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 September 30, 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
--------------------------------- -------------------
(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 October 31, 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............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........17
Item 4. Controls and Procedures............................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 2. Changes in Securities and Use of Proceeds..........................18
Item 3. Defaults Upon Senior Securities....................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
SIGNATURES....................................................................19
EXHIBIT INDEX.................................................................20
-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 September 30, 2003, and the related
consolidated statements of operations and other comprehensive income for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews 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
and 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 reviews, we are not aware of any material modifications that should
be made to such consolidated interim 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, 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 consolidated financial statements, in 2003 the
Company changed its accounting policy for asset retirement obligations.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
November 3, 2003
-3-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of
----------------------------------
September 30, December 31,
2003 2002
---------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 92,619 $ 43,706
Restricted cash....................................................................... 8,097 60,238
Trade accounts receivable, net........................................................ 69,689 62,138
Trade accounts receivable from affiliate.............................................. 1,584 1,416
Prepaid expenses and other current assets............................................. 4,168 9,943
Inventories........................................................................... 24,558 25,049
Due from affiliates................................................................... 43 -
---------- ----------
Total current assets............................................................... 200,758 202,490
---------- ----------
Restricted cash......................................................................... 10,454 14,299
Properties, plants, contracts and equipment, net........................................ 1,185,972 1,234,408
Goodwill................................................................................ 265,897 265,897
Note receivable from related party...................................................... 137,086 137,789
Deferred financing charges and other assets............................................. 8,917 10,153
---------- ----------
Total assets............................................................................ $1,809,084 $1,865,036
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 3,261 $ 667
Accrued interest...................................................................... 16,241 3,382
Interest rate swap liability.......................................................... 16,623 21,023
Other accrued liabilities............................................................. 35,089 36,551
Income tax payable.................................................................... 7,884 -
Due to affiliates..................................................................... - 406
Current portion of long-term debt..................................................... 66,919 86,656
---------- ---------
Total current liabilities.......................................................... 146,017 148,685
---------- ---------
Project loans........................................................................... 105,997 122,573
Salton Sea notes and bonds.............................................................. 448,296 463,591
Senior secured bonds.................................................................... 331,100 338,400
Deferred income taxes................................................................... 254,451 248,033
Other long-term liabilities............................................................. 7,883 1,480
---------- ---------
Total liabilities..................................................................... 1,293,744 1,322,762
---------- ---------
Minority interest....................................................................... 50,354 52,379
Commitments and contingencies (Notes 4 and 5)
Members' equity......................................................................... 472,567 499,748
Accumulated other comprehensive loss.................................................... (7,581) (9,853)
---------- ----------
Total members' equity................................................................. 464,986 489,895
---------- ----------
Total liabilities and members' equity................................................... $1,809,084 $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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Unaudited)
Revenue:
Operating revenue................................................... $142,803 $141,305 $388,213 $381,247
Interest and other income........................................... 696 2,272 1,969 7,237
-------- -------- -------- --------
Total revenue..................................................... 143,499 143,577 390,182 388,484
-------- -------- -------- --------
Costs and expenses:
Fuel................................................................ 32,085 30,398 95,790 89,667
Plant operations.................................................... 33,415 31,023 98,369 96,684
General and administrative.......................................... 1,085 2,106 3,200 4,875
Depreciation and amortization....................................... 21,796 19,966 64,579 62,380
Interest expense.................................................... 17,187 18,950 53,097 58,108
-------- --------- -------- --------
Total costs and expenses.......................................... 105,568 102,443 315,035 311,714
-------- --------- -------- --------
Income before provision for income taxes............................... 37,931 41,134 75,147 76,770
Provision for income taxes.......................................... 9,004 10,999 18,139 19,408
-------- --------- -------- --------
Income before minority interest........................................ 28,927 30,135 57,008 57,362
Minority interest................................................... 6,205 5,287 16,722 14,974
-------- --------- -------- --------
Income before cumulative effect of change in accounting principle...... 22,722 24,848 40,286 42,388
Cumulative effect of change in accounting
principle, net of tax (Note 2).................................... - - (2,467) -
-------- --------- -------- ---------
Net income............................................................. $ 22,722 $ 24,848 $ 37,819 $ 42,388
======== ========= ======== =========
Other comprehensive income:
Unrealized gain (loss) on cash flow hedges, net of tax.............. 2,060 (1,721) 2,272 (2,139)
-------- --------- -------- ---------
Comprehensive income................................................... $ 24,782 $ 23,127 $ 40,091 $ 40,249
======== ========= ======== =========
The accompanying notes are an integral part of these financial statements.
-5-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months
Ended September 30,
--------------------
2003 2002
-------- -------
(Unaudited)
Cash flows from operating activities:
Net income................................................................................... $ 37,819 $ 42,388
Adjustments to reconcile net income to net cash flows from operating activities:
Cumulative effect of change in accounting principle, net of tax........................... 2,467 -
Depreciation and amortization............................................................. 64,579 62,380
Provision for deferred income taxes....................................................... 6,810 15,489
Distributions to minority interest in excess of income.................................... (2,900) (2,132)
Other..................................................................................... 4,499 1,064
Changes in other items:
Trade accounts receivable, net.......................................................... (7,719) 38,073
Due to/from affiliates.................................................................. (449) (1,375)
Other assets............................................................................ 7,095 1,792
Accounts payable and other accrued liabilities.......................................... 22,286 45
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Net cash flows from operating activities.............................................. 134,487 157,724
--------- ---------
Cash flows from investing activities:
Capital expenditures, net of warranty settlement............................................. (17,652) (26,847)
Decrease in restricted cash.................................................................. 3,845 216
--------- ---------
Net cash flows from investing activities.................................................. (13,807) (26,631)
--------- ---------
Cash flows from financing activities:
Repayment of debt............................................................................ (58,908) (51,484)
Distributions................................................................................ (65,000) (14,400)
Decrease (increase) in restricted cash....................................................... 52,141 (35,023)
-------- ---------
Net cash flows from financing activities.................................................. (71,767) (100,907)
--------- ---------
Net increase in cash and cash equivalents........................................................ 48,913 30,186
Cash and cash equivalents at beginning of period................................................. 43,706 34,870
--------- ---------
Cash and cash equivalents at end of period....................................................... $ 92,619 $ 65,056
========= =========
Supplemental Disclosure:
Interest paid................................................................................ $ 40,238 $ 42,782
========= =========
Income taxes paid............................................................................ $ 920 $ 993
========= =========
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 September 30, 2003, and the results of
operations for the three-month and nine-month periods ended September 30, 2003
and 2002, and of cash flows for the nine-month periods ended September 30, 2003
and 2002. The results of operations for the three-month and nine-month periods
ended September 30, 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 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 and supporting note
disclosures have been reclassified in order to conform to the 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 Statement of Financial Accounting
Standards 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, measured the obligations using an expected cash flow
approach and recorded those liabilities pursuant to SFAS 143 as of January 1,
2003. The following liabilities reflect amounts as if this statement had been
applied during all periods (in thousands):
September 30, December 31,
2003 2002
--------------- ---------------
(Proforma)
Plant abandonment.................... $3,969 $3,798
Landfill abandonment................. $3,914 $3,663
Following is a reconciliation of net income as originally reported for the
three-month and nine-month periods September 30, 2003 and 2002, to adjusted net
income as if this statement had been applied to all periods (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Reported net income............................................... $22,722 $24,848 $37,819 $42,388
Accretion and amortization expense................................ - (133) - (459)
Cumulative effect of change in accounting principle............... - - 2,467 -
------- ------- ------- -------
Adjusted net income............................................... $22,722 $24,717 $40,286 $41,929
======= ======= ======= =======
-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, which are
included in properties, plants, contracts and equipment, net, on the balance
sheet, as of September 30, 2003 and December 31, 2002 (in thousands):
September 30, 2003 December 31, 2002
--------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts........... $338,716 $216,319 $338,716 $203,685
Patented Technology................ 46,290 16,833 46,290 15,385
-------- -------- -------- ----------
Total............................ $385,006 $233,152 $385,006 $219,070
======== ======== ======== ========
Amortization expense on acquired intangible assets was $4.6 million and $14.1
million for the three-month and nine-month periods ended September 30, 2003,
respectively, and $4.6 million and $13.7 million for the three-month and
nine-month periods ended September 30, 2002, respectively. CE Generation expects
amortization expense on acquired intangible assets to be $18.7 million for 2003
and $15.8 million for each of the five 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 $2.7 million as of December 31, 2002. In
connection with the June 11, 2003 settlement discussed below, the receivables
associated with this allowance were written off during 2003.
On March 25, 2002, 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
failed to recognize the uncontrollable force event and as such did not pay
amounts otherwise due and owing and improperly derated Salton Sea II from 15 MW
to 12.5 MW, under the Salton Sea II Power Purchase Agreement. On January 29,
2003, Salton Sea Power Generation, L.P., owner of Salton Sea II, served a
complaint on Edison for such unpaid amounts and to rescind such deration.
-8-
On June 11, 2003, the Imperial Valley Projects (excluding the Salton Sea I,
Salton Sea V and CE Turbo projects) entered into a settlement agreement with
Edison. The settlement, which relates to the capacity bonus payment and Salton
Sea II uncontrollable force event disputes, provides for an $800,000 settlement
payment from Edison, payment of amounts previously withheld for the Unit II
deration and the recission of such deration. The amounts previously withheld for
the Unit II deration were received in the second quarter of 2003. The $800,000
settlement payment is contingent upon approval by the California Public
Utilities Commission.
On July 10, 2003, Salton Sea IV's 34 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totaling $1.7 million. On
September 19, 2003 and October 17, 2003, Salton Sea Power Generation, L.P., with
Fish Lake Power Company, owner of Salton Sea IV served notices of error Edison
for such unpaid amounts. As a result, the Company established reserve of $1.4
million for capacity payments as of September 30, 2003.
As a result of uncertainties related to Edison, the letter of credit that
supported the debt service reserve fund at Salton Sea Funding Corporation had
not been extended beyond its then existing July 2004 expiration date, and as
such cash distributions were not available to CE Generation until the Salton Sea
Funding Corporation debt service reserve fund of approximately $65.4 million had
been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. At December 31, 2002, the fund had a cash balance
of $46.3 million.
In May 2003, the previous $65.4 million Salton Sea Funding Corporation debt
service reserve letter of credit was replaced by a $32.7 million TransAlta USA
Inc. ("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter
of credit which expires on May 30, 2004, and a $32.7 million MidAmerican Energy
Holdings Company ("MidAmerican") letter of credit which expires on June 6, 2006.
These new Salton Sea Funding Corporation debt service reserve letters of credit
permitted the cash, which was previously restricted, to be included in funds
distributed to CE Generation on May 29, 2003. During the second quarter of 2003,
CE Generation distributed a total of $65.0 million to MidAmerican and TransAlta.
Stone & Webster
- ---------------
The Salton Sea V Project was constructed by Stone & Webster, Inc. (formerly
Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw
Group ("Stone & Webster"), pursuant to a date certain, fixed-price, turnkey
engineering, procure, construct and manage contract (the "Salton Sea V Project
Contract"). On March 7, 2002, Salton Sea Power L.L.C. ("Salton Sea Power"), the
owner of the Salton Sea V Project, filed a Demand for Arbitration against Stone
& Webster for breach of contract and breach of warranty arising from
deficiencies in Stone & Webster's design, engineering, construction and
procurement of equipment for the Salton Sea V Project pursuant to the Salton Sea
V Project EPC Contract. The demand for arbitration did not include a stated
claim amount. On April 25, 2003, Salton Sea Power entered into a settlement
agreement with Stone & Webster. The Settlement Agreement resulted in a total
payment of $12.1 million from Stone & Webster in the second quarter 2003 and the
arbitration was dismissed. The settlement was recorded as a $4.5 million
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
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 related
to a Demand for Arbitration against Stone & Webster for breach of contract and
breach of warranty arising from deficiencies in Stone & Webster's design,
engineering, construction and procurement of equipment for the CE Turbo Project.
The settlement agreement resulted in a $3.5 million payment from Stone & Webster
which was recorded as a reduction of incremental capital expenditures.
-9-
Other Commitments and Contingencies
- -----------------------------------
CE Generation's geothermal and cogeneration facilities are Qualifying Facilities
("QF") 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, a 200 net MW natural gas-fired cogeneration project
owned by Power Resources Ltd. ("Power Resources"), an indirect wholly-owned
subsidiary of CE Generation, was a QF under PURPA and sold electricity to TXU
Generation Company LP pursuant to a 15-year negotiated power purchase agreement
("the Power Resources PPA"), which provided for capacity and energy payments.
Capacity and energy payments in 2003 were $3.7 million per month and 3.6 cents
per kilowatt hour, respectively. The Power Resources PPA expired September 30,
2003. The Power Resources Project sold steam to ALON USA, LP ("ALON") under a
15-year agreement that also expired September 30, 2003.
On August 5, 2003, Power Resources entered into a Tolling Agreement with ONEOK
Energy Marketing and Trading Company, L.P. ("ONEOK"). Under the terms of the
agreement, Power Resources sells its electricity and capacity to ONEOK for $1.75
per kilowatt-month plus a variable operating and maintenance fee of $.50 per MW
hour ("MWh"). In addition, ONEOK pays annual turbine start-up costs in an amount
equal to the greater of (i) $3,643 per turbine start-up, (ii) $939,986 or (iii)
$140 per hour of operation during the year. The agreement commenced October 1,
2003 and expires December 31, 2005.
On May 20, 2003, Salton Sea Power entered into a Power Sales Agreement (the
"Riverside Power Sales Agreement") with the City of Riverside, California
("Riverside"). Under the terms of the agreement, Salton Sea Power sells up to 20
MW of energy generated from Salton Sea V to Riverside at $61 per MWh. Sales
under the agreement commenced June 1, 2003 and will terminate May 31, 2013.
Minerals LLC ("Minerals") contracted with Zachry Construction Corporation
("Zachry") under a time and materials contract to do a maximum of $1.32 million
work for the Zinc Recovery Project. Zachry has invoiced Minerals for $4.7
million of work under this contract. Minerals has been unable to substantiate
Zachry's invoices. Zachry filed a demand for arbitration with the American
Arbitration Association (the "AAA") on August 19, 2003 for collection of its
claimed outstanding invoices. Although the AAA has selected an arbitration
panel, neither the AAA nor the panel has scheduled any hearings on this matter
to date. Minerals anticipates that the evidentiary hearing on this matter will
not likely occur prior to the summer of 2004.
5. Related Party Transactions
On January 29, 2003, TransAlta purchased El Paso Merchant Energy North American
Company's ("EPME") 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo began selling power to a subsidiary of TransAlta on February 12, 2003
based on percentages of the Dow Jones SP-15 Index. The Transaction Agreement
shall continue until the earlier of (a) 30 days following a written notice of
termination after October 1, 2003 or (b) any other termination date mutually
agreed to by the parties. No such notice of termination has been given by either
party. Sales under this agreement totaled $2.9 million and $8.0 million during
the three-month and nine-month periods ended September 30, 2003, respectively.
Sales to EPME totaled $1.1 million and $4.6 million during the three-month and
nine-month periods ended September 30, 2002, respectively.
-10-
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 SEPTEMBER 30, 2003
AND 2002
Operating revenue increased $1.5 million or 1.1% to $142.8 million for the
three-month period ended September 30, 2003 from $141.3 million for the same
period in 2002. The increase reflects $3.3 million of higher revenue at the
company's gas facilities due to $5.6 million of increased energy rates partially
offset by $2.3 million in lower revenue from decreased production as a result of
curtailment and maintenance and $1.8 million of lower revenue due to decreased
production related to an uncontrollable force event at the Salton Sea Unit IV
Project partially offset by higher rates at the geothermal projects located in
the Imperial Valley in California (the "Imperial Valley Projects").
-11-
Interest and other income decreased $1.6 million to $0.7 million for the
three-month period ended September 30, 2003 from $2.3 million for the same
period in 2002 due to interest earned on past due Southern California Edison
("Edison") amounts in 2002.
Fuel expenses increased $1.7 million to $32.1 million for the three-month period
ended September 30, 2003 from $30.4 million for the same period in 2002. The
increase was primarily due to higher natural gas prices at the Company's gas
facilities, partially offset by increased utility curtailment in 2003.
Plant operating expenses, which include operating, maintenance, resource and
other plant operating expenses, increased $2.4 million to $33.4 million for the
three-month period ended September 30, 2003 from $31.0 million for the same
period in 2002. The increase was primarily due to an uncontrollable force event
at the Salton Sea Unit IV Project and timing of other maintenance activities.
General and administrative expenses decreased $1.0 million to $1.1 million for
the three-month period ended September 30, 2003 from $2.1 million for the same
period in 2002. These costs include administrative services including executive,
financial, legal, tax and other corporate functions. The decrease in 2003 was
primarily due to a reduction in legal costs related to disputes with Edison.
Depreciation and amortization increased $1.8 million to $21.8 million for the
three month period ended September 30, 2003 from $20.0 million for the same
period in 2002. The increase was primarily due to a change in salvage values
used at the Salton Sea Projects.
Interest expense decreased $1.8 million to $17.2 million for the three-month
period ended September 30, 2003 from $19.0 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 to $9.0 million for the
three-month period ended September 30, 2003 from $11.0 million for the same
period in 2002. The effective tax rate was 23.7% and 26.7% in 2003 and 2002,
respectively. The lower effective tax rate is due to greater depletion benefits
in 2003.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003
AND 2002
Operating revenue increased $7.0 million or 1.8% to $388.2 million for the
nine-month period ended September 30, 2003 from $381.2 million for the same
period in 2002. The increase reflects $26.0 million due to higher rates at the
Imperial Valley Projects and $15.6 million due to increased energy rates at the
Company's gas facilities in 2003, partially offset by the $21.0 million
adjustment to the Edison provision at the Imperial Valley Projects in the first
quarter of 2002 and $13.6 million in lower revenue from decreased production, at
both the Imperial Valley Projects and the gas facilities, as a result of
curtailment and maintenance, in 2003.
Interest and other income decreased $5.2 million to $2.0 million for the
nine-month period ended September 30, 2003 from $7.2 million for the same period
in 2002 due to the interest earned in 2002 on past due Edison amounts, Salton
Sea II Project business interruption revenue and the sale of Saranac emission
credits in 2002.
Fuel expenses increased $6.1 million to $95.8 million for the nine-month period
ended September 30, 2003 from $89.7 million for the same period in 2002. The
increase was primarily due to higher natural gas prices at the Company's gas
facilities.
Plant operating expenses, which include operating, maintenance, resource and
other plant operating expenses, increased $1.7 million to $98.4 million for the
nine-month period ended September 30, 2003 from $96.7 million for the same
period in 2002. The increase was primarily due to the Salton Sea Unit IV repairs
partially offset by settlement of a warranty claim with Stone & Webster, Inc.
("Stone & Webster").
General and administrative expenses decreased $1.7 million to $3.2 million for
the nine-month period ended September 30, 2003 from $4.9 million for the same
period in 2002. These costs include administrative services including
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executive, financial, legal, tax and other corporate functions. The decrease in
2003 was due to a reduction in legal costs related to disputes with Edison.
Depreciation and amortization increased $2.2 million to $64.6 million for the
nine-month period ended September 30, 2003 from $62.4 million for the same
period in 2002. The increase was primarily due to a change in salvage values
used at the Salton Sea Projects.
Interest expense decreased $5.0 million to $53.1 million for the nine-month
period ended September 30, 2003 from $58.1 million for the same period in 2002.
The decrease is due to lower outstanding debt balances.
The provision for income taxes decreased $1.3 million to $18.1 million for the
nine-month period ended September 30, 2003 from $19.4 million for the same
period in 2002. The effective tax rate was 24.1% and 25.3% in 2003 and 2002,
respectively. The lower effective tax rate is due to greater depletion benefits
in 2003.
The cumulative effect of a change in accounting principle in 2003 reflects the
Company's adoption of Statement of Financial Accounting Standards 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 $0.5 million
lower for the nine-month period ended September 30, 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 PRL (beginning September 30, 2003) and 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), or
(2) owning direct interests in the subsidiaries that own interests in the
foregoing projects, the Saranac Project, a 240 net megawatt ("MW") natural
gas-fired cogeneration facility owned by Saranac Energy Company, Inc., an
indirect wholly-owned subsidiary of CE Generation, and the Power Resources
Project, a 200 net MW natural gas-fired cogeneration project owned by Power
Resources Ltd. ("Power Resources"), an indirect wholly-owned subsidiary of CE
Generation.
CE Generation generated cash flows from operations of $134.5 million for the
nine-month period ended September 30, 2003 compared with $157.7 million for the
same period in 2002. The decrease was primarily due to the receipt of past due
balances from Edison in 2002 and changes in working capital in 2003.
Cash flow used in investing activities was $13.8 million for the nine-month
period ended September 30, 2003 and included a $4.5 million reduction due to
recoveries from the Stone & Webster settlement. Cash used was $26.6 million for
the nine-month period ended September 30, 2002. Capital expenditures are the
primary component of investing activities.
Cash flow used in financing activities was $71.8 million for the nine-month
period ended September 30, 2003 compared with $100.9 million for the same period
in 2002. The changes in cash flows from financing activities primarily reflect
the funding of debt service reserve accounts and distributions to owners.
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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 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 $2.7 million as of December 31, 2002. In
connection with the June 11, 2003 settlement discussed below, the receivables
associated with this allowance were written off during 2003.
On March 25, 2002, 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 failed to recognize the
uncontrollable force event and as such did not pay amounts otherwise due and
owing and improperly derated Salton Sea II from 15 MW to 12.5 MW, under the
Salton Sea II Power Purchase Agreement. On January 29, 2003, Salton Sea Power
Generation, L.P., owner of Salton Sea II, served a complaint on Edison for such
unpaid amounts and to rescind such deration.
On June 11, 2003, the Imperial Valley Projects (excluding the Salton Sea I,
Salton Sea V and CE Turbo Projects) entered into a settlement agreement with
Edison. The settlement, which relates to the capacity bonus payment and Salton
Sea II uncontrollable force event disputes, provides for an $800,000 settlement
payment from Edison, payment of amounts previously withheld for the Unit II
deration and the recission of such deration. The amounts previously withheld for
the Unit II deration were received in the second quarter of 2003. The $800,000
settlement payment is contingent upon approval by the California Public
Utilities Commission.
On July 10, 2003, Salton Sea IV's 34 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended, and Salton
Sea IV returned to service on September 17, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea IV Power Purchase Agreement totaling $1.7 million. On
September 19, 2003 and October 17, 2003, Salton Sea Power Generation, L.P., with
Fish Lake Power Company, owner of Salton Sea IV served notices of error on
Edison for such unpaid amounts. As a result, the Company has set up a reserve of
$1.4 million for capacity payments as of September 30, 2003.
As a result of uncertainties related to Edison, the letter of credit that
supported the debt service reserve fund at Salton Sea Funding Corporation had
not been extended beyond its then existing July 2004 expiration date, and as
such cash distributions were not available to CE Generation until the Salton Sea
Funding Corporation debt service reserve fund of approximately $65.4 million had
been funded or the letter of credit had been extended beyond its July 2004
expiration date or replaced. At December 31, 2002, the fund had a cash balance
of $46.3 million.
In May 2003, the previous $65.4 million Salton Sea Funding Corporation debt
service reserve letter of credit was replaced by a $32.7 million TransAlta USA
Inc. ("TransAlta"), a wholly owned subsidiary of TransAlta Corporation, letter
of credit which expires May 30, 2004 and a $32.7 million MidAmerican Energy
Holdings Company ("MidAmerican") letter of credit which expires June 6, 2006.
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These new Salton Sea Funding Corporation debt service reserve letters of credit
permitted the cash, which was previously restricted, to be included in funds
distributed to CE Generation on May 29, 2003. During the second quarter of 2003,
CE Generation distributed a total of $65.0 million to MidAmerican and TransAlta.
Stone & Webster
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The Salton Sea V Project was constructed by Stone & Webster, pursuant to a date
certain, fixed-price, turnkey engineering, procure, construct and manage
contract (the "Salton Sea V Project EPC Contract"). On March 7, 2002, Salton Sea
Power L.L.C. ("Salton Sea Power"), the owner of the Salton Sea V Project, filed
a Demand for Arbitration against Stone & Webster for breach of contract and
breach of warranty arising from deficiencies in Stone & Webster's design,
engineering, construction and procurement of equipment for the Salton Sea V
Project pursuant to the Salton Sea V Project EPC Contract. The demand for
arbitration did not include a stated claim amount. On April 25, 2003, Salton Sea
Power entered into a settlement agreement with Stone & Webster. The Settlement
Agreement resulted in a total payment of $12.1 million from Stone & Webster in
the second quarter of 2003 and the arbitration was dismissed. The settlement was
recorded as a $4.5 million reduction of incremental capital expenditures and a
$7.6 million reduction of incremental operating expenses related to legal, other
expenses and equipment write-offs.
The CE Turbo Project was constructed by Stone & Webster, pursuant to a date
certain, fixed-price, turnkey engineering, procure, construct and manage
contract (the "CE Turbo Project EPC Contract"). On March 7, 2002, Vulcan/BN
Geothermal Power Company, Del Ranch, L.P., and CE Turbo LLC, the owners of the
CE Turbo Project, filed a Demand for Arbitration against Stone & Webster for
breach of contract and breach of warranty arising from deficiencies in Stone &
Webster's design, engineering, construction and procurement of equipment for the
CE Turbo Project pursuant to the CE Turbo Project's EPC Contract.
On November 25, 2002, Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and
CE Turbo, LLC entered into a settlement agreement with Stone & Webster related
to a Demand for Arbitration against Stone & Webster for breach of contract and
breach of warranty arising from deficiencies in Stone & Webster's design,
engineering, construction and procurement of equipment for the CE Turbo Project.
The settlement agreement resulted in a $3.5 million payment from Stone & Webster
which was recorded as a reduction of incremental capital expenditures.
The Power Resources Project was a Qualifying Facility ("QF") under the Public
Utility Regulatory Policies Act of 1978 ("PURPA") and sold electricity to TXU
Generation Company LP pursuant to a 15 year negotiated power purchase agreement
("the Power Resources PPA"), which provided for capacity and energy payments.
Capacity and energy payments, in 2003 were $3.7 million per month and 3.6 cents
per kilowatt ("kW") hour, respectively. The Power Resources PPA expired
September 30, 2003. The Power Resources Project sold steam to ALON USA, LP
("ALON") under a 15-year agreement that also expired September 30, 2003.
On August 5, 2003, Power Resources Ltd. ("Power Resources") entered into a
Tolling Agreement with ONEOK Energy Marketing and Trading Company, L.P.
("ONEOK"). Under the terms of the agreement, Power Resources sells its
electricity and capacity to ONEOK for $1.75 per kW-month plus a variable
operating and maintenance fee of $.50 per MW hour ("MWh"). In addition, ONEOK
pays annual turbine start-up costs in an amount equal to the greater of (i)
$3,643 per turbine start-up, (ii) $939,986 or (iii) $140 per hour of operation
during the year. The agreement commenced October 1, 2003 and expires December
31, 2005.
On May 20, 2003, Salton Sea Power entered into a Power Sales Agreement with the
City of Riverside, California ("Riverside"). Under the terms of the agreement,
Salton Sea Power sells up to 20 MW of energy generated from Salton Sea V to
Riverside at $61 per MWh. Sales under the agreement commenced June 1, 2003 and
will terminate May 31, 2013.
Minerals LLC ("Minerals") contracted with Zachry Construction Corporation
("Zachry") under a time and materials contract to do a maximum of $1.32 million
work for the Zinc Recovery Project. Zachry has invoiced Minerals for $4.7
million of work under this contract. Minerals has been unable to substantiate
Zachry's invoices. Zachry filed a demand for arbitration with the American
Arbitration Association (the "AAA") on August 19, 2003 for collection of its
claimed outstanding invoices. Although the AAA has selected an arbitration
panel, neither the AAA nor the panel has scheduled any hearings on this matter
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to date. Minerals anticipates that the evidentiary hearing on this matter will
not likely occur prior to the summer of 2004.
RELATED PARTY TRANSACTIONS
On January 29, 2003, TransAlta purchased El Paso Merchant Energy North American
Company's ("EPME") 50% interest in CE Generation.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo LLC began selling power to a subsidiary of TransAlta on February 12,
2003 based on percentages of the Dow Jones SP-15 Index. The Transaction
Agreement shall continue until the earlier of (a) 30 days following a written
notice of termination after October 1, 2003 or (b) any other termination date
mutually agreed to by the parties. No such notice of termination has been given
by either party. Sales under this agreement totaled $2.9 million and $8.0
million during the three-month and nine-month periods September 30, 2003,
respectively.
Sales to EPME totaled $1.1 million and $4.6 million during the three-month and
nine-month periods ended September 30, 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 other than as
discussed in this "Liquidity and Capital Resources" section.
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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. Other than the Power Resources and Riverside contract changes, CE
Generation's exposure to market risk has not changed materially since December
31, 2002.
Item 4. Controls and Procedures.
An evaluation was performed under the supervision and with the participation of
the Company's management, including its chief executive officer and chief
financial officer, regarding the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2003. Based on that evaluation, the Company's management,
including the chief executive officer and chief financial officer, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls.
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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.
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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: November 6, 2003 /s/ Wayne F. Irmiter
----------------------------
Wayne F. Irmiter
Vice President & Controller
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EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
31.1 Chief Executive Officer's Certificate Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Accounting Officer's Certificate Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Accounting Officer's Certificate Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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