UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 2002
Commission File No. 333-89521
CE GENERATION, LLC
(Exact name of registrant as specified in its charter)
Delaware 47-0818523
- ----------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
302 South 36th Street, Suite 400-2 Omaha, NE 68131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 341-4500
--------------
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
The members' equity accounts are held 50% by MidAmerican Energy Holdings
Company and 50% by El Paso Merchant Energy North America Company as of August
14, 2002.
TABLE OF CONTENTS
Part I Financial Information.......................................... 1
Item 1. Financial Statements....................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... 10
Part II Other Information.............................................. 17
Item 1. Legal Proceedings.......................................... 17
Item 2. Changes in Securities and Use of Proceeds.................. 17
Item 3. Defaults on Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
Signatures............................................................... 18
INDEPENDENT ACCOUNTANTS' REPORT
Board of Managers
CE Generation, LLC
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of CE
Generation, LLC and subsidiaries (collectively, the "Company") as of June 30,
2002, and the related consolidated statements of operations and other
comprehensive income for the three-month and six-month periods ended June 30,
2002 and 2001 and of cash flows for the six month periods ended June 30, 2002
and 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CE
Generation, LLC and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations and other comprehensive income, members'
equity and cash flows for the year then ended (not presented herein); and in our
report dated January 17, 2002 (March 1, 2002 as to Note 9A) we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2001 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
August 2, 2002
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CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Cash and cash equivalents ................................ $ 37,053 $ 34,870
Restricted cash .......................................... 50,419 17,025
Accounts receivable, net of allowance for
doubtful accounts of $5,141 and $24,754 ................ 72,906 128,725
Prepaid expenses and other assets ........................ 12,366 7,178
Inventory ................................................ 22,749 23,705
Due from affiliates ...................................... -- 132
----------- -----------
Total current assets ..................................... 195,493 211,635
Restricted cash .......................................... 12,925 14,009
Properties, plants, contracts and equipment, net ......... 1,265,264 1,287,668
Excess of cost over fair value of net assets acquired, net 265,897 265,897
Note receivable from related party ....................... 138,843 139,896
Deferred financing charges and other assets .............. 11,061 13,014
----------- -----------
Total assets ............................................. $ 1,889,483 $ 1,932,119
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Accounts payable ......................................... $ 3,129 $ 8,766
Accrued interest ......................................... 3,474 3,674
Interest rate swap liability ............................. 16,762 16,295
Other accrued liabilities ................................ 31,479 42,037
Due to affiliates ........................................ 175 --
Current portion of long term debt ........................ 85,846 85,036
----------- -----------
Total current liabilities ................................ 140,865 155,808
Project loans ............................................ 142,858 163,142
Salton Sea notes and bonds ............................... 477,634 491,678
Senior secured bonds ..................................... 347,400 356,400
Deferred income taxes .................................... 253,935 237,882
----------- -----------
Total liabilities ........................................ 1,362,692 1,404,910
Minority interest ........................................ 56,692 59,832
Commitments and contingencies (Note 3)
Members' equity .......................................... 478,213 475,073
Accumulated other comprehensive loss ..................... (8,114) (7,696)
----------- -----------
Total equity ............................................. 470,099 467,377
----------- -----------
Total liabilities and members' equity .................... $ 1,889,483 $ 1,932,119
=========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Sales of electricity and steam ......... $ 114,697 $ 124,047 $ 239,942 $ 272,033
Interest and other income .............. 2,800 5,358 4,965 7,059
--------- --------- --------- ---------
Total revenues ......................... 117,497 129,405 244,907 279,092
Cost and Expenses:
Fuel ................................... 30,116 29,774 59,269 66,462
Plant operations ....................... 36,152 32,877 68,430 66,693
Depreciation and amortization .......... 21,606 22,862 42,414 43,512
Interest expense ....................... 19,613 20,184 39,158 41,171
--------- --------- --------- ---------
Total expenses ......................... 107,487 105,697 209,271 217,838
--------- --------- --------- ---------
Income before provision for income taxes 10,010 23,708 35,636 61,254
Provision for income taxes ............. 2,451 5,035 8,409 17,510
--------- --------- --------- ---------
Income before minority interest and
cumulative effect of accounting change . 7,559 18,673 27,227 43,744
Minority interest ...................... 4,361 1,301 9,687 6,198
--------- --------- --------- ---------
Income before cumulative effect
of accounting change ................... 3,198 17,372 17,540 37,546
Cumulative effect of accounting
change, net of tax ..................... -- -- -- (15,386)
--------- --------- --------- ---------
Net income ............................. $ 3,198 $ 17,372 $ 17,540 $ 22,160
========= ========= ========= =========
Other comprehensive income (loss):
Cumulative effect of change in accounting
principle, net of tax ................... -- -- -- (5,954)
Unrealized gain (loss) on cash flow
hedges, net of tax ...................... (1,609) 1,031 (418) 78
--------- --------- --------- ---------
Comprehensive income .................... $ 1,589 $ 18,403 $ 17,122 $ 16,284
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income ....................................................... $ 17,540 $ 22,160
Adjustments to reconcile net income to cash flows from
operating activities:
Cumulative effect of change in accounting
principle, net of tax ........................................ -- 15,386
Depreciation and amortization .................................... 42,414 43,512
Provision for deferred income taxes .............................. 15,939 (25,998)
Distributions to minority interest less than (in excess) of income (3,140) 540
Changes in other items:
Accounts receivable .............................................. 55,819 8,501
Due from affiliates .............................................. 307 (443)
Accounts payable and other accrued liabilities ................... (16,395) 22,201
Inventory ........................................................ 956 4,464
Other assets ..................................................... (3,121) 1,459
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Net cash flows from operating activities ......................... 111,319 91,782
Cash flows from investing activities:
Capital expenditures ............................................. (19,908) (11,677)
Decrease/(Increase) in restricted cash ........................... 1,084 (5,170)
--------- ---------
(18,824) (16,847)
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Net cash flows from investing activities
Cash flows from financing activities:
Repayment of project loans ....................................... (42,518) (33,743)
Distributions .................................................... (14,400) --
Decrease (increase) in restricted cash ........................... (33,394) 256
--------- ---------
Net cash flows from financing activities ......................... (90,312) (33,487)
--------- ---------
Net increase in cash and cash equivalents ........................ 2,183 41,448
Cash and cash equivalents at beginning of period ................. 34,870 36,152
--------- ---------
Cash and cash equivalents at end of period ....................... $ 37,053 $ 77,600
========= =========
Supplemental disclosure:
Interest paid .................................................... $ 37,960 $ 40,581
========= =========
Income taxes paid ................................................ $ 559 $ 9,544
========= =========
The accompanying notes are an integral part of these financial statements.
-5-
CE GENERATION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of the management of CE Generation, LLC ("CE Generation" or the
"Company") the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of June 30, 2002 and the results of operations
for the three and the six months ended June 30, 2002 and 2001 and cash flows for
the six months ended June 2002 and 2001. The results of operations for the six
months ended June 30, 2002 are not necessarily indicative of the results to be
expected for the full year.
The unaudited consolidated financial statements shall be read in conjunction
with the consolidated financial statements included in the CE Generation annual
report on Form 10-K for the year ended December 31, 2001.
Certain prior year amounts have been reclassified in order to conform with
current year classifications.
2. ACCOUNTING POLICIES
Effective January 1, 2001, CE Generation changed its accounting policy for major
maintenance, overhaul and well workover costs. These costs, had historically
been accounted for using deferral and accrual methods, and are now expensed as
incurred. The Company recorded a cumulative effect of this change of
approximately $15.4 million, net of tax of approximately $9.9 million, in the
six months ended June 30, 2001.
CE Generation adopted Statement of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended
effective January 1, 2001. As a result of the adoption of SFAS No. 133, CE
Generation recorded the fair value of the liability associated with the interest
rate swap agreements at January 1, 2001, which was approximately $6.0 million,
net of tax of approximately $4.0 million. These interest rate swap agreements
are considered cash flow hedges and therefore the offset is recorded in
accumulated other comprehensive income. The adoption did not have an impact on
net income or cash flows.
On January 1, 2002, CE Generation adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which establishes the accounting for acquired goodwill and
other intangible assets, and provides goodwill and indefinite-lived intangible
assets will not be amortized, but will be tested for impairment on an annual
basis. CE Generation's related amortization consists solely of goodwill
amortization, which has no income tax effect. Following is a reconciliation of
net income as originally reported for the three and six month periods ended June
30, 2002 and 2001, to adjusted net income (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------- ------- ------- -------
Reported net income . $ 3,198 $17,372 $17,540 $22,160
Goodwill amortization -- 2,397 -- 4,795
------- ------- ------- -------
Adjusted net income . $ 3,198 $19,769 $17,540 $26,955
======= ======= ======= =======
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The following table summarizes the acquired intangible assets as of June 30,
2002 (in thousands):
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts $313,183 $189,952
Patented Technology 46,290 14,420
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Total $359,473 $204,373
======== ========
Amortization expense on acquired intangible assets was $4.6 and $9.1 million for
the three and six month periods ended June 30, 2002. CE Generation expects
amortization expense on acquired intangible assets to be $9.1 million for the
remainder of fiscal 2002, $18.1 million for 2003 and $14.9 million for each of
the four succeeding fiscal years.
In accordance with SFAS No. 142, CE Generation has determined its reporting
units and completed the transitional impairment testing of goodwill in the
second quarter primarily using a discounted cash flow methodology as of January
1, 2002. No impairment was indicated as a result of the transitional impairment
test.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard addresses financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS No. 143 is effective for the Company's
fiscal year beginning January 1, 2003. Management has not quantified the impact
this standard will have on the Company's consolidated financial statements.
In October 2001, FASB issued SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets. The standard addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. There was no financial
statement impact as a result of CE Generation's adoption of SFAS No. 144 on
January 1, 2002.
3. COMMITMENTS AND CONTINGENCIES
A. SOUTHERN CALIFORNIA EDISON AND THE CALIFORNIA POWER EXCHANGE
Southern California Edison ("Edison"), a wholly-owned subsidiary of Edison
International, is a public utility primarily engaged in the business of
supplying electric energy to retail customers in Central and Southern
California, excluding Los Angeles. Due to reduced liquidity, Edison had failed
to pay approximately $119 million owed under the power purchase agreements with
the Imperial Valley Projects (excluding the Salton Sea V and Turbo Projects) for
power delivered in the fourth quarter 2000 and the first quarter 2001. Due to
Edison's failure to pay contractual obligations, the Imperial Valley Projects
(excluding the Salton Sea V and Turbo Projects) had established an allowance for
doubtful accounts of approximately $21 million as of December 31, 2001.
The final payment was received March 1, 2002. Following the receipt of Edison's
payment of past due balances, the Imperial Valley Projects released the
remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such, cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and Turbo Projects have not received payment for power
sold under the Transaction Agreements during December 2000 and January 2001 of
approximately $3.8 million. The Imperial Valley Projects have established an
allowance for doubtful accounts for the full amount of this receivable. The
Project entities will vigorously pursue collection.
-7-
Edison has failed to pay approximately $3.9 million of capacity bonus payments
for the months from October 2001 through May 2002. On December 10, 2001 the
Imperial Valley Projects (excluding the Salton Sea I, Salton Sea V and Turbo
Projects) filed a lawsuit against Edison in California's Imperial County
Superior Court seeking a court order requiring Edison to make the required
capacity bonus payments under the Power Purchase Agreements. Due to Edison's
failure to pay these contractual obligations, the Imperial Valley Projects have
established an allowance for doubtful accounts of approximately $1.3 million.
The Project entities are vigorously pursuing collection of the capacity bonus
payments.
B. ENVIRONMENTAL LIABILITIES
The Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company's existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company's cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company's facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of June 30, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were $3.0 million and
$4.2 million, respectively.
4. RELATED PARTY TRANSACTIONS
MidAmerican Energy Holdings Company ("MEHC") provides certain administrative and
management services to CE Generation, and MEHC's executive, financial, legal,
tax and other corporate staff departments perform certain services for CE
Generation. Expenses incurred by MEHC and allocated to CE Generation are
estimated based on the individual services and expense items provided. Allocated
expenses totaled approximately $.7 million and $1.0 million for the three months
and $1.3 million and $1.9 million for the six months ended June 30, 2002 and
2001, respectively, and are included in plant operations expense.
On August 1, 2002, the Administrative Services Agreement between MEHC and CE
Generation was amended to provide for a fixed monthly fee in lieu of allocated
expenses. The fixed fee, which is retroactive to January 1, 2002, is $258,333
per month.
On September 29, 2000, Salton Sea Power L.L.C. (Salton Sea Power) and CE Turbo
LLC ("CE Turbo") entered into an agreement to sell all available power from the
Salton Sea V Project and Turbo Project to El Paso Merchant Energy Company
("EPME"). Under the terms of the agreement, EPME purchased and sold available
power on behalf of Salton Sea Power and CE Turbo, into the California ISO
markets. The purchase price for the available power was equivalent to the value
actually received by EPME for the sale of such power, including renewable
premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and Turbo
Project to EPME. Under the terms of the agreement, at the option of Salton Sea
Power and CE Turbo, EPME purchased all available power from the Salton Sea V
Project and Turbo Project based on day ahead price quotes received from EPME.
-8-
On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into a
Transaction Agreement to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 22, 2001, the Imperial Valley Projects
(excluding the Salton Sea V Project and Turbo Project) ceased selling available
power to EPME and resumed power sales to Edison.
Pursuant to these agreements, sales to EPME from the Company totaled $.9 million
and $70.1 million for the three months ended June 30, 2002 and 2001,
respectively and $3.5 million and $98.3 million for the six months ended June
30, 2002 and 2001, respectively. As of June 30, 2002 and December 31, 2001,
accounts receivable from EPME were $.5 million and $.9 million, respectively.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of significant factors,
which have affected CE Generation, LLC's ("CE Generation" or the "Company")
financial condition and results of operations during the periods included in the
accompanying statements of operations. The Company's actual results in the
future could differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development and construction
uncertainty, operating uncertainty, acquisition uncertainty, uncertainties
relating to geothermal resources, uncertainties relating to economic and
political conditions and uncertainties regarding the impact of regulations,
changes in government policy, industry deregulation and competition. Reference
is made to all of the Company's SEC filings, incorporated herein by reference,
for a description of such factors. The Company assumes no responsibility to
update forward-looking information contained herein.
BUSINESS
The consolidated financial statements reflect the consolidated financial
statements of CE Generation, and its wholly-owned subsidiaries, Magma Power
Company ("Magma"), FSRI Holdings, Inc. ("FSRI") and Yuma Cogeneration Associates
("Yuma").
The following table sets out information concerning CE Generation Projects:
PROJECT FUEL COMMERCIAL CAPACITY LOCATION
OPERATION
Vulcan Geothermal 1986 34 MW California
Del Ranch Geothermal 1989 38 MW California
Elmore Geothermal 1989 38 MW California
Leathers Geothermal 1990 38 MW California
CE Turbo Geothermal 2000 10 MW California
Salton Sea I Geothermal 1987 10 MW California
Salton Sea II Geothermal 1990 20 MW California
Salton Sea III Geothermal 1989 49.8 MW California
Salton Sea IV Geothermal 1996 39.6 MW California
Salton Sea V Geothermal 2000 49 MW California
Power Resources Gas 1988 200 MW Texas
Yuma Gas 1994 50 MW Arizona
Saranac Gas 1994 240 MW New York
The Vulcan Project, Del Ranch Project, Elmore Project, Leathers Project and CE
Turbo Project are referred to as the Partnership Projects. The Salton Sea I
Project, Salton Sea II Project, Salton Sea III Project, Salton Sea IV Project
and Salton Sea V Project are referred to as the Salton Sea Projects. The
Partnership Projects and the Salton Sea Projects are collectively referred to as
the Imperial Valley Projects. The Power Resources Project, Yuma Project and
Saranac Project are collectively referred to as the Gas Projects.
-10-
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Consolidated Financial Statements and accompanying notes. Note 2
to the Consolidated Financial Statements in the Annual Report on Form 10-K
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Estimates are used for,
but not limited to, the accounting for the allowance for doubtful accounts,
impairment of long-lived assets and contingent liabilities. Actual results could
differ from these estimates. The following critical accounting policies are
impacted significantly by judgments, assumptions and estimates used in the
preparation of the Consolidated Financial Statements.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, estimates of the
recoverability of amounts due could be adversely affected.
Impairment of Long-Lived Assets
- -------------------------------
The Company's long-lived assets consist primarily of property, plant and
equipment, and intangible assets with useful lives, which range from 3 to 40
years, and acquired goodwill. The Company believes the useful lives of its
long-lived assets are reasonable. The Company evaluates goodwill impairment on
an annual basis. The Company also evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Triggering events include a significant change in
the extent or manner in which long-lived assets are being used or in its
physical condition, in legal factors, or in the business climate that could
affect the value of the long-lived assets, including changes in regulation. The
interpretation of such events requires judgment from management as to whether
such an event has occurred and is required. If an event occurs that could affect
the carrying value of the asset and management does not identify it as a
triggering event, future results of operations could be significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Company expects to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value which is based on discounted estimated cash flows from the future use
of the asset.
The estimated cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Company would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which dictates the accounting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that amortization of goodwill and
indefinite-lived intangible assets be discontinued. The Company has completed
the initial impairment testing of goodwill as required by SFAS No. 142 and no
impairment was indicated.
Contingent Liabilities
- ----------------------
The Company is subject to the possibility of various loss contingencies,
including tax, legal and environmental, arising in the ordinary course of
business. The Company considers the likelihood of the loss or the incurrence of
a liability as well as our ability to reasonably estimate the amount of loss in
determining loss contingencies. An
-11-
estimated loss contingency is accrued when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The Company
regularly evaluates current information available to us to determine whether
such accruals should be adjusted.
RESULTS OF OPERATIONS
Sales of electricity and steam decreased to $114.7 million for the three months
ended June 30, 2002 from $124.0 million for the same period in 2001, an 8%
decrease. Sales of electricity and steam decreased to $239.9 million for the six
months ended June 30, 2002 from $ 272.0 million for the same period in 2001, a
12% decrease. Sales of electricity and steam for the six months ended June 30,
2002 included the impact of a $20 million reduction in the allowance for
doubtful accounts. Sales of electricity and steam for the six months ended June
30, 2001 included the impact of a $44 million increase in the allowance for
doubtful accounts. Excluding the impact of the adjustments related to the
allowance for doubtful accounts, sales of electricity and steam decreased $9.3
million and $96.1 million for the three and six months ended June 30, 2002,
respectively compared to the same period in 2001. The three and six month
decreases were primarily a result of lower energy prices under the Imperial
Valley Projects' and the Yuma Project's PPAs.
As a result of the Settlement Agreements, Edison has elected to pay the Imperial
Valley Projects (except Salton Sea Projects IV and V and the Turbo Project) a
fixed energy price in lieu of Edison's Average Avoided Cost of Energy. The fixed
energy price was 3.25 cents per kilowatt-hour for the period January 1, 2002
through April 30, 2002 and increased to 5.37 cents per kilowatt-hour effective
May 1, 2002 through April 30, 2007. Edison's Average Avoided Cost of Energy was
8.1 cents per kilowatt-hour for the three months and 11.6 cents per
kilowatt-hour for the six months ended June 30, 2001, respectively.
The following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- --------- ---------
Overall capacity factor 84.3% 88.2% 86.9% 89.8%
Megawatt-hours produced 601,000 621,800 1,231,800 1,273,300
Capacity (net megawatts)(average) 326.4 326.4 326.4 326.4
The overall capacity factor for the Salton Sea Projects decreased for the three
and six months ended June 30, 2002 compared to the same period in 2001 due to
more extensive overhauls in 2002 than in 2001. The 2002 overhauls include an
uncontrollable force event at the Salton Sea II Project. Salton Sea II's 10 MW
turbine went out of service on March 25, 2002 and is expected to be placed back
into service in December 2002. The Company expects to collect lost revenues
under the Salton Sea II PPA and through insurance coverage excluding
deductibles.
The following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- --------- ---------
Overall capacity factor ......... 92.1% 86.1% 92.8% 91.6%
Megawatt-hours produced ......... 985,543 942,286 1,974,944 1,949,226
Capacity (net megawatts)(average) 490 490 490 490
The overall capacity factor of the Gas Projects reflects the effect of
contractual curtailments and maintenance scheduling. The capacity factors
adjusted for the contractual curtailments during the three months ended June 30,
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2002 and 2001 were 98.9% and 93.1%, respectively. The capacity factors adjusted
for the contractual curtailments during the six months ended June 30, 2002 and
2001 were 99.9% and 96.4%, respectively.
Interest and other income decreased to $2.8 million during the three months
ended June 30, 2002 from $5.4 million for the same period in 2001. Interest and
other income decreased to $5.0 million during the six month's ended June 30,
2002 from $7.1 million for the same period in 2001. The decreases were primarily
due to interest earned on past due balances from SCE.
Fuel expenses increased during the three months ended June 30, 2002 to $30.1
million from $29.8 million for the same period in 2001. The increase reflects
increased production at the Gas Projects in 2002, partially offset by decreased
gas prices at Yuma. Fuel expenses decreased to $59.3 million during the six
months ended June 30, 2002 from $66.5 million for the same period in 2001. The
decrease was primarily due to higher gas prices in 2001, primarily at Yuma.
Plant operating expenses increased during the three months ended June 30, 2002
to $36.2 million from $32.9 million for the same period in 2001. For the six
month period ended June 30, 2002 operating expenses increased to $68.4 million
from $66.7 million for the same period in 2001. These costs include operating,
maintenance, resource, general and administrative and other plant operating
expenses. This increase was primarily due to extensive overhaul costs of $9.5
million at the Imperial Valley Projects in 2002, partially offset by decreased
royalty costs of $.8 million at the Imperial Valley Projects due to the decrease
in revenue.
Depreciation and amortization decreased slightly to $21.6 million during the
three months ended June 30, 2002 from $22.9 million for the same period in 2001.
For the six month period ended June 30, 2002 depreciation and amortization
decreased to $42.4 million from $43.5 million in 2001. The decreases were due to
the discontinuation of goodwill amortization, resulting from the adoption of
SFAS No. 142, which totaled $4.8 million for the six months ended June 30, 2001.
This decrease was partially offset by capital additions and asset write offs in
2002.
Interest expense decreased during the three months ended June 30, 2002 to $19.6
million from $20.2 million for the same period in 2001. For the six months ended
June 30, 2002 interest decreased to $39.2 million from $41.2 million for the
same period in 2001. The decrease resulted from the paydown of debt balances.
The provision for income taxes decreased to $2.5 million during the three months
ended June 30, 2002 from $5.0 million for the same period in 2001. For the six
month period ended June 30, 2002, the provision for income tax decreased to $8.4
from $17.5 million for the same period in 2001. The effective rate was 32.4% and
31.8% for the six months ended June 30, 2002 and 2001, respectively. The changes
from year to year in the effective tax rate are due primarily to the generation
of energy tax credits and depletion deductions and the discontinuance of
non-deductible goodwill amortization in 2002.
Minority interest increased to $4.4 million during the three months ended June
30, 2002 from $1.3 million for the same period in 2001. For the six month period
ended June 30, 2002, minority interest increased to $9.7 million from $6.2
million for the same period in 2001. The increase was the result of higher fixed
return payments to the minority interest partners in 2002 at Saranac projects.
Effective January 1, 2001, the Company changed its accounting policy for major
maintenance, overhaul and well workover costs. These costs, which had
historically been accounted for using deferral and accrual methods, are now
expensed as incurred. The cumulative effect of the change in accounting policy
represents a January 1, 2001 write off of prepaid and accrued major maintenance
and well workover balances of approximately $15.4 million, net of tax of
approximately $9.9 million in the three months ended March 31, 2001.
Net income decreased to $3.2 during the three months ended June 30, 2002 from
$17.4 million for the same period in 2001. Net income decreased to $17.5 million
during the six months ended from $22.2 million for the same period in 2002.
RELATED PARTY TRANSACTIONS
MEHC provides certain administrative and management services to CE Generation,
and MEHC's executive, financial, legal, tax and other corporate staff
departments perform certain services for CE Generation. Expenses incurred by
MEHC and allocated to CE Generation are estimated based on the individual
services and expense
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items provided. Allocated expenses totaled approximately $.7 million and $1.0
million for the three months and $1.3 million and $1.9 million for the six
months ended June 30, 2002 and 2001, respectively, and are included in plant
operations expense.
On August 1, 2002, the Administrative Services Agreement between MEHC and CE
Generation was amended to provide for a fixed monthly fee in lieu of allocated
expenses. The fixed fee, which is retroactive to January 1, 2002, is $258,333
per month.
On September 29, 2000, Salton Sea Power L.L.C. ("Salton Sea Power") and CE Turbo
LLC ("CE Turbo") entered into an agreement to sell all available power from the
Salton Sea V Project and Turbo Project to EPME. Under the terms of the
agreement, EPME purchased and sold available power on behalf of Salton Sea Power
and CE Turbo, into the California ISO markets. The purchase price for the
available power was equivalent to the value actually received by EPME for the
sale of such power, including renewable premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and Turbo
Project to EPME. Under the terms of the agreement, at the option of Salton Sea
Power and CE Turbo, EPME purchased all available power from the Salton Sea V
Project and Turbo Project based on day ahead price quotes received from EPME.
On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into a
Transaction Agreement to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 28, 2001, the Imperial Valley Projects
(excluding the Salton Sea V Project and Turbo Project) ceased selling available
power to EPME and resumed power sales to Edison.
Pursuant to these agreements, sales to EPME from the Company totaled $.9 million
and $70.1 million for the three months and $3.5 million and $98.3 million for
the six months ended June 30, 2002 and 2001, respectively. As of June 30, 2002
and December 31, 2001, accounts receivable from EPME were $.5 million and $.9
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Each of CE Generation's direct or indirect subsidiaries is organized as a legal
entity separate and apart from CE Generation and its other subsidiaries and
MEHC. Pursuant to separate project financing agreements, the assets of each
subsidiary (excluding Yuma) are pledged or encumbered to support or otherwise
provide the security for their own project or subsidiary debt. It should not be
assumed that any asset of any subsidiary of CE Generation, will be available to
satisfy the obligations of CE Generation or any of its other subsidiaries;
provided, however, that unrestricted cash or other assets which are available
for distribution may, subject to applicable law and the terms of financing
arrangements for such parties, be advanced, loaned, paid as dividends or
otherwise distributed or contributed to CE Generation or affiliates thereof.
"Subsidiary" means all of CE Generation's direct or indirect subsidiaries (1)
owning direct or indirect interests in the Imperial Valley Projects (including
the Salton Sea Projects and the Partnership Projects other than Magma Power
Company and Salton Sea Power Company), or (2) owning direct interests in the
subsidiaries that own interests in the foregoing projects, the Saranac Project
and the Power Resources Project.
CE Generation generated cash flows from operations of $111.3 million for the six
months ended June 30, 2002 compared with $91.8 million for the same period in
2001. The increase was primarily due to the receipt of past due balances from
Southern California Edison ("Edison").
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. Due to
reduced liquidity, Edison failed to pay approximately $119 million owed under
the power purchase agreements with the Imperial Valley Projects, (excluding the
Salton Sea V and Turbo Projects) for power delivered in the fourth quarter 2000
and the first quarter 2001. Due to Edison's failure to pay contractual
obligations, the Imperial Valley Projects (excluding the Salton Sea V and Turbo
Projects) had established an allowance for doubtful accounts of approximately
$21 million as of December 31, 2001.
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The payment was received March 1, 2002. Following the receipt of Edison's final
payment of past due balances, the Imperial Valley Projects released the
remaining allowance for doubtful accounts.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at Salton Sea Funding Corporation has not
been extended beyond its current July 2004 expiration date, and as such, cash
distributions are not available to CE Generation until the Salton Sea Funding
Corporation debt service reserve fund of approximately $67.6 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and Turbo Projects have not received payment for power
sold under the Transaction Agreements during December 2000 and January 2001 of
approximately $3.8 million. The Imperial Valley Projects have established an
allowance for doubtful accounts for the full amount of this receivable.
Edison has failed to pay approximately $3.9 million of capacity bonus payments
for the months from October 2001 through May 2002. On December 10, 2001 the
Imperial Valley Projects (excluding the Salton Sea I, Salton Sea V, and Turbo
Projects) filed a lawsuit against Edison in California's Imperial County
Superior Court seeking a court order requiring Edison to make the required
capacity bonus payments under the Power Purchase Agreements. Due to Edison's
failure to pay these contractual obligations, the Imperial Valley Projects have
established an allowance for doubtful accounts of approximately $1.3 million.
The Project entities are vigorously pursuing collection of the capacity bonus
payments.
Cash flow used in investing activities was $18.8 million for the six months
ended June 30, 2002 compared with cash used of $16.8 million for the same period
in 2001. Capital expenditures are the primary components of investing
activities.
Cash flow used in financing activities was $90.3 million for the six months
ended June 30, 2002 compared with $33.5 million for the same period in 2001. The
changes in cash flows from financing activities reflect the scheduled debt
repayments, a $14.4 million distribution in 2002 and a $33.4 million deposit
into the debt service reserve account in 2002.
ENVIRONMENTAL LIABILITIES
The Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company's existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company's cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company's facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of June 30, 2002 and December 31, 2001, the
environmental liabilities recorded on the balance sheet were $3.0 million and
$4.2 million, respectively.
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INFLATION
Inflation has not had a significant impact on CE Generation's cost structure.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the market risk from the information
provided in Item 7A Quantitative and Qualitative Disclosures About Market Risk
of the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in the contractual obligations and
commercial commitments from the information provided in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
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PART II OTHER INFORMATION.
ITEM I - LEGAL PROCEEDINGS
Neither CE Generation nor its subsidiaries are parties to any material
legal matters except those described in Footnote 3 of CE Generation's financial
statements.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULT ON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Not applicable.
(b) Reports on Form 8-K:
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Omaha,
State of Nebraska, on this 14th day of August 2002.
CE Generation, LLC
/s/ Joseph M. Lillo
--------------------------------------------
By: Joseph M. Lillo
Vice President and Controller
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