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(Exact name of registrant as specified in its charter)
Delaware 94-3328762
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Coso Finance Partners California 68-0133679
Coso Energy Developers California 94-3071296
Coso Power Developers California 94-3102796
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(Exact names of Registrants as (State or other jurisdiction (IRS Employer
specified in their charters) of incorporation) Identification No.)
565 Fifth Avenue, 29th Floor, New York, New York 10017-2478
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 921-9099
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Securities registered pursuant to Section 12(g) of the Act:
9.05% Series B Senior Secured Notes Due 2009
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(Title of class)
Indicate by check mark whether the registrants (1) have 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) have 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 (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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. [ ]
None of the Registrants' Common Stock is traded in a public market.
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant:
Not applicable
Documents Incorporated by Reference
Not applicable
CAITHNESS COSO FUNDING CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003
Part I Page
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Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities (Not applicable) 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on 18
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 18
Item 9B. Other Information 19
Part III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management 21
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accounting Fees and Services 25
Part IV
Item 15. Exhibits and Financial Statement Schedules 25
2
Part I
Item 1. Business.
The Coso Projects
The Coso projects consist of three 80 MW geothermal power plants, called
Navy I, BLM and Navy II, certain transmission lines, wells, gathering system and
other related facilities. The Coso projects are located near one another in the
Mojave Desert approximately 150 miles northeast of Los Angeles, California, and
have been generating electricity since the late 1980s. Unlike fossil fuel-fired
power plants, the Coso projects' power plants use geothermal energy derived from
the natural heat of the earth's interior to generate electricity.
Coso Finance Partners (The Navy I Partnership) owns Navy I and its related
facilities, Coso Energy Developers (the BLM Partnership) owns BLM and its
related facilities and Coso Power Developers (the Navy II Partnership) owns Navy
II and its related facilities (collectively, the Coso Partnerships). The Coso
Partnerships and their affiliates own the exclusive right to explore, develop
and use, currently without any known interference from any other power
developers, a portion of the Coso Known Geothermal Resource Area.
The Navy I, BLM, and Navy II Partnership sells 100% of the electrical
energy generated at the plants to Southern California Edison (Edison) under
three long-term Standard Offer No. 4 power purchase agreements, which expires in
August 2011, March 2019 and January 2010, respectively. Each power purchase
agreement expires after the last maturity date of the senior secured notes.
(Edison is one of the largest investor-owned electric utilities in the United
States.) Under the power purchase agreements, the Coso Partnerships receive the
following payments:
o Capacity payments for being able to produce electricity at certain
levels. Capacity payments are fixed throughout the lives of the power
purchase agreements;
o Capacity bonus payments if they are able to produce electricity above
a specified, higher level. The maximum capacity bonus payment
available is also fixed throughout the lives of the power purchase
agreements; and
o Energy payments based on the amount of electricity their respective
plants actually produce.
Energy payments were fixed for the first ten years of firm operation under
the power purchase agreements. Firm operation was achieved for each Coso
Partnership when Edison and that Coso Partnership under its power purchase
agreement agreed that each generating unit at a plant was a reliable source of
generation and could reasonably be expected to operate continuously at its
effective rating. After the first ten years of firm operation and until its
power purchase agreement expires, Edison is required to make energy payments to
the Coso Partnership based on its avoided cost of energy. Edison's avoided cost
of energy is Edison's cost to generate electricity if Edison were to produce it
itself or buy it from another power producer rather than buy it from the
relevant Coso Partnership. The Edison power purchase agreements will expire in
August 2011 for the Navy I Partnership; in March 2019 for the BLM Partnership;
and in January 2010 for the Navy II Partnership.
Edison entered into an agreement (the "Agreement") with the Coso
Partnerships on June 19, 2001 that addressed renewable energy pricing and issues
concerning California's energy crisis. The Agreement, which was amended on
November 30, 2001, established May 1, 2002 as the date the Coso Partnerships
began receiving a fixed energy rate of 5.37 cents per kWh for five (5) years.
Subsequent to the five year period, Edison will be required to make energy
payments to the Coso Partnerships based on its avoided cost of energy until each
partnership's power purchase agreement expires.
3
Operating Strategy
The Coso Partnerships seek to maximize their cash flow at the Coso projects
through active management of their cost structure and the geothermal resource.
The Coso Partnerships engage Coso Operating Company (COC), which is an affiliate
of Caithness Acquisition Company, LLC (CAC), a wholly owned subsidiary of
Caithness Energy, LLC (Caithness Energy) to maintain all three plants, the
transmission lines and the geothermal resource, including well drilling.
Payments for operator fees are subordinated to all payments made under the
senior secured notes.
The Coso projects qualify as Small Power Qualifying Facilities (QF) under
the Public Utility Regulatory Policies Act (PURPA) and the rules and regulations
promulgated under PURPA by the Federal Energy Regulatory Commission (FERC).
PURPA exempts QFs, such as the Coso projects from certain federal and state
regulations. The Coso projects must continue to satisfy certain ownership and
fuel-use standards to maintain their QF status. Since their inception, the Coso
projects have satisfied these standards and expect that they will continue to do
so in the future.
The Sponsor
Caithness Energy, through its controlled affiliates, is a developer and
owner of independent power projects and is the majority owner of the Coso
projects. Caithness Equities Corporation (formerly known as Caithness
Corporation), the controlling member of Caithness Energy has been involved in
the development of long-term investment opportunities involving natural
resources for more than 25 years. Caithness Equities Corporation is one of the
two original sponsors of the Coso projects and formed Caithness Energy in 1995
to consolidate its ownership of independent power projects.
Caithness Energy believes that it is currently the second largest owner of
geothermal power projects in the United States, based on the total electrical
generating capacity of its power projects. Through its controlled affiliates,
Caithness Energy owns interests in five geothermal plants, including the Coso
projects, totaling 313 MW of generating capacity. Caithness Energy has interests
in other operating power generating facilities, including solar, wind and
natural gas, totaling an additional 2,193 MW of generating capacity.
Caithness Energy is headquartered in New York City and has affiliate
offices in California, Nevada, Colorado, New Jersey and Florida.
The Issuer
Caithness Coso Funding Corp. (Funding Corp.) is a special purpose
corporation owned entirely by the Coso Partnerships. It was formed for the
purpose of issuing the senior secured notes (Notes) on behalf of the Coso
Partnerships who have jointly, severally, and unconditionally guaranteed
repayment of the senior secured notes.
Funding Corp. has no material assets, other than the loans made to the Coso
Partnerships, and does not conduct any business, other than issuing the senior
secured notes and making the loans to the Coso Partnerships.
The Coso Known Geothermal Resource Area
The Coso projects are located in an area that has been designated as a
Known Geothermal Resources Area by the Bureau of Land Management pursuant to the
Geothermal Steam Act of 1970. The Bureau of Land Management designates an area
as a Known Geothermal Resource Area when it determines that a commercially
viable geothermal resource is likely to exist there. There are over 100 Known
Geothermal Resource Areas in the United States, most of which are located in the
western United States in tectonically active regions.
4
The Coso Known Geothermal Resource Area is located in Inyo County,
California, approximately 150 miles northeast of Los Angeles. The Coso
geothermal resource is a "liquid-dominated" hot water source contained within
the heterogeneous fractured granite rocks of the Coso Mountains. It is believed
the heat source for the Coso geothermal resource is a hot molten rock or "magma"
body located at a depth of six-to-seven miles beneath the surface of the field.
Geochemical studies indicate that the water in the Coso geothermal resource is
ancient water that has been there since the ice age or longer.
Steam Sharing Program
In 1994, the Coso Partnerships entered into a Geothermal Exchange Agreement
which implemented a steam-sharing program among the Coso projects. The purpose
of the steam-sharing program is to enhance the management and optimize the
overall use of the Coso geothermal resource. Pursuant to the steam sharing
program, the Coso Partnerships constructed an inter-project steam supply and
water injection system that links the three Coso projects and BLM North (see
page 4, BLM North) together via metered transfer lines through which the Coso
Partnerships exchange steam and other geothermal resources with one another.
As part of the steam sharing program, the Coso Partnerships plan to
conserve the geothermal resource whenever possible by, among other things,
transferring steam between and among the Coso projects and BLM North, rather
than drilling new wells at the Coso projects' sites prematurely, and expanding a
flexible field-wide water reinjection program. While the U.S. Navy and the
Bureau of Land Management have consented to the steam sharing program, each has
reserved the right, in its sole discretion, to withdraw its consent to such
transfers under certain circumstances.
In 2004, the Navy I Partnership and the Navy II Partnership incurred
aggregate royalties to the U.S Navy of approximately $2.6 million for steam
transferred by Navy I to Navy II and by Navy II to BLM under the steam sharing
program from geothermal resources located on the property on which Navy I or
Navy II, as the case may be, are situated. Of this amount, the Navy I and Navy
II Partnerships each incurred approximately $1.3 million. The BLM Partnership
reimbursed the Navy II Partnership approximately $0.4 million of the royalties
incurred by the Navy II Partnership. The BLM Partnership incurs a royalty to the
Navy II Partnership for electricity generated by BLM and sold to Edison for
steam transferred from U.S. Navy property.
Royalty and Revenue-Sharing Arrangements
The Coso Partnerships are required to make royalty payments to, and are
subject to other revenue-sharing arrangements with, the U.S. Navy, the Bureau of
Land Management and certain other persons.
Navy I and Navy II
The Navy I and Navy II Partnerships have entered into a new agreement ("New
Contract") with the United States Navy which terminates the existing contracts
that were due to expire on December 31, 2009. The New Contract commenced on
November 1, 2004 and extends the Navy I and Navy II Partnerships exclusive
rights to explore, develop and use certain geothermal resources on U.S. Navy
lands through October 31, 2034.
Under the terms of the New Contract, the royalty paid to the U.S. Navy has
been restructured so that the Navy I and Navy II Partnerships will pay at a rate
of 15% of gross revenues received up to an annual base revenue amount as stated
in the agreement. Beyond the annual base revenue amount, the U.S. Navy and the
Navy I and Navy II Partnerships will split the additional revenues, on a 50/50
basis, until the U.S. Navy receives a maximum of 20% of all gross revenue.
5
Under the terminated contracts with the U.S. Navy, the Navy I Partnership
paid royalties for Units 2 and 3 at 20% of gross revenue through 2009 and the
Navy II Partnership paid royalties at 18% of gross revenue through 2004 which
was due to increase to 20% for the period 2005 through 2009. Additionally, the
Navy I Partnership was obligated to pay a royalty for Unit I consisting of the
payment of the U.S. Navy's electric bill for the China Lake Weapons Facility,
subject to an indexed reimbursement from the U.S. Navy. The terminated contracts
also obligated the Navy I Partnership to fund an escrow account so that the Navy
I Partnership would pay the U.S. Navy $25 million on December 31, 2009. That
provision was also terminated and a new escrow arrangement was entered into so
the amount the Navy I Partnership owes the U.S. Navy on December 31, 2009 is now
$18 million. Finally, in the terminated contracts the U.S. Navy had the right to
terminate the contracts at any time for their convenience. Under the New
Contract that right has been eliminated.
BLM
The BLM Partnership pays royalties to the Bureau of Land Management under
the BLM lease. The royalty rate is 10% of the net value of the steam produced by
the BLM Partnership. This royalty rate is fixed for the life of the BLM lease.
In addition to this royalty, the BLM Partnership is obligated, in connection
with the assignment of the BLM lease to the BLM Partnership, to pay to Coso Land
Company (CLC), a general partnership of which CAC and another affiliate of
Caithness Energy are the general partners, a royalty of 5% based on the value of
the steam produced. The royalty is subordinated to the payment of all the BLM
Partnership's other royalties, all debt service and all operating costs of the
BLM Partnership. No portion of the royalty accrued to CLC has been paid to date,
since it is subordinated to payment of the project loan.
BLM North
In December 2000, the Bureau of Land Management allowed CLC to assign each
of the Coso Partnerships an undivided one-third interest in leases CLC had
previously bought from the Los Angeles Department of Water and Power (LADWP).
The assignment required each Coso Partnership to pay $8.00 per acre in
additional rent to the Bureau of Land Management. When the leased property
commences to produce geothermal steam, the Coso Partnerships will pay monthly
royalties under the LADWP leases of 10% of the value of steam produced, 5% of
the value of any by-products, and 5% of the value of commercially demineralized
water. The Bureau of Land Management may establish minimum production levels and
reduce the foregoing royalties if necessary to encourage greater recovery of
leased resources.
Operations and Maintenance
The operations and maintenance services for the Coso projects, including
the Navy I, BLM, and Navy II transmission lines, wells, gathering system, and
other related facilities, are performed by COC on behalf of the Coso
Partnerships pursuant to two separate Operation and Maintenance agreements. One
agreement pertains to operating the plant and was for an initial three years
with an automatic three year extension expiring in May 2005. The other agreement
pertains to developing the resource and expires on December 31, 2009. COC
maintains a qualified technical staff covering a broad range of disciplines
including geology, geophysics, geochemistry, drilling technology, reservoir
engineering, plant engineering, construction management, maintenance services,
production management, electric power operation and certain accounting services.
As of December 31, 2004, COC employed 85 people to operate and maintain the Coso
projects.
Insurance
The Coso Partnerships renew their insurance policy annually and currently
have property, business interruption, catastrophe and general liability
insurance. For the period February 25, 2004 to February 24, 2005 the plants were
insured up to their replacement cost for general property damage and business
interruption on an actual loss sustained basis with an indemnity period of 12
months, subject to a $250,000 deductible for property damage (and a $500,000
deductible for the turbine generator sets), with a 45-day deductible for
business interruption (including machinery breakdown). Catastrophic insurance
(including earthquake and flood) was capped at $150 million for property damage,
subject to a minimum deductible of $2.5 million or 5.0% of the loss. The
deductible for flood damage is $250,000 for any one loss. Liability insurance
coverage was $51 million (occurrence based). Operators' extra expense (control
of well) insurance is $10 million per occurrence with a $250,000 deductible.
6
Competition
The Coso Partnerships sell all electrical energy generated at the plants to
Edison under three long-term Standard Offer No. 4 power purchase agreements. The
payments under these agreements have constituted 100% of the operating revenues
of each power plant since its inception.
Environmental and Regulatory Matters
The Coso Partnerships are subject to environmental laws and regulations at
the federal, state and local levels in connection with the development,
ownership and operation of the Coso projects. These environmental laws and
regulations generally require that a wide variety of permits and governmental
approvals be obtained to construct and operate an energy-producing facility. The
facility must then operate in compliance with the terms of these permits and
approvals. If the Coso Partnerships fail to operate their facilities in
compliance with applicable laws, permits and approvals, governmental agencies
could levy fines, curtail operations, or seek orders to cease operations.
The Coso Partnerships believe they are in compliance in all material
respects with all environmental regulatory requirements applicable to the Coso
projects, and that maintaining compliance with current governmental requirements
will not require a material increase in capital expenditures or materially
adversely affect that Coso Partnership's financial condition or results of
operations. It is possible, however, that future developments, such as more
stringent requirements of environmental laws and enforcement policies
thereunder, could affect capital and other costs at the Coso projects and the
manner in which the Coso Partnerships conduct their business.
Risk Factors
Operating the Coso projects involves, among other things, general economic,
financial, competitive, legislative, legal, regulatory and other factors that
are beyond management's control. Changes in these factors could make it more
expensive to operate the Coso projects, or require additional capital
expenditures, or reduce certain benefits currently available to the Coso
Partnerships. There are a variety of other risks that affect the Coso projects,
some of which are beyond management's control, including:
o One or more of the Coso projects could perform below expected levels
of output or efficiency which would reduce revenue;
o In light of the uncertainty of the Western energy markets, Edison's
financial viability may be considered uncertain and accounts
receivable from Edison could be reduced or eliminated;
o The Coso geothermal resource could be interrupted or unavailable;
o Operating costs could increase;
o Changes in the regulatory structure which govern the current
operations of the Coso Partnerships.
7
o Future competition may lead to an accelerated depletion of the
resource;
o Energy prices paid by Edison could decrease or terminate;
o Delivery of electrical energy to Edison could be disrupted;
o Environmental problems or regulation changes could arise which could
lead to fines or a shutdown of one or more plants;
o Plant units and equipment have broken down or failed in the past and
could break down or fail in the future;
o The operators of the Coso projects could suffer labor disputes;
o The government could change permit or governmental approval
requirements restricting operations;
o Third parties could fail to perform their contractual obligations to
the Coso Partnerships; and
o Catastrophic events, such as fires, earthquakes, explosions, floods,
severe storms or other occurrences including terrorism or war, could
affect one or more of the Coso projects, the Navy or Edison.
In addition, the Coso Partnerships must meet specified performance
requirements under their respective power purchase agreements during the months
of June through September to continue to qualify for the maximum capacity and
capacity bonus payments. If one or more of the events listed above occur and
substantially affect the performance of one or more of the plants during these
months, operating revenues would be significantly decreased.
Item 2. Properties
Plants
Navy I
Navy I and its steam resource are located on the United States Naval
Weapons Center at China Lake and commenced operations in 1987. In December 2000,
Navy I acquired an undivided one-third interest in leases previously purchased
from LADWP located on Bureau of Land Management property. Geothermal steam for
Navy I is produced using 43 production and injection wells located within a
radius of approximately 3,000 feet of Navy I. Navy I consists of three separate
turbine generators, known as Units 1, 2 and 3, each with approximately 30 MW of
electrical generating capacity. Navy I's steam gathering and piping systems are
cross-connected to Navy II via metered transfers to allow steam to be
transferred from wells located on the real property covered by the LADWP leases
to Navy I and between Navy I and Navy II, pursuant to the steam sharing program.
Unit 1 commenced firm operation in 1987, and Units 2 and 3 commenced firm
operation during 1988. Navy I has an aggregate gross electrical generating
capacity of approximately 90 MW, and operated at an average operating capacity
factor of 101.3% in 2004, 100.3% in 2003, and 104.7% in 2002, based on a stated
capacity of 80 MW.
BLM
BLM and its steam resource are located on Bureau of Land Management
property, within the boundaries of the United States Naval Weapons Center at
China Lake and commenced operations in 1989. In December 2000, BLM acquired an
undivided one-third interest in leases previously purchased from LADWP which are
also located on Bureau of Land Management property. BLM is comprised of turbine
generators located at two different power blocks: the BLM East site and the BLM
8
West site. The BLM East site is located approximately 1.3 miles east of the BLM
West site. Geothermal steam for BLM is produced using 41 production and
injection wells located within a radius of approximately 4,000 feet from either
the BLM East or the BLM West site. BLM consists of three separate turbine
generators, known as Units 7, 8 and 9. Units 7 and 8 are located at the BLM East
site, each with a generating capacity of approximately 30 MW, while Unit 9 is
located at the BLM West site, with a generating capacity of approximately 30 MW.
All three units commenced firm operation during 1989. BLM's steam gathering and
piping systems are cross connected to Navy II via metered transfers to allow
steam to be transferred between Navy II and BLM pursuant to the steam sharing
program. BLM has an aggregate gross electrical generating capacity of
approximately 90 MW, and operated at an average operating capacity factor of
86.7% in 2004, 89.8% in 2003, and 93.9% in 2002, based on a stated capacity of
80 MW.
Navy II
Navy II and its steam resource are located on the United States Naval
Weapons Center at China Lake and commenced operations in 1989. In December 2000,
Navy II acquired an undivided one-third interest in leases previously purchased
from LADWP which are located on Bureau of Land Management property. Geothermal
steam for Navy II is produced using 34 production and injection wells located
within a radius of approximately 6,000 feet of Navy II. Navy II consists of
three separate turbine generators, known as Units 4, 5 and 6, each with
approximately 30 MW of electrical generating capacity. All three Navy II units
commenced firm operation in 1990. Navy II's steam supply systems are
cross-connected to Navy I and BLM steam supply systems via metered transfers to
allow steam to be transferred between or among the plants pursuant to the steam
sharing program. Navy II has an aggregate gross electrical capacity of
approximately 90 MW, and operated at an average operating capacity factor of
106.6% in 2004, 103.4% in 2003, and 100.4% in 2002, based on a stated capacity
of 80 MW.
Transmission Lines
The electricity generated by Navy I is conveyed over an approximately
28.8-mile 115 kilovolt ("kV") transmission line on the U.S. Navy and Bureau of
Land Management land that is connected to the Edison substation at Inyokern,
California. The Navy I Partnership owns and uses this transmission line and its
related facilities. The electricity generated by BLM and Navy II is conveyed
over an approximately 28.8-mile 230 kV transmission line on U.S. Navy and Bureau
of Land Management land that is also connected to the Edison substation at
Inyokern, California. Coso Transmission Line Partners, which is jointly owned by
the BLM and Navy II Partnerships, owns the BLM/Navy II transmission line and
related facilities.
Item 3. Legal Proceedings.
The Coso Partnerships are currently parties to various items of litigation
relating to day-to-day operations. Management does not believe the outcome of
such proceedings will be material to the financial condition and results of
operations of the Coso Partnerships, either individually or taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases and Equity Securities.
Not applicable.
9
Item 6. Selected Financial Data.
The selected fiscal year end financial data has been derived from the
audited financial statements of the Coso Partnerships. The information contained
in the following tables should be read in conjunction with the audited financial
statements and notes thereto included elsewhere in this report.
Navy I Partnership
and Subsidiary
(In thousands, except ratio data)
Year Ended December 31,
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2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues(c).................................... $ 60,544 $ 59,792 $ 92,065 $ 53,400 $ 52,419
Operating expenses(d).................................... (35,155) (34,037) (33,517) (29,304) (29,239)
------ ------ ------ ------ ------
Operating income......................................... 25,389 25,755 58,548 24,096 23,180
Non-Operating income (expense):
Interest expense......................................... (8,592) (9,738) (10,836) (11,732) (12,493)
Other expenses........................................... (315) (315) (315) (705) (520)
Interest and other income, net........................... 2,491 1,782 1,715 3,050 2,621
----- ----- ------ ------ ------
Net income............................................... $ 18,973 $ 15,704 $ 49,112 $ 14,709 $ 12,788
====== ====== ====== ====== ======
Operating Data:
Operating capacity factor (a)............................ 101.3% 100.3% 104.7% 108.3% 111.8%
kWh produced............................................. 711,760 702,850 733,877 758,890 785,624
See Footnotes to Selected Financial and Operating Data
BLM Partnership
(Stand-alone)
(In thousands, except ratio data)
Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues(c).................................... $ 44,746 $ 46,869 $ 81,252 $ 44,041 $ 42,174
Operating expenses(d).................................... (25,482) (24,932) (28,526) (31,396) (31,414)
------ ------ ------ ------ ------
Operating income......................................... 19,264 21,937 52,726 12,645 10,760
Non-Operating income (expense):
Interest expense......................................... (7,457) (8,018) (8,567) (8,958) (9,174)
Other expenses........................................... (255) (255) (255) (440) (318)
Interest and other income, net........................... 2,059 1,141 1,455 3,766 8,125
----- ----- ----- ----- -----
Net income............................................... $ 13,611 $ 13,881 $ 45,359 $ 7,013 $ 9,393
====== ====== ====== ===== =====
Operating Data:
Operating capacity factor (a)............................ 86.7% 89.8% 93.9% 102.8% 109.4%
kWh produced............................................. 609,100 629,470 657,813 720,130 769,098
See Footnotes to Selected Financial and Operating Data
10
Navy II Partnership
and Subsidiary
(In thousands, except ratio data)
Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues(c).................................... $ 48,129 $ 46,149 $ 79,592 $ 36,389 $ 43,054
Operating expenses(d).................................... (28,089) (27,766) (29,559) (34,615) (34,820)
------ ------ ------ ------ ------
Operating income......................................... 20,040 18,383 50,033 1,774 8,234
Non-Operating income (expense):
Interest expense......................................... (6,211) (7,070) (7,538) (8,128) (9,130)
Other expenses........................................... (217) (217) (217) (1,119) (769)
Interest and other income, net........................... 2,681 569 1,025 3,090 3,105
----- ----- ----- ----- -----
Net income (loss)........................................ $ 16,293 $ 9,888 $ 43,303 $ (4,383) $ 1,440
====== ===== ====== ===== =====
Operating Data:
Operating capacity factor (a)............................ 106.6% 103.4% 100.4% 104.9% 111.1%
kWh produced............................................. 749,040 724,600 703,920 735,210 780,709
See Footnotes to Selected Financial and Operating Data
As of December 31,
------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data (in thousands):
- ---------------------------------
Navy I Partnership and Subsidiary
Cash....................................................... $ 791 $ 1,429 $ 4,274 $ 264 $ 3,498
Restricted cash, cash equivalents and investments.......... 28,192 24,657 28,692 21,325 22,996
Property, plant and equipment, net......................... 133,624 135,871 137,497 141,652 150,422
Power purchase contract, net............................... 7,650 8,798 9,945 11,093 12,240
Total assets............................................... 186,979 187,265 197,760 195,829 201,647
Project loan (b)........................................... 86,850 97,547 110,955 122,550 134,984
Partners' capital.......................................... 76,892 66,676 65,408 52,425 46,871
BLM Partnership (stand-alone)
Cash....................................................... $ 496 $ 603 $ 1,423 $ -- $ 5,862
Restricted cash, cash equivalents and investments.......... 11,071 10,155 6,646 7,368 14,502
Property, plant and equipment, net......................... 123,903 130,519 135,853 148,417 153,618
Power purchase contract, net............................... 15,221 16,293 17,365 18,437 19,510
Total assets............................................... 162,906 170,556 174,871 183,978 201,312
Project loan (b)........................................... 74,900 84,821 89,875 96,250 100,907
Partners' capital.......................................... 56,936 54,817 56,603 52,762 69,245
Navy II Partnership and Subsidiary
Cash....................................................... $ 507 $ 78 $ 824 $ -- $ 7,741
Restricted cash, cash equivalents and investments.......... 8,609 8,281 10,855 5,517 10,214
Property, plant and equipment, net......................... 113,696 120,509 122,105 130,821 143,346
Power purchase contract, net............................... 14,437 17,232 20,026 22,820 25,614
Total assets............................................... 155,005 164,543 171,487 172,816 198,564
Project loan (b)........................................... 60,527 71,246 80,401 84,200 94,176
Partners' capital.......................................... 87,527 85,084 85,361 62,220 87,423
See Footnotes to Selected Financial and Operating Data
11
Footnotes to Selected Financial and Operating Data
(a) Based on a stated capacity of 80 MW.
(b) Reflects indebtedness owed to Funding Corp., which loaned all the proceeds
from the Notes to the Coso Partnerships at interest rates and maturities
identical to the interest rates and maturities of the senior secured notes.
(c) Reflects non-recognition of operating revenues in 2001 for the period
November 1, 2000 through March 26, 2001, based on non-collection of amounts
due for power generated and sold to Edison, which was subsequently
collected and recognized in operating revenue in 2002.
(d) Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Except for financial information contained herein, the matters discussed in
this annual report may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and subject to the safe
harbor created by the Securities Litigation Reform Act of 1995. Such statements
include declarations regarding the intent, belief or current expectations of
Caithness Coso Funding Corp. (Funding Corp.), Coso Finance Partners and
Subsidiary (the Navy I Partnership), Coso Energy Developers (the BLM
Partnership), and Coso Power Developers and Subsidiary (the Navy II
Partnership), collectively, (the Coso Partnerships) and their respective
management. Such statements may be identified by terms such as expected,
anticipated, may, will, believe or other terms or variations of such words. Any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties; actual results could differ
materially from those indicated by such forward-looking statements. Among the
important factors that could cause future operating results to differ materially
from those anticipated include, but are not limited to: (i) risks relating to
the uncertainties in the California energy market, (ii) the financial viability
of Southern California Edison, ("Edison"), (iii) risks related to the operation
of geothermal power plants (iv) the impact of avoided cost pricing along with
other pricing variables, (v) general operating risks, including resource
availability and regulatory oversight, (vi) changes in government regulation,
(vii) the effects of competition and (viii) the alleged manipulation of the
California energy market.
Capacity Utilization
For purposes of consistency in financial presentation, the plant capacity
factor for each of the Coso Partnerships is based on a nominal capacity amount
of 80MW (240MW in the aggregate). The Coso Partnerships have a gross operating
capacity that allows for the production of electricity in excess of their
nominal capacity amounts. Utilization of this operating margin is based upon a
number of factors and can be expected to vary throughout the year under normal
operating conditions.
The following data includes the operating capacity factor, capacity and
electricity production (in kWh) for each Coso Partnership on a stand-alone
basis:
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Navy I Partnership
Operating capacity factor 101.3% 100.3% 104.7%
Capacity (MW) (average) 81.03 80.23 83.78
kWh produced (000s) 711,760 702,850 733,877
12
BLM Partnership
Operating capacity factor 86.7% 89.8% 93.9%
Capacity (MW) (average) 69.34 71.86 75.09
kWh produced (000s) 609,100 629,470 657,813
Navy II Partnership
Operating capacity factor 106.6% 103.4% 100.4%
Capacity (MW) (average) 85.27 82.72 80.36
kWh produced (000s) 749,040 724,600 703,920
Total energy production for the Navy I and Navy II Partnerships increased
in 2004, as compared to 2003, due to successful implementation of well
maintenance and capital improvements including the enhancement of existing
production wells and additional steam field piping modifications that were
completed in 2003. The Coso Partnerships expect to further enhance the steam
utilization and efficiency of the projects through various plant enhancements
and additional steam-field piping modifications. With respect to the reservoir,
an injection augmentation program, aimed at improving reservoir pressure and
minimizing resource decline, is currently in the engineering design phase. The
funds necessary to implement the capital improvement program are available from
reserves established under the Notes and from excess cash flow generated after
debt service.
Total energy production for the BLM Partnership decreased in 2004 as
compared to 2003 due to a decline in steam, which management is attempting to
remediate through well maintenance capital improvements and the other programs
discussed above.
Total energy production for the Navy I and BLM Partnerships decreased in
2003, as compared to 2002, due to a decline in steam, which management is
attempting to remediate through the well maintenance, capital improvements and
the other programs discussed above.
Total energy production for the Navy II Partnership increased in 2003, as
compared to 2002, due to the success of the effort to increase production
overall, whereby the Coso Partnerships have implemented the above mentioned
projects.
Results of Operations for the years ended December 31, 2004, 2003, and 2002.
- ----------------------------------------------------------------------------
The following discusses the results of operations of the Coso Partnerships
for the years ended December 31, 2004, 2003 and 2002 (dollar amounts in tables
are in thousands, except per kWh data):
Revenue
2004 2003 2002
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Total Operating Revenues
including steam transfers
Navy I Partnership 60,544 8.5 59,792 8.5 92,065 12.5
BLM Partnership 44,746 7.3 46,869 7.4 81,252 12.4
Navy II Partnership 48,129 6.4 46,149 6.4 79,592 11.3
The Coso Partnerships sell all electricity generated to Edison under their
respective power purchase agreements. Total operating revenues consist of
capacity payments, capacity bonus payments, and energy payments, including steam
transfers discussed above.
Total operating revenues for the Navy I and Navy II Partnerships increased
in 2004, as compared to 2003, due to the increase in energy production discussed
above.
Total operating revenues for the BLM Partnership decreased in 2004, as
compared to 2003, due to the decrease in energy production discussed above.
13
Total operating revenues for the Coso Partnerships decreased in 2003 as
compared to 2002, due to the recognition of revenues generated but not
recognized for the period from November 1, 2000 through March 26, 2001. Periodic
increases in natural gas prices and imbalances between supply and demand, among
other factors, have at times led to significant increases in wholesale
electricity prices in California. During those periods, Edison had fixed tariffs
with its retail customers that were significantly below the wholesale prices it
paid in California. That resulted in significant under-recoveries by Edison of
its electricity purchase costs. On January 16, 2001, Edison announced that it
was temporarily suspending payments for energy provided, including the energy
provided by the Partnership, pending a permanent solution to its liquidity
crisis. Subsequently, pursuant to a California Public Utilities Commission
(CPUC) order, Edison resumed making payments to the Coso Partnerships beginning
with power generated on March 27, 2001. Edison also made payments equal to 10%
of the unpaid balance for power generated from November 1, 2000 to March 26,
2001 and paid interest on the outstanding amount at 7% per annum. On March 1,
2002, the Navy I, BLM and Navy II Partnerships received payment and recognized
revenue of $37.3 million, $37.1 million and $38.0 million, respectively, for
energy generated in 2000 and 2001. The decreases in operating revenue at the
Navy I and BLM Partnerships were caused by their decline in steam discussed
above. The decreases for each of the Coso Partnerships were partially offset by
the increase in the fixed energy rate to 5.37 cents per kWh paid during 2003, as
compared to the average fixed energy rate of 4.66 cents per kWh paid in 2002.
Plant Operating Expense
2004 2003 2002
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I Partnership 10,955 1.5 10,159 1.4 9,837 1.3
BLM Partnership 14,088 2.3 12,834 2.0 11,748 1.8
Navy II Partnership 9,617 1.3 9,890 1.3 10,192 1.5
Plant operating expense consists of labor and related expenses, supplies
and maintenance, property taxes, insurance, workovers and administrative
expense. Plant operating expenses have been consistent from year to year with
the following exceptions; Property taxes for the Navy I, BLM and Navy
Partnerships decreased by approximately $269,000, $350,000 and $390,000
respectively in 2004 as compared to 2003 offset by increased well workover costs
of $1,421,000, $1,002,000 and $407,000 respectively for the same periods. The
decrease in property taxes in 2004 resulted from lower assessed values, while
the increase in well workover costs resulted from the production enhancement
projects discussed above.
Plant operating expenses for the Navy I Partnership increased in 2003 as
compared to 2002, due to increased insurance costs, well workovers and an
allowance for doubtful accounts of $216,000 established based on a dispute with
Edison regarding the payment for capacity, offset by the reduction in property
tax. Plant operating expenses for the BLM Partnership increased in 2003 as
compared to 2002, due to increased insurance costs, well workovers, partially
offset by the reduction in property tax. Plant operating expenses for the Navy
II Partnership decreased in 2003 as compared to 2002, due to the reduction in
property tax and lower well workovers partially offset by the increased
insurance costs and an allowance for doubtful accounts established based on a
dispute with Edison regarding payment for capacity of $82,000.
Insurance expense for each of the Coso Partnerships increased by
approximately $75,000 in 2003 as compared to 2002, while property taxes
decreased for the Navy I, BLM, and Navy II Partnerships by approximately
$670,000, $720,000 and $610,000, respectively, for the same periods. The
significant decrease in property taxes in 2003 resulted from a correction by
Inyo county to the 2001 assessment received and paid in 2002.
14
Royalty Expense
2004 2003 2002
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I Partnership 12,747 1.8 13,081 1.9 12,914 1.8
BLM Partnership 2,313 0.4 2,778 0.4 2,436 0.4
Navy II Partnership 8,231 1.1 7,520 1.0 6,961 1.0
The royalty expense for the Navy I Partnership decreased in 2004 as
compared to 2003 due to the reduction in Unit 1 royalty resulting from reduced
tariff rates charged by Edison for the ten month period in 2004 governed under
the old Navy contract discussed above. The decrease in royalty for Unit I was
partially offset by an increase in royalty for Units 2 and 3 due to higher
revenue resulting from increased energy production in 2004 as compared to 2003,
discussed above.
The royalty expense for the BLM Partnership decreased in 2004, as compared
to 2003, due to lower revenue resulting from the decreased energy production
discussed above. The royalty expense for the Navy II Partnership increased in
2004, as compared to 2003, due to higher revenue resulting from the increased
energy production discussed above.
The royalty expenses for the Coso Partnerships increased slightly in 2003
as compared to 2002 primarily due to the increase in the fixed energy rate to
5.37 cents per kWh from 4.66 cents per kWh in 2002.
Depreciation and Amortization
Depreciation and amortization expense for the Navy I Partnership increased
in 2004, as compared to 2003, due to a new well being placed in service in 2004.
Depreciation and amortization expense for the BLM and Navy II Partnerships
remain comparable in 2004 as compared to 2003 as older wells and plant overhauls
are fully depreciated and replaced with capital additions.
Depreciation and amortization for the Coso Partnerships decreased in 2003
as compared to 2002 due to older wells and plant overhauls being fully
depreciated during 2003. The decrease for the Navy I Partnership was offset by
an increase in capitalized assets associated with the new well placed in service
in 2002.
Interest and Other Income
Interest and other income for the Navy I Partnership decreased in 2004, as
compared to the same period in 2003, due to a $1 million legal settlement and a
one-time credit of $0.5 million paid in 2003 by the California Department of
Water Resources resulting from the energy crisis of 2001, partially offset by a
property tax refund in 2004 resulting from a reduction in the prior year
assessed values. Interest and other income for the BLM and Navy II Partnerships
increased in 2004, as compared to 2003, due to property tax refunds resulting
from a reduction in the prior year assessed values.
Interest and other income for the Coso Partnerships decreased in 2003 as
compared to 2002 due to a decrease in the rate of return on investments due to
lower market rates for fixed income investments during those periods in 2003 and
decreased interest income on amounts in arrears, owed by Edison in 2001, that
were settled and paid by Edison on March 1, 2002. The decrease for the Navy I
Partnership was partially offset by the one-time credit of $0.5 million
discussed above.
Interest Expense
Interest expense for the Coso Partnerships decreases annually due to the
reduction in the principal amount of the project loans from Funding Corp.
15
Liquidity and Capital Resources
Each of the Navy I Partnership, the BLM Partnership and the Navy II
Partnership derive substantially all of their cash flow from Edison under their
power purchase agreements and from interest income earned on funds on deposit.
The Coso Partnerships have used their cash primarily for capital expenditures
for power plant improvements, resource and operating costs, distributions to
partners and payments with respect to the project loan.
The Coso Partnerships cash flow obligations over the next several years
consist of debt service payments to Funding Corp., as they come due under the
Notes. The Coso Partnerships expect to be able to meet these obligations from
operating cash flow. Historically, any excess cash after debt service has either
been reserved for capital improvements or distributed to the partners.
The Coso Partnerships ability to meet their obligations as they come due
will depend upon the ability of Edison to meet its obligations under the terms
of the standard offer No. 4 power purchase agreements and the Coso Partnerships'
ability to continue to generate electricity. Edison's shortfall in collections,
due to its bankruptcy in 2001 coupled with its near term capital requirements,
materially and adversely affected its liquidity during 2000 and 2001. In
resolution of that issue, Edison settled with the CPUC on October 2, 2001,
enabling it to recover in retail electric rates its historical shortfall in
electric purchase costs. On September 23, 2002, the United States Court of
Appeals for the Ninth Circuit issued an opinion and order on appeal from the
district court's stipulated judgment which affirmed the stipulated judgment in
part and referred questions based on California state law to the Supreme Court
of California. The appeals court stated that if the Agreement violated
California state law then the appeals court would be required to void the
stipulated judgment. California Supreme Court accepted the Ninth Circuit Court
of Appeals request to address the issues referred to it in the September 23,
2002 ruling, and subsequently found that the stipulated judgment did not violate
state laws. No further appeals have been taken in this matter. Consequently, the
Agreement remains in full force and effect. Immediately after this settlement,
Edison and each of the Coso Partnerships entered into an amendment of their
respective Agreement (referenced above) pertaining to past due obligations. The
Agreement, as amended, was approved by the CPUC in January of 2002, and
established the fixed energy rates discussed above and set payment terms for the
past due amounts owed to the Coso Partnerships by Edison. Edison's failure to
pay its future obligations may have a material adverse effect on the Coso
Partnerships ability to make debt service payments to Funding Corp., as they
come due under the Notes.
On March 1, 2002, Edison reached certain financing milestones and paid the
Coso Partnerships for revenue generated but not recognized for the period from
November 1, 2000 through March 26, 2001. The Coso Partnerships did not recognize
the revenue timely because of the uncertainty of collection. In the first
quarter of 2002, the Navy I, BLM and Navy II Partnerships recognized revenue for
energy delivered during that period of $37.3 million, $37.1 million and $38.0
million, respectively. Since, March 27, 2001 Edison has been current with
payments for the energy portion of the Coso Partnerships' revenue.
Under the depository agreement with the trustee for the notes, the Coso
Partnerships established accounts with a depository and pledged those accounts
as security for the benefit of the holders of the senior secured notes. All
amounts deposited with the depository are, at the direction of the Coso
Partnerships, invested by the depository in permitted investments. All revenues
or other proceeds actually received by the Coso Partnerships are deposited in a
revenue account and withdrawn upon receipt by the depository of a certificate
from the relevant Coso Partnerships detailing the amounts to be paid from funds
in its respective revenue account.
Net cash from operating activities for the Navy I and Navy II Partnerships
increased in 2004, as compared to 2003, due to the increased production, while
net cash from operating activities for the BLM Partnership decreased during the
same periods due to the decrease in production discussed above. Net cash from
operating activities for the Coso Partnerships decreased in 2003 as compared to
2002 primarily due to Edison's payment received in 2002 for revenue generated
but not recognized for the period from November 1, 2000 through March 26, 2001.
16
Net cash from investing activities at the Navy I Partnership decreased in
2004 as compared to 2003 due to the increase in restricted cash requirements
associated with the Notes while net cash from investing activities in the BLM
and Navy II Partnerships increased during the same periods due to a decrease in
capital expenditures. Net cash from investing activities for the Coso
Partnerships decreased in 2003 as compared to 2002 due to the increase in
restricted cash requirements associated with the notes. The decrease for the BLM
Partnership was offset by a decrease in capital expenditures for 2003.
Net cash from financing activities for the Navy I Partnerships increased in
2004, as compared to 2003, primarily due to a decrease in partner distributions
in 2004 and a reduction in the debt service payment. Net cash from financing
activities for the BLM and Navy II Partnerships decreased in 2004, as compared
to 2003, due to an increase in debt service payments and increased partner
distributions for the Navy II Partnership but partially offset by decreased
partner distributions for the BLM Partnership. Net cash flow from financing
activities for the Coso Partnerships increased in 2003 as compared to 2002
primarily due to a decrease in partner distributions in 2003.
The following is a summary of the Coso Partnerships' material contractual
obligations (in millions):
Less than 2-3 4-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ----- ------ ----- ----- -------
Project Loans..................... $ 222,279 $ 35,480 $ 85,705 $ 101,094 $ ---
Interest on the Project Loans..... 60,282 19,474 28,794 12,014 ---
Operation & Maintenance Payments.. 5,115 1,107 2,004 2,004 ---
Other long-term obligations....... 3,262 595 1,264 1,403 ---
------- ------ ------- ------- -------
$ 290,938 $ 56,061 $ 116,503 $ 115,112 $ ---
The project loans were issued under an indenture dated May 28, 1999 between
Funding Corp. and the trustee, U.S. Bank Trust NA. (see Item 8).
Other long-term obligations relate to Unit 1 at Navy 1, whereby the Navy I
Partnership is obligated to pay the U.S. Navy the sum of $18.0 million on
December 31, 2009. Payment of the obligation will be made from an established
sinking fund which the Navy I Partnership has been making payments to since
1987. That payment is secured by the existing funds on deposit so that funds
plus accrued interest are expected to aggregate $18.0 million by December 31,
2009.
Critical Accounting Policies and Estimates
Preparation of this Annual Report on Form 10-K requires the Coso
Partnerships to make estimates and assumptions that affect the reported amount
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the Coso Partnerships' financial statements, and the reported
amounts of revenue and expenses during the reporting period. The Coso
Partnerships' critical accounting policies, including the assumptions and
judgments underlying them, are disclosed under the caption "Summary of
Significant Accounting Policies" under Item 8. These policies have been
consistently applied and address such matters as revenue recognition,
depreciation methods and asset impairment recognition. While policies associated
with estimates and judgments may be affected by different assumption or
condition, the Coso Partnerships' believes its estimates and judgments
associated with the reported amounts are appropriate. Actual results may differ
from those estimates.
The Company considers the policies discussed below as critical to an
understanding of the Coso Partnerships' financial statements as application of
these policies places the most significant demands on management's judgment,
with financial reporting results relying on the estimation of matters that are
uncertain.
Accounts Receivable and Revenue Recognition - Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison. In the event that Edison is not able to make payment on amounts due, and
collection is not reasonably assured, the Coso Partnerships' will not recognize
revenue for energy delivered, until payment is collected.
17
In the event that the PPC's are amended the Coso Partnerships accounting
policies would be modified in accordance with the guidance established in
Emerging Issues Task Force (EITF) 91-6, "Revenue Recognition of Long-Term Power
Sales Contract" and EITF 01-8, "Determining Whether an Arrangement Contains a
Lease".
Revenue for capacity payments are recognized at the end of each month that
capacity is provided under the PPC's when collection is reasonably assured.
Revenue for bonus payments are recognized at the end of each month in which
actual energy delivered exceeds 85% of the plant capacity stated in the PPC's.
Impairment of Long-Lived Assets - Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Asset Retirement Obligations - The fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs should be capitalized as part of the carrying amount of the
long-lived asset. This policy was applied to the financial statements for the
Coso Partnerships' for the fiscal year beginning January 1, 2003.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
None.
Item 8. Financial Statements and Supplementary Data.
CAITHNESS COSO FUNDING CORP. AND
COSO OPERATING PARTNERSHIPS
Index Page
----- ----
Caithness Coso Funding Corp:
- ----------------------------
KPMG LLP Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2004 and 2003 F-2
Statements of Income for the years ended
December 31, 2004, 2003 and 2002 F-3
Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-4
Notes to Financial Statements F-5
Coso Finance Partners and Subsidiary:
- -------------------------------------
KPMG LLP Report of Independent Registered Public Accounting Firm F-6
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-7
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-8
Consolidated Statements of Partners' Capital for the years ended
December 31, 2004, 2003 and 2002 F-9
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-10
Notes to Consolidated Financial Statements F-11
Coso Energy Developers:
- -----------------------
KPMG LLP Report of Independent Registered Public Accounting Firm F-12
Balance Sheets as of December 31, 2004 and 2003 F-13
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-14
Statements of Partners' Capital for the years ended
December 31, 2004, 2003 and 2002 F-15
Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-16
Notes to Financial Statements F-17
Coso Power Developers and Subsidiary:
- -------------------------------------
KPMG LLP Report of Independent Registered Public Accounting Firm F-18
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-19
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-20
Consolidated Statements of Partners' Capital for the years ended
December 31, 2004, 2003 and 2002 F-21
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-22
Notes to Consolidated Financial Statements F-23
Supplemental Consolidated Unaudited Condensed quarterly Financial
information for 2004, 2003 and 2002 F-24
Coso Partnerships and Subsidiary:
- ---------------------------------
Supplemental Consolidated Condensed Combined Financial
Information for the Coso Partnerships:
Unaudited Consolidated Condensed Combined Balance Sheets as
of December 31, 2004 and 2003 F-25
Unaudited Consolidated Condensed Combined Statements of
Operations for the years ended
December 31, 2004, 2003 and 2002 F-26
Unaudited Consolidated Condensed Combined Statements of
Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-27
Notes to the Unaudited Consolidated Condensed Combined
Financial Statements F-28
Report of Independent Registered Public Accounting Firm
Caithness Coso Funding Corp.:
We have audited the accompanying balance sheets of Caithness Coso Funding Corp.
as of December 31, 2004 and 2003, and the related statements of income and cash
flows for each of the years in the three-year period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Caithness Coso Funding Corp. as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
March 17, 2005
New York, New York
/s/ KPMG, LLP
- -------------
KPMG, LLP
F-1
CAITHNESS COSO FUNDING CORP.
Balance Sheets
December 31, 2004 and 2003
(Dollars in thousands)
Assets 2004 2003
------------ ------------
Current assets:
Accrued interest receivable $ 883 1,008
Current portion of Project loan from Coso Finance Partners 15,100 10,694
Current portion of Project loan from Coso Energy Developers 8,683 9,920
Current portion of Project loan from Coso Power Developers 11,697 10,718
------------ ------------
Total current assets 36,363 32,340
Project loan from Coso Finance Partners 71,750 86,853
Project loan from Coso Energy Developers 66,217 74,901
Project loan from Coso Power Developers 48,830 60,528
------------ ------------
Total assets $ 223,160 254,622
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Senior secured notes:
Accrued interest payable $ 883 1,008
Current portion on project loans 35,480 31,332
------------ ------------
Total current liabilities 36,363 32,340
9.05% notes due December 15, 2009 186,797 222,282
Stockholders' equity (note 5) -- --
------------ ------------
Total liabilities and stockholders' equity $ 223,160 254,622
============ ============
See accompanying notes to financial statements.
F-2
CAITHNESS COSO FUNDING CORP.
Statements of Income
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
-------------- -------------- --------------
Revenue:
Interest income $ 22,260 24,828 26,931
Expense:
Interest expense (22,260) (24,828) (26,931)
-------------- -------------- --------------
Net income $ -- -- --
============== ============== ==============
See accompanying notes to financial statements.
F-3
CAITHNESS COSO FUNDING CORP.
Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
--------------- --------------- ---------------
Cash flows from investing activities - repayment
of project loans $ 31,462 27,739 21,864
--------------- --------------- ---------------
Cash flows from financing activities - repayment
of 9.05% notes (31,462) (27,739) (21,864)
--------------- --------------- ---------------
Net changes in cash -- -- --
Cash at beginning of year -- -- --
--------------- --------------- ---------------
Cash at end of year $ -- -- --
=============== =============== ===============
Supplemental cash flow disclosures:
Interest paid $ 22,385 24,950 27,026
See accompanying notes to financial statements.
F-4
CAITHNESS COSO FUNDING CORP.
Notes to Financial Statements
December 31, 2004, 2003, and 2002
(Dollars in thousands)
(1) Organization of the Corporation
Caithness Coso Funding Corp. (Funding Corp.), which was incorporated on
April 22, 1999, is a single purpose Delaware corporation formed to issue
senior secured notes (Notes) for its own account and as an agent acting on
behalf of Coso Finance Partners (CFP), Coso Energy Developers (CED), and
Coso Power Developers (CPD), collectively, the "Partnerships." The
Partnerships are California general partnerships.
On May 28, 1999, Funding Corp. sold $413,000 of Notes (see note 4).
Pursuant to separate credit agreements between Funding Corp. and each
partnership (Credit Agreements), the net proceeds from the offering of the
Notes were loaned to the Partnerships. Payment of the Notes is provided for
by payments made by the Partnerships under their respective project loans
(see note 3). Funding Corp. has no material assets, other than the project
loans, and does not conduct any operations apart from having issued the
Notes and making the project loans to the Partnerships.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
stockholders' equity, and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
Based on quoted market rates of the Notes, the fair value of the project
loans and underlying Notes as of December 31, 2004 and 2003 is $247,706 and
$253,614, respectively.
(3) Project Loans to the Partnerships
Pursuant to each Credit Agreement, each partnership shall make project loan
payments in scheduled installment amounts which, in the aggregate, are
sufficient to enable Funding Corp. to pay scheduled principal and interest
on the Notes (see note 4).
The Notes are general obligations of Funding Corp., and are secured and
perfected by: (1) first priority pledge of the promissory notes evidencing
each Partnership's obligation to repay the loan; (2) first priority lien on
the funds in the debt service cash accounts of the Partnerships; and
(3) first priority pledge of all of the outstanding capital stock of
Funding Corp. These obligations are unconditionally guaranteed by the
Partnerships and are secured and perfected by substantially all assets of
the Partnerships and the equity interests in the Partnerships. Funding
Corp., CPD, CED, and CFP are jointly and severally liable for the repayment
of the Notes.
(4) Senior Secured Notes
On May 28, 1999, Funding Corp. completed a $413,000 underwritten public
debt offering consisting of $110,000 6.8% Notes due and paid 2001 and
$303,000 9.05% Notes due 2009. The Notes were issued under an indenture
dated as of May 28, 1999 between Funding Corp. and the trustee, U.S. Bank
Trust N.A.
Payment of the Notes is provided for by payments to be made by the
Partnerships on their respective project loans (see note 3). Interest is
payable each June 15 and December 15.
The annual maturity of the $303,000 9.05% Notes for each year ending
December 31 is as follows:
Amount
------------
2005 $ 35,480
2006 38,286
2007 47,419
2008 49,261
2009 51,831
------------
$ 222,277
============
The Note indentures contain certain restrictive covenants that, among other
things, limit the ability to incur additional indebtedness, release funds
from reserve accounts, make distributions, create loans, and enter into any
transaction, merger, or consolidation.
(5) Stockholders' Equity
Funding Corp. is authorized to issue 1,000 shares of common stock, one cent
par value per share. Upon incorporating in 1999, Funding Corp. issued
100 common shares each to CFP, CED, and CPD.
(6) Risks and Uncertainties
The Partnerships sell 100% of the electrical energy generated to Southern
California Edison (Edison) under long-term power purchase contracts, and
are significantly impacted by risks beyond their control. Among the
important factors that could cause actual results to differ materially from
those anticipated include, but are not limited to: (i) risks relating to
the uncertainties in the California energy market, (ii) the financial
viability of Edison, (iii) risks related to the operation of power plants,
(iv) the impact of avoided cost pricing along with other pricing variables,
(v) general operating risks, including resource availability and regulatory
oversight, (vi) changes in government regulations, (vii) the effects of
competition, (viii) the alleged manipulation of the California energy
market, and (ix) acts of terrorism directed at the project or other
facilities affecting the normal course of business.
F-5
Report of Independent Registered Public Accounting Firm
The Partners and Management Committee
Coso Finance Partners and subsidiary:
We have audited the accompanying consolidated balance sheets of Coso Finance
Partners and subsidiary (the Partnership) as of December 31, 2004 and 2003, and
the related consolidated statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coso Finance
Partners and subsidiary as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004 in conformity with U.S. generally accepted
accounting principles.
As discussed in note 2 to the financial statements, effective January 1, 2004,
the Partnership retroactively adopted the provisions of Financial Accounting
Standards Board Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities by restating the 2003 and 2002 consolidated financial
statements and effective January 1, 2003 the Partnership adopted the provisions
of Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations.
March 17, 2005
New York, New York
/s/ KPMG, LLP
- -------------
KPMG, LLP
F-6
COSO FINANCE PARTNERS
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003
(Dollars in thousands)
Assets 2004 2003
--------------- ---------------
Current assets:
Cash $ 791 1,454
Restricted cash and cash equivalents (note 2) 13,298 11,408
Accounts receivable (net of allowances of $216) (note 2) 7,502 6,925
Prepaid expenses and other assets 702 872
Inventory 5,357 5,270
Amounts due from related parties (note 7) 1,583 1,525
-------------- ---------------
Total current assets 29,233 27,454
Restricted cash and investments (notes 2 and 11) 14,894 13,249
Property, plant, and equipment, net (note 4) 133,624 135,871
Power purchase contract, net (note 2) 7,650 8,798
Deferred financing costs, net (note 2) 1,578 1,893
--------------- ---------------
Total assets $ 186,979 187,265
=============== ===============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued liabilities (note 8) $ 4,601 4,503
Amounts due to related parties (note 7) 606 474
Current portion of project loan (note 6) 15,100 10,694
--------------- ---------------
Total current liabilities 20,307 15,671
Other liabilities (notes 2 and 5) 15,648 15,603
Amounts due to related parties (note 7) 2,382 2,462
Project loan (note 6) 71,750 86,853
--------------- ---------------
Total liabilities 110,087 120,589
Commitments and contingencies (notes 5, 6, and 11)
Partners' capital 76,892 66,676
--------------- ---------------
Total liabilities and partners' capital $ 186,979 187,265
=============== ===============
See accompanying notes to consolidated financial statements.
F-7
COSO FINANCE PARTNERS
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------------------ ------------------ ------------------
Revenue:
Energy revenues (notes 2, 7, and 11) $ 46,307 45,526 75,906
Capacity and bonus payments 14,237 14,266 16,159
------------------ ------------------ ------------------
Total revenue 60,544 59,792 92,065
------------------ ------------------ ------------------
Operating expenses:
Plant operating expenses (note 3) 10,955 10,159 9,837
Royalty expense (note 5) 12,747 13,081 12,914
Depreciation and amortization 11,453 10,797 10,766
------------------ ------------------ ------------------
Total operating expenses 35,155 34,037 33,517
------------------ ------------------ ------------------
Operating income 25,389 25,755 58,548
------------------ ------------------ ------------------
Other (income) expenses:
Interest and other income (note 2) (2,491) (1,782) (1,715)
Interest expense on project loan 8,592 9,738 10,836
Noncash interest expense 315 315 315
------------------ ------------------ ------------------
Total other expenses 6,416 8,271 9,436
------------------ ------------------ ------------------
Income before cumulative effect of
change in accounting principle 18,973 17,484 49,112
Cumulative effect of cahnge in accounting
principle (note 2) -- 1,780 --
------------------ ------------------ ------------------
Net income $ 18,973 15,704 49,112
================== ================== ==================
See accompanying notes to consolidated financial statements.
F-8
COSO FINANCE PARTNERS
AND SUBSIDIARY
Consolidated Statements of Partner's Capital
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
New CLOC
ESCA Company,
LLC LLC Total
------------------ ------------------ -------------------
Balance at December 31, 2001 $ 29,584 22,841 52,425
Net income 26,324 22,788 49,112
Distributions to partners (19,365) (16,764) (36,129)
------------------ ------------------ -------------------
Balance at December 31, 2002 36,543 28,865 65,408
Net income 8,417 7,287 15,704
Distributions to partners (7,738) (6,698) (14,436)
------------------ ------------------ -------------------
Balance at December 31, 2003 37,222 29,454 66,676
Net income 10,170 8,803 18,973
Distributions to partners (4,694) (4,063) (8,757)
------------------ ------------------ -------------------
Balance at December 31, 2004 $ 42,698 34,194 76,892
================== ================== ===================
See accompanying notes to consolidated financial statements.
F-9
COSO FINANCE PARTNERS
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------------------ ----------------- -----------------
Cash flows from operating activities:
Net income $ 18,973 15,704 49,112
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,453 10,797 10,766
Noncash interest expense 315 315 315
Noncash plant operating expense 202 204 --
Provision for doubtful account -- 216 --
Cumulative effect of change in
accounting principle -- 1,780 --
Changes in operating assets and liabilities:
Accounts receivable, prepaid expenses,
and other assets (494) 432 (4,345)
Accounts payable and accrued liabilities 98 (1,364) (625)
Amounts due from related parties (58) (96) 8,172
Amounts due to related parties 52 (116) (212)
Other 72 882 1,380
------------------ ----------------- -----------------
Net cash provided by operating activities 30,613 28,754 64,563
------------------ ----------------- -----------------
Cash flows from investing activities:
Capital expenditures (8,287) (7,765) (5,462)
Decrease (increase) in restricted cash (3,535) 4,035 (7,367)
------------------ ----------------- -----------------
Net cash provided by investing activities (11,822) (3,730) (12,829)
------------------ ----------------- -----------------
Cash flows from financing activities:
Distributions to partners (8,757) (14,436) (36,129)
Repayment of project financing loans (10,697) (13,408) (11,595)
------------------ ----------------- -----------------
Net cash used in financing activities (19,454) (27,844) (47,724)
------------------ ----------------- -----------------
Net change in cash (663) (2,820) 4,010
Cash at beginning of year 1,454 4,274 264
------------------ ----------------- -----------------
Cash at end of year $ 791 1,454 4,274
================== ================= =================
Supplemental cash flow disclosure:
Cash paid for interest $ 8,634 9,798 10,880
See accompanying notes to consolidated financial statements.
F-10
COSO FINANCE PARTNERS
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(Dollars in thousands)
(1) Organization, Operation, and Business of the Partnership
Coso Finance Partners (CFP), a California general partnership, was formed
on July 7, 1987 to refinance and construct a geothermal power plant on land
at the China Lake Naval Air Weapons Station, Coso Hot Springs, China Lake,
California. CFP is a general partnership owned by ESCA, LLC (ESCA) and New
CLOC Company, LLC (New CLOC), both Delaware limited liability companies.
The power plant is located on land owned by the United States Navy (Navy).
Under the terms of that contract, CFP develops geothermal energy and pays a
royalty to the Navy (see note 5).
CFP sells all electricity produced to Southern California Edison (Edison)
under a 24-year power purchase contract (PPC) expiring in 2011. Under the
terms of the PPC, Edison makes payments to CFP as follows:
* Contractual payments for energy delivered escalated at an average rate
of approximately 7.6% for the first ten years after the date of firm
operation (scheduled energy price period). After the scheduled energy
price period, the energy payment adjusted to the actual avoided energy
cost experienced by Edison. In August 1997, CFP completed the first
ten-year period. At that time, Edison ceased paying the scheduled
energy rates. Edison entered into an agreement (the Agreement) with
CFP on June 19, 2001 that addressed renewable energy pricing and
issues concerning California's energy crisis. The Agreement, which was
amended on November 30, 2001, established May 1, 2002 as the date from
which CFP receives a fixed energy rate of 5.37 cents per kilowatt
(kWh) for five (5) years. From January 1, 2002 through April 30, 2002,
CFP elected to receive from Edison a fixed energy rate of 3.25 cents
per kWh. The average rate of energy paid to CFP for the years ended
December 31, 2004, 2003, and 2002 was 5.37, 5.37, and 4.66 cents per
kWh, respectively. Subsequent to the five-year period, Edison will be
required to make energy payments to CFP based on its avoided cost of
energy until the PPC expires. Beyond the five-year period, CFP cannot
predict the likely level of avoided cost of energy prices under the
PPC and, accordingly, the revenues generated by CFP could fluctuate
significantly;
* Capacity payments which remain fixed over the life of the PPC to the
extent that actual energy delivered exceeds minimum levels of the
plant capacity defined in the PPC; and
* Bonus payments to the extent that actual energy delivered exceeds 85%
of the plant capacity are calculated monthly as stated in the PPC. In
2004, 2003, and 2002, the bonus payments aggregated $2,147, $2,176,
and $2,176, respectively.
Coso Operating Company, LLC (COC), an affiliated Delaware limited liability
company, provides for the operation and maintenance of the geothermal power
facilities and administrative services pursuant to certain operation and
maintenance agreements with New CLOC, the managing general partner (see
note 7).
The partnership agreement provides for distributable cash flow to be
allocated 53.6% and 46.4% to ESCA and New CLOC, respectively. For purposes
of allocating net income to partners' capital accounts, profits and losses
are allocated based on the aforementioned cash flow percentages. For income
tax purposes, certain deductions and credits are subject to special
allocations as defined in the partnership agreements.
(2) Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the assets,
liability, income, and expenses of CFP and its majority-controlled
subsidiary New CLPSI Company, LLC (collectively, the Partnership), (see
note 3). Intercompany balances and transactions have been eliminated upon
consolidation.
The consolidated financial statements include the accounts of New CLPSI
Company, LLC (CLPSI) as a result of the adoption of the Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised
December 2003), (FIN 46R) Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. An entity shall be
subject to consolidation according to the provisions of FIN 46R, if, by
design, the holders of the equity investment at risk lack any one of the
following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights; (2) the obligation to
absorb the expected losses of the entity if they occur; or (3) the right to
receive the expected residual returns of the entity if they occur. The
Company determined that CLPSI is a variable interest entity under FIN 46R
and was consolidated, effective January 1, 2004. The effects on the
Partnership's consolidated financial statements for the years ended
December 31, 2004 and 2003, were increases of $2,429 and $2,465 to assets
and liabilities, respectively.
The consolidated financial statements relating to prior periods have been
retroactively restated to consolidate the accounts of CLPSI as a direct
result of the adoption of FIN 46R. There was no cumulative effect recorded
upon the adoption of the Interpretation.
Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for
electricity delivered and sold under the PPC. As of December 31, 2003, the
Partnership established an allowance for doubtful accounts of $216, based
on a dispute with Edison regarding a payment for capacity. In October and
November, Edison limited generation to complete their transmission system
maintenance resulting in lower capacity payments. CFP is disputing Edison's
claim that the forced reduction in generation was the result of scheduled
maintenance which permits Edison to discount the capacity payment to CFP.
In addition, the Navy reimbursed CFP under the existing Navy Contract which
terminated on November 1, 2004, for electricity paid on its behalf through
October 31, 2004 (see note 5). As of December 31, 2004 and 2003, the
balance due from the Navy was $701 and $732, respectively, and is included
in accrued liabilities offsetting the royalty payable to the Navy (see note
5).
Operating revenues are recognized as income during the period in which
electricity is delivered to Edison. Revenue was recognized based on the
payment rates scheduled in CFP's PPC with Edison through August 1997. From
August 1997 through December 31, 2001, except for the period January 1,
2002 through May 31, 2007, as discussed in note 1, revenue is recognized
based on Edison's avoided energy cost until CFP's PPC expires.
Periodic increases in natural gas prices and imbalances between supply and
demand, among other factors, have at times led to significant increases in
wholesale electricity prices in California. During those periods, Edison
had fixed tariffs with its retail customers that were significantly below
the wholesale prices it paid in California. That resulted in significant
under-recoveries by Edison of its electricity purchase costs. On
January 16, 2001, Edison announced that it was temporarily suspending
payments for energy provided, including the energy provided by the
Partnership, pending a permanent solution to its liquidity crisis.
Subsequently, pursuant to a California Public Utilities Commission (CPUC)
order, Edison resumed making payments to the Partnership beginning with
power generated on March 27, 2001. Edison also made a payment equal to 10%
of the unpaid balance for power generated from November 1, 2000 to
March 26, 2001, and paid interest on the outstanding amount at 7% per
annum. That payment was made pursuant to the Agreement between Edison and
CFP described in note 1. The Agreement, as amended, which received CPUC
approval in January 2002, established the fixed energy rates discussed
above and set payment terms for past due amounts owed to the Partnership by
Edison. Due to the uncertainty surrounding Edison's ability to make payment
on past due amounts, collection was not reasonably assured and the
Partnership did not recognize revenue of $37,253 from Edison for energy
delivered during the period November 1, 2000 through March 26, 2001. On
March 1, 2002, Edison reached certain financing milestones and paid the
Partnership $37,253 for electricity generated during the period November 1,
2000 through March 26, 2001. The Partnership recognized revenue for such
electricity deliveries in March 2002.
Revenue for capacity payments is recognized at the end of each month that
capacity is provided under the PPC when collection is reasonably assured.
Revenue for bonus payments is recognized at the end of each month in which
actual energy delivered exceeds 85% of the plant capacity stated in the
PPC.
In the event that the PPC is amended the Partnership's accounting policies
would be modified in accordance with the guidance established in Emerging
Issues Task Force (EITF) 91-6, Revenue Recognition of Long-Term Power Sales
Contract and EITF 01-8, Determining Whether an Arrangement Contains a
Lease.
Fixed Assets and Depreciation
The costs of major additions and betterments are capitalized, while
replacements, maintenance, and repairs which do not improve or extend the
lives of the respective assets are expensed as incurred.
Depreciation of the operating power plant and transmission line is computed
on a straight-line basis over their estimated useful lives of 30 years and,
for significant additions, the shorter of the useful life or the remainder
of the 30-year life from the plant's commencement of operations.
Wells and Resource Development Costs
Wells and resource development costs include costs incurred in connection
with the exploration and development of geothermal resources. All such
costs, which include dry hole costs, the cost of drilling and equipping
production wells, and administrative and interest costs directly
attributable to the project, are capitalized and amortized over their
estimated useful lives when production commences. The estimated useful
lives of production wells are 10 years each; exploration costs and
development costs, other than production wells, are amortized over 30 years
and, for significant additions, the shorter of the useful life or the
remainder of the 30-year life from the plant's commencement of operations.
Deferred Plant Overhaul Costs and Well Rework Costs
Plant overhaul costs are deferred and amortized over the estimated period
between overhauls, as these costs extend the useful lives of the respective
assets. These deferred costs of $625 and $58 at December 31, 2004 and 2003,
respectively, are included in property, plant, and equipment. Currently,
plant overhauls are amortized over three to four years from the point of
completion.
Production and injection rework costs included in plant operating expenses
are expensed as incurred. For the years ended December 31, 2004, 2003, and
2002, such costs were $1,998, $577, and $305, respectively.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented separately in
the appropriate asset and liability sections of the consolidated balance
sheet.
Deferred Financing Costs
Deferred financing costs as of December 31, 2004 and 2003 consist of loan
fees and other costs of financing that are amortized over the term of the
related financing. Annual amortization of the deferred financing costs
included in noncash interest expense is $315. Accumulated amortization at
December 31, 2004 and 2003 was $2,543 and $2,228, respectively.
Power Purchase Contract
The PPC, which is amortized on a straight-line basis over the remaining
term of the PPC, will expire in 2011. Annual amortization of the PPC is
$1,147. The PPC consists of a gross carrying amount of $14,344, and
accumulated amortization at December 31, 2004 and 2003 was $6,694 and
$5,546, respectively.
Income Taxes
There is no provision for income taxes since such taxes are the
responsibility of the partners. The net difference between the tax bases
and the reported amounts of property, plant, and equipment, net at
December 31, 2004 and 2003 was $123,159 and $133,507, respectively.
Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
money market instruments purchased with initial maturities of three months
or less to be cash equivalents.
Restricted Cash and Investments
Restricted cash and investments include a capital expenditure reserve and a
sinking fund related to a lump-sum royalty payment of $18,000 to be paid to
the Navy on December 31, 2009 (see note 5) totaling $14,738 and $13,093 at
December 31, 2004 and 2003, respectively. The monthly amount deposited into
the sinking fund was approximately $111 through October 31, 2004. At
December 31, 2004 and 2003, the sinking fund account includes $7,293 of
various mortgage-backed securities with maturities in 2009 and 2007,
respectively. These mortgage-backed securities are classified as held to
maturity and reported at amortized cost, and mature as follows: $1,620 on
October 24, 2007, $480 on November 5, 2007, and $5,193 on August 15, 2009.
Restricted cash and investments also include a debt service reserve for the
project debt service required by the project loan (see note 6). The
carrying amount of restricted cash and investments at December 31, 2004 and
2003 approximated fair value, which is based on quoted market prices as
provided by the financial institution which holds the investments.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, and partners' capital and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues, expenses, and allocation of profits and
losses during the period. Actual results could differ significantly from
those estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
prepaid expenses and other assets, amounts due from related parties,
accounts payable and accrued liabilities, and amounts due to related
parties approximated fair value as of December 31, 2004 and 2003, because
of the relatively short maturities of these instruments. The project loan
as of December 31, 2004 and 2003 has an estimated fair value of $96,786 and
$105,838, respectively, based on the quoted market price of the senior
secured notes (see note 6).
Asset Retirement Obligations
In June 2001, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and amends SFAS No. 19, Financial Accounting and Reporting
by Oil and Gas Producing Companies. The Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of a fair value
can be made, and that the associated asset retirement costs be capitalized
as part of the carrying amount of the long-lived asset. The Statement is
effective for consolidated financial statements issued for fiscal years
beginning after June 15, 2002. On January 1, 2003, CFP adopted SFAS No. 143
and estimated the restoration costs CFP expects to incur when the land
lease with the Navy expires. Under the land lease, CFP is required to
remove all property, plant, and equipment to restore the land to its
original state. Adoption of SFAS No. 143 resulted in a loss from the
cumulative effect of a change in accounting principle of $1,780, a net
increase in property, plant, and equipment of $259, and an increase in
other liabilities of $2,039. On November 1, 2004 CFP entered into a new
agreement (New Contract) with the Navy, extending their land lease through
October 31, 2034 (see note 5). Adoption of the terms of the New Contract
resulted in a change in accounting estimate, resulting in a reduction of
property, plant, and equipment, net of $229, a reduction to the accumulated
liability of $1,535 and an increase in interest and other income of $1,306.
As of December 31, 2004 and 2003, the accumulated liability associated with
the restoration costs was $910 and $2,243, respectively, and is included in
other liabilities. Accretion expense for the years ended December 31, 2004
and 2003 included in plant operating expense was $202 and $204,
respectively. If CFP had adopted SFAS No. 143 retroactively to January 1,
2002, net income for the year ended December 31, 2002 would have decreased
by $199.
Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(3) Plant Operating Expense
Included in plant operating expense are general administrative expenses
that include insurance, property taxes, and other professional expenses.
For the years ended December 31, 2004, 2003, and 2002, these costs were
$5,377, $6,270, and $6,516, respectively.
(4) Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
---- ----
Power plant and gathering system $ 160,465 161,207
Transmission line 5,746 5,746
Wells and resource development costs 86,570 80,262
------- -------
252,781 247,215
Less accumulated depreciation and
amortization (119,157) (111,344)
------- -------
$ 133,624 135,871
======= =======
(5) Royalty Expense
Royalty expense for the years ended December 31, 2004, 2003, and 2002 is
summarized as follows:
2004 2003 2002
---- ---- ----
Unit 1 $ 3,202 6,047 6,281
Others 9,545 7,034 6,633
------ ------ -----
Total $ 12,747 13,081 12,914
====== ====== ======
CFP is required to make royalty payments to the Navy. On November 1, 2004,
the New Contract with the Navy terminated the existing contract that was
due to expire on December 31, 2009. The New Contract extends CFP's
exclusive right to explore, develop, and use certain geothermal resources
on Navy lands through October 31, 2034.
Under the terms of the New Contract, the royalty paid to the Navy was
restructured so that CFP will pay at a rate of 15% of gross revenues
received up to an annual base revenue amount. Beyond the annual base
revenue amount, the Navy and CFP will split the additional revenues, on a
50/50 basis, until the Navy receives a maximum of 20% of all gross revenue.
Under the original contract with the Navy, CFP was obligated to pay
royalties for Units 2 and 3 at a fixed percentage of electricity sales at
15% of revenue received through 2003, and was increased to 20% from 2004
through 2009, and a royalty for Unit I consisting of the payment of the
Navy's electric bill for the China Lake Weapons Facility, subject to an
indexed reimbursement from the Navy. The reimbursement was based on a
pricing formula for tariff rates charged by Edison, which were increased in
2001 by the CPUC. On July 10, 2003, the CPUC adopted a settlement between
Edison and other parties to lower retail electric rates effective as of
August 1, 2003. Those rates were in effect for one year, after which new
rates would have been established in accordance with CPUC guidelines and
while Edison has filed for new rates, they are not currently effective.
Additionally, under the original agreement, the Navy was compensated
annually for any savings in electrical usage at the China Lake Facility
below a baseline amount (Conserved Power). Upon termination of the existing
Navy contract, the Navy was paid $1.2 million for Conserved Power from
January 1, 2004 through October 31, 2004. The original contract obligated
CFP to fund an escrow account so that the Navy I Partnership would pay the
Navy $25 million on December 31, 2009. That provision was also terminated
and a new escrow arrangement was entered into and the amount CFP owes the
Navy under the new contract is now $18 million. That payment is secured by
the existing funds on deposit so that funds plus accrued interest are
expected to aggregate $18.0 million by December 31, 2009. Accordingly, $111
was deposited monthly through October 31, 2004. Finally, in the original
contracts the Navy had the right to terminate the contracts at any time for
its convenience, which was eliminated under the New Contract.
(6) Project Loan
On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.), a wholly
owned subsidiary of the Partnership, CED, and CPD (collectively known as
the Coso Partnerships), raised $413,000 from an offering of senior secured
notes. Funding Corp. loaned approximately $151,550 to CFP from the $413,000
debt raised from the offering of senior secured notes on terms consistent
with those of the senior secured notes. The loan consisted of one note of
$29,000 at 6.80% which was paid off on December 15, 2001, and another of
$122,550 at 9.05% which has payments due semiannually through December 15,
2009.
The annual maturity of the project loan for each year ending December 31 is
as follows:
Amount
------
2005 $ 15,100
2006 16,160
2007 17,337
2008 18,295
2009 19,958
------
$ 86,850
======
The loan contains certain restrictive covenants that, among other things,
limit the Partnership's ability to incur additional indebtedness, release
funds from reserve accounts, make distributions, create liens, and enter
into any transaction of merger or consolidation.
The Partnership, Funding Corp., CPD, and CED are jointly and severally
liable for the repayment of the senior secured notes, which are
collateralized by the assets of the Coso Partnerships.
The annual maturity of the senior secured notes for each year ending
December 31 is as follows:
Amount
------
2005 $ 35,480
2006 38,286
2007 47,419
2008 49,261
2009 51,831
-------
$ 222,277
=======
(7) Related Party Transactions
The amounts due from and to related parties at December 31, 2004 and 2003
consist of the following:
2004 2003
---- ----
Amounts due from related parties:
Coso Operating Company, LLC $ -- 116
New RVPI Company, LLC 21 --
Caithness Energy, LLC 239 239
Coso Power Developers 951 838
Coso Energy Developers 372 332
----- -----
$ 1,583 1,525
===== =====
Amounts due to related parties:
Caithness Coso Funding Corp. $ 345 388
Coso Operating Company, LLC 131 --
Caithness Corporation 76 --
Caithness Operating Company, LLC 54 86
Coso Power Developers (Noncurrent) 1,923 1,914
Coso Energy Developers (Noncurrent) 459 548
----- -----
$ 2,988 2,936
===== =====
COC and Caithness Operating Company, LLC are reimbursed monthly for
non-third-party costs incurred on behalf of CFP. These costs comprise
principally direct operating costs of the CFP geothermal facility,
allocable general and administrative costs, and an operator fee. The amount
due from COC relates to advances for payments of operating expenses. The
amount due to COC relates to reimbursements for payment of operating
expenses. For each of the years ended December 31, 2004, 2003, and 2002,
the Partnership paid COC an operators fee of $418.
CFP is charged a nonmanaging fee payable to the nonmanaging partner, ESCA,
or its assignee. For the years ended December 31, 2004, 2003, and 2002, CFP
paid $248, $243, and $241, respectively.
The amount due to Funding Corp. is accrued interest for 15 days in
December related to the project loan (see note 6).
During 1994, the Coso Partnerships entered into steam sharing agreements
under which the partnerships may transfer steam, with the resulting
incremental revenue and royalty expense shared equally by the partnerships.
In the second half of 1995, interconnection facilities between the plants
were completed and the transfer of steam commenced. CFP's steam sharing
revenue, included in energy revenues, was $8,101, $7,796, and $5,801 for
the years ended December 31, 2004, 2003, and 2002, respectively.
CLPSI is a wholly owned subsidiary of Caithness Acquisition Company, LLC
(CAC). CLPSI purchases, stores, and distributes spare parts to the Coso
Partnerships. Also, certain other maintenance facilities utilized by the
Coso Partnerships are owned by CLPSI. CFP's advances to CLPSI fund the
purchase of spare parts inventory and other assets. Intercompany balances
and transactions have been eliminated upon consolidation. CLPSI bills the
Coso Partnerships for spare parts as utilized and for use of other
facilities at amounts sufficient for CLPSI to recover its operating costs.
(8) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2004 and 2003
consist of the following:
2004 2003
-------- --------
Accrued capitalized costs $ 1,204 479
Royalty payable 1,308 3,091
Trade creditors 1,165 --
Other 924 933
-------- --------
$ 4,601 4,503
======== ========
(9) Employee Benefit Plan
The Partnership has established a 401(k) plan (the Plan) for the benefit of
eligible employees who elect to participate. Eligible employees may elect
to contribute up to 15% of their annual compensation, as defined, in the
Plan. The Partnership will match 50% of the employee's contribution up to
the first 6% of the employee's salary. Additionally, the Partnership may
elect to make a discretionary profit sharing contribution to the Plan. The
Partnership's expense relating to the Plan approximated $143, $128, and
$122 in 2004, 2003, and 2002, respectively.
(10) Settlement of Litigation
In December 2003, CFP settled outstanding litigation relating to the
failure and repair of a generator in 1999. The total net proceeds of
approximately $900 were received in December 2003 and January 2004.
(11) Commitments and Contingencies
The Partnership is required to obtain a "Financial Guarantee Bond for
Closure Costs" (Water Bond), which would be used in the event of
noncompliance of the remediation obligation for waste discharge. For the
years ended December 31, 2004 and 2003, the fair value of the Water Bond
that is reported as a noncurrent restricted investment is $156.
Settlement Agreement Between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth
Circuit (Ninth Circuit) issued an opinion and order on appeal from the
district court's stipulated judgment which affirmed the stipulated judgment
in part and referred questions based on California state law to the
California Supreme Court. The appeals court stated that if the settlement
agreement violated California state law then the appeals court would be
required to void the stipulated judgment. The California Supreme Court
accepted the Ninth Circuit's request to address the issues referred to in
the September 23, 2002 ruling. On August 21, 2003, the California Supreme
Court found that state laws were not violated as a result of the settlement
agreements. On December 19, 2003, the Ninth Circuit fully affirmed the
district court's stipulated judgment based on the reply from the California
Supreme Court. No appeal of this order was taken and it is now final.
Court of Appeals' Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC
decision, claiming that the "floor" line loss factor of 0.95 for renewable
generators violated the Public Utility Regulatory Policies Act of 1978.
Subsequently, the California Court of Appeals issued a decision on
August 20, 2002 in response to the writ affirming the January 2001 CPUC
decision, except for the 0.95 "floor," which it rejected as an abuse of
discretion by the CPUC. While this matter was appealed to the California
Supreme Court, the petition for review was denied. The Coso Partnerships
are currently evaluating potential actions to redress this issue. The Coso
Partnerships' Agreements set the loss factor at 1.0 for energy sold between
May 2002 through May 2007. After April 2007, the Coso Partnerships will
have a line loss factor of less than 1.0, effectively decreasing revenues
if Edison's challenge to the CPUC ruling stands. The Coso Partnerships
cannot predict whether any subsequent action on this matter will be
successful.
(12) Risks and Uncertainties
CFP sells 100% of the electrical energy generated to Edison under a
long-term PPC, and may be significantly impacted by risks beyond the
Partnership's control. Among the important factors that could cause future
operating results to differ materially from those anticipated include, but
are not limited to: (i) risks relating to the uncertainties in the
California energy market, (ii) the financial viability of Edison,
(iii) risks related to the operation of power plants, (iv) the impact of
avoided cost pricing along with other pricing variables, including natural
gas, (v) general operating risks, including resource availability and
regulatory oversight, (vi) changes in government regulations, (vii) the
effects of competition, (viii) the alleged manipulation of the California
energy market, and (ix) acts of terrorism directed at the project or other
facilities affecting the normal course of business.
F-11
Report of Independent Registered Public Accounting Firm
The Partners and Management Committee
Coso Energy Developers:
We have audited the accompanying balance sheets of Coso Energy Developers
(the Partnership) as of December 31, 2004 and 2003, and the related statements
of operations, partners' capital, and cash flows for each of the years in the
three-year period ended December 31, 2004. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Coso Energy Developers as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
As discussed in note 2 to the financial statements, effective January 1, 2003,
the Partnership adopted the provisions of Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations.
March 17, 2005
New York, New York
/s/ KPMG, LLP
- -------------
KPMG, LLP
F-12
COSO ENERGY DEVELOPERS
Balance Sheets
December 31, 2004 and 2003
(Dollars in thousands)
Assets 2004 2003
--------------- ---------------
Current assets:
Cash $ 496 603
Restricted cash and cash equivalents (note 2) 10,850 9,941
Accounts receivable (note 2) 6,636 6,830
Prepaid expenses and other assets 930 1,094
Amounts due from related parties (note 7) 485 442
-------------- --------------
Total current assests 19,397 18,910
Restricted investments (notes 2 and 11) 221 214
Investment in Coso Transmission Line Partners (note 3) 2,430 2,542
Advances to New CLPSI Company, LLC (note 4) 459 548
Property, plant, and equipment (note 5) 123,903 130,519
Power purchase contract, net (note 2) 15,221 16,293
Deferred financing costs, net (note 2) 1,275 1,530
--------------- --------------
Total assets $ 162,906 170,556
=============== ==============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued liabilities (note 8) $ 1,710 2,114
Amounts due to related parties (note 7) 1,648 1,473
Current portion of project loan (note 6) 8,683 9,920
--------------- --------------
Total current liabilities 12,041 13,507
Other liabilities (note 2) 1,263 1,522
Amounts due to related parties (note 7) 26,449 25,809
Project loan (note 6) 66,217 74,901
--------------- --------------
Total liabilities 105,970 115,739
Commitments and contingencies (notes 6 and 11)
Partners' capital 56,936 54,817
--------------- --------------
Total liabilities and partners' capital $ 162,906 170,556
=============== ==============
See accompanying notes to financial statements.
F-13
COSO ENERGY DEVELOPERS
Statements of Operations
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Revenues:
Energy revenues (notes 2, 7, and 11) $ 30,833 32,930 65,489
Capacity and bonus payments 13,913 13,939 15,763
----------- ---------- ----------
Total revenues 44,746 46,869 81,252
----------- ---------- ----------
Operating expenses:
Plant operating expense (note 9) 14,088 12,834 11,748
Royalty expense 2,313 2,778 2,436
Depreciation and amortization 9,081 9,320 14,342
----------- ---------- ----------
Total operating expenses 25,482 24,932 28,526
----------- ---------- ----------
Operating income 19,264 21,937 52,726
----------- ---------- ----------
Other (income)/expenses:
Interest and other income (2,059) (1,141) (1,455)
Interest expense on project loan 7,457 8,018 8,567
Noncash interest expense 255 255 255
----------- ---------- ----------
Total other expenses 5,653 7,132 7,367
----------- ---------- ----------
Income before cumulative effect
of change in accounting principle 13,611 14,805 45,359
Cumulative effect of change in accounting
principle (note 2) -- 924 --
----------- ---------- ----------
Net income $ 13,611 13,881 45,359
=========== ========== ==========
See accompanying notes to financial statements.
F-14
COSO ENERGY DEVELOPERS
Statements of Partners' Capital
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
Caithness
Coso New
Holdings, CHIP
LLC Company, LLC Total
------------ ------------ ------------
Balance at December 31, 2001 $ 34,407 18,355 52,762
Distributions to partners (21,589) (19,929) (41,518)
Net income 23,587 21,772 45,359
------------ ------------ -------------
Balance at December 31, 2002 36,405 20,198 56,603
Distributions to partners (8,147) (7,520) (15,667)
Net income 7,218 6,663 13,881
------------ ------------ -------------
Balance at December 31, 2003 35,476 19,341 54,817
Distributions to partners (5,976) (5,516) (11,492)
Net income 7,078 6,533 13,611
------------ ------------ -------------
Balance at December 31, 2004 $ 36,578 20,358 56,936
============ ============ =============
See accompanying notes to financial statements.
F-15
COSO ENERGY DEVELOPERS
Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 13,611 13,881 45,359
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,081 9,320 14,342
Noncash interest expense 255 255 255
Noncash plant operating expense 124 112 --
Cumulative effect of change in accounting
principle -- 924 --
Changes in operating assets and liabilities:
Accounts receivable, prepaid expenses
and other assets 358 127 (4,263)
Advances to New CLPSI Company, LLC 89 126 115
Accounts payable and accrued liabilities (404) 470 (6,055)
Amounts due from related parties (43) (21) (20)
Other (289) (144) 432
Amounts due to related parties 815 965 (950)
----------- ----------- ------------
Net cash provided by operating activities 23,597 26,015 49,215
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (1,487) (2,716) (706)
Investment in Coso Transmission Line Partners 112 111 85
(Increase) decrease in restricted cash (916) (3,509) 722
----------- ----------- ------------
Net cash (used in) provided by
investing activities (2,291) (6,114) 101
----------- ----------- ------------
Cash flows from financing activities:
Distributions to partners (11,492) (15,667) (41,518)
Repayment of project financing loans (9,921) (5,054) (6,375)
----------- ----------- ------------
Net cash used in financing activities (21,413) (20,721) (47,893)
----------- ----------- ------------
Net change in cash (107) (820) 1,423
Cash at beginning of year 603 1,423 --
----------- ----------- ------------
Cash at end of year $ 496 603 1,423
=========== =========== ============
Supplemental cash flow disclosure:
Cash paid for interest $ 7,497 8,042 8,595
See accompanying notes to financial statements.
F-16
COSO ENERGY DEVELOPERS
Notes to Financial Statements
December 31, 2004, 2003, and 2002
(Dollars in thousands)
(1) Organization, Operation, and Business of the Partnership
Coso Energy Developers (CED or the Partnership), a California general
partnership, was founded on March 31, 1988, in connection with financing
the construction of a geothermal power plant on land leased from the U.S.
Bureau of Land Management (BLM) at Coso Hot Springs, China Lake,
California. CED is a general partnership owned by Caithness Coso Holdings,
LLC (CCH), a California limited liability company, and New CHIP Company,
LLC (New CHIP), a Delaware limited liability company, which are affiliates
of CED.
The CED power plants are located on land owned by BLM. There are turbine
generators located at both the East and West power locks. CED pays
royalties to BLM of 10% of the net value of the steam produced.
The primary BLM geothermal lease had an initial term of ten years ending in
1998, and thereafter is subject to automatic extension until October 31,
2035, so long as geothermal steam is commercially produced. In addition,
the lease may be extended to 2075 at the option of BLM. Coso Land Company
(CLC), the original leaseholder, retained a 5% overriding royalty from
interest based on the value of the steam produced. CLC was a joint venture
between Caithness Acquisition Company, LLC (CAC) and an affiliate to CCH.
The Partnership sells all electricity produced to Southern California
Edison (Edison) under a 30-year power purchase contract (the PPC) expiring
in 2019. Under the terms of the PPC, Edison makes payments to CED as
follows:
* Contractual payments for energy delivered escalated at an average rate
of approximately 7.6% for the first ten years after the date of firm
operation (scheduled energy price period). After the scheduled energy
price period, the energy payment adjusted to the actual avoided energy
cost experienced by Edison. In March 1999, the Partnership completed
the ten-year fixed price payment period and Edison ceased paying the
scheduled energy rates. Edison entered into an agreement
(the Agreement) with the Partnership on June 19, 2001 that addressed
renewable energy pricing and issues concerning California's energy
crisis. The Agreement, which was amended on November 30, 2001,
established May 1, 2002 as the date when the Partnership will begin
receiving a fixed energy rate of 5.37 cents per kilowatt (kWh) for
five (5) years. From January 1, 2002 through April 30, 2002, CED
elected to receive from Edison a fixed energy rate of 3.25 cents per
kWh. The average rate of energy paid to the Partnership for the years
ended December 31, 2004, 2003, and 2002 was 5.37, 5.37, and 4.66 cents
per kWh, respectively. Starting May 1, 2002, CED received 5.37 cents
per kWh, pursuant to the Agreement discussed above. Subsequent to the
five-year period, Edison will be required to make energy payments to
the Partnership based on its avoided cost of energy until the PPC
expires. Beyond the five-year period, the Partnership cannot predict
the likely level of avoided cost of energy prices under the PPC and,
accordingly, the revenues generated by the Partnership could fluctuate
significantly;
* Capacity payments which remain fixed over the life of the PPC to the
extent that actual energy delivered exceeds minimum levels of the
plant capacity defined in the PPC; and
* Bonus payments to the extent that actual energy delivery exceeds 85%
of the plant capacity, are calculated monthly as stated in the PPC. In
2004, 2003, and 2002, the bonus payments aggregated $2,100, $2,126,
and $2,126, respectively.
Coso Operating Company, LLC (COC), an affiliated Delaware limited liability
company, provides for the operation and maintenance of the geothermal power
facilities and administrative services pursuant to certain operation and
maintenance agreements with New CHIP, the managing general partner (see
note 7).
The partnership agreement provides for distributable cash flow to be
allocated 48% to New CHIP and 52% to CCH. For purposes of allocating net
income to partners' capital accounts, profits and losses are allocated
based on the aforementioned cash flow percentages. For income tax purposes,
certain deductions and credits are subject to special allocations as
defined in the partnership agreement.
(2) Summary of Significant Accounting Policies
Accounts Receivable and Revenue Recognition
Accounts receivable primarily consist of receivables from Edison for
electricity delivered and sold under the PPC. Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison. Subsequent to the five-year period stated in the Agreement, except
for the period January 1, 2002 through April 30, 2002, as discussed in
note 1, revenue is recognized based on Edison's avoided energy cost, until
the Partnership's PPC expires.
Periodic increases in natural gas prices and imbalances between supply and
demand, among other factors, have at times led to significant increases in
wholesale electricity prices in California. During those periods, Edison
had fixed tariffs with its retail customers that were significantly below
the wholesale prices it paid in California. That resulted in significant
under-recoveries by Edison of its electricity purchase costs. On
January 16, 2001, Edison announced that it was temporarily suspending
payments for energy provided, including the energy provided by the
Partnership, pending a permanent solution to its liquidity crisis.
Subsequently, pursuant to a California Public Utilities Commission (CPUC)
order, Edison resumed making payments to the Partnership beginning with
power generated on March 27, 2001. Edison also made a payment equal to 10%
of the unpaid balance for power generated from November 1, 2000 to
March 26, 2001 and paid interest on the outstanding amount at 7% per annum.
That payment was made pursuant to the Agreement between Edison and the
Partnership described in note 1. The Agreement, as amended, which received
CPUC approval in January 2002, established the fixed energy rates discussed
above and set payment terms for past due amounts owed to the Partnership by
Edison. Due to the uncertainty surrounding Edison's ability to make payment
on past due amounts, collection was not reasonably assured and the
Partnership did not recognize revenue of $37,068 from Edison for energy
delivered during the period November 1, 2000 through March 26, 2001. On
March 1, 2002, Edison reached certain financing milestones and paid the
Partnership $37,068 for electricity generated during the period November 1,
2000 through March 26, 2001. The Partnership recognized revenue for such
electricity deliveries in March 2002.
Revenue for capacity payments is recognized at the end of each month that
capacity is provided under the PPC when collection is reasonably assured.
Revenue for bonus payments is recognized at the end of each month in which
actual energy delivered exceeds 85% of the plant capacity stated in the
PPC.
In the event that the PPC is amended, the Partnership's accounting policies
would be modified in accordance with the guidance established in Emerging
Issues Task Force (EITF) 91-6, Revenue Recognition of Long-Term Power Sales
Contracts, and EITF 01-8, Determining Whether an Arrangement Contains a
Lease.
Fixed Assets and Depreciation
The costs of major additions and betterments are capitalized, while
replacements, maintenance, and repairs, which do not improve or extend the
life of the respective assets, are expensed as incurred.
Depreciation of the power plant and transmission line is computed on a
straight-line basis over their estimated useful lives of 30 years and, for
significant additions, the shorter of the useful life or the remainder of
the 30-year life from the plant's commencement of operations.
Wells and Resource Development Costs
Wells and resource development costs include costs incurred in connection
with the exploration and development of geothermal resources. All such
costs, which include dry hole costs, the cost of drilling and equipping
production wells, and administrative and interest costs directly
attributable to the project are capitalized and amortized over their
estimated useful lives when production commences. The estimated useful
lives of production wells are 10 years each; exploration costs and
development costs, other than production wells, are amortized over 30 years
and, for significant additions, the shorter of the useful life or the
remainder of the 30-year life from the plant's commencement of operations.
Deferred Plant Overhaul Costs and Well Rework Costs
Plant overhaul costs are deferred and amortized over the estimated period
between overhauls as these costs extend the life of the respective assets.
These deferred costs of $199 and $420 at December 31, 2004 and 2003,
respectively, are included in property, plant, and equipment. Currently,
plant overhauls are amortized over three years from the point of
completion.
Production and injection rework costs included in plant operating expenses
are expensed as incurred during the year. For the years ended December 31,
2004, 2003, and 2002, such costs were $2,495, $1,493, and $0, respectively.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Deferred Financing Costs
Deferred financing costs as of December 31, 2004 and 2003 consist of loan
fees and other costs of financing that are amortized over the term of the
related financing. Annual amortization of the deferred financing costs
included in noncash interest expense is $255. Accumulated amortization at
December 31, 2004 and 2003 was $1,757 and $1,502, respectively.
Power Purchase Contract
Intangible asset as of December 31, 2004 and 2003 consists of the PPC that
is amortized on a straight-line basis over the remaining term of the PPC,
which will expire in 2019. Annual amortization of the PPC is $1,072. The
PPC consists of a gross carrying amount of $21,443, and accumulated
amortization at December 31, 2004 and 2003 was $6,222 and $5,150,
respectively.
Income Taxes
There is no provision for income taxes since such taxes are the
responsibility of the partners. The net difference between the tax bases
and the reported amounts of property, plant, and equipment, net at
December 31, 2004 and 2003 was $106,270 and $123,010, respectively.
Cash Equivalents
For purposes of the statements of cash flows, CED considers all money
market instruments purchased with an initial maturity of three months or
less to be cash equivalents.
Restricted Cash and Investments
As of December 31, 2004 and 2003, the Partnership's investments were
classified as held to maturity and reported at amortized cost. Included in
restricted cash and investments are capital expenditure reserves and debt
service reserve for the project debt service required by the project loan
(see note 6). The carrying amount of restricted cash and investments at
December 31, 2004 and 2003 approximated fair value, which is based on
quoted market prices as provided by the financial institution that holds
the investments.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
partners' capital and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues,
expenses, and the allocation of profits and losses during the period.
Actual results could differ significantly from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
prepaid expenses and other assets, amounts due from related parties,
accounts payable and accrued liabilities, and amounts due to related
parties approximated fair value as of December 31, 2004 and 2003, because
of the relatively short maturity of these instruments. The project loan as
of December 31, 2004 and 2003 has an estimated fair value of $83,469 and
$92,031, respectively, based on the quoted market price of the senior
secured notes (see note 6).
The investment in Coso Transmission Line Partners (see note 3) and advances
to New CLPSI Company, LLC (CLPSI) (see note 4) approximate the fair value.
Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligations. This Statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and amends SFAS
No. 19, Financial Accounting and Reporting by Oil and Gas Producing
Companies. The Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of a fair value can be made, and that the
associated asset retirement costs be capitalized as part of the carrying
amount of the long-lived asset. The Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. On
January 1, 2003, CED adopted SFAS No. 143 and estimated the restoration
costs CED expects to incur when the land lease with BLM expires. Under the
land lease, CED is required to remove all property, plant, and equipment to
restore the land to its original state. Adoption of SFAS No. 143 resulted
in a loss from the cumulative effect of a change in accounting principle of
$924, a net increase in property, plant, and equipment of $198, and an
increase in other liabilities of $1,122. As of December 31, 2004 and 2003,
the accumulated liability associated with the restoration costs was $1,357
and $1,234, respectively, and is included in other liabilities. Accretion
expense for the years ended December 31, 2004 and 2003 included in plant
operating expense was $123 and $112, respectively. If CED had adopted SFAS
No. 143 retroactively to January 1, 2002, net income for the year ended
December 31, 2002 would have decreased by $110.
New Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), (FIN 46) Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation is to be
applied in the first fiscal year or interim period beginning after December
15, 2003 to enterprises that hold a variable interest in all entities that
are not special purpose entities. There is no effect of the application of
this Interpretation on CED's financial statements.
(3) Investment in Coso Transmission Line Partners
Coso Transmission Line Partners (CTLP) is a partnership owned 46.67% by CED
and 53.33% by Coso Power Developers (CPD), which owns the transmission line
and facilities connecting the power plants owned by CED and CPD to the
transmission line owned by Edison, at Inyokern, California, located
28 miles south of the plants. CTLP charges CED and CPD for the use of the
transmission line at amounts sufficient for CTLP to recover its operating
costs. These charges are recorded by CED as operating expenses and
reflected as an increase in CED's payable to CTLP (see note 7).
(4) Advances to New CLPSI Company, LLC
CLPSI is a wholly owned subsidiary of CAC. CLPSI purchases, stores, and
distributes spare parts to CED, CPD, and Coso Finance Partners (CFP)
(collectively known as the Coso Partnerships). Also, certain other
maintenance facilities utilized by the Coso Partnerships are owned by
CLPSI. CED's advances to CLPSI fund the purchase of spare parts inventory
and other assets. CLPSI bills the Coso Partnerships for spare parts as
utilized and for use of the other facilities at amounts sufficient for
CLPSI to recover its operating costs.
(5) Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
-------- --------
Power plant and gathering system $ 148,751 148,198
Transmission line 9,120 9,120
Wells and resources development costs 93,483 93,612
------- -------
251,354 250,930
Less accumulated depreciation and amortization (127,451) (120,411)
------- -------
$ 123,903 130,519
======= =======
(6) Project Loan
On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.), a wholly
owned subsidiary of the Coso Partnerships, raised $413,000 from an offering
of senior secured notes. Funding Corp. loaned approximately $108,000 to CED
from the $413,000 debt raised from the offering of senior secured notes on
terms consistent with those of the senior secured notes. The loan consisted
of one note of $11,650 at 6.80%, which was paid off on December 15, 2001,
and another of $96,250 at 9.05%, which has payments due semi-annually
through December 15, 2009.
The annual maturity of the project loan for each year ending December 31 is
as follows:
Amount
------
2005 $ 8,683
2006 10,388
2007 17,552
2009 18,574
2009 19,703
------
$ 74,900
======
The loan contains certain restrictive covenants that, among other things,
limit the Partnership's ability to incur additional indebtedness, release
funds from reserve accounts, make distributions, create liens, and enter
into any transaction of merger or consolidation.
The Partnership, Funding Corp., CPD, and CFP are jointly and severally
liable for the repayment of the senior secured notes, which are
collateralized by the assets of the Coso Partnerships.
The annual maturity of the senior secured notes for each year ending
December 31 is as follows:
Amount
------
2005 $ 35,480
2006 38,286
2007 47,419
2009 49,261
2009 51,831
-------
$ 222,277
=======
(7) Related Party Transactions
The amounts due from and to related parties at December 31, 2004 and 2003
consist of the following:
2004 2003
---- ----
Amounts due from related parties:
New RVPI Company, LLC $ 21 --
Coso Land Company:
Principal 141 141
Accrued interest 323 301
------ ------
$ 485 442
====== ======
Amounts due to related parties:
Coso Power Developers $ 379 380
Coso Finance Partners 372 332
Coso Land Company (noncurrent) 26,449 25,809
Caithness Coso Funding Corp. 297 337
Coso Operating Company, LLC 555 350
Caithness Operating Company, Inc. 45 74
------ ------
$ 28,097 27,282
====== ======
COC and Caithness Operating Company, Inc are reimbursed monthly for
non-third-party costs incurred on behalf of CED. These costs are comprised
principally of direct operating costs of the CED geothermal facility,
allocable general and administrative costs, and an operator fee. The amount
due to COC relates to reimbursements for payments of operating expenses.
For each of the years ended December 31, 2004, 2003, and 2002, the
Partnership paid COC an operators fee of $418.
CED is charged a nonmanaging fee payable to the nonmanaging partner, CCH,
or its assignee. For the years ended December 31, 2004, 2003, and 2002, CED
paid $248, $243, and $241, respectively.
As indicated in note 1, CLC is entitled to a royalty of 5% of the value of
steam used by CED to produce the electricity sold to Edison. The royalty
due CLC for the years ended December 31, 2004, 2003, and 2002 was $640,
$814, and $781, respectively. Payment of royalties due to CLC is
subordinated to payment of the project loan and is included in amounts due
to related parties noncurrent (see note 6). The total amount payable as of
December 31, 2004 and 2003 was $26,449 and $25,809, respectively. The
obligation is noninterest bearing.
CED is charged for its use of the transmission line owned by CTLP. The
amount of such net charges, which are included in plant operating expenses,
were $112, $111, and $113 for the years ended December 31, 2004, 2003, and
2002, respectively.
CED is charged by CLPSI for both its inventory usage and its portion of the
expenses of operating CLPSI. The 2004, 2003, and 2002 costs charged to CED
from CLPSI, which are included in plant operating expenses, were
approximately $81, $318, and $350, respectively.
The amount due to Funding Corp. represents accrued interest for 15 days in
December related to the project loan (see note 6).
On December 16, 1992, CED retired CLC's promissory note due to CalEnergy
Company, Inc., resulting in the loan from CED to CLC of $141. Interest at
5% was accrued on this loan for the years ended December 31, 2004, 2003,
and 2002, respectively. Interest on the note was $22, $21, and $20 in 2004,
2003, and 2002, respectively.
During 1994, the Coso Partnerships entered into steam sharing agreements
under which the partnerships may transfer steam, with the resulting
incremental revenue and royalty expense shared equally by the partnerships.
In the second half of 1995, interconnection facilities between the plants
were completed and the transfer of steam commenced. CED's steam sharing
resulted in an expense, included in energy revenues, of $1,888, $908, and
$546, for the years ended December 31, 2004, 2003, and 2002, respectively.
(8) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2004 and 2003
consist of the following:
2004 2003
-------- --------
Royalty payable $ 226 1,045
Other 1,484 1,069
-------- --------
$ 1,710 2,114
======== ========
(9) Plant Operating Expense
Included in plant operating expense are general administrative expenses
that include insurance, property taxes, and other professional expenses.
For the years ended December 31, 2004, 2003, and 2002, these costs were
$6,534, $6,503, and $7,198, respectively.
(10) Employee Benefit Plan
The Partnership has established a 401(k) plan (the Plan) for the benefit of
eligible employees who elect to participate. Eligible employees may elect
to contribute up to 15% of their annual compensation, as defined, in the
Plan. The Partnership will match 50% of the employee's contribution up to
the first 6% of the employee's salary. Additionally, the Partnership may
elect to make a discretionary profit sharing contribution to the Plan. The
Partnership's expense relating to the Plan approximated $149, $146, and
$157 in 2004, 2003, and 2002, respectively.
(11) Commitments and Contingencies
The Partnership is required to obtain a "Financial Guarantee Bond for
Closure Costs" (Water Bond), which would be used in the event of
noncompliance of the remediation obligation for waste discharge. For the
years ended December 31, 2004 and 2003, the fair values of the Water Bond
that is reported as a noncurrent restricted investment are $221 and $214,
respectively.
Settlement Agreement between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth
Circuit (Ninth Circuit) issued an opinion and order on appeal from the
district court's stipulated judgment which affirmed the stipulated judgment
in part and referred questions based on California state law to the
California Supreme Court. The Ninth Circuit stated that if the settlement
agreement violated California state law, then the appeals court would be
required to void the stipulated judgment. The California Supreme Court
accepted the Ninth Circuit's request to address the issues referred to in
the September 23, 2002 ruling. On August 21, 2003, the California Supreme
Court found that state laws were not violated as a result of the settlement
agreements. On December 19, 2003, the Ninth Circuit fully affirmed the
district court's stipulated judgment based on the reply from the California
Supreme Court. No appeal of this order was taken and it is now final.
Court of Appeals Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC
decision, claiming that the "floor" line loss factor of 0.95 for renewable
generators violated the Public Utility Regulatory Policies Act of 1978.
Subsequently, the California Court of Appeals issued a decision on
August 20, 2002 in response to the writ affirming the January 2001 CPUC
decision, except for the 0.95 "floor," which it rejected as an abuse of
discretion by the CPUC. While this matter was appealed to the California
Supreme Court, the petition for review was denied. The Coso Partnerships
are currently evaluating potential actions to redress this issue. The Coso
Partnerships' Agreements set the loss factor at 1.0 for energy sold between
May 2002 through May 2007. After April 2007, the Coso Partnerships will
have a line loss factor of less than 1.0, effectively decreasing revenues
if Edison's challenge to the CPUC ruling stands. The Coso Partnerships
cannot predict whether any subsequent action regarding this matter will be
successful.
(12) Risks and Uncertainties
CED sells 100% of the electrical energy generated to Edison under a
long-term PPC, and may be significantly impacted by risks beyond the
Partnership's control. Among the important factors that could cause future
operating results to differ materially from those anticipated include, but
are not limited to: (i) risks relating to the uncertainties in the
California energy market, (ii) the financial viability of Edison,
(iii) risks related to the operation of power plants, (iv) the impact of
avoided cost pricing along with other pricing variables, (v) general
operating risks, including resource availability and regulatory oversight,
(vi) changes in government regulations, (vii) the effects of competition,
(viii) the alleged manipulation of the California energy market, and (ix)
acts of terrorism directed at the project or other facilities affecting the
normal course of business.
F-17
Report of Independent Registered Public Accounting Firm
The Partners and Management Committee
Coso Power Developers and subsidiary:
We have audited the accompanying consolidated balance sheets of Coso Power
Developers and subsidiary (the Partnership) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, partners' capital, and
cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coso Power
Developers and subsidiary as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004 in conformity with U.S. generally accepted
accounting principles.
As discussed in note 2 to the financial statements, effective January 1, 2004,
the Partnership retroactively adopted the provisions of Financial Accounting
Standards Board Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, by restating the 2003 and 2002 consolidated
financial statements, and effective January 1, 2003, the Partnership adopted the
provisions of Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations.
March 17, 2005
New York, New York
/s/ KPMG, LLP
- -------------
KPMG, LLP
F-18
COSO POWER DEVELOPERS
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003
(Dollars in thousands)
Assets 2004 2003
-------------- --------------
Current assets:
Cash $ 507 78
Restricted cash and cash equivalents (note 2) 8,474 8,146
Accounts receivable, (net of allowances of $82) (note 2) 7,693 7,985
Prepaid expenses and other assets 634 830
Amounts due from related parties (note 7) 6,421 6,412
-------------- --------------
Total current assets 23,729 23,451
Restricted investments (notes 2 and 11) 135 135
Advances to New CLPSI Company, LLC (note 4) 1,923 1,914
Property, plant, and equipment, net (note 5) 113,696 120,509
Power purchase contract, net (note 2) 14,437 17,232
Deferred financing costs, net (note 2) 1,085 1,302
-------------- --------------
Total assets $ 155,005 164,543
=============== ==============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued liabilities (note 8) $ 2,372 1,891
Amounts due to related parties (note 7) 1,313 1,191
Current portion of project loan (note 6) 11,697 10,718
--------------- --------------
Total current liabilities 15,382 13,800
Other liabilities (note 2) 835 2,589
Project loan (note 6) 48,830 60,528
--------------- --------------
Total liabilities 65,047 76,917
Commitments and contingencies (notes 6 and 11)
Minority interest 2,431 2,542
Partners' capital 87,527 85,084
--------------- --------------
Total liabilities and partners' capital $ 155,005 164,543
=============== ==============
See accompanying notes to consolidated financial statements.
F-19
COSO POWER DEVELOPERS
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------------------ ------------------ ------------------
Revenues:
Energy revenues (notes 2, 7, and 11) $ 34,111 32,131 63,756
Capacity and bonus payments 14,018 14,018 15,836
------------------ ------------------ ------------------
Total revenues 48,129 46,149 79,592
------------------ ------------------ ------------------
Operating expenses:
Plant operating expense (note 9) 9,617 9,890 10,192
Royalty expense 8,231 7,520 6,961
Depreciation and amortization 10,241 10,356 12,406
------------------ ------------------ ------------------
Total operating expenses 28,089 27,766 29,559
------------------ ------------------ ------------------
Operating income 20,040 18,383 50,033
------------------ ------------------ ------------------
Other (income)/expenses:
Interest and other income (note 2) (2,681) (569) (1,025)
Interest expense on project loan 6,211 7,070 7,538
Noncash interest expense 217 217 217
------------------ ------------------ ------------------
Total other expenses 3,747 6,718 6,730
------------------ ------------------ ------------------
Income before cumulative effect
of change in accounting principle 16,293 11,665 43,303
Cumulative effect of change in accounting
principle (note 2) -- 1,777 --
------------------ ------------------ ------------------
Net income $ 16,293 9,888 43,303
================== ================== ==================
See accompanying notes to consolidated financial statements.
F-20
COSO POWER DEVELOPERS
AND SUBSIDIARY
Consolidated Statements of Partners' Capital
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
Caithness
Navy II New
Group, CTC
LLC Company, LLC Total
------------------- ------------------ -------------------
Balance at December 31, 2001 $ 32,340.0 29,880.0 62,220.0
Distributions to partners (10,081.0) (10,081.0) (20,162.0)
Net income 21,651.5 21,651.5 43,303.0
------------------- ------------------ -------------------
Balance at December 31, 2002 43,910.5 41,450.5 85,361.0
Distributions to partners (5,082.5) (5,082.5) (10,165.0)
Net income 4,944.0 4,944.0 9,888.0
------------------- ------------------ -------------------
Balance at December 31, 2003 43,772.0 41,312.0 85,084.0
Distributions to partners (6,925.0) (6,925.0) (13,850.0)
Net income 8,146.5 8,146.5 16,293.0
------------------- ------------------ -------------------
Balance at December 31, 2004 $ 44,993.5 42,533.5 87,527.0
=================== ================== ===================
See accompanying notes to consolidated financial statements.
F-21
COSO POWER DEVELOPERS
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 16,293 9,888 43,303
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,241 10,356 12,406
Noncash interest expense 217 217 217
Noncash plant operating expense 209 213 --
Provision for doubtful accounts -- 82 --
Cumulative effect of change in accounting principle -- 1,777 --
Changes in operating assets and liabilities:
Accounts receivable, prepaid expenses, and other assets 488 (552) (4,475)
Advances to New CLPSI Company, LLC (9) (3) 2
Accounts payable and accrued liabilities 481 (57) (13,912)
Amounts due from related parties (9) (510) 237
Other (1,647) (122) 366
Amounts due to related parties 122 433 (7,020)
---------------- ---------------- ----------------
Net cash provided by operating activities 26,386 21,722 31,124
---------------- ---------------- ----------------
Cash flows from investing activities:
Capital expenditures (949) (5,611) (896)
(Increase) decrease in restricted cash (328) 2,574 (5,338)
---------------- ---------------- ----------------
Net cash used in investing activities (1,277) (3,037) (6,234)
---------------- ---------------- ----------------
Cash flows from financing activities:
Distributions to partners (13,850) (10,165) (20,162)
Advances to minority interest (111) (111) (105)
Repayment of project financing loan (10,719) (9,155) (3,799)
---------------- ---------------- ----------------
Net cash used in financing activities (24,680) (19,431) (24,066)
---------------- ---------------- ----------------
Net change in cash 429 (746) 824
Cash at beginning of year 78 824 --
---------------- ---------------- ----------------
Cash at end of year $ 507 78 824
================ ================ ================
Supplemental cash flow disclosure:
Cash paid for interest $ 6,254 7,110 7,551
See accompanying notes to consolidated financial statements.
F-22
COSO POWER DEVELOPERS
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(Dollars in thousands)
(1) Organization, Operation, and Business of the Partnership
Coso Power Developers (CPD), a California general partnership, was formed
on July 31, 1989 in connection with financing the construction of a
geothermal power plant on land at the China Lake Naval Air Weapons Station
at Coso Hot Springs, China Lake, California. CPD is a general partnership
between Caithness Navy II Group, LLC (Navy II), and New CTC Company, LLC
(New CTC), which are affiliated Delaware limited liability companies.
The power plant is located on land owned by the United States Navy (Navy),
which CPD paid a royalty of 18% of revenues, through October 31, 2004. On
November 1, 2004, CPD entered into a new agreement (New Contract) with the
Navy, which terminated the existing contracts that were due to expire in
2010. The New Contract extends CPD's exclusive right to explore, develop,
and use certain geothermal resources of Navy lands through October 31,
2034.
Under the terms of the New Contract, the royalty paid to the Navy has been
restructured so that CPD will pay a rate of 15% of gross revenues received
up to annual base revenue amount. Beyond the annual base revenue amount,
the Navy and CPD will split the additional revenues, on a 50/50 basis,
until the Navy receives a maximum of 20% of all gross revenue.
CPD sells all electricity produced to Southern California Edison (Edison)
under a 20-year power purchase contract (the PPC) expiring in 2010. Under
the terms of the PPC, Edison makes payments to CPD as follows:
* Contractual payments for energy delivered escalated at an average rate
of approximately 7.6% for the first ten years after the date of firm
operation (scheduled energy price period). The scheduled energy price
period extended until January 2000. After the scheduled energy price
period, the energy payment adjusted to the actual avoided energy cost
experienced by Edison. Edison entered into an agreement (the
Agreement) with CPD on June 19, 2001 that addressed renewable energy
pricing and issues concerning California's energy crisis. The
Agreement, which was amended on November 30, 2001, established May 1,
2002 as the date from which CPD receives a fixed energy rate of 5.37
cents per kilowatt (kWh) for five (5) years. From January 1, 2002
through April 30, 2002, CPD elected to receive from Edison a fixed
energy rate of 3.25 cents per kWh. The average rate of energy paid to
CPD for the years ended December 31, 2004, 2003, and 2002, was 5.37,
5.37, and 4.66 cents per kWh, respectively. Starting May 1, 2002, CPD
received 5.37 cents per kWh, pursuant to the Agreement discussed
above. Subsequent to the five-year period, Edison will be required to
make energy payments to CPD based on its avoided cost of energy until
the PPC expires. Beyond the five-year period, CPD cannot predict the
likely level of avoided cost of energy prices under the PPC and,
accordingly, the revenues generated by CPD could fluctuate
significantly;
* Capacity payments which remain fixed over the life of the PPC to the
extent that actual energy delivered exceeds minimum levels of the
plant capacity defined in the PPC; and
* Bonus payments to the extent that actual energy delivered exceeds 85%
of the plant capacity, are calculated monthly as stated in the PPC. In
2004, 2003, and 2002, the bonus payments aggregated $2,138, $2,138,
and $2,138, respectively.
Coso Operating Company, LLC (COC), an affiliated Delaware limited liability
company, provides for the operation and maintenance of the geothermal power
facilities and administrative services pursuant to certain operation and
maintenance agreements with New CTC, the managing general partner (see
note 7).
The partnership agreement provides for distributable cash flow to be
allocated 50% each to New CTC and Navy II. For purposes of allocating net
income to partners' capital accounts and for income tax purposes, profits
and losses are allocated based on the aforementioned cash flow percentages.
For income tax purposes, certain deductions and credits are subject to
special allocations as defined in the partnership agreements.
(2) Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the assets,
liabilities, income, and expenses of CPD and its majority-owned subsidiary
Coso Transmission Line Partners (collectively the Partnership) (see
note 3). Intercompany balances and transactions have been eliminated upon
consolidation.
The consolidated financial statements include the accounts of Coso
Transmission Line Partners (CTLP) as a result of the adoption of the
Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised
December 2003) (FIN 46R), Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. An entity shall be
subject to consolidation according to the provisions of FIN 46R, if, by
design, the holders of the equity investment at risk lack any one of the
following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights; (2) the obligation to
absorb the expected losses of the entity if they occur; or (3) the right to
receive the expected residual returns of the entity if they occur. The
Company determined that CTLP is a variable interest entity under FIN 46R
and was consolidated effective January 1, 2004. The effects on the
Partnership's consolidated financial statements for the years ended
December 31, 2004 and 2003 were increases of $2,431 and $2,542 to assets,
and minority interest, respectively.
The consolidated financial statements relating to prior periods have been
retroactively restated to consolidate the accounts of CTLP as a direct
result of the adoption of FIN 46R. There was no cumulative effect recorded
upon the adoption of the Interpretation.
Accounts Receivable and Revenue Recognition
Accounts receivable primarily consists of receivables from Edison for
electricity delivered and sold under the PPC. As of December 31, 2003, the
Partnership established an allowance for doubtful accounts of $82, based on
a dispute with Edison regarding a payment for capacity. In October and
November of 2003, Edison limited generation to complete their transmission
system maintenance, resulting in lower capacity payments. CPD is disputing
Edison's claim that the forced reduction in generation was the result of
scheduled maintenance, which permits Edison to discount the capacity
payment to CPD.
Operating revenues are recognized as income during the period in which
electricity is delivered to Edison. Subsequent to May 31, 2007, as
discussed in note 1, revenue is recognized based on Edison's avoided energy
cost, until CPD's PPC expires.
Periodic increases in natural gas prices and imbalances between supply and
demand, among other factors, have at times led to significant increases in
wholesale electricity prices in California. During those periods, Edison
had fixed tariffs with its retail customers that were significantly below
the wholesale prices it paid in California. That resulted in significant
under-recoveries by Edison of its electricity purchase costs. On
January 16, 2001, Edison announced that it was temporarily suspending
payments for energy provided, including the energy provided by the
Partnership, pending a permanent solution to its liquidity crisis.
Subsequently, pursuant to a California Public Utilities Commission (CPUC)
order, Edison resumed making payments to the Partnership beginning with
power generated on March 27, 2001. Edison also made a payment equal to 10%
of the unpaid balance for power generated from November 1, 2000 to
March 26, 2001 and paid interest on the outstanding amount at 7% per annum.
That payment was made pursuant to the Agreement between Edison and CPD
described in note 1. The Agreement, as amended, which received CPUC
approval in January 2002, established the fixed energy rates discussed
above and set payment terms for past due amounts owed to the Partnership by
Edison. Due to the uncertainty surrounding Edison's ability to make payment
on past due amounts, collection was not reasonably assured and the
Partnership did not recognize revenue of $38,045 from Edison for energy
delivered during the period November 1, 2000 through March 26, 2001. On
March 1, 2002, Edison reached certain financing milestones and paid the
Partnership $38,045 for electricity generated during the period November 1,
2000 through March 26, 2001. The Partnership recognized revenues for such
electricity deliveries in March 2002.
Revenue for capacity payments is recognized at the end of each month that
capacity is provided under the PPC when collection is reasonably assured.
Revenue for bonus payments is recognized at the end of each month in which
actual energy delivered exceeds 85% of the plant capacity stated in the
PPC.
In the event that the PPC is amended, the Partnership's accounting policies
would be modified in accordance with the guidance established in Emerging
Issues Task Force (EITF) 91-6, Revenue Recognition of Long-Term Power Sales
Contracts, and EITF 01-8, Determining Whether an Arrangement Contains a
Lease.
Fixed Assets and Depreciation
The costs of major additions and betterments are capitalized, while
replacements, maintenance, and repairs that do not improve or extend the
life of the respective assets are expensed as incurred.
Depreciation of the power plant and transmission line is computed on a
straight-line basis over their estimated useful life of 30 years and, for
significant additions, the shorter of the useful life or the remainder of
the 30-year life from the plant's commencement of operations.
Wells and Resource Development Costs
Wells and resource development costs include costs incurred in connection
with the exploration and development of geothermal resources. All such
costs, which include dry hole costs, the costs of drilling and equipping
production wells, and administrative and interest costs directly
attributable to the project, are capitalized and amortized over their
estimated useful lives when production commences. The estimated useful
lives of production wells are ten years each; exploration costs and
development costs, other than production wells, are amortized over 30 years
and, for significant additions, the shorter of the useful life or the
remainder of the 30-year life from the plant's commencement of operations.
Deferred Plant Overhaul Costs and Well Rework Costs
Plant overhaul costs are deferred and amortized over the estimated period
between overhauls, as these costs extend the useful lives of the respective
assets. These deferred costs of $199 and $246 at December 31, 2004 and
2003, respectively, are included in property, plant, and equipment.
Currently, plant overhauls are amortized over three years from the point of
completion.
Production and injection rework costs included in plant operating expenses
are expensed as incurred. For the years ended December 31, 2004, 2003, and
2002, such costs were $407, $0, and $328, respectively.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented separately in
the appropriate asset and liability sections of the consolidated balance
sheet.
Deferred Financing Costs
Deferred financing costs as of December 31, 2004 and 2003 consist of loan
fees and other costs of financing that are amortized over the term of the
related financing. Annual amortization of the deferred financing costs is
$217, and is included in noncash interest expense. Accumulated amortization
at December 31, 2004 and 2003 was $3,090 and $2,873, respectively.
Power Purchase Contract
The PPC, which is amortized on a straight-line basis over the remaining
term of the PPC, will expire in 2010. Annual amortization of the PPC is
approximately $2,794. The PPC consists of a gross carrying amount of
$30,738, and accumulated amortization at December 31, 2004 and 2003 was
$16,301 and $13,506, respectively.
Income Taxes
There is no provision for income taxes since such taxes are the
responsibility of the partners. The net difference between the tax basis
and the reported amounts of property, plant, and equipment, net at December
31, 2004 and 2003 was $86,322 and $91,420, respectively.
Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
money market instruments purchased with initial maturities of three months
or less to be cash equivalents.
Restricted Cash and Investments
As of December 31, 2004 and 2003, the Partnership's investments were
classified as held to maturity and reported at amortized cost. Included in
restricted cash and investments are capital expenditure reserves and a debt
service reserve for the project debt service required by the project loan
(see note 6). The carrying amount of restricted cash and investments at
December 31, 2004 and 2003 approximated fair value, which is based on
quoted market prices as provided by the financial institution that holds
the investments.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, partners' capital, and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues, expenses, and the allocation of profits and
losses during the reportable period. Actual results could differ
significantly from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
prepaid expenses and other assets, amounts due from related parties,
accounts payable and accrued liabilities, and amounts due to related
parties approximated fair value as of December 31, 2004 and 2003, because
of the relatively short maturity of these instruments. The project loan as
of December 31, 2004 and 2003 has an estimated fair value of $67,451 and
$77,302, respectively, based on the quoted market price of the senior
secured notes (see note 6).
The investments in CTLP (see note 3) and advances to New CLPSI Company, LLC
(CLPSI) (see note 4) approximate fair value.
Asset Retirement Obligation
In June 2001, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and amends FASB No. 19, Financial Accounting and Reporting
by Oil and Gas Producing Companies. The Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of a fair value
can be made, and that the associated asset retirement costs be capitalized
as part of the carrying amount of the long-lived asset. The Statement is
effective for consolidated financial statements issued for fiscal years
beginning after June 15, 2002. On January 1, 2003, CPD adopted SFAS No. 143
and estimated the restoration costs CPD expects to incur when the land
lease with the Navy expires. Under the land lease CPD is required to remove
all property, plant, and equipment to restore the land to its original
state. Adoption of SFAS No. 143 resulted in a loss from the cumulative
effect of a change in accounting principle of $1,777, a net increase in
property, plant, and equipment of $354, and an increase in other
liabilities of $2,131. On November 1, 2004, CPD entered into the New
Contract with the Navy, extending their land lease through October 31, 2034
(see note 1). Adoption of the terms of the New Contract resulted in a
change in accounting estimate, resulting in a reduction of property, plant,
and equipment, net of $316, a reduction of the accumulated liability of
$1,719, and an increase in interest and other income of $1,403. As of
December 31, 2004 and 2003, the accumulated liability associated with the
restorations costs was $835 and $2,345, respectively, and is included in
other liabilities. Accretion expense for the years ended December 31, 2004
and 2003 included in plant operating expense was $209 and $213,
respectively. If CPD had adopted SFAS No. 143 retroactively to January 1,
2002, net income for the year ended December 31, 2002 would have decreased
by $215.
Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(3) Investment in Coso Transmission Line Partners
CTLP is a partnership owned 53.33% by CPD and 46.67% by Coso Energy
Developers (CED), which owns the transmission line and facilities
connecting the power plants owned by CPD and CED to the transmission line
owned by Edison, at Inyokern, California, located 28 miles south of the
plants. CTLP charges CPD and CED for the use of the transmission line at
amounts sufficient for CTLP to recover its operating costs. The charges to
CPD are eliminated in consolidation.
(4) Advances to New CLPSI Company, LLC
CLPSI is a wholly owned subsidiary of Caithness Acquisition Company, LLC
(CAC). CLPSI purchases, stores, and distributes spare parts to CPD, CED,
and Coso Finance Partners (CFP) (collectively known as the Coso
Partnerships). Also, certain other maintenance facilities utilized by the
Coso Partnerships are owned by CLPSI. CPD's advances to CLPSI fund the
purchase of spare parts inventory and other assets. CLPSI bills the Coso
Partnerships for spare parts as utilized and for use of the other
facilities at amounts sufficient for CLPSI to recover its operating costs.
(5) Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
------- -------
Power, plant, and gathering system $ 148,960 149,775
Transmission line 16,336 16,336
Wells and resource development costs 59,598 59,762
------- -------
224,894 225,873
Less accumulated depreciation
and amortization (111,198) (105,364)
------- -------
$ 113,696 120,509
======= =======
(6) Project Loan
On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.), a wholly
owned subsidiary of the Coso Partnerships, raised $413,000 from an offering
of senior secured notes. Funding Corp. loaned approximately $154,000 to CPD
from the $413,000 debt raised from the offering of senior secured notes on
terms consistent with those of the senior secured notes. The loan consisted
of one note of $69,350 at 6.80%, which was paid off on December 15, 2001,
and another note of $84,200 at 9.05%, which has payments due semi-annually
through December 15, 2009.
The annual maturity of the project loan for each year ending December 31 is
as follows:
Amount
------
2005 $ 11,697
2006 11,738
2007 12,530
2008 12,392
2009 12,170
------
$ 60,527
======
The loan contains certain restrictive covenants that, among other things,
limit the Partnership's ability to incur additional indebtedness, release
funds from reserve amounts, make distributions, create loans, and enter
into any transaction of merger or consolidation.
The Partnership, Funding Corp., CED, and CFP are jointly and severally
liable for the repayment of the senior secured notes, which are
collateralized by the assets of the Coso Partnerships.
The annual maturity of the senior secured notes for each year ending
December 31 is as follows:
Amount
------
2005 $ 35,480
2006 38,286
2007 47,419
2008 49,261
2009 51,831
-------
$ 222,277
=======
(7) Related Party Transactions
The amounts due from and to related parties at December 31, 2004 and 2003
consist of the following:
2004 2003
-------- --------
Amounts due from related parties:
Coso Energy Developers $ 379 380
New RVPI Company, LLC 21 --
Coso Operating Company, LLC 865 1,122
China Lake Joint Venture:
Principal 1,562 1,562
Accrued interest 3,594 3,348
----- -----
$ 6,421 6,412
===== =====
Amounts due to related parties:
Coso Finance Partners $ 951 838
Caithness Corporation 79 --
Caithness Coso Funding Corp. 241 283
Caithness Operating Company, LLC 42 70
----- -----
$ 1,313 1,191
===== =====
COC and Caithness Operating Company, LLC are reimbursed monthly for
non-third-party costs incurred on behalf of CPD. These costs are comprised
principally of direct operating costs of the CPD geothermal facility,
allocable general and administrative costs, and an operator fee. The amount
due from COC relates to advances for payments of operating expenses. For
each of the years ended December 31, 2004, 2003, and 2002, the Partnership
paid COC an operator's fee of $418.
CPD is charged a nonmanaging fee payable to the nonmanaging partner,
Navy II, or its assignee. For the years ended December 31, 2004, 2003, and
2002, CPD paid $248, $243, and $241, respectively.
CPD is charged by CLPSI for both its inventory usage and its portion of the
expenses of operating CLPSI. The charges to CPD from CLPSI in 2004, 2003,
and 2002, which are included in plant operating expenses, were
approximately $81, $189, and $237, respectively.
On December 16, 1992, CPD retired China Lake Joint Venture's (CLJV)
promissory note due CalEnergy, resulting in the loan from CPD to CLJV of
$1,562 at December 31, 1992. CLJV is an affiliated venture. Interest has
been accrued on this loan for the years ended December 31, 2004, 2003, and
2002 at 5%, 5%, and 5%, respectively. Interest on the loan was $246, $234,
and $229, in 2004, 2003, and 2002, respectively.
The amount due to Funding Corp. represents accrued interest for 15 days in
December, related to the project loan (see note 6).
During 1994, the Coso Partnerships entered into steam sharing agreements
under which the partnerships may transfer steam, with the resulting
incremental revenue and royalty expense shared equally by the partnerships.
In the second half of 1995, interconnection facilities between the plants
were completed and the transfer of steam commenced. CPD's steam sharing
resulted in an expense, included in energy revenues, of $6,213, $6,888, and
$5,255 for the years ended December 31, 2004, 2003, and 2002, respectively.
(8) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2004 and 2003
consist of the following:
2004 2003
-------- --------
Royalty payable $ 1,094 1,044
Other 1,278 847
-------- --------
$ 2,372 1,891
======== ========
(9) Plant Operating Expense
Included in plant operating expense are general administrative expenses
that include insurance, property taxes, and other professional expenses.
For the years ended December 31, 2004, 2003, and 2002, these costs were
$5,306, $6,030, and $6,429, respectively.
(10) Employee Benefit Plan
The Partnership has established a 401(k) plan (the Plan) for the benefit of
eligible employees who elect to participate. Eligible employees may elect
to contribute up to 15% of their annual compensation, as defined, to the
Plan. The Partnership will match 50% of the employee's contribution up to
the first 6% of the employee's salary. Additionally, the Partnership may
elect to make a discretionary profit sharing contribution to the Plan. The
Partnership's expense relating to the Plan approximated $132, $127, and
$125 in 2004, 2003, and 2002, respectively.
(11) Commitments and Contingencies
The Partnership is required to obtain a "Financial Guarantee Bond for
Closure Costs" (Water Bond), which would be used in the event of
noncompliance of the remediation obligation for waste discharge. For the
years ended December 31, 2004 and 2003, the fair value of the Water Bond
that is reported as a noncurrent restricted investment is $135.
Settlement Agreement between Edison and the California Public Utilities
Commission
On September 23, 2002, the United States Court of Appeals for the Ninth
Circuit (Ninth Circuit) issued an opinion and order on appeal from the
district court's stipulated judgment which affirmed the stipulated judgment
in part and referred questions based on California state law to the
California Supreme Court. The Ninth Circuit stated that if the settlement
agreement violated California state law, then the appeals court would be
required to void the stipulated judgment. The California Supreme Court
accepted the Ninth Circuit's request to address the issues referred to in
the September 23, 2002 ruling. On August 21, 2003, the California Supreme
Court found that state laws were not violated as of result of the
settlement agreements. On December 19, 2003, the Ninth Circuit fully
affirmed the district court's stipulated judgment based on the reply from
the California Supreme Court.
Court of Appeals Decision on Line Loss Factor
Edison filed a petition for a writ of review of a January 2001 CPUC
decision, claiming that the "floor" line loss factor of 0.95 for renewable
generators violated the Public Utility Regulator Policies Act of 1978.
Subsequently, the California Court of Appeals issued a decision on
August 20, 2002 in response to the writ affirming the January 2001 CPUC
decision, except for the 0.95 "floor," which it rejected as an abuse of
discretion by the CPUC. While this matter was appealed to the California
Supreme Court, the petition for review was denied. The Coso Partnerships
are currently evaluating potential actions to redress this issue. The Coso
Partnerships' Agreements set the loss factor at 1.0 for energy sold between
May 2002 through May 2007. After April 2007, the Coso Partnerships will
have a line loss factor of less than 1.0, effectively decreasing revenues
if Edison's challenge to the CPUC ruling stands. CPD cannot predict whether
any subsequent action regarding this matter will be successful.
(12) Risks and Uncertainties
CPD sells 100% of the electrical energy generated to Edison under a
long-term PPC, and may be significantly impacted by risks beyond the
Partnership's control. Among the important factors that could cause future
operating results to differ materially from those anticipated include, but
are not limited to: (i) risks relating to the uncertainties in the
California energy market, (ii) the financial viability of Edison,
(iii) risks related to the operation of power plants, (iv) the impact of
avoided cost pricing along with other pricing variables including natural
gas, (v) general operating risks, including resource availability and
regulatory oversight, (vi) changes in government regulations, (vii) the
effects of competition, (viii) the alleged manipulation of the California
energy market, and (ix) acts of terrorism directed at the project or other
facilities affecting the normal course of business.
F-23
Quarterly Data (Unaudited)
March 31(a) June 30(a) September 30(a) December 31(a)
----------- ---------- --------------- --------------
Caithness Coso Funding Corp:
2004
Total revenues $ 5,675 5,689 5,482 5,414
Operating income -- -- -- --
Net income $ -- -- -- --
2003
Total revenues $ 6,294 6,323 6,144 6,067
Operating income -- -- -- --
Net income $ -- -- -- --
2002
Total revenues $ 6,854 6,856 6,659 6,562
Operating income -- -- -- --
Net income $ -- -- -- --
Coso Finance Partners:
2004
Total revenues $ 13,111 14,583 19,847 13,003
Operating income 5,358 6,102 8,422 5,507
Net income $ 3,130 3,899 6,933 5,011
2003
Total revenues $ 12,553 15,323 19,833 12,083
Operating income 5,039 6,348 9,829 4,539
Net income $ 760 3,836 7,400 3,708
2002
Total revenues $ 45,498 14,328 19,761 12,478
Operating income 38,408 6,072 8,104 5,964
Net income $ 36,063 4,300 5,528 3,221
Coso Energy Developers:
2004
Total revenues $ 9,099 11,034 15,467 9,146
Operating income 3,369 3,236 9,166 3,493
Net income $ 1,687 1,469 8,372 2,083
2003
Total revenues $ 9,334 11,610 16,222 9,703
Operating income 4,212 5,559 9,073 3,093
Net income $ 1,514 3,721 7,265 1,381
2002
Total revenues $ 43,480 11,190 16,591 9,991
Operating income 36,805 3,705 7,878 4,338
Net income $ 35,203 1,725 5,961 2,470
Coso Power Developers:
2004
Total revenues $ 9,656 11,443 17,094 9,936
Operating income 2,705 4,539 9,516 3,280
Net income $ 1,127 2,970 8,693 3,503
2003
Total revenues $ 8,512 10,825 16,513 10,299
Operating income 1,890 4,112 8,873 3,508
Net income (loss) $ (1,634) 2,330 7,174 2,018
2002
Total revenues $ 44,422 9,771 15,838 9,561
Operating income 37,532 1,697 8,451 2,353
Net income (loss) $ 36,085 (60) 6,796 482
(a) In the opinion of the Caithness Coso Funding Corp. and the Partnerships,
all adjustments, which consist of normal recurring accruals to present a
fair statement of the amounts shown for such periods, have been made.
Supplemental Consolidated Condensed Combined Financial Information for Coso
Partnerships
The following information presents unaudited condensed combined financial
statements of the Coso Partnerships. These financial statements represent a
compilation of the financial statements of Caithness Coso Funding Corp., Coso
Finance Partners, Coso Energy Developers and Coso Power Developers for the
periods indicated. This supplemental financial information is not required by
GAAP and has been provided to facilitate a more comprehensive understanding of
the financial position, operating results and cash flows of the Coso
Partnerships as a whole, which jointly and severally guarantee the repayment of
Caithness Coso Funding Corp's senior notes. The unaudited condensed combined
financial statements should be read in conjunction with each individual
Partnership's financial statements and their accompanying notes.
F-24
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED CONDENSED COMBINED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
2004 2003
Assets:
Current assets:
Cash........................................... $ 1,794 2,135
Restricted cash and cash equivalents........... 32,622 29,495
Accounts receivable, net....................... 21,831 21,740
Prepaid expenses and other..................... 2,266 2,796
Inventory...................................... 5,357 5,270
Amounts due from related parties............... 6,787 6,829
------ ------
Total current assets 70,657 68,265
Restricted cash and cash equivalents............. 15,250 13,598
Property, plant and equipment, net............... 371,223 386,899
Power purchase agreement, net.................... 37,308 42,323
Deferred financing costs, net.................... 3,938 4,725
------- -------
Total assets........................... $ 498,376 $ 515,810
======= =======
Liabilities and Partners' Capital:
Current Liabilities:
Accounts payable and accrued liabilities...... $ 8,684 $ 8,508
Amounts due to related parties................ 1,865 1,588
Current portion of project loans.............. 35,480 31,332
------ ------
Total current liabilities 46,029 41,428
Other liabilities............................... 17,746 19,714
Amounts due to related parties.................. 26,449 25,809
Project loan.................................... 186,797 222,282
------- -------
Total liabilities..................... 277,021 309,233
Partners' capital................................ 221,355 206,577
------- -------
Total liabilities and partners' capital $ 498,376 $ 515,810
======= =======
See accompanying notes to the unaudited condensed combined financial statements.
F-25
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Revenue:
Energy revenues............................ $ 111,251 $ 110,587 $ 205,151
Capacity revenues.......................... 42,168 42,223 47,758
------- ------- -------
Total revenue......................... 153,419 152,810 252,909
------- ------- -------
Operating expenses:
Plant operating expenses................... 34,368 32,883 31,777
Royalty expense............................ 23,291 23,379 22,311
Depreciation and amortization.............. 30,775 30,172 37,242
------ ------ ------
Total operating expenses.............. 88,434 86,434 91,330
------ ------- -------
Operating income...................... 64,985 66,376 161,579
------ ------ -------
Other (income)/expenses:
Interest and other income.................. (6,939) (3,191) (3,923)
Interest expense........................... 22,260 24,826 26,941
Non cash interest expense.................. 787 787 787
------ ------ ------
Total other expenses.................. 16,108 22,422 23,805
------ ------ ------
Income before cumulative effect of change
in accounting principle............... 48,877 43,954 137,774
Cumulative effect of change in accounting
principle............................. -- 4,481 --
------ ------ -------
Net income............................ $ 48,877 $ 39,473 $ 137,774
====== ====== =======
See accompanying notes to the unaudited condensed combined financial statements.
F-26
COSO PARTNERSHIPS
UNAUDITED CONSOLIDATED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
December 31, December 31, December 31,
2004 2003 2002
Net cash provided by (used in) operating activities... $ 80,596 $ 76,491 $ 144,902
Net cash provided by (used in) investing activities... (15,390) (12,881) (18,962)
Net cash provided by (used in) financing activities... (65,547) (67,996) (119,683)
------ ------ -------
Net change in cash.................................... $ (341) $ (4,386) $ 6,257
====== ====== =======
Supplemental cash flow disclosure:
Cash paid for interest.................... $ 22,385 $ 24,950 $ 27,026
====== ====== ======
See accompanying notes to the unaudited condensed combined financial statements.
F-27
COSO PARTNERSHIPS
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED COMBINED
FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed combined financial statements were derived
from the stand alone unaudited condensed financial statements of Caithness Coso
Funding Corp., Coso Finance Partners, Coso Energy Developers and Coso Power
Developers (the "Coso Partnerships"). All intercompany accounts and transactions
were eliminated. This financial information has been provided to facilitate a
more comprehensive understanding of the financial position, operating results
and cash flows of the Coso Partnerships as a whole. The unaudited condensed
combined financial statements should be read in conjunction with each individual
Partnership's unaudited condensed financial statements.
(2) Accounts Receivable and Revenue Recognition
The Coso Partnerships sell all electricity produced to Southern California
Edison (Edison) under long-term power purchase contracts. Due to the uncertainty
surrounding Edison's ability to make payment on past due amounts, collection was
not reasonably assured and the Coso Partnerships had not recognized revenue from
Edison for energy delivered during the period November 1, 2000 through March 26,
2001.
On March 1, 2002, the Coso Partnerships recognized revenue for energy delivered
from November 1, 2000 through March 26, 2001 of $112.4 million, when Edison
reached certain financing milestones and paid the Coso Partnerships for revenue
generated but not recognized for the period November 1, 2000 through March 26,
2001.
(3) Reclassifications
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
F-28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Registrants' Chief Executive Officer and Chief Financial Officer (the
Registrant's principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation as of December 31, 2004,
that the design and operation of the Registrant's "disclosure controls and
procedures" (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934, as amended (Exchange Act)) are effective to ensure that information
required to be disclosed by the Registrant in the reports filed or submitted by
the Registrant under the Exchange Act is accumulated, recorded, processed,
summarized and reported to the Registrant's management, including the
Registrants' principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding whether or not disclosure is
required.
During the period ended December 31, 2004, there were no changes in the
Registrant's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Registrant's internal controls over
financial reporting.
18
Item 9B. Other Information.
The Registrants' do not have any additional information required to be
disclosed in a report on Form 8-K during the fourth quarter of 2004 that was not
already reported on the Form 8-K filed November 1, 2004.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the persons who served as our directors and
executive officers as of December 31, 2004:
Name Age Position(s)
---- --- -----------
James D. Bishop, Sr. 71 Director, Chairman and Chief Executive Officer
Leslie J. Gelber 48 Director, President and Chief Operating Officer
James D. Bishop, Jr. 44 Director, Vice Chairman
Christopher T. McCallion 43 Director, Executive Vice President and Chief Financial
Officer
Kenneth P. Hoffman 52 Senior Vice President
Mark A. Ferrucci 52 Director
David V. Casale 41 Vice President and Controller
John A. McNamara 45 Vice President Finance
Barbara Bishop Gollan 46 Vice President
James D. Bishop, Sr., Chairman, Chief Executive Officer and a Director of
Funding Corp. and of Caithness Energy, has served as a Director of Caithness
Equities Corporation (formerly known as Caithness Corporation) since its
inception in 1975. Mr. Bishop served as Caithness Equities Corporation's
President from its inception until December 1986 and has served as Chairman of
Caithness Equities Corporation since January 1987. Mr. Bishop also serves as a
director for various other entities which engage in independent power production
and natural resource exploration and development. Mr. Bishop holds a Master of
Business Administration degree from Harvard Business School and a Bachelor of
Arts degree from Yale University. Mr. Bishop is the father of James D. Bishop,
Jr. and Barbara Bishop Gollan.
Leslie J. Gelber, President, Chief Operating Officer and a Director of
Funding Corp. and of Caithness Energy, has served as President and Chief
Operating Officer of Caithness Equities Corporation since January 1999. Prior to
joining Caithness Equities Corporation, Mr. Gelber served as President of Cogen
Technologies, Inc., which is also engaged in the field of independent power
production, from August 1998 until December 1998. From July 1993 to July 1998,
Mr. Gelber served as President of ESI Energy, Inc., the non-regulated
independent power company owned by FPL Group, Inc. Mr. Gelber holds a Master of
Business Administration degree from the University of Miami and holds a Bachelor
of Arts degree in Economics from Alfred University.
19
James D. Bishop, Jr., Vice Chairman and a Director of Funding Corp. and of
Caithness Energy, joined Caithness Equities Corporation in 1988 and served as
President and Chief Operating Officer of Caithness Equities Corporation from
November 1995 until December 1998. Mr. Bishop also serves on all the boards of
directors and management committees of the entities and joint ventures
affiliated with Caithness Equities Corporation. Mr. Bishop holds a Master of
Business Administration degree from the Kellogg Graduate School of Management at
Northwestern University and holds a Bachelor of Science degree from Trinity
College. Mr. Bishop is the son of James D. Bishop, Sr. and the brother of
Barbara Bishop Gollan.
Christopher T. McCallion, Executive Vice President, Chief Financial Officer
and a Director of Funding Corp. and of Caithness Energy, served as Vice
President and Controller of Caithness Equities Corporation from July 1991 to
November 1995, and has served as Executive Vice President and Chief Financial
Officer of Caithness Equities Corporation since November 1995. Mr. McCallion
holds a Bachelor of Science degree from Seton Hall University.
Kenneth P. Hoffman a Senior Vice President of Funding Corp and of Caithness
Energy, joined Caithness Equities Corporation in March of 2000. Prior to joining
Caithness, Mr. Hoffman was a Vice President of FPL Energy, Inc. From 1989 until
1993 he was the Vice President of Business Management of ESI Energy, Inc. Before
1989, Mr. Hoffman was employed by Florida Power & Light Company. Mr. Hoffman
holds a Master of Business Administration degree from Florida International
University and a Bachelor of Science degree from Rochester Institute of
Technology.
Mark A. Ferrucci, a Director of Funding Corp., has served as the
independent director of Funding Corp. since May 1999. From 1977 until 2002, Mr.
Ferrucci was an employee of CT Corporation System, where he served as CT
Corporation System's Assistant Secretary and as Assistant Vice President from
1992 to 2002. At present, Mr. Ferrucci operates as a sole proprietor that
provides corporate staffing services to businesses and law firms.
David V. Casale, Vice President and the Controller of Funding Corp. and of
Caithness Energy joined Caithness Equities Corporation in December 1991 and has
served as Vice President and as its Controller since November 1995. Mr. Casale
also serves on the boards of directors of joint ventures affiliated with
Caithness Equities Corporation. Mr. Casale holds a Bachelor of Arts degree from
Adelphi University.
John A. McNamara, Vice President of Finance of Funding Corp. and of
Caithness Energy, joined Caithness Equities Corporation in September of 1990 and
has served as Vice President since 1999. Prior to joining Caithness Equities
Corporation, Mr. McNamara was a broker with Bradley & Company, an account
executive with First Georgetown Securities, Inc. and a staff member of the
United States Senate Committee on Small Business. He received a Masters of
Business Administration degree from Georgetown University and a Bachelor of Arts
degree from Denison University.
Barbara Bishop Gollan, Vice President of Funding Corp. and of Caithness
Energy, joined Caithness Equities Corporation as Vice President in October 1990.
Ms. Gollan has authored and co-authored a number of technical papers on
geothermal systems, which were presented to the Geothermal Resources Council,
the Geologic Society of America and the Stanford Geothermal Workshop. Ms. Gollan
holds a Master of Science degree in Geology and Geochemistry from Stanford
University and holds a Bachelor of Arts degree from Amherst College. Ms. Gollan
is the daughter of Mr. James D. Bishop, Sr. and the sister of James D. Bishop,
Jr.
The Board of Directors appointed Mr. Ferrucci as an independent director.
The unanimous affirmative vote of our Board of Directors (including Mr.
Ferrucci) is required before certain actions can be taken, including, but not
limited to, (1) engaging in any business or activity other than issuing the
senior secured notes and making the related loans to the Coso Partnerships, (2)
incurring any debt, or assuming or guaranteeing any debt of any other entity,
(3) dissolving or liquidating, (4) consolidating, merging or selling all or
substantially all of our assets or (5) instituting any bankruptcy or insolvency
proceedings.
20
Item 11. Executive Compensation.
None of the directors or executive officers of Funding Corp. receives any
compensation for his or her services, except Mr. Ferruci, who receives $8,400 in
compensation annually for services provided.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 2004 certain information
regarding the beneficial ownership of Coso Funding Corp.'s voting securities and
the beneficial ownership of the voting securities of each of the Coso
Partnerships by:
(1) Each person who is known by the Registrants and the Coso Partnerships to
beneficially own 5% or more of Coso Funding Corp.'s voting securities or 5%
or more of the voting securities of any Coso Partnership,
(2) Each of Coso Funding Corp.'s directors and executive officers who also act
in similar capacities on behalf of the managing partner of each Coso
Partnership and each of the delegates to the management committee of each
Coso Partnership, and
(3) All of Coso Funding Corp.'s directors and executive officers who also act
in similar capacities for the managing partnership of each Coso Partnership
and all of the delegates to the management committee of each Coso
Partnership as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended. Except as otherwise
noted, each person named below has an address in care of our principal executive
offices.
Beneficial Ownership of Coso Funding Corp. and the Coso Partnerships
Percent Indirect Percent Indirect Percent Indirect Percent Indirect
Beneficial Beneficial Beneficial Beneficial
Name and Address of Ownership in Ownership in Ownership in Ownership in
Beneficial Owner Coso Funding the Navy I the BLM the Navy II
---------------- Corp. Partnership Partnership Partnership
----- ----------- ----------- -----------
James D. Bishop, Sr. (1)(2).............. -- -- -- --
Leslie J. Gelber (1)(3).................. -- -- -- --
James D. Bishop, Jr. (1)(4).............. 17.3% 16.9% 19.3% 15.7%
Christopher T. McCallion (1)(3).......... -- -- -- --
Kenneth P. Hoffman (1)(3)................ -- -- -- --
Larry K. Carpenter (1)(3)................ -- -- -- --
Mark A. Ferrucci......................... -- -- -- --
David V. Casale (1)(3)................... -- -- -- --
John A. McNamara (1)(3).................. -- -- -- --
Barbara Bishop Gollan (1)(3)(5).......... -- -- -- --
Dominion Energy, Inc. (6)................ * -- 7.8% 2.8%
901 East Byrd Street
Richmond, VA 23219
21
Mojave Energy Company (7)................ 6.1% 5.5% 7.7% 5.2%
c/o Davenport Resources, Inc.
200 Railroad Avenue, 3rd floor
Greenwich, CT 06830
ArcLight Clean Power Investors, LLC 13.96% 13.6% 14.7% 13.3%
(8)......................................
200 Clarendon Street
Boston, MA 02117
All directors, executive officers
and management committee delegates
as a group............................... 21.4% 17.4% 30.2% 16.6%
* Less than 5.0%.
(1) The address of such person is c/o Caithness Corporation, 565 Fifth Avenue,
29th Floor, New York, New York 10017-2478.
(2) James D. Bishop, Sr. is the beneficiary of The James D. Bishop Trust--2002
("Bishop, Sr. 2Trust"), which owns shares of common stock of Caithness
Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., and
Mojave Power II, Inc., and membership units in Caithness 1997, LLC, the
voting rights of which have been transferred to The Caithness Entities
Voting Trust, the trustee of which is James D. Bishop, Jr. Caithness
Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc.,
Mojave Power II Inc., and Caithness 1997, LLC own, indirectly through
various entities, general partnership interests in the Navy I Partnership,
the BLM Partnership and the Navy II Partnership, which collectively own all
of the shares of common stock of Funding Corp. The Bishop, Sr. Trust is
irrevocable. James D. Bishop, Sr., therefore, does not have voting or
investment power over these shares of common stock of Caithness Equities
Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., Mojave Power
II, Inc. and these membership interests in Caithness 1997, LLC.
(3) Indirect owner of economic interests in the Coso Partnerships through
Caithness Equities Corporation's (f/k/a Caithness Corporation) employee
incentive plans, which economic interests are not listed on this table.
(4) James D. Bishop, Jr. is: (i) the beneficiary of The James D. Bishop, Jr.
Irrevocable Trust--1996 (the "Bishop, Jr. Trust"), which owns shares of
common stock of Caithness Equities Corporation (f/k/a Caithness
Corporation), and membership units in Caithness 1997, LLC, the voting
rights of which have been transferred to the Caithness Entities Voting
Trust, the trustee of which is James D. Bishop, Jr.; (ii) the owner of
common stock of Caithness Equities Corporation (f/k/a Caithness
Corporation) and Mojave Power, Inc., and membership units in Caithness
1997, LLC; and (iii) the trustee of The Caithness Entities Voting Trust
which possesses sole voting control over the shares of common stock of
Caithness Equities Corporation (f/k/a Caithness Corporation), Mojave Power,
Inc., Mojave Power II, Inc., and the membership interests in Caithness
1997, LLC held by the Bishop, Sr. Trust, The Barbara Bishop Gollan
Irrevocable Trust--1996 (the "Gollan Trust"), The Elizabeth Bishop DeLuca
Irrevocable Trust--1996 and The Linda Bishop Fotiu Irrevocable Trust--1996.
The interests listed in (i) and (ii) above entitle James D. Bishop, Jr. to
the following indirect beneficial ownership interests: Funding Corp. 1.6%;
Navy I Partnership 1.6%; BLM Partnership 1.5%; and Navy II Partnership
1.6%. James D. Bishop, Jr. disclaims beneficial ownership of the interests
listed in (iii) above.
(5) Barbara Bishop Gollan is the beneficiary of the Gollan Trust, which owns
shares of common stock of Caithness Equities Corporation (f/k/a Caithness
Corporation), and membership units in Caithness 1997, LLC, the voting
rights of which have been transferred to The Caithness Entities Voting
Trust, the trustee of which is James D. Bishop, Jr. The Gollan Trust is
irrevocable. Barbara Bishop Gollan, therefore, does not have voting or
investment power over these shares of common stock of Caithness Equities
Corporation (f/k/a Caithness Corporation).
(6) Dominion Energy, Inc. owns: (i) a limited liability company membership
interest in Caithness BLM Group, LP, a Delaware limited partnership, which
owns a limited liability company membership interest in Caithness Coso
Holdings, LLC, which owns a general partnership interest in the BLM
Partnership; and (ii) a limited liability company membership interest in
Navy II Group which owns a general partnership interest in the Navy II
Partnership.
22
(7) Mojave Energy Company owns limited liability company membership interests
in Caithness Power, LLC, which owns, indirectly through various entities,
general partnership interests in each of the Coso Partnerships.
(8) ArcLight Clean Power Investors, LLC owns limited liability company
membership interests in Caithness Investors, LLC, which owns, indirectly
through various entities, general partnership interests in each of the Coso
Partnerships.
Item 13. Certain Relationships and Related Transactions.
The Coso Partnerships
Each of the Coso Partnerships has two general partners, a managing partner
and a non-managing partner. Under the amended and restated partnership
agreement, the managing partner of each Coso Partnership is generally
responsible for the management and control of the day-to-day business and
affairs. The managing partner of the Navy I Partnership is New CLOC Company,
LLC, a Delaware limited liability company, the managing partner of the BLM
Partnership is New CHIP Company, LLC, a Delaware limited liability company and
the managing partner of the Navy II Partnership is New CTC Company, LLC, a
Delaware limited liability company. The non-managing partner of the Navy I
Partnership is ESCA, LLC, a Delaware limited liability company, the non-managing
partner of the BLM Partnership is Caithness Coso Holdings, LLC, a Delaware
limited liability company, and the non-managing partner of the Navy II
Partnership is Caithness Navy II Group, LLC, a Delaware limited liability
company.
Each managing partner is a limited liability company managed by a manager
who is appointed by Caithness Acquisition Company, LLC (CAC), the sole member of
each managing partner. The manager is responsible for the ordinary course
management and operations by its Coso Partnership. CAC has appointed itself as
the manager of each managing partner. CAC has also appointed Mr. Ferrucci as the
independent manager of each managing partner. (In addition, each of the managing
members of the non-managing partners has appointed Mr. Ferrucci as the
independent manager of that non-managing partner.) The approval of the
independent manager is required before the managing partner (or the non-managing
partner, as the case may be) may take certain actions that do not involve the
ordinary course management and operations by the Coso Partnerships of the Coso
projects, including, among others, (1) commencing any bankruptcy or insolvency
proceeding involving the managing partner, (2) incurring any debt in the name of
the managing partner for which it would be liable, (3) dissolving, liquidating,
consolidating or merging, or selling all or substantially all of the assets of,
its respective Coso Partnership, or (4) engaging in any business or activity
other than acting as the managing partner of its respective Coso Partnership.
Each managing partner also has its officers, who are also officers of Funding
Corp. who act on behalf of the managing partners of the Coso Partnerships.
CAC, a limited liability company, is the manager and sole member of each of
the managing partners. Caithness Energy, LLC (Caithness Energy) as the manager
and sole owner of CAC, has delegated its role as manager of CAC to the CAC board
of directors, including the power to manage the managing partners of the Coso
Partnerships. Each managing partner's officers are also the officers of CAC.
None of the persons acting on behalf of the Coso Partnerships receives any
compensation from the Coso Partnerships for his or her services, except that
nominal compensation is paid in consideration for Mr. Ferrucci's services.
Caithness Energy is governed by a board of directors and not by its
members. The directors of Funding Corp., other than Mr. Ferrucci, also currently
serve as members of the board of directors of Caithness Energy. Under the
limited liability company agreement of Caithness Energy, Caithness Equities
Corporation (formerly known as Caithness Corporation) is entitled to appoint a
number of members to the Board of Directors of Caithness Energy who hold, in the
aggregate, a majority of the votes of all members of such board of directors.
Caithness Corporation's present appointees are Messrs. Bishop, Sr., and Bishop,
Jr. In addition, Messrs. Gelber, and McCallion serve as voting members of the
board of directors of Caithness Energy pursuant to their individual executive
compensation agreements with Caithness Energy. These four individuals, together
with Mr. Ferrucci, serve as the CAC board of directors.
23
Management Committees
Under the amended and restated partnership agreement of each Coso
Partnership, the managing partner is subject to the directives of a management
committee which oversees the business operations of the Coso Partnership. The
managing partner of a Coso Partnership may not take certain specific actions
without the consent of the management committee of that Coso Partnership.
However, the management committee may not direct the managing partner of the
Coso Partnership to take any action over which the independent manager has
exclusive authority without the requisite approval of the independent manager.
The management committee of each Coso Partnership consists of four delegates,
two of which are appointed by the managing partner and two of which are
appointed by the non-managing partner. Each partner may substitute or change its
delegates.
Under the amended and restated partnership agreements of the Coso
Partnerships, each partner may appoint one delegate with multiple votes. The
names of the delegates appointed by affiliates of Caithness Energy to the
management committees of the Coso Partnerships are set forth below.
As of December 31, 2004, the following persons were the members of the
management committee of each Coso Partnership, as applicable. Each person has
two votes on each management committee on which he serves:
Name Age Partnership(s)
---- --- --------------
Kenneth P. Hoffman 52 Navy I Partnership, BLM Partnership, Navy II Partnership
Christopher T. McCallion 43 Navy I Partnership, BLM Partnership, Navy II Partnership
Certain information regarding Messrs. Bishop and McCallion is provided
above.
Management Committee Fees
The members of the management committees are not entitled to any direct
compensation from Funding Corp. or the Coso Partnerships. However, each Coso
Partnership previously paid its two general partners' annual management
committee fees for their participation on the management committee of that Coso
Partnership. The following table sets forth, for the years ended December 31,
2004, 2003 and 2002, the total amount of management committee fees paid or
payable by each of the Coso Partnerships to its partners:
Year Ended December 31
----------------------
2004 2003 2002
---- ---- ----
Navy I Partnership
ESCA....................... $ 248,000 $ 243,000 $ 241,000
======= ======= =======
BLM Partnership
CCH........................ $ 248,000 $ 243,000 $ 241,000
======= ======= =======
Navy II Partnership
Navy II Group.............. $ 248,000 $ 243,000 $ 241,000
======= ======= =======
Funding Corp.
As of December 31, 2004, the authorized capital stock of Funding Corp.
consisted of 1,000 shares of common stock, par value 1 cent per share, of which
300 shares were outstanding. The outstanding common stock is owned equally by
the Coso Partnerships.
24
Coso Partnerships
The directors and executive officers also act in similar capacities on
behalf of the managing partner of each Coso Partnership and, except for Mr.
Ferrucci, on behalf of CAC and Caithness Energy. Several of these directors and
executive officers beneficially own the securities of Caithness Equities
Corporation, who beneficially owns the majority of membership interests of
Caithness Energy.
Item 14. Principal Accounting Fees and Services
Audit Fees
1) The aggregate Audit Fees billed for professional services for the years
ended December 31, 2004, 2003 and 2002 rendered by KPMG for the audit of
the annual financial statements and review of financial statements included
in the Form 10-Q or services provided in connection with statutory and
regulatory filings or engagements were approximately $268,000, $249,000 and
$249,000, respectively.
Non-Audit Fees
2) There were no Audit-Related Fees billed for the years ended December 31,
2004, 2003 and 2002 for assurance and related services by KPMG that were
related to the performance of the audit or review of the financial
statements.
Tax Fees
3) The aggregate Tax Fees billed for professional services for the years ended
December 31, 2004, 2003 and 2002 rendered by KPMG for tax compliance, tax
advice, and tax planning were approximately $33,000, $31,200 and $58,500,
respectively. The nature of tax services provided consisted of preparation
and review of Federal and State income tax returns.
All Other Fees
4) There were no Other Fees billed for the years ended December 31, 2004, 2003
and 2002 for products and services provided by KPMG, other than the
services reported above.
Part IV
Item 15. Exhibits, Financial Statements Schedules
(a) Documents filed as part of this report:
Financial Statements and Schedules
(b) Exhibits:
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of Caithness Coso Funding Corp.*
3.2 Bylaws of Caithness Coso Funding Corp.*
3.3 Third Amended and Restated Partnership Agreement of Coso Finance
Partners, dated as of May 28, 1999.*
25
3.4 Third Amended and Restated Partnership Agreement of Coso Energy
Developers, dated as of May 28, 1999.*
3.5 Third Amended and Restated Partnership Agreement of Coso Power
Developers, dated as of May 28, 1999.*
3.6 Amendment Agreement, dated as of May 28, 1999, by and among Coso
Finance Partners, Caithness Acquisition Company, LLC, New CLOC
Company, LLC, ESCA, LLC and Coso Operating Company LLC.*
3.7 Amendment Agreement, dated as of May 28, 1999, by and among Coso
Energy Developers, Caithness Acquisition Company, LLC, New CHIP
Company, LLC, Caithness Coso Holdings, LLC and Coso Operating Company
LLC.*
3.8 Amendment Agreement, dated as of May 28, 1999, by and among Coso Power
Developers, Caithness Acquisition Company, LLC, New CTC Company, LLC,
Caithness Navy II Group, LLC and Coso Operating Company LLC.*
4.1 Indenture, dated as of May 28, 1999, among Caithness Coso Funding
Corp., Coso Finance Partners, Coso Energy Developers, Coso Power
Developers, and U.S. Bank Trust National Association as trustee and as
collateral agent.*
4.3 Notation of Guarantee, dated as of May 28, 1999, of Coso Finance
Partners.*
4.4 Notation of Guarantee, dated as of May 28, 1999, of Coso Energy
Developers.*
4.5 Notation of Guarantee, dated as of May 28, 1999, of Coso Power
Developers.*
4.6 Registration Rights Agreement, dated as of May 28, 1999, by and among
Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy
Developers, Coso Power Developers, and Donaldson, Lufkin & Jenrette
Securities Corporation.*
10.1 Deposit and Disbursement Agreement, dated as of May 28, 1999, among
Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy
Developers, Coso Power Developers, and U.S. Bank Trust National
Association, as collateral agent, as trustee, and as depositary.*
10.2 Credit Agreement, dated as of May 28, 1999, between Caithness Coso
Funding Corp. and Coso Finance Partners.*
10.3 Promissory Note due 2001 of Coso Finance Partners in favor of
Caithness Coso Funding Corp.*
10.4 Promissory Note due 2009 of Coso Finance Partners in favor of
Caithness Coso Funding Corp.*
10.5 Credit Agreement, dated as of May 28, 1999, between Caithness Coso
Funding Corp. and Coso Energy Developers.*
10.6 Promissory Note due 2001 of Coso Energy Developers in favor of
Caithness Coso Funding Corp.*
10.7 Promissory Note due 2009 of Coso Energy Developers in favor of
Caithness Coso Funding Corp.*
10.8 Credit Agreement, dated as of May 28, 1999, between Caithness Coso
Funding Corp. and Coso Power Developers.*
10.9 Promissory Note due 2001 of Coso Power Developers in favor of
Caithness Coso Funding Corp.*
10.10 Promissory Note due 2009 of Coso Power Developers in favor of
Caithness Coso Funding Corp.*
26
10.11 Purchase Agreement, dated as of May 21, 1999, by and among Caithness
Coso Funding Corp., as Issuer, Coso Finance Partners, Coso Energy
Developers and Coso Power Developers, as guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation, as initial purchaser.*
10.12 Security Agreement, dated as of May 28, 1999, executed by and among
Caithness Coso Funding Corp. in favor of U.S. Bank Trust National
Association, as collateral agent.*
10.13 Security Agreement, dated as of May 28, 1999, executed by and among
Coso Finance Partners in Favor of U.S. Bank Trust National
Association, as collateral agent.*
10.14 Security Agreement, dated as of May 28, 1999, executed by Coso Energy
Developers in favor of U.S. Bank Trust National Association, as
collateral agent.*
10.15 Security Agreement, dated as of May 28, 1999, executed by Coso Power
Developers in favor of U.S. Bank Trust National Association, as
collateral agent.*
10.18 Security Agreement (Navy I project permits), dated as of May 28,
1999, executed by Coso Operating Company LLC in favor of U.S. Bank
Trust National Association, as collateral agent.*
10.19 Security Agreement (BLM project permits), dated as of May 28, 1999,
executed by Coso Operating Company LLC in favor of U.S. Bank Trust
National Association, as collateral agent.*
10.20 Security Agreement (Navy II project permits), dated as of May 28,
1999, executed by Coso Operating Company LLC in favor of U.S. Bank
Trust National Association, as collateral agent.*
10.24 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by Coso Finance Partners
in favor of U.S. Bank Trust National Association, as trustee, and as
beneficiary.*
10.25 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by Coso Energy
Developers in favor of U.S. Bank Trust National Association, as
trustee, and as beneficiary.*
10.26 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by Coso Power Developers
in favor of U.S. Bank Trust National Association, as trustee, and as
beneficiary.*
10.27 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by Coso Transmission
Line Partners in favor of U.S. Bank Trust National Association, as
trustee, and as beneficiary.*
10.28 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by China Lake Joint
Venture in favor of U.S. Bank Trust National Association, as trustee,
and as beneficiary.*
10.29 Deed of Trust, Assignment of Rents, Fixture Filing and Security
Agreement, dated as of May 28, 1999, executed by Coso Land Company in
favor of U.S. Bank Trust National Association, as trustee, and as
beneficiary.*
10.30 Stock Pledge Agreement, dated as of May 28, 1999, by Coso Finance
Partners, Coso Energy Developers and Coso Power Developers in favor of
U.S. Bank Trust National Association, as Collateral agent.*
10.31 Partnership Interest Pledge Agreement (Navy I), dated as of May 28,
1999, by ESCA, LLC and New CLOC Company, LLC, in favor of U.S. Bank
Trust National Association, as collateral agent.*
27
10.32 Partnership Interest Pledge Agreement (BLM), dated as of May 28,
1999, by Caithness Coso Holdings, LLC and New CHIP Company, LLC, in
favor of U.S. Bank Trust National Association, as Collateral agent.*
10.33 Partnership Interest Pledge Agreement (Navy II), dated as of May 28,
1999, by Caithness Navy II Group, LLC and New CTC Company, LLC, in
favor of U.S. Bank Trust National Association, as collateral agent.*
10.34 Partnership Interest Pledge Agreement (CTLP), dated as of May 28,
1999, by Coso Energy Developers and Coso Power Developers, in favor of
U.S. Bank Trust National Association, as Collateral agent.*
10.35 Partnership Interest Pledge Agreement (CLJV), dated as of May 28,
1999, by Caithness Acquisition Company, LLC and Caithness Geothermal
1980 Ltd., LP, in favor of U.S. Bank Trust National Association, as
collateral agent.*
10.36 Partnership Interest Pledge Agreement (CLC), dated as of May 28,
1999, by Caithness Acquisition Company, LLC and Caithness Geothermal
1980 Ltd., LP, in favor of U.S. Bank Trust National Association, as
collateral agent.*
10.37 Promissory Notes Security Agreement, dated as of May 28, 1999, by
Caithness Coso Funding Corp., in favor of U.S. Bank Trust National
Association, as collateral agent.*
10.38 Original Service Contract N62474-79-C-5382, dated December 6, 1979,
between U.S. Naval Weapons Center and California Energy Company, Inc.,
Contractor (the "Navy Contract "), including all Amendments thereto.*
10.39 Escrow Agreement, dated December 16, 1992, as amended, by and among
10.40 Offer to Lease and Lease for Geothermal Resources, Serial No. 11402,
dated April 29, 1985 but Effective May 1, 1985, from the United States
of America, acting through the Bureau of Land Management, to
California Energy Company, Inc.; as assigned by Assignment Affecting
Record Title to Geothermal Resources Lease, dated June 24, 1985, but
effective July 1, 1985 from California Energy Company, Inc. to Coso
Land Company; as assigned by Assignment of Record Title Interest in a
Lease for Oil and Gas or Geothermal Resources, dated April 20, 1988,
but effective May 1, 1988 from Coso Land Company to Coso Geothermal
Company; as assigned by Assignment of Record Title Interest in a Lease
for Oil and Gas or Geothermal Resources dated April 20, 1988 but
effective May 1, 1988 from Coso Geothermal Company to Coso Energy
Developers.*
10.41 Geothermal Resources Lease, Serial No. CA-11383, by and between the
United States of America, acting through the Bureau of Land
Management, and the LADWP, effective as of January 1, 1988; as
assigned by Lease Assignment Agreement by and between LADWP and Coso
Land Company, dated September 10, 1997; as assigned by Assignment of
Record Title Interest in Lease for Oil and Gas or Geothermal
Resources, by and between the United States of America, acting through
the Bureau of Land Management, and Coso Land Company, effective
January 1, 1998; and as extended by Extension of primary term of
CACA-11383 to September 23, 2004.*
10.42 Geothermal Resources Lease, Serial No. CA-11384, by and between the
United States of America, acting through the Bureau of Land
Management, and the LADWP, effective as of February 1, 1982; as
assigned by Lease Assignment Agreement by and between LADWP and Coso
Land Company, dated September 10, 1997; as assigned by Assignment of
Record Title Interest in a Lease for Oil and Gas or Geothermal
Resources (CACA-11384), by and between the United States of America,
acting through the Bureau of Land Management, and Coso Land Company,
effective as of January 1, 1998; and as extended by extension of
primary term of CACA-11385 to December 24, 2002.*
28
10.43 Geothermal Resources Lease, Serial No. CA-11385, by and between the
United States of America, acting through the Bureau of Land
Management, and the LADWP, effective as of February 1, 1982; as
assigned by Lease Assignment Agreement by and between LADWP and Coso
Land Company, dated September 10, 1997; as assigned by Assignment of
Record Title Interest in a Lease for Oil and Gas or Geothermal
Resources (CACA-11385) by and between the United States of America,
acting Through the Bureau of Land Management, and Coso Land Company,
effective as of January 1, 1998; and as extended by extension of
primary term of CACA-11385 to December 24, 2002.*
10.44 License for Electric Power Plant Site Utilizing Geothermal Resources
between the United States of America, Licensor, through the Bureau of
Land Management, and Coso Energy Developers, Licensee, Serial No. CACA
22512, dated March 8, 1989 (expires 3/8/19).*
10.45 License for Electric Power Plant Site Utilizing Geothermal Resources
between the United States of America, acting through the Bureau of
Land Management, and Coso Energy Developers, Licensee, Serial No.
25690, dated 12/29/1989 (expires 12/28/19).*
10.46 Right of Way CA-18885 by and between the United States of America,
acting through the Bureau of Land Management, and California Energy
Company, Inc., dated May 7, 1986 (telephone cable)(expires 5/7/16).*
10.47 Right of Way CA-13510 by and between the United States of America,
acting through the Bureau of Land Management, and California Energy
Company, Inc., dated April 12, 1984 (Coso office site)(expires
4/12/14).*
10.48 Agreement of Transfer and Assignment (Navy I Transmission Line),
dated July 14, 1987, among China Lake Joint Venture and Coso Finance
Partners.*
10.49 Agreement of Transfer and Assignment (Navy II Transmission Line),
dated July 31, 1989, among Coso Power Developers and Coso Transmission
Line Partners.*
10.50 Agreement of Transfer and Assignment (BLM Transmission Line), dated
July 31, 1989, among Coso Energy Developers and Coso Transmission Line
Partners.*
10.51 Agreement Regarding Overriding Royalty (CLC Royalty), dated May 5,
1988, between Coso Energy Developers and Coso Land Company.*
10.52 Coso Geothermal Exchange Agreement, dated January 11, 1994, by and
among Coso Finance Partners, Coso Energy Developers, Coso Power
Developers, and California Energy Company, Inc.*
10.53 Amendment to Coso Geothermal Exchange Agreement, dated April 12,
1995, by and among Coso Finance Partners, Coso Energy Developers, Coso
Power Developers, and California Energy Company, Inc.*
10.55 Operation and Maintenance Agreement (Navy I Project), dated May 28,
1999, by and among FPL Energy Operating Services, Inc. and Coso
Operating Company, LLC and New CLOC Company, LLC.*
10.56 Operation and Maintenance Agreement (BLM Project), dated May 28,
1999, by and among FPL Energy Operating Services, Inc. and Coso
Operating Company, LLC and New CHIP Company, LLC.*
10.57 Operation and Maintenance Agreement (Navy II Project), dated May 28,
1999, by and among FPL Energy Operating Services, Inc. and Coso
Operating Company, LLC and New CTC Company, LLC.*
29
10.58 Field Operation and Maintenance Agreement (Navy I), dated February
25, 1999, between Coso Operating Company, LLC and New CLOC Company,
LLC.*
10.59 Field Operations and Maintenance Agreement (Navy II), dated February
25, 1999, between Coso Operating Company, LLC and New CTC Company,
LLC.*
10.60 Field Operations and Maintenance Agreement (BLM), dated February 25,
1999, between Coso Operating Company, LLC and New CHIP Company, LLC.*
10.61 Purchase Agreement, dated as of January 16, 1999, by and among
Caithness Energy, L.L.C., Caithness Acquisition Company, LLC, and
California Energy Company, Inc.*
10.62 Agreement Concerning Consideration, dated as of February 25, 1999, by
and among Caithness Energy, L.L.C., Caithness Acquisition Company,
L.L.C., New CLOC Company, LLC, New CHIP Company, LLC, New CTC Company,
LLC, and CalEnergy Company, Inc.*
10.63 Future Revenue Agreement, dated February 25, 1999, by and between
Caithness Energy, L.L.C., Caithness Acquisition Company, LLC, New CTC
Company, LLC, New CLOC Company, LLC, NewCHIP Company, LLC, Coso
Finance Partners, Coso Energy Developers, Coso Power Developers, and
California Energy Company, Inc.*
10.64 Acknowledgment and Agreement--Release, dated January 16, 1999,
executed by Caithness Resources, Inc., Caithness Corporation,
Caithness Power, L.L.C., James Bishop Sr., and Caithness CEA
Geothermal, LP (appended to Exhibit 10.61).*
10.65 Acknowledgment and Agreement--Indemnity, dated May 28, 1999, executed
by Coso Finance Partners, New CLOC Company, LLC, ESCA, LLC, Coso
Energy Developers, New CHIP Company, LLC, Caithness Coso Holdings,
LLC, Coso Power Developers, New CTC Company, LLC, and Caithness Navy
II Group, LLC.*
10.66 Acknowledgment and Agreement--Release, dated May 28, 1999, executed
by Coso Finance Partners, New CLOC Company, LLC, ESCA, LLC, Coso
Energy Developers, New CHIP Company, LLC, Caithness Coso Holdings,
LLC, Coso Power Developers, New CTC Company, LLC, and Caithness Navy
II Group, LLC.*
10.67 Acknowledgment and Agreement--Indemnity, dated January 16, 1999,
executed by Caithness Resources, Inc., Caithness Corporation,
Caithness Power, L.L.C., China Lake Operating Company, Coso Technology
Corporation and Coso Hotsprings Intermountain Power (appended to
Exhibit 10.61).*
10.68 Power Purchase Agreement (modified Standard Offer No.4) (Navy I),
dated as of June 4, 1984, as Amended, by and between Southern
California Edison Company and Coso Finance Partners (as assignee of
China Lake Joint Venture).*
10.69 Power Purchase Agreement (modified Standard Offer No.4) (BLM), dated
as of February 1, 1985, by and between Southern California Edison
Company and Coso Energy Developers (as assignee of China Lake Joint
Venture).*
10.70 Power Purchase Agreement (modified Standard Offer No.4) (Navy II),
dated as of February 1, 1985, by and between Southern California
Edison Company and Coso Power Developers (as assignee of China Lake
Joint Venture).*
10.72 Interconnection and Integration Facilities Agreement (BLM project),
dated December 15, 1988, Between Southern California Edison Company
and Coso Energy Developers (as assignee of China Lake Joint Venture).*
30
10.73 Interconnection and Integration Facilities Agreement (Navy II
project), dated December 15, 1988, Between Southern California Edison
Company and Coso Power Developers (as assignee of China Lake Joint
Venture).*
10.77 Operating Fee Subordination Agreement (Navy I), dated as of May 28,
1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust
National Association, as collateral agent.*
10.78 Operating Fee Subordination Agreement (BLM), dated as of May 28,
1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust
National Association, as collateral agent.*
10.79 Operating Fee Subordination Agreement (Navy II), dated as of May 28,
1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust
National Association, as collateral agent.*
10.80 Management Fee Subordination Agreement (Navy I), dated as of May 28,
1999, by and among ESCA, LLC, New CLOC Company, LLC, Coso Finance
Partners, and U.S. Bank Trust National Association, as collateral
agent.*
10.81 Management Fee Subordination Agreement (BLM), dated as of May 28,
1999, by and among Caithness Coso Holdings, LLC, New CHIP Company,
LLC, Coso Energy Developers, and U.S. Bank Trust National Association,
as collateral agent.*
10.82 Management Fee Subordination Agreement (Navy II), dated as of May 28,
1999, by and among Caithness Navy II Group, LLC, New CTC Company, LLC,
Coso Power Developers, and U.S. Bank Trust National Association, as
collateral agent.*
10.83 Cotenancy Agreement, dated as of May 28, 1999, by and among Coso
Finance Partners, Coso Energy Developers, and Coso Power Developers.*
10.84 Acquisition Agreement, dated as of May 28, 1999, among Coso Land
Company, Coso Finance Partners, Coso Energy Developers, Coso Power
Developers, and Coso Operating Company, LLC.*
10.85 Assignment and Assumption Agreement, dated as of May 28, 1999, by and
among MidAmerican Energy Holdings Company as successor-in-interest to
Cal Energy Company, Inc., Coso Energy Developers, Coso Power
Developers and Coso Finance Partners.*
21.1 Subsidiaries of Caithness Coso Funding Corp., Coso Finance Partners,
Coso Energy Developers, and Coso Power Developers.*
23.3 Consent of Sandwell Engineering Inc.*
23.4 Consent of Henwood Energy Services, Inc.*
23.5 Consent of GeothermEx, Inc.*
23.6 Consent of Riordan & McKinzie, A Professional Law Corporation
(included in Exhibit 5.1).*
23.7 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 5.2).*
24.1 Powers of Attorney (included on pages II-9, II-11, II-13 and II-15).*
25.1 Form T-1 Statement of Eligibility and Qualification of U.S. Bank Trust
National Association as Trustee.*
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
31
99.3 Sale Agreement by and between Caithness Acquisition Company, LLC, and
ESI Geothermal, Inc. dated as of October 6, 1999.**
99.4 Assignment, Assumption and Novation Agreement (Coso Finance Partners)
by and between FPL Energy Operating Services, Inc. and Coso Operating
Company, LLC dated October 18, 1999.**
99.5 Assignment, Assumption and Novation Agreement (Coso Energy Developers)
by and between FPL Energy Operating Services, Inc. and Coso Operating
Company, LLC dated October 18, 1999.**
99.6 Assignment, Assumption and Novation Agreement (Coso Power Developers)
by and between FPL Energy Operating Services, Inc. and Coso Operating
Company, LLC dated October 18, 1999.**
100.1 Contract N68711-05-C-0001 Geothermal Resource Development, Naval Air
Weapons Station at the Coso Project China Lake, California***
* Incorporated herein by reference from the Registration Statement on
Form S-4, Registration No. 333-83815 filed with the Securities and
Exchange Commission (the SEC) by Coso Funding Corp. on October 7,
1999, as amended.
** Incorporated herein by reference from the Form 8-K on report dated
October 18, 1999 for Coso Funding Corp., filed with the SEC.
*** Incorporated herein by reference from the Form 8-K on report dated
November 1, 2004 for Coso Funding Corp., filed with the SEC.
32
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Caithness Coso Funding Corp., Coso
Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power
Developers and Subsidiary (collectively, the Registrant) on Form 10-K for the
year ended December 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, James D. Bishop, Sr., Chief
Executive Officer of the Registrant, certify, to the best of my knowledge and
belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Registrant.
Date: March 29, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ JAMES D. BISHOP, SR.
------------------------
James D. Bishop, Sr.
Director, Chairman &
Chief Executive Officer
Exhibit 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Caithness Coso Funding Corp., Coso
Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power
Developers and Subsidiary (collectively, the Registrant) on Form 10-K for the
year ended December 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Christopher T. McCallion, Chief
Financial Officer of the Registrant, certify, to the best of my knowledge and
belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Registrant.
Date: March 29, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President
& Chief Financial Officer
Principal Financial &
Accounting Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION
302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, James D. Bishop, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of Caithness Coso Funding
Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and
Coso Power Developers and Subsidiary (collectively, the Registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 29, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ JAMES D. BISHOP, SR.
------------------------
James D. Bishop, Sr.
Director, Chairman &
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION
302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher T. McCallion, certify that:
1. I have reviewed this annual report on Form 10-K of Caithness Coso Funding
Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and
Coso Power Developers and Subsidiary (collectively, the Registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 29, 2005 Caithness Coso Funding Corp.
a Delaware Corporation
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President
& Chief Financial Officer
Principal Financial &
Accounting Officer
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.
CAITHNESS COSO FUNDING CORP.,
a Delaware corporation
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 29, 2005
COSO FINANCE PARTNERS
a California general partnership
By: New CLOC Company, LLC,
its Managing General Partner
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 29, 2005
COSO ENERGY DEVELOPERS
a California general partnership
By: New CHIP Company, LLC,
its Managing General Partner
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 29, 2005
COSO POWER DEVELOPERS
a California general partnership
By: New CTC Company, LLC,
its Managing General Partner
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /S/ JAMES D. BISHOP, SR.
------------------------
James D. Bishop, Sr.
Director, Chairman and Chief
Executive Officer
(Principal Executive Officer
Date: March 29, 2005
By: /S/ CHRISTOPHER T. MCCALLION
----------------------------
Christopher T. McCallion
Director, Executive Vice President
& Chief Financial Officer
(Principal Accounting Officer)
Date: March 29, 2005
By: /S/ LESLIE J. GELBER
--------------------
Leslie J. Gelber
Director, President and
Chief Operating Officer
Date: March 29, 2005
By: /S/ JAMES D. BISHOP, JR.
------------------------
James D. Bishop, Jr.
Director, Vice Chairman
Date: March 29, 2005
By: /S/ MARK A. FERRUCCI
--------------------
Mark A. Ferrucci
Director
Date: March 29, 2005