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 quarterly period ended March 31, 2003
Commission File No. 333-89521
CE GENERATION, LLC
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(Exact name of registrant as specified in its charter)
Delaware 47-0818523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 South 36th Street, Suite 400
Omaha, Nebraska 68131
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(Address of principal executive offices) (Zip Code)
(402) 341-4500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The members' equity accounts are held 50% by MidAmerican Energy Holdings Company
and 50% by TransAlta USA Inc. as of May 12, 2003.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........14
Item 4. Controls and Procedures............................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................15
Item 2. Changes in Securities and Use of Proceeds..........................15
Item 3. Defaults Upon Senior Securities....................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 5. Other Information..................................................15
Item 6. Exhibits and Reports on Form 8-K...................................15
SIGNATURES....................................................................16
CERTIFICATIONS................................................................17
EXHIBIT INDEX.................................................................19
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Members
CE Generation, LLC
We have reviewed the accompanying consolidated balance sheet of CE Generation,
LLC and subsidiaries (the Company) as of March 31, 2003, and the related
consolidated statements of operations and other comprehensive income and cash
flows for the three-month periods ended March 31, 2003 and 2002. 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 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 as of December 31, 2002, 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 24,
2003 (January 29, 2003 as to Note 12) 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, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 2 to the condensed financial statements, in 2003 the
Company changed its accounting policy for asset retirement obligations.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
May 8, 2003
-3-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
--------------------------
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 78,518 $ 43,706
Restricted cash ...................................... 60,386 60,238
Accounts receivable, net ............................. 60,773 63,554
Prepaid expenses and other current assets ............ 4,815 9,943
Inventories .......................................... 25,296 25,049
Due from affiliates .................................. 897 -
----------- -----------
Total current assets ............................... 230,685 202,490
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Restricted cash ........................................ 15,124 14,299
Properties, plants, contracts and equipment, net ....... 1,224,480 1,234,408
Excess of cost over fair value of net assets acquired .. 265,897 265,897
Note receivable from related party ..................... 137,789 137,789
Deferred financing charges and other assets ............ 9,750 10,153
----------- -----------
TOTAL ASSETS ........................................... $ 1,883,725 $ 1,865,036
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 4,079 $ 667
Accrued interest ..................................... 16,748 3,382
Interest rate swap liability ......................... 19,655 21,023
Other accrued liabilities ............................ 39,112 36,551
Due to affiliates..................................... - 406
Current portion of long-term debt .................... 82,038 86,656
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Total current liabilities .......................... 161,632 148,685
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Project loans .......................................... 117,049 122,573
Salton Sea notes and bonds ............................. 463,591 463,591
Senior secured bonds ................................... 338,400 338,400
Deferred income taxes .................................. 248,388 248,033
Other long-term liabilities ............................ 7,591 1,480
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Total liabilities .................................... 1,336,651 1,322,762
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Minority interest ...................................... 52,043 52,379
Commitments and contingencies (Notes 4 and 5)
Members' equity ........................................ 504,102 499,748
Accumulated other comprehensive loss, net .............. (9,071) (9,853)
----------- -----------
Total members' equity ................................ 495,031 489,895
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TOTAL LIABILITIES AND MEMBERS' EQUITY .................. $ 1,883,725 $ 1,865,036
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
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(UNAUDITED)
REVENUE:
Operating revenue ............................................. $ 122,005 $ 125,245
Interest and other income ..................................... 723 2,165
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Total revenue ............................................... 122,728 127,410
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COSTS AND EXPENSES:
Fuel .......................................................... 33,463 29,153
Plant operations .............................................. 32,219 31,153
General and administrative .................................... 1,304 1,125
Depreciation and amortization ................................. 21,157 20,808
Interest expense .............................................. 18,024 19,545
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Total costs and expenses .................................... 106,167 101,784
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INCOME BEFORE PROVISION FOR INCOME TAXES ........................ 16,561 25,626
Provision for income taxes .................................... 3,995 5,958
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INCOME BEFORE MINORITY INTEREST ................................. 12,566 19,668
Minority interest ............................................. 5,745 5,326
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INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 6,821 14,342
Cumulative effect of change in accounting
principle, net of tax (Note 2) .............................. (2,467) --
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NET INCOME ...................................................... $ 4,354 $ 14,342
========= =========
OTHER COMPREHENSIVE INCOME:
Unrealized gain on cash flow hedges, net of tax ............... 782 1,191
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COMPREHENSIVE INCOME ............................................ $ 5,136 $ 15,533
========= =========
The accompanying notes are an integral part of these financial statements.
-5-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 4,354 $ 14,342
Adjustments to reconcile net cash flows from
operating activities:
Cumulative effect of change in accounting
principle, net of tax .............................. 2,467 --
Depreciation and amortization ........................ 21,157 20,808
Provision for deferred income taxes .................. 1,569 10,656
Distributions to minority interest in excess of income (492) (579)
Changes in other items:
Accounts receivable ................................ 2,781 75,369
Due from affiliates ................................ (1,303) (765)
Accounts payable and other accrued liabilities ..... 19,458 5,539
Other ................................................ 6,199 (3,995)
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Net cash flows from operating activities ........... 56,190 121,375
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................... (10,263) (6,323)
(Increase) decrease in restricted cash ................. (825) 1,720
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Net cash flows from investing activities ............. (11,088) (4,603)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of project loans ............................. (10,142) (8,966)
(Increase) decrease in restricted cash ................. (148) 166
-------- ---------
Net cash flows from financing activities ............. (10,290) (8,800)
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NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 34,812 107,972
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 43,706 34,870
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 78,518 $ 142,842
======== =========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized .............. $ 3,503 $ 4,678
======== =========
Income taxes paid ...................................... $ 216 $ 212
======== =========
The accompanying notes are an integral part of these financial statements.
-6-
CE GENERATION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2003 and the results of operations
and cash flows for the three-month periods ended March 31, 2003 and 2002. The
results of operations for the three-month periods ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year.
The unaudited consolidated financial statements and notes thereto should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2002.
Certain amounts in the prior year financial statements have been reclassified in
order to conform to current year presentation. Such reclassifications did not
impact previously reported net income or members' equity.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
was recognized as a cumulative effect of a change in accounting principle of
$2.5 million, net of tax of $1.6 million, as of January 1, 2003.
The Company identified legal retirement obligations related to landfill and
plant abandonment costs. The Company recorded liabilities pursuant to SFAS 143
as of January 1, 2003. The Company used an expected cash flow approach to
measure the obligations. The following liabilities reflect amounts as if this
statement had been applied during all periods (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
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(PROFORMA)
Plant abandonment ....... $3,856 $3,798
Landfill abandonment .... $3,735 $3,663
Following is a reconciliation of net income as originally reported for the
three-month periods March 31, 2003 and 2002, to adjusted net income as if this
statement had been applied to all periods (in thousands):
THREE MONTHS
ENDED MARCH 31,
------------------
2003 2002
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Reported net income ................................ $4,354 $ 14,342
Accretion and amortization expense ................. -- (163)
Cumulative effect of change in accounting principle 2,467 --
------ --------
Adjusted net income ................................ $6,821 $ 14,179
====== ========
-7-
The plant abandonment obligation had not been recorded prior to January 1, 2003.
The landfill abandonment obligation had a previously recorded liability of $1.5
million at December 31, 2002.
3. INTANGIBLE ASSETS
The following table summarizes the acquired intangible assets as of March 31,
2003 and December 31, 2002 (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts ... $338,716 $207,961 $338,716 $203,685
Patented Technology ........ 46,290 15,867 46,290 15,385
-------- -------- -------- --------
Total .................... $385,006 $223,828 $385,006 $219,070
======== ======== ======== ========
Amortization expense on acquired intangible assets was $4.8 million for the
three-month periods ended March 31, 2003 and 2002, respectively. CE Generation
expects amortization expense on acquired intangible assets to be $13.9 million
for the remainder of 2003 and $15.8 million for each of the four succeeding
fiscal years.
4. COMMITMENTS AND CONTINGENCIES
Edison and the California Power Exchange
- ----------------------------------------
Due to reduced liquidity, Southern California Edison ("Edison") had failed to
pay approximately $119 million owed under the power purchase agreements with the
projects indirectly owned by the company located in the Imperial Valley (the
"Imperial Valley Projects") (excluding the Salton Sea V and CE Turbo Projects)
for power delivered in the fourth quarter 2000 and the first quarter 2001. Due
to Edison's failure to pay contractual obligations, the Imperial Valley Projects
(excluding the Salton Sea V and CE Turbo Projects) had established an allowance
for doubtful accounts of approximately $21 million as of December 31, 2001.
Pursuant to a settlement agreement, the final payment by Edison for past due
balances was received March 1, 2002. Following the receipt of Edison's payment
of past due balances, the Imperial Valley Projects released the remaining
allowance for doubtful accounts.
Edison has disputed a portion of the settlement agreement and has failed to pay
approximately $3.9 million of capacity bonus payments for the months from
October 2001 through May 2002. On December 10, 2001 the Imperial Valley Projects
(excluding the Salton Sea I, Salton Sea V and CE Turbo Projects) filed a lawsuit
against Edison in California's Imperial County Superior Court seeking a court
order requiring Edison to make the required capacity bonus payments under the
Power Purchase Agreements. Due to Edison's failure to pay these contractual
obligations, the Imperial Valley Projects established an allowance for doubtful
accounts of approximately $3.1 million and $2.7 million as of March 31, 2003 and
December 31, 2002, respectively.
On March 25, 2002, Salton Sea II's 10 megawatt ("MW") turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and Salton Sea II returned to service, on December 17, 2002. Edison has
failed to recognize the uncontrollable force event and as such has not paid
amounts otherwise due and owing and has improperly derated Salton Sea II from 15
MW to 12.5 MW, under the Salton Sea II Power Purchase Agreement. On January 29,
2003, Salton Sea Power Generation, L.P. served a complaint on Edison for such
unpaid amounts and to rescind such deration.
-8-
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 $65.4 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced. The fund had a cash balance of $46.4 million and $46.3 million
as of March 31, 2003 and December 31, 2002, respectively.
Other Commitments
- -----------------
CE Generation's geothermal and cogeneration facilities are qualifying facilities
under the Public Utility Regulatory Policies Act of 1978 ("PURPA") and their
contracts for the sale of electricity are subject to regulations thereunder. In
order to promote open competition in the industry, legislation has been proposed
in the U.S. Congress that calls for either a repeal of PURPA on a prospective
basis or the significant restructuring of the regulations governing the electric
industry, including sections of PURPA. Current federal legislative proposals
would not abrogate, amend, or modify existing contracts with electric utilities.
The ultimate outcome of any proposed legislation is unknown at this time.
The Power Resources Project is a Qualifying Facility under PURPA and sells
electricity to TXU Generation Company LP pursuant to a 15 year negotiated power
purchase agreement ("the Power Resources PPA"), which provides for capacity and
energy payments. Capacity payments and energy payments, which in 2003 are $3.7
million per month and 3.6 cents per kilowatt hour, respectively. The Power
Resources PPA expires in September 2003. The Power Resources Project sells steam
to ALON USA, LP ("ALON") under a 15-year agreement. As long as the Power
Resources Project meets its supply obligations, ALON is required to purchase at
least the minimum amount of steam per year required to allow the Power Resources
Project to maintain its Qualifying Facility status under PURPA.
Saranac Power Partners, L.P., a subsidiary of the Company formed to build, own
and operate natural gas fired combined cycle cogeneration facilities, is a
Qualifying Facility under PURPA and has a contract to purchase natural gas from
a third party for its cogeneration facility for a period of 15 years for an
amount up to 51,000 MMBtus per day which expires in 2009. The price for such
deliveries is a stated rate, escalated annually at a rate of 4%.
The Salton Sea V Project is obligated to supply the electricity demands of the
Zinc Recovery Project, which commenced operations in December 2002, at the
market rates available to the Salton Sea V Project, less the wheeling costs.
Salton Sea V Project expects to sell up to 22 MW of its output to Minerals. The
remainder of the Salton Sea V Project output is sold through other market
transactions.
5. RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA Inc. ("TransAlta"), a wholly owned subsidiary
of TransAlta Corporation, purchased El Paso Merchant Energy's 50% interest in CE
Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo began selling power to TransAlta on February 12, 2003 based on
percentages of the Dow Jones SP-15 Index. Such agreement will expire on October
31, 2003. Sales to TransAlta totaled $2.3 million and $0 million during the
three-month periods March 31, 2003 and 2002, respectively.
As of March 31, 2003, accounts receivable from TransAlta, included in accounts
receivable, net, were $2.3 million. At December 31, 2002, accounts receivable
from El Paso Merchant Energy, included in accounts receivable, net, were $1.4
million.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
CE Generation, LLC ("CE Generation" or the "Company"), during the periods
included in the accompanying financial statements. This discussion should be
read in conjunction with the Company's historical financial statements and the
notes to those statements. The Company's actual results in the future could
differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
From time to time, CE Generation may make forward-looking statements within the
meaning of the federal securities laws that involve judgments, assumptions and
other uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of CE Generation's expectations, beliefs, future plans and
strategies, anticipated events or trends and similar comments concerning matters
that are not historical facts. These types of forward-looking 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 Private Securities Litigation Reform Act of 1995,
CE Generation has identified important factors that could cause actual results
to differ materially from those expectations, including weather effects on
revenues and other operating uncertainties, uncertainties relating to economic
and political conditions and uncertainties regarding the impact of regulations,
changes in government policy and competition. The Company does not assume any
responsibility to update forward-looking information contained herein.
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 Company's Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 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.
For additional discussion of the Company's critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
Operating revenue decreased $3.2 million or 2.6% to $122.0 million for the three
months ended March 31, 2003 from $125.2 million for the same period in 2002. The
decrease reflects the $21.0 million adjustment to the Southern California Edison
("Edison") provision at the Imperial Valley Projects in the first quarter of
2002, offset by $9.6 million due to higher rates at the Imperial Valley Projects
and $7.7 million due to increased energy rates at the Gas Projects in the first
quarter 2003.
Interest and other income decreased $1.5 million to $0.7 million for the three
months ended March 31, 2003 from $2.2 million for the same period in 2002 due to
the interest earned in 2002 on past due Edison amounts.
-10-
Fuel expenses increased $4.3 million or 14.7% to $33.5 million for the three
months ended March 31, 2003 from $29.2 million for the same period in 2002. The
increase was primarily due to increased natural gas prices at our gas fired
power projects.
Plant operating expenses, which include operating, maintenance, resource and
other plant operating expenses, increased $1.0 million or 3.2% to $32.2 million
for the three months ended March 31, 2003 from $31.2 million for the same period
in 2002. The increase was primarily due to timing of maintenance activities.
General and administrative expenses increased $0.2 million or 18.2% to $1.3
million for the three months ended March 31, 2003 from $1.1 million for the same
period in 2002. These costs include administrative services provided to CE
Generation, including executive, financial, legal, tax and other corporate
functions. The increase in 2003 was primarily due to legal costs.
Depreciation and amortization increased $0.4 million or 1.9% to $21.2 million
for the three months ended March 31, 2003 from $20.8 million for the same period
in 2002.
Interest expense, decreased $1.5 million or 7.7% to $18.0 million for the three
months ended March 31, 2003 from $19.5 million for the same period in 2002. The
decrease is due to lower outstanding debt balances.
The provision for income taxes decreased $2.0 million or 33.3% to $4.0 million
for the three months ended March 31, 2003 from $6.0 million for the same period
in 2002. The effective tax rate was 24.1% and 23.2% in 2003 and 2002,
respectively.
The cumulative effect of change in accounting principle in 2003 reflects the
Company's adoption of Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143") as of January 1,
2003. The cumulative effect of initially applying this statement was recognized
as a cumulative effect of a change in accounting principle of $2.5 million, net
of tax of $1.6 million, as of January 1, 2003.
If CE Generation had adopted the policy as of January 1, 2002, income before
cumulative effect of change in accounting principle would have been $0.2 million
lower in 2002 on a proforma basis.
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.
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 $56.2 million for the
three months ended March 31, 2003 compared with $121.4 million for the same
period in 2002. The decrease was primarily due to the receipt of past due
balances from Edison in 2002 partially offset by higher costs and changes in
working capital in 2003.
Cash flow used in investing activities was $11.1 million for the three months
ended March 31, 2003 compared with cash used of $4.6 million for the same period
in 2002. Capital expenditures are the primary component of investing activities.
-11-
Cash flow used in financing activities was $10.3 million for the three months
ended March 31, 2003 compared with $8.8 million for the same period in 2002. The
changes in cash flows from financing activities primarily reflect the scheduled
debt repayments.
Edison is a public utility primarily engaged in the business of supplying
electric energy to retail customers in Central and Southern California,
excluding Los Angeles. Due to reduced liquidity, Edison failed to pay
approximately $119 million owed under the power purchase agreements with the
Imperial Valley Projects (excluding the Salton Sea V and CE Turbo Projects) for
power delivered in the fourth quarter 2000 and the first quarter 2001. Due to
Edison's failure to pay contractual obligations, the Imperial Valley Projects
(excluding the Salton Sea V and CE Turbo Projects) had established an allowance
for doubtful accounts of approximately $21 million as of December 31, 2001.
The final payment of the past due amounts by Edison 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.
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 CE Turbo
Projects) filed a lawsuit against Edison in California's Imperial County
Superior Court seeking a court order requiring Edison to make the required
capacity bonus payments under the Power Purchase Agreements. Due to Edison's
failure to pay these contractual obligations, the Imperial Valley Projects have
established an allowance for doubtful accounts of approximately $3.1 million.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea II returned to service, on December 17, 2002. Edison has failed to recognize
the uncontrollable force event and as such has not paid amounts otherwise due
and owing and has improperly derated Salton Sea II from 15 MW to 12.5 MW, under
the Salton Sea II Power Purchase Agreement. On January 29, 2003, Salton Sea
Power Generation, L.P. served a complaint on Edison for such unpaid amounts and
to rescind such deration.
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 $65.4 million has been
funded or the letter of credit has been extended beyond its July 2004 expiration
date or replaced. The fund has a cash balance of $46.4 million as of March 31,
2003.
The Salton Sea V and CE Turbo Projects were constructed by Stone & Webster, Inc.
(formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of
the Shaw Group ("Stone and Webster"), pursuant to a date certain, fixed-price,
turnkey engineering, procure, construct and manage contracts (collectively, the
"Salton Sea V and CE Turbo Projects EPC Contracts"). On March 7, 2002, Salton
Sea Power, Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and CE Turbo,
the owners of the Salton Sea V and CE Turbo Projects, filed a Demand for
Arbitration against Stone & Webster for breach of contract and breach of
warranty arising from deficiencies in Stone & Webster's design, engineering,
construction and procurement of equipment for the Salton Sea V and CE Turbo
Projects pursuant to the Salton Sea V and CE Turbo Projects' EPC Contracts.
On November 25, 2002 Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and CE
Turbo, LLC entered into a Settlement Agreement with Stone & Webster. The
Settlement Agreement resulted in a $3.5 million payment from Stone & Webster.
On April 25, 2003, Salton Sea Power entered into a settlement agreement with
Stone & Webster. The Settlement Agreement will result in a total payment of
$12.1 million from Stone & Webster in the second quarter of 2003 and the
arbitration will be dismissed.
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RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta USA Inc. ("TransAlta"), a wholly owned subsidiary
of TransAlta Corporation, purchased El Paso's Merchant Energy's 50% interest in
CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo began selling power to TransAlta on February 12, 2003 based on
percentages of the Dow Jones SP-15 Index. Such agreement will expire on October
31, 2003. Sales to TransAlta totaled $2.2 million and $0 million during the
three months ended March 31, 2003 and 2002, respectively.
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, 2002.
-13-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting CE
Generation, see Item 7A "Qualitative and Quantitative Disclosures About Market
Risk" of CE Generation's Annual Report on Form 10-K for the year ended December
31, 2002. CE Generation's exposure to market risk has not changed materially
since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
CE Generation, LLC's chief executive officer and chief financial officer have
established "disclosure controls and procedures" (as defined in Rule 13a-14(c)
and Rule 15d-14(c) of the Securities and Exchange Act of 1934) to ensure that
material information of the companies and their subsidiaries is made known to
them by others within the respective companies. Under their supervision, an
evaluation of the disclosure controls and procedures was performed within 90
days prior to the filing of this quarterly report. Based on that evaluation, the
above-mentioned officers have concluded that, as of the date of the evaluation,
the disclosure controls and procedures were operating effectively. Additionally,
the above-mentioned officers find that there have been no significant changes in
internal controls, or in other factors that could significantly affect internal
controls, subsequent to the date of that evaluation.
-14-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4 to the financial statements and discussion in management's discussion
and analysis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON 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:
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Quarterly Report.
(B) REPORTS ON FORM 8-K:
None.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CE GENERATION, LLC
------------------
(Registrant)
Date: May 12, 2003 /s/ Wayne F. Irmiter
---------------------------
Wayne F. Irmiter
Vice President & Controller
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SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Edward J. Heinrich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Generation, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Edward J. Heinrich
--------------------------
Edward J. Heinrich
President
(chief executive officer)
-17-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Wayne F. Irmiter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CE Generation, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Wayne F. Irmiter
-----------------------------
Wayne F. Irmiter
Vice President and Controller
(chief accounting officer)
-18-
EXHIBIT INDEX
Exhibit No.
- -----------
99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Accounting Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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