UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 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, NE 68131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 341-4500
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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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of each of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
Yes [ ] No [X]
The members' equity accounts are held 50% by MidAmerican Energy Holdings Company
and 50% by TransAlta USA Inc. as of February 27, 2004.
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TABLE OF CONTENTS
PART I
Item 1. Business.............................................................4
Item 2. Properties..........................................................10
Item 3. Legal Proceedings...................................................10
Item 4. Submission of Matters to a Vote of Security Holders.................10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder's
Matters and Issuer Purchases of Equity Securities.................11
Item 6. Selected Financial Data.............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........20
Item 8. Financial Statements and Supplementary Data.........................21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................43
Item 9A. Controls and Procedures.............................................43
PART III
Item 10. Directors and Executive Officers of the Registrant..................44
Item 11. Executive Compensation..............................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.......................................45
Item 13. Certain Relationships and Related Transactions......................45
Item 14. Principal Accountant Fees and Services..............................46
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....47
SIGNATURES...................................................................49
EXHIBIT INDEX................................................................50
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may", "will", "could", "project", "believe", "anticipate",
"expect", "estimate", "continue", "potential", "plan", "forecast", and similar
terms. These statements represent CE Generation, LLC's intentions, plans,
expectations and beliefs and are subject to risks, uncertainties and other
factors. Many of these factors are outside CE Generation, LLC's control and
could cause actual results to differ materially from such forward-looking
statements. These factors include, among others:
o general economic and business conditions in the jurisdictions in which
CE Generation, LLC's facilities are located;
o the financial condition and creditworthiness of our significant
customers and suppliers;
o governmental, statutory, regulatory or administrative initiatives or
ratemaking actions affecting CE Generation, LLC or the power
generation industries;
o weather effects on sales and revenue;
o general industry trends;
o increased competition in the power generation industry;
o fuel and power costs and availability;
o changes in business strategy, development plans or customer or vendor
relationships;
o availability of qualified personnel;
o unscheduled outages or repairs;
o financial or regulatory accounting principles or policies imposed by
the Public Company Accounting Oversight Board, the Financial
Accounting Standards Board ("FASB"), the Securities and Exchange
Commission ("SEC") and similar entities with regulatory oversight;
o other risks or unforeseen events, including wars, the effects of
terrorism, embargos and other catastrophic events; and
o other business or investment considerations that may be disclosed from
time to time in SEC filings or in other publicly disseminated written
documents.
CE Generation, LLC undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors should not be construed as
exclusive.
In this Annual Report references to kW means kilowatts, MW means megawatts, kWh
means kilowatt hours, MWh means megawatt hours, and MMBtus means million British
thermal units.
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PART I
ITEM 1. BUSINESS.
GENERAL
CE Generation, LLC ("CE Generation" or the "Company"), is a Delaware limited
liability company created by MidAmerican Energy Holdings Company ("MEHC") on
February 8, 1999, for the sole purpose of issuing securities and holding the
equity investments in certain subsidiaries. On March 3, 1999, MEHC sold 50% of
its ownership interest in CE Generation to El Paso CE Generation Holding Company
("El Paso").
On January 29, 2003, El Paso sold all its interest in CE Generation to TransAlta
USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.
The Company's limited liability company operating agreement provides that MEHC
and TransAlta each are entitled to appoint 50% of the directors and are entitled
to 50% of the distributions made by the Company.
CE Generation owns all of the common stock interests in Magma Power Company
("Magma"), FSRI Holdings, Inc. ("FSRI") and California Energy Development
Corporation and their subsidiaries. Through its subsidiaries, CE Generation is
primarily engaged in the development, ownership and operation of environmentally
responsible independent power production facilities in the United States
utilizing geothermal and natural gas resources.
The principal executive office of CE Generation is located at 302 South 36th
Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is (402)
341-4500.
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THE PROJECTS
CE Generation has an aggregate net ownership interest of 769 MW of electrical
generating capacity in power plants in operation in the United States, which
have an aggregate net capacity of 829 MW. Set forth below is a table describing
certain characteristics of CE Generation's projects as of December 31, 2003:
FACILITY NET POWER PURCHASE
CAPACITY NET MW AGREEMENT POWER
OPERATING PROJECT (MW) (1) OWNED (1) LOCATION EXPIRATION PURCHASER (2)
- ----------------- -------- --------- -------- ---------- ---------------------
GEOTHERMAL FACILITIES:
Salton Sea Projects
Salton Sea I...................... 10 10 California 2017 Edison
Salton Sea II..................... 20 20 California 2020 Edison
Salton Sea III.................... 50 50 California 2019 Edison
Salton Sea IV..................... 40 40 California 2026 Edison
Salton Sea V...................... 49 49 California Varies TransAlta
--- ---
Riverside/Minerals(3)
Total Salton Sea Projects...... 169 169
--- ---
Partnership Projects
Vulcan............................ 34 34 California 2016 Edison
Elmore............................ 38 38 California 2018 Edison
Leathers.......................... 38 38 California 2019 Edison
Del Ranch......................... 38 38 California 2019 Edison
CE Turbo.......................... 10 10 California Varies TransAlta/Minerals(3)
--- ---
Total Partnership Projects........ 158 158
--- ---
Total geothermal facilities....... 327 327
--- ---
GAS FACILITIES:
Saranac........................... 240 180 New York 2009 NYSE&G
Power Resources (4)............... 212 212 Texas 2005 ONEOK
Yuma.............................. 50 50 Arizona 2024 SDG&E
--- ---
Total gas facilities........... 502 442
--- ---
TOTAL OPERATING PROJECTS.......... 829 769
=== ===
(1) Represents nominal net generating capability (contract capacity for
most). Actual MW may vary depending on operating conditions and plant
design. Net MW owned indicates current legal ownership.
(2) Southern California Edison Company ("Edison"); TransAlta; CalEnergy
Minerals LLC ("Minerals"); the City of Riverside, California
("Riverside"); New York State Electric & Gas Corporation ("NYSE&G");
ONEOK Energy, Marketing and Trading Company, L.P. ("ONEOK"); and San
Diego Gas & Electric Company ("SDG&E").
(3) Each contract governing power purchases by Minerals will expire 33
years from the date of the initial power delivery under such contract.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea
Power LLC ("Salton Sea Power") which owns Salton Sea V, and CE Turbo
LLC ("CE Turbo") began selling available power to 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; or (b) any other
termination date mutually agreed to by the parties. No such notice of
termination has been given by either party. Effective July 1, 2004,
Salton Sea Power and CE Turbo will also be selling the environmental
attributes associated with up to 931,800 MWh to TransAlta Marketing
(US) Inc ("TransAlta Marketing") through December 31, 2008. Salton
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Sea Power also entered into a 10-year power sales agreement for up to
20 MW with Riverside in May 2003.
(4) Power Resources net capacity was 200 MW during operation as a QF under
the TXU Power Generation Company, LP ("TXU") Power Purchase Agreement,
which expired September 30, 2003. The net capacity increased to 212 MW
during operations as an exempt wholesale generator ("EWG"), as defined
by the Energy Policy Act of 1992, under the ONEOK tolling agreement
due to the absence of the need to deliver steam to a third party.
GEOTHERMAL FACILITIES
CE Generation affiliates currently operate ten geothermal plants (the "Imperial
Valley Projects") in the Imperial Valley in California. The "Salton Sea
Projects" consist of the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea
IV and Salton Sea V Projects (the "Salton Sea I Project", the "Salton Sea II
Project", the "Salton Sea III Project", the "Salton Sea IV Project", and the
"Salton Sea V Project" respectively). The "Partnership Projects" consist of the
Vulcan, Elmore, Leathers, Del Ranch and CE Turbo projects (the "Vulcan Project",
the "Elmore Project", the "Leathers Project", the "Del Ranch Project", and the
"CE Turbo Project", respectively).
Each of the Imperial Valley Projects, excluding the Salton Sea V and CE Turbo
Projects, sells electricity to Edison pursuant to a separate Standard Offer No.
4 Agreement ("SO4 Agreement") or a negotiated power purchase agreement. Each
power purchase agreement is independent of the others, and the performance
requirements specified within one such agreement apply only to the project which
is subject to the agreement. The power purchase agreements provide for capacity
payments, capacity bonus payments, and energy payments. Edison makes fixed
annual capacity payments and capacity bonus payments to the applicable projects
to the extent that capacity factors exceed certain benchmarks. The price for
capacity was fixed for the life of the SO4 Agreements and is significantly
higher in the months of June through September.
Energy payments under the Imperial Valley Projects SO4 Agreements, excluding the
Salton Sea IV Project, were at increasing fixed rates for the first ten years
after firm operation and thereafter at a rate based on the cost that Edison
avoids by purchasing energy from the project instead of obtaining the energy
from other sources ("Edison's Avoided Cost of Energy"). In June and November
2001, the Imperial Valley Projects which receive Edison's Avoided Cost of
Energy, entered into agreements that provide for amended energy payments under
the SO4 Agreements. The amendments provide for fixed energy payments per kWh in
lieu of Edison's Avoided Cost of Energy. The fixed energy payment was 3.25 cents
per kWh from December 1, 2001 through April 30, 2002 and is 5.37 cents per kWh
commencing May 1, 2002 for a five-year period. Following the five-year period,
the energy payments revert back to Edison's Avoided Cost of Energy.
For the years ended December 31, 2003, 2002 and 2001, respectively, Edison's
Average Avoided Cost of Energy was 5.4 cents per kWh, 3.5 cents per kWh and 7.4
cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy
vary substantially from year-to-year based primarily on the future cost of gas.
The Salton Sea I Project contracts to sell electricity to Edison pursuant to a
30-year negotiated power purchase agreement, which commenced on July 1, 1987
(the "Salton Sea I PPA"). The contract capacity and contract nameplate are each
10 MW. The capacity payment is based on the firm capacity price, which adjusts
quarterly based on a basket of energy indices for the term of the Salton Sea I
PPA and is currently $158.71 per kW-year. The capacity payment was approximately
$1.5 million in 2003. The energy payment is calculated using a Base Price
(defined as the initial value of the energy payment (4.7 cents per kWh for the
second quarter of 1992)), which is subject to quarterly adjustments based on a
basket of energy indices. The time period weighted average energy payment for
Salton Sea I was 6.1 cents per kWh during 2003.
The Salton Sea II Project contracts to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on April 5, 1990. The contract
capacity and contract nameplate are 15 MW (16.5 MW during
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on-peak periods) and 20 MW, respectively. The price for contract capacity and
contract capacity bonus payments is fixed for the life of the modified SO4
Agreement. Pursuant to the SO4 Agreements, the maximum annual capacity and bonus
payments are approximately $3.3 million. Edison is entitled to receive, at no
cost, 5% of all energy delivered in excess of 80% of contract capacity through
September 30, 2004.
The Salton Sea III Project contracts to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on February 13, 1989. The contract
capacity and contract nameplate are 47.5 MW and 49.8 MW, respectively. The price
for contract capacity payments and capacity bonus payments is fixed at $175 per
kW per year. Pursuant to the SO4 Agreements, the maximum annual capacity and
bonus payments are approximately $9.7 million.
The Salton Sea IV Project contracts to sell electricity to Edison pursuant to a
modified SO4 Agreement which provides for contract capacity payments on 40 MW of
capacity at two different rates based on the respective contract capacities
deemed attributable to the original Salton Sea I PPA option (20 MW) and to the
original Salton Sea IV SO4 Agreement (14 MW). The capacity payment price for the
20 MW portion adjusts quarterly based upon specified indices and the capacity
payment price for the 14 MW portion is a fixed levelized rate. The capacity and
bonus payments in 2003, 2002 and 2001 were approximately $3.9 million, $5.5
million and $5.7 million, respectively. The energy payment (for deliveries up to
a rate of 39.6 MW) is at a base price, adjusted quarterly based on specified
indices, for 55.6% of the total energy delivered by the Salton Sea IV Project
and is based on an energy payment schedule for 44.4% of the total energy
delivered by the Salton Sea IV Project. The contract has a 30-year term but
Edison is not required to purchase the 20 MW of capacity and energy originally
attributable to the Salton Sea I PPA option after September 30, 2017, the
original termination date of the Salton Sea I PPA.
On May 20, 2003, Salton Sea Power, LLC ("Salton Sea Power") entered into a Power
Sales Agreement with Riverside. Under the terms of the agreement, Salton Sea
Power sells up to 20 MW of energy generated from the Salton Sea V Project to
Riverside at 6.1 cents per kWh. Pursuant to a 33-year power sales agreement,
sales under the agreement commenced June 1, 2003 and will terminate May 31,
2013. The Salton Sea V Project sells a portion of its net output to Minerals for
its full electrical energy requirements, currently estimated to be 19 MW. The
agreement provides for energy payments based on the market rates available to
the Salton Sea V Project, adjusted for wheeling costs. The Salton Sea V Project
sells its remaining output under the TransAlta Transaction Agreement as
described below.
Commencing January 17, 2001, Salton Sea Power and CE Turbo entered into a series
of transaction agreements to sell available power from the Salton Sea V and CE
Turbo Projects to El Paso based on day ahead price quotes received from El Paso
under the original agreement and based on percentages of the Dow Jones SP-15
Index thereafter. Pursuant to a Transaction Agreement ("TransAlta Transaction
Agreement") dated January 29, 2003, Salton Sea Power and CE Turbo began selling
available power to 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; or (b) any
other termination date mutually agreed to by the parties. No such notice of
termination has been given by either party.
The Vulcan Project contracts to sell electricity to Edison under a 30-year SO4
Agreement that commenced on February 10, 1986. The Vulcan Project has a contract
capacity and contract nameplate of 29.5 MW and 34 MW, respectively. Pursuant to
the SO4 Agreements, the maximum annual capacity and bonus payments are
approximately $5.5 million.
The Elmore Project contracts to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 1, 1989. The contract capacity and contract
nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4 Agreements, the
maximum annual capacity and bonus payments are approximately $7.9 million.
The Leathers Project contracts to sell electricity to Edison pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity
and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4
Agreements, the maximum annual capacity and bonus payments are approximately
$7.5 million.
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The Del Ranch Project contracts to sell electricity to Edison under a 30-year
SO4 Agreement that commenced on January 2, 1989. The contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4
Agreements, the maximum annual capacity and bonus payments are approximately
$7.9 million.
The CE Turbo Project sells its available power under the TransAlta Transaction
Agreement. The CE Turbo Project may sell its output to Minerals, pursuant to a
33-year power purchase agreement. The agreement provides for energy payments
based on the market rates available to the CE Turbo Project, adjusted for
wheeling costs.
The Imperial Valley Projects, other than the Salton Sea I Project, receive
transmission service from the Imperial Irrigation District to deliver
electricity to Edison near Mirage, California. These projects pay a rate based
on the Imperial Irrigation District's cost of service, which was $1.78 per month
per kW of service provided for 2003 and is recalculated annually. The
transmission service and interconnection agreements expire in 2015 for the
Partnership Projects, 2019 for the Salton Sea III Project, 2020 for the Salton
Sea II Project and 2026 for the Salton Sea IV Project. The Salton Sea V and CE
Turbo Projects have entered into 30-year agreements with similar terms with the
Imperial Irrigation District. The Salton Sea I Project delivers energy to Edison
at the project site and has no transmission service agreement with the Imperial
Irrigation District.
GAS FACILITIES
CE Generation affiliates currently operate three gas fired facilities (the "Gas
Projects") located in New York, Arizona and Texas. The Gas Projects consist of
the "Saranac Project", the "Power Resources Project", and the "Yuma Project",
respectively.
The Saranac Project is a 240 net MW natural gas-fired cogeneration facility
located in Plattsburgh, New York, which began commercial operation in June 1994.
The Saranac Project has entered into a 15-year power purchase agreement (the
"Saranac PPA") with NYSE&G. The Saranac Project has entered into 15-year steam
purchase agreements (the "Saranac Steam Purchase Agreements") with
Georgia-Pacific Corporation and Pactiv Corporation. The Saranac Project has a
15-year natural gas supply contract (the "Saranac Gas Supply Agreement") with
Coral Energy to supply 100% of the Saranac Project's fuel requirements. Coral
Energy is responsible for production and delivery of natural gas to the
U.S.-Canadian border; the gas is then transported by the North Country Gas
Pipeline Corporation ("NCGP") the remaining 22 miles to the plant. NCGP is a
wholly-owned subsidiary of Saranac Power Partners, L.P. (the "Saranac
Partnership") and the Saranac Partnership also owns the Saranac Project. NCGP
also transports gas for NYSE&G and Georgia-Pacific Corporation. Each of the
Saranac PPA, the Saranac Steam Purchase Agreements and the Saranac Gas Supply
Agreement contains rates that are fixed for the respective contract terms. The
2003 Saranac PPA rates escalate at a higher percentage than the Saranac Gas
Supply Agreement rates. The Saranac Partnership is indirectly owned by
subsidiaries of CE Generation, ArcLight Capital Holdings and General Electric
Capital Corporation.
The Power Resources Project, a 212 net MW natural gas-fired cogeneration project
owned by Power Resources, Ltd. ("Power Resources"), an indirect wholly-owned
subsidiary of CE Generation, sold electricity to TXU as a QF, pursuant to a
15-year negotiated power purchase agreement (the "Power Resources PPA"), which
provided for capacity and energy payments. The contractual capacity payments in
2003, 2002, and 2001 were $3.7 million, $3.6 million, and $3.5 million per
month, respectively. The average energy payments in 2003, 2002, and 2001 were
3.6, 3.5, and 3.4 cents per kWh, 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.
The agreement commenced October 1, 2003 and expires December 31, 2005. Under the
terms of the agreement, Power Resources sells its electricity and capacity to
ONEOK, as an EWG for $1.75 per kW-month plus a variable operating and
maintenance fee of $.50 per 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 contract year.
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The Yuma Project is a 50 net MW natural gas-fired cogeneration project in Yuma,
Arizona providing 50 MW of electricity to SDG&E under an existing 30-year power
purchase contract ("Yuma PPA") commencing in May 1994. The energy is sold at
SDG&E's Avoided Cost of Energy and the capacity is sold to SDG&E at a fixed
price for the life of the Yuma PPA. For the years ended December 31, 2003, 2002
and 2001, SDG&E's Average Avoided Cost of Energy was 6.0 cents per kWh, 4.1
cents per kWh and 7.8 cents per kWh, respectively. The maximum annual capacity
payments are approximately $8.4 million. The power is wheeled to SDG&E over
transmission lines constructed and owned by Arizona Public Service Company. The
project entity, Yuma Cogeneration Associates ("YCA"), has executed steam sales
contracts with Queen Carpet, Inc. to act as its thermal host. Since the
industrial entity has the right under its agreement to terminate the agreement
upon one year's notice if a change in its technology eliminates its need for
steam, and in any case to terminate the agreement at any time upon three years
notice, there can be no assurance that the Yuma Project will maintain its status
as a QF. However, if the industrial entity terminates the agreement, YCA
anticipates that it will be able to locate an alternative thermal host in order
to maintain its status as a QF. A natural gas supply and transportation
agreement has been executed with Southwest Gas Corporation, terminable under
certain circumstances by YCA and Southwest Gas Corporation.
INSURANCE
The Company currently possess property, business interruption, catastrophic and
general liability insurance. There can be no assurance that such comprehensive
insurance coverage will be available in the future at commercially reasonable
costs or terms or that the amounts for which the Company has or will be insured
will cover all potential losses.
Because geothermally active areas such as the area in which the Imperial Valley
Projects are located are subject to frequent low-level seismic disturbances, and
serious seismic disturbances are possible, the power generating plants and other
facilities at these projects are designed and built to withstand relatively
significant levels of seismic disturbance. However, there is no assurance that
seismic disturbances of a nature and magnitude so as to cause material damage to
the projects or gathering systems or a material change in the nature of the
geothermal resource will not occur, that insurance with respect to seismic
disturbances will be maintained by or on behalf of all of the projects, that
insurance proceeds will be adequate to cover all potential losses sustained, or
that insurance will continue to be available in the future in amounts adequate
to insure against such seismic disturbances.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company is subject to a number of environmental laws and regulations
affecting many aspects of their present and future operations, including the
disposal of various forms of materials resulting from geothermal reservoir
production and the drilling and operation of new wells. Such laws and
regulations generally require the Company to obtain and comply with a wide
variety of licenses, permits and other approvals. In addition, regulatory
compliance for the construction of new facilities is a costly and time-consuming
process, and intricate and rapidly changing environmental regulations may
require major expenditures for permitting and create the risk of expensive
delays or material impairment of project value if projects cannot function as
planned due to changing regulatory requirements or local opposition. The Company
also remains subject to a varied and complex body of environmental and energy
regulations that both public officials and private individuals may seek to
enforce. There can be no assurance that existing regulations will not be revised
or that new regulations will not be adopted or become applicable to the Company
which could have an adverse impact on its operations. In particular, the
independent power market in the United States is dependent on the existing
energy regulatory structure, including the Public Utility Regulatory Policies
Act of 1978 and its implementation by utility commissions in the various states.
The structure of such federal and state energy regulations has in the past, and
may in the future, be the subject of various challenges and restructuring
proposals by utilities and other industry participants. The implementation of
regulatory changes in response to such challenges or restructuring proposals, or
otherwise imposing more comprehensive or stringent requirements on the Company,
which would result in increased compliance costs could have a material adverse
effect on the Company's results of operations.
EMPLOYEES
Employees necessary for the operation of the CE Generation projects are provided
by CalEnergy Operating Corporation ("CEOC") and Falcon Power Operating Company
("FPOC"), indirect subsidiaries of CE Generation, under operation and
maintenance agreements. As of December 31, 2003, CEOC and FPOC employed 235 and
57 people full-time, respectively.
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ITEM 2. PROPERTIES.
The Company's most significant physical properties are its current interest in
operating power facilities and its related real property interests. The gas
fired generating facilities are located on land leased or owned by the
respective project companies. The Company maintains an inventory of
approximately 26,000 acres of geothermal property leases in the Salton Sea area
to support the Imperial Valley Projects. The Company, as lessee, pays certain
royalties and other fees to the property owners and other royalty interest
holders from the revenue generated by the Imperial Valley Projects. The Company
also has interests in other geothermal property leases which are unrelated to
its current operating power facilities. Certain of the producing acreage owned
by Magma is leased to Mammoth-Pacific as owner and operator of the Mammoth
Plants, and Magma, as lessor, receives royalties from the revenues earned by
such power plants.
Lessors and royalty holders are generally paid a monthly or annual rental
payment during the term of the lease or mineral interest, unless and until the
acreage goes into production, in which case the rental typically stops and the
(generally higher) royalty payments begin. Leases of federal property are
transacted with the Department of Interior, Bureau of Land Management, pursuant
to standard geothermal leases under the Geothermal Steam Act and the regulations
promulgated thereunder (the "Regulations"), and are for a primary term of 10
years, extendible for an additional 5 years if drilling is commenced within the
primary term and is diligently pursued for two successive 5 year periods upon
certain conditions set forth in the Regulations. A secondary term of up to
40-years is available so long as geothermal resources from the property are
being produced or used in commercial quantities. Leases of state lands may vary
in form. Leases of private lands vary considerably, since their terms and
provisions are the product of negotiations with the landowners.
ITEM 3. LEGAL PROCEEDINGS.
Edison and the California Power Exchange
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Due to reduced liquidity, Southern California Edison Company ("Edison") had
failed to pay approximately $119 million owed under the power purchase
agreements with the Imperial Valley Projects (excluding the Salton Sea V and 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 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 40 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 $2.3 million.
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 established reserves of $1.7 million for capacity payments as of
December 31, 2003.
On October 9, 2003, Salton Sea III's 50 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
III returned to service on December 12, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea III Power Purchase Agreement totaling $0.7 million.
Salton Sea Power Generation, L.P., owner of Salton Sea III, served notice of
error on Edison for such unpaid amounts. As a result the Company has fully
reserved for this balance as of December 31, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER'S MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands)
The selected data presented below are derived from CE Generation's audited
consolidated financial statements. The consolidated financial statements reflect
the consolidated financial statements of Magma and subsidiaries (excluding
wholly-owned subsidiaries retained by MEHC in 1999 when CE Generation was
formed), FSRI and subsidiaries and YCA, each a wholly-owned subsidiary of CE
Generation. The consolidated financial statements present CE Generation's
financial position, results of operations and cash flows as if CE Generation
were a separate legal entity for all periods presented.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 (1) 1999
----------- ---------- ----------- ---------- -----------
STATEMENT OF OPERATIONS DATA:
Total revenue ........................... $ 487,422 $ 510,082 $ 565,838 $ 510,796 $ 340,683
Income before minority interest and
cumulative effect of change in
accounting principle .................. 58,188 79,071 89,812 73,535 44,492
Cumulative effect of change in
accounting principle, net of tax (2) .. (2,467) - (15,386) - -
Net income .............................. 34,874 58,314 58,808 73,535 44,492
BALANCE SHEET DATA:
Total assets ............................ $ 1,708,742 $1,865,036 $ 1,932,119 $1,984,445 $1,725,411
Project loans, including current portion 122,573 163,142 199,006 230,221 76,261
Salton Sea notes and bonds, including
current portion ....................... 463,592 491,678 520,250 543,908 568,980
Senior Secured Bonds, including current
portion ............................... 338,400 356,400 377,000 389,600 400,000
Members' equity ......................... 418,885 489,895 467,377 438,915 392,280
(1) Reflects full consolidation of the Saranac Project, which was
previously accounted for as an equity investment. The 2000 results
also reflect the addition of the Salton Sea Unit V and CE Turbo
Projects, which commenced operations in 2000.
(2) The cumulative effect of change in accounting principle in 2003
reflects a January 1, 2003 adoption of Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). The cumulative effect of change
in accounting principle in 2001 reflects a January 1, 2001 write-off
of prepaid and accrued balances associated with the change in policy
for accounting for major maintenance, overhauls and well workovers.
See Note 2 to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
selected consolidated financial data and the consolidated financial statements
included in Items 6 and 8 herein.
EXECUTIVE SUMMARY
Significant items impacting the 2003 financial results of CE Generation were the
expiration of the TXU contract with Power Resources and decreased production at
the Salton Sea III and IV Project plants due to uncontrollable force events in
2003. Significant items impacting the 2002 financial results were the collection
of the majority of the amounts in dispute with Edison and the favorable
resolution of income tax matters. The 2001 results reflect higher revenue due to
higher prices at the Imperial Valley and Yuma Projects, partially offset by an
asset impairment in 2001 reflecting the write-off of the book value of a steam
turbine held in storage, and the cumulative effect of the change in accounting
principle in 2001 reflecting the Company's change in its accounting policy for
major maintenance, overhaul and well workover costs.
The capacity factor for a particular project is determined by dividing the total
quantity of electricity sold by the product of the project's capacity and the
total hours in the year. At December 31, 2003, the capacity factors for the
Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea
IV Project, and Salton Sea V Project plants are based on capacity amounts of
approximately 10, 20, 50, 40, and 49 net MW, respectively. At December 31, 2003,
the capacity factors for the Vulcan Project, Elmore Project, Leathers Project,
Del Ranch Project, and CE Turbo Project plants are based on capacity amounts of
approximately 34, 38, 38, 38 and 10 net MW, respectively. At December 31, 2003,
the capacity factors for the Saranac Project, Power Resources Project and Yuma
Project plants are based on capacity amounts of approximately 240, 212 and 50
MW, respectively. Each plant possesses an operating margin, which allows for
production in excess of the amount listed above. Utilization of this operating
margin is based upon a variety of factors and can be expected to vary throughout
the year under normal operating conditions. The amount of revenues received by
these projects is affected by the extent to which they are able to operate and
generate electricity. Accordingly, the capacity and capacity factor figures
provide information on operating performance that has affected the revenues
received by these projects.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2003 AND 2002
Operating revenue decreased $17.3 million or 3.5% to $483.4 million for the year
ended December 31, 2003 from $500.7 million for the same period in 2002. The
decrease reflects $44.9 million in lower revenue in 2003 from decreased
production at both the Imperial Valley Projects and the Gas Projects, as a
result of contract curtailments, scheduled maintenance, uncontrollable force
events and the expiration of the TXU contract at Power Resources and the $21.0
million favorable adjustment to the Edison provision at the Imperial Valley
Projects in the first quarter of 2002 partially offset by increases of $30.1
million due to higher energy rates at the Imperial Valley Projects and $18.4
million due to increased energy rates at the Gas Projects in 2003.
The following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
2003 2002
--------- ---------
Overall capacity factor ............. 84.56% 89.60%
MWh produced ........................ 2,417,700 2,561,800
Capacity (net MW)(weighted average).. 326.4 326.4
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The decrease in capacity and production in 2003 are primarily the result of the
uncontrollable force events at the Salton Sea III and Salton Sea IV Projects. On
July 10, 2003, the Salton Sea IV Project's 40 MW turbine went out of service due
to an uncontrollable force event. Such uncontrollable force event ended, and the
Salton Sea IV Project plant returned to service on September 17, 2003. On
October 9, 2003, the Salton Sea III Project's 50 MW turbine went out of service
due to an uncontrollable force event. Such uncontrollable force event ended and
the Salton Sea III Project's plant returned to service on December 12, 2003.
The following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
2003 2002
--------- ---------
Overall capacity factor ............. 77.91% 92.35%
MWh produced ........................ 3,364,479 3,963,818
Capacity (net MW)(weighted average).. 493.0 490.0
The decrease in production and capacity factors in 2003 are primarily the result
of the expiration of Power Resources' contract with TXU in September 2003.
Interest and other income decreased $5.4 million to $4.0 million for the year
ended December 31, 2003 from $9.4 million for the same period in 2002 primarily
due to the interest earned in 2002 on past due Edison amounts and Salton Sea II
Project business interruption revenue.
Fuel expenses decreased $3.4 million to $118.3 million for the year ended
December 31, 2003 from $121.7 million for the same period in 2002. The decrease
reflects $11.4 million in lower fuel costs in 2003 from decreased production at
the Gas Projects, as a result of contract curtailments, scheduled maintenance
and the expiration of the TXU contract at Power Resources partially offset by an
$8.0 million increase due to higher fuel prices at the Gas Projects in 2003.
Plant operating expenses, which include operating, maintenance, resource and
other plant operating expenses, decreased $4.3 million to $129.8 million for the
year ended December 31, 2003 from $134.1 million for the same period in 2002.
The decrease was primarily due to the $7.6 million settlement of a warranty
claim with Stone & Webster, Inc. ("Stone & Webster"), partially offset by
increased major maintenance outages at the Gas Projects in 2003.
General and administrative expenses decreased $2.5 million to $4.4 million for
the year ended December 31, 2003 from $6.9 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 due to a
reduction in legal costs related to disputes with Edison.
Depreciation and amortization increased $5.6 million to $87.7 million for the
year ended December 31, 2003 from $82.1 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 $7.3 million to $69.4 million for the year ended
December 31, 2003 from $76.7 million for the same period in 2002. The decrease
is due to lower outstanding debt balances.
The $3.9 million asset impairment in 2003 represents a write-off of
miscellaneous equipment at the Imperial Valley Projects.
The provision for income taxes increased $6.1 million to $15.7 million for the
year ended December 31, 2003 from $9.6 million for the same period in 2002. The
effective tax rate was 21.3% and 10.8% in 2003 and 2002, respectively. During
2002, the Company made considerable progress on several significant income tax
examination
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matters for prior tax years, including percentage of depletion, which resulted
in a decrease in income tax expense of $15.1 million in 2002.
The cumulative effect of a change in accounting principle in 2003 reflects the
Company's adoption of 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 year ended December 31, 2002 on a proforma
basis.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2002 AND 2001
Operating revenue decreased $51.6 million or 9.3% to $500.7 million for the year
ended December 31, 2002 from $552.3 million for the same period in 2001. The
decrease reflects higher prices at the Imperial Valley and Yuma Projects in the
first quarter of 2001.
The following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
2002 2001
--------- ---------
Overall capacity factor ............. 89.60% 89.70%
MWh produced ........................ 2,561,800 2,565,600
Capacity (net MW)(weighted average).. 326.4 326.4
The following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
2002 2001
--------- ---------
Overall capacity factor ............. 92.35% 88.60%
MWh produced ........................ 3,963,818 3,804,800
Capacity (net MW)(weighted average).. 490.0 490.0
The changes in the overall capacity factor in 2002 and 2001 were due primarily
to major maintenance scheduling.
Interest and other income decreased $4.2 million or 30.7% to $9.4 million for
the year ended December 31, 2002 from $13.5 million for the same period in 2001
due to the interest earned in 2001 on past due Edison amounts.
Fuel expenses increased $0.7 million or 0.6% to $121.7 million for the year
ended December 31, 2002 from $121.0 million for the same period in 2001. The
increase was primarily due to increased production.
Plant operating expenses, which include operating, maintenance, resource and
other plant operating expenses, decreased $0.3 million or 0.2% to $134.1 million
for the year ended December 31, 2002 from $134.4 million for the same period in
2001. The decrease was primarily due to timing of major maintenance activities.
General and administrative expenses decreased $3.3 million or 32.4% to $6.9
million for the year ended December 31, 2002 from $10.2 million for the same
period in 2001. These costs include administrative services provided to CE
Generation, including executive, financial, legal, tax and other corporate
functions. The decrease in 2002 was primarily due to high legal costs in 2001
related to the disputes with Edison.
Depreciation and amortization decreased $0.8 million or 0.1% to $82.1 million
for the year ended December 31, 2002 from $82.9 million for the same period in
2001. This decrease was due to the discontinuation of goodwill
-14-
amortization, resulting from the adoption of SFAS No. 142, "Goodwill and
Intangible Assets," which totaled $9.6 million in 2001. This decrease was
partially offset by increased depreciation from capital additions.
Interest expense, decreased $5.2 million or 6.3% to $76.7 million for the year
ended December 31, 2002 from $81.9 million for the same period in 2001. The
decrease reflects lower debt balances.
The asset impairment in 2001 principally reflects the write-off of the book
value of a steam turbine. In 2001, the Company made the decision to dispose of
the turbine. The Company determined that the turbine, which had been held in
storage for possible use in new development projects, no longer had any
significant value.
The provision for income taxes decreased $19.0 million or 66.5% to $9.6 million
for the year ended December 31, 2002 from $28.5 million for the same period in
2001. The effective tax rate was 10.8% and 24.1% in 2002 and 2001, respectively.
During 2002, the Company made considerable progress on several significant
income tax examination matters for prior tax years, including percentage of
depletion, which resulted in a decrease in income tax expense of $15.1 million
in 2002.
The cumulative effect of the change in accounting principle in 2001 reflects the
Company's change in its accounting policy for major maintenance, overhaul and
well workover costs. These costs, which had historically been accounted for
using the deferral and accrual methods, are now expensed as incurred. The
cumulative effect of the change in accounting policy represents a January 1,
2001 write-off of prepaid and accrued major maintenance and well workover
balances of approximately $15.4 million, net of tax of $9.9 million.
RELATED PARTY TRANSACTIONS
Pursuant to the Administrative Services Agreement, MEHC provides certain
administrative and management services to CE Generation, and MEHC's executive,
financial, legal, tax and other corporate staff departments perform certain
services for CE Generation. Expenses incurred by MEHC and allocated to CE
Generation were estimated based on the individual services and expense items
provided. The allocated expenses in 2003, 2002 and 2001 were $0.2 million, $0.2
million and $3.4 million, respectively, and are included in general and
administrative expense. On August 1, 2002, the Administrative Services Agreement
between MEHC and CE Generation was amended to provide for a fixed monthly fee in
lieu of certain expenses, which were being allocated. The fixed fee, which was
retroactive to January 1, 2002 and ends December 2004, is $3.1 million annually
and is included in general and administrative expense.
The Company participates in multi-employer pension plans sponsored by MEHC. The
Company's contributions to the various plans was approximately $2.3 million,
$1.8 million and $1.6 million in 2003, 2002 and 2001, respectively.
On September 29, 2000, Salton Sea Power and CE Turbo entered into an agreement
to sell all available power from the Salton Sea V Project and CE Turbo Project
to El Paso. Under the terms of the agreement, El Paso purchased and sold
available power on behalf of Salton Sea Power and CE Turbo, into the California
Independent System Operator markets. The purchase price for the available power
was equivalent to the value actually received by El Paso for the sale of such
power, including renewable premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and CE Turbo
Project to El Paso. Under the terms of the agreement, at the option of Salton
Sea Power and CE Turbo, El Paso purchased all available power from the Salton
Sea V Project and CE Turbo Project based on day-ahead price quotes received from
El Paso.
On March 27, 2001 and May 1, 2001, the owners of the Imperial Valley Projects
entered into Transaction Agreements to sell available power to El Paso based on
percentages of the Dow Jones SP-15 Index. On June 22, 2001, the owners of the
Imperial Valley Projects (excluding Salton Sea Power and CE Turbo) ceased
selling
-15-
available power to El Paso and resumed power sales to Edison under both the SO4
Agreements and negotiated Power Purchase Agreements. Effective September 16,
2002 Salton Sea Power and CE Turbo entered into Transaction Agreements to sell
available power to El Paso at increased percentages of the Dow Jones SP-15
Index.
Pursuant to these agreements, sales to El Paso from the Company totaled $1.2
million, $8.9 million and $102.8 million in 2003, 2002 and 2001, respectively.
As of December 31, 2003 and 2002, accounts receivable from El Paso were $ - and
$1.4 million, respectively.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo began selling available power to 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; or (b) any other termination date mutually agreed to by the
parties. No such notice of termination has been given by either party. Pursuant
to this agreement, sales to TransAlta totaled $9.9 million in 2003. As of
December 31, 2003, accounts receivable from TransAlta were $1.6 million.
On January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 MWh of generation, a "Green Tag") associated with
up to 931,800 MWh of available generation of the Salton Sea V Project and CE
Turbo Project through December 31, 2008 to TransAlta Marketing at a price of
$10.00 per Green Tag. Salton Sea Power and CE Turbo expect to commence sales
under their agreement in July 2004.
Pursuant to the November 1, 1998 Amended and Restated Power Sales Agreements,
Salton Sea Power and CE Turbo are to provide Minerals with its full electrical
energy requirements at the market rates available to them, less wheeling costs.
Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled
$0.9 million, $0.4 million and $0.9 million for the years ended December 31,
2003, 2002 and 2001, respectively, and there were no sales to Minerals from CE
Turbo for the years ended December 31, 2003, 2002 or 2001. There were no
material accounts receivable balances at December 31, 2003 or 2002.
LIQUIDITY AND CAPITAL RESOURCES
Each of CE Generation's direct or indirect subsidiaries is organized as a legal
entity separate and apart from CE Generation and its other subsidiaries and
MEHC. Pursuant to separate project financing agreements, the assets of each
subsidiary (excluding the Power Resources Project and Yuma Project) 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 and Salton Sea Power Company); or (2) owning direct interests in the
subsidiaries that own interests in the foregoing projects and the Saranac
Project.
CE Generation generated cash flows from operations of $146.6 million for the
year ended December 31, 2003 compared with $197.5 million for the same period in
2002. The decrease was mainly due to reduced net income and the timing of
receipts of past due balances from Edison in 2002, partially offset by changes
in working capital.
The Imperial Valley Projects' only source of electricity revenue is payments
received pursuant to long-term power sales agreements with Edison, other than
Salton Sea V and CE Turbo Project revenues. Because of the Imperial Valley
Projects' dependence on Edison, if Edison fails to fulfill its obligations to
the projects, it could significantly impair the ability, of the Imperial Valley
Projects, to fund operating and maintenance expenses,
-16-
payments of interest and principal on the Securities, projected capital
expenditures and debt service reserve fund requirements.
The Power Resources Project sold electricity to TXU as a QF, 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 kWh, respectively. The Power
Resources PPA expired September 30, 2003. The Power Resources Project sold steam
to 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.
The agreement commenced October 1, 2003 and expires December 31, 2005. Under the
terms of the agreement, Power Resources sells its electricity and capacity to
ONEOK, as an EWG, for $1.75 per kW-month plus a variable operating and
maintenance fee of $.50 per 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.
On May 20, 2003, Salton Sea Power entered into a Power Sales Agreement with
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 6.1 cents per kWh. Sales
under the agreement commenced June 1, 2003 and will terminate May 31, 2013.
Cash flow used in investing activities was $14.7 million for the year ended
December 31, 2003 compared with cash used of $28.9 million for the same period
in 2002. Capital expenditures and major maintenance cash reserves are the
primary component of investing activities. The decrease was primarily due to the
use of $5.7 million of restricted cash for the Saranac Project major maintenance
outage in 2003 and the impact of the Stone & Webster settlement. Capital
expenditures for 2004 are expected to be approximately $33.3 million.
The Salton Sea V Project was constructed by Stone & Webster, pursuant to the
Salton Sea V Project EPC Contract. On March 7, 2002, 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.
Cash flow used in financing activities was $141.8 million for the year ended
December 31, 2003 compared with $159.8 million for the same period in 2002. The
changes in cash flows from financing activities reflect the scheduled debt
repayments; a $109.5 million distribution in 2003 and a $52.9 million reduction
to the debt service reserve account of Salton Sea Funding Corporation ("Funding
Corporation") in 2003. In May 2003, the previous $65.4 million Funding
Corporation debt service reserve letter of credit was replaced by a $32.7
million TransAlta letter of credit which expires on May 30, 2004, and a $32.7
million MEHC letter of credit which expires on June 6, 2006.
On January 30, 2004, Funding Corporation announced its election to redeem an
aggregate principal amount of approximately $136.4 million of its 7.475% Senior
Secured Series F Bonds due November 30, 2018, pro rata, at a redemption price of
100% of such aggregate outstanding principal amount, plus accrued interest to
the date of redemption. The trustee delivered a redemption notice to the holders
of the bonds on January 29, 2004. The record date for the redemption is February
15, 2004 and the redemption is expected to be completed on March 1, 2004.
Funding Corporation has made a demand on MEHC for the full amount remaining on
MEHC's guarantee of the Series F Bonds in order to fund the redemption. Upon the
expected payment under MEHC's guarantee, MEHC will no longer have any liability
with respect to its guarantee.
-17-
ENVIRONMENTAL LIABILITIES
The Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of: (i) increasing the lead time for the
construction of new facilities; (ii) significantly increasing the total cost of
new facilities; (iii) requiring modification of the Company's existing
facilities; (iv) increasing the risk of delay on construction projects; (v)
increasing the Company's cost of waste disposal; and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company's facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of December 31, 2003 and 2002, the
environmental liabilities recorded on the balance sheet were $4.6 million and
$5.3 million, respectively.
INFLATION
Inflation has not had a significant impact on CE Generation's cost structure.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has contractual obligations and commercial commitments that may
affect its financial condition. Contractual obligations to make future payments
primarily arise from long-term debt and fuel purchase agreements. In addition,
possible future payments arise from lines of credit and standby letters of
credit.
The following tables identify material obligations and commitments as of
December 31, 2003 (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
< 2-3 4-5 > 5
TOTAL 1 YEAR YEARS YEARS YEARS
---------- -------- -------- -------- --------
Contractual cash obligations:
Long-term debt(1)..................... $ 924,565 $201,915 $145,833 $142,533 $434,284
Other long-term obligations (2) ...... 394,904 66,088 139,830 151,450 37,536
---------- -------- -------- -------- --------
Total contractual cash obligations.. $1,319,469 $268,003 $285,663 $293,983 $471,820
========== ======== ======== ======== ========
(1) Total less than one year includes $136.4 million expected to be redeemed
on March 1, 2004.
(2) Other long-term obligations represent natural gas purchase agreements for
the Saranac Project as of December 31, 2003.
The Saranac Project has issued an irrevocable letter of credit to its gas
supplier in the amount of $15.4 million. The Saranac Project has $5.1 million
available in additional unused letters of credit. Annual fees related to these
letters of credit are calculated as 1.75% of the issued balance and .05% of the
unissued balance. CE Generation has issued a debt service reserve letter of
credit of approximately $24.2 million.
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OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any obligations which meet the definition of an
off-balance sheet arrangement and which have or are reasonably likely to have a
material effect on the financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations". 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.
In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which served to clarify guidance in FIN
46, "Consolidation of Variable Interest Entities" ("FIN 46") and provided
additional guidance surrounding the application of FIN 46. The adoption of FIN
46R as it relates to special purpose entities did not have a material effect on
the Company's financial position, results of operations or cash flows. The
Company will evaluate the provisions of FIN 46R related to non-special purpose
entities in the first quarter of 2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Note 2 to the consolidated financial statements in this annual report
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, contingent liabilities and income taxes. Actual
results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
by management in the preparation of the Consolidated Financial Statements.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than the Company's historical experience,
estimates of the recoverability of amounts due could be adversely affected.
Impairment of Long-Lived Assets
- -------------------------------
The Company's long-lived assets consist primarily of properties, plants and
equipment. Depreciation is computed using the straight-line method based on
economic lives. The Company believes the useful lives assigned to the
depreciable assets, which generally range from 3 to 30 years, are reasonable.
The Company periodically evaluates long-lived assets, including properties,
plants and equipment, when events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Upon the occurrence of a
triggering event, the carrying amount of a long-lived asset is reviewed to
assess whether the recoverable amount has declined below its carrying amount.
The recoverable amount is the estimated net future cash flows that the Company
expects to recover from the future use of the asset, undiscounted and without
interest, plus the asset's residual value on disposal. Where the recoverable
amount of the long-lived asset is less than the carrying value, an impairment
loss would be recognized to write down the asset to its fair value that is based
on discounted estimated cash flows from the future use of the asset.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which establishes the accounting for acquired
goodwill and other intangible assets, and provides that goodwill and
indefinite-lived intangible assets will not be amortized, but will be tested for
impairment on an annual basis. The Company's related amortization consists
solely of goodwill amortization. In accordance with SFAS 142, the Company
completed its annual goodwill impairment test during the fourth quarter of 2003,
primarily using a discounted cash flow methodology. No impairment was indicated
as a result of the impairment tests.
Contingent Liabilities
- ----------------------
The Company establishes reserves for estimated loss contingencies, such as
environmental, legal and income taxes, when it is management's assessment that a
loss is probable and the amount of the loss can be reasonably
-19-
estimated. Revisions to contingent liabilities are reflected in operations in
the period in which different facts or information become known or circumstances
change that affect the previous assumptions with respect to the likelihood or
amount of loss. Reserves for contingent liabilities are based upon management's
assumptions and estimates, and advice of legal counsel or other third parties
regarding the probable outcomes of any matters. Should the outcomes differ from
the assumptions and estimates, revisions to the estimated reserves for
contingent liabilities would be required.
Income Taxes
- ------------
CE Generation and its subsidiaries file a consolidated federal tax return.
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement and tax bases of assets and liabilities using
estimated tax rates in effect for the year in which the differences are expected
to reverse.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
At December 31, 2003 and 2002 respectively, the Company had fixed-rate long-term
debt of $802.0 million and $848.1 million with a fair value of $826.8 million
and $778.2 million. These instruments are fixed-rate and therefore do not expose
the Company to the risk of earnings loss due to changes in market interest
rates. However, the fair value of these instruments would decrease by
approximately $44.7 million and $49.2 million if interest rates were to increase
by 10% from their levels at December 31, 2003 and 2002, respectively. In
general, a decrease in fair value would impact earnings and cash flows only if
the Company were to reacquire all or a portion of these instruments prior to
their maturity.
At December 31, 2003 and 2002, respectively, the Company had floating-rate
obligations of $122.6 million and $163.1 million, which exposes the Company to
the risk of increased interest expense in the event of increases in short-term
interest rates. The Company has entered into interest rate swap agreements for
the purpose of completely offsetting these interest rate fluctuations. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the instruments. At December 31, 2003 and 2002, respectively,
these interest rate swaps had an aggregate notional amount of $122.6 million and
$163.1 million, which the Company could terminate at a cost of approximately
$13.9 million and $21.0 million. A decrease of 10% in the December 31, 2003 and
2002 level of interest rates would increase the cost of terminating the swaps by
approximately $3.2 million and $4.3 million, respectively. These termination
costs would impact the Company's earnings and cash flows only if all or a
portion of the swap instruments were terminated prior to their expiration.
-20-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report.................................................22
Consolidated Balance Sheets..................................................23
Consolidated Statements of Operations........................................24
Consolidated Statements of Members' Equity...................................25
Consolidated Statements of Cash Flows........................................26
Notes to Consolidated Financial Statements...................................27
-21-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members'
CE Generation, LLC
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of CE Generation,
LLC and subsidiaries (collectively, the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations and other
comprehensive income, members' equity, and cash flows for each of the three
years in the period ended December 31, 2003. Our audits also included the
consolidated financial statement schedule listed in Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CE Generation, LLC and subsidiaries
as of December 31, 2003 and 2002 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements the Company
changed its accounting policy for asset retirement obligations, in 2003, the
Company changed its accounting policy for goodwill and other intangible assets
in 2002 and the Company changed its accounting policy for major maintenance,
overhaul and well workover costs in 2001.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 20, 2004
-22-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF DECEMBER 31,
----------------------------
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 33,853 $ 43,706
Restricted cash .................................................. 7,297 60,238
Trade accounts receivable, net of allowance of $6,268 and $6,496.. 49,434 62,138
Trade accounts receivable from affiliate ......................... 1,564 1,416
Prepaid expenses and other current assets ........................ 6,104 5,600
Income tax receivable ............................................ - 4,343
Inventories ...................................................... 25,265 25,049
Note receivable from related party and other due from affiliates.. 137,034 -
----------- -----------
Total current assets ........................................... 260,551 202,490
----------- -----------
Restricted cash .................................................... 6,419 14,299
Properties, plants, contracts and equipment, net ................... 1,167,359 1,234,408
Goodwill ........................................................... 265,897 265,897
Note receivable from related party ................................. - 137,789
Deferred financing charges and other assets ........................ 8,516 10,153
----------- -----------
TOTAL ASSETS ....................................................... $ 1,708,742 $ 1,865,036
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 1,262 $ 667
Accrued interest ................................................. 3,156 3,382
Interest rate swap liability ..................................... 13,873 21,023
Other accrued liabilities ........................................ 31,893 36,551
Income tax payable ............................................... 1,138 -
Due to affiliates ................................................ - 406
Current portion of long-term debt ................................ 201,915 86,656
----------- -----------
Total current liabilities ...................................... 253,237 148,685
----------- -----------
Project loans ...................................................... 100,473 122,573
Salton Sea notes and bonds ......................................... 298,377 463,591
Senior secured bonds ............................................... 323,800 338,400
Deferred income taxes .............................................. 257,045 248,033
Other long-term liabilities ........................................ 8,039 1,480
----------- -----------
Total liabilities ................................................ 1,240,971 1,322,762
----------- -----------
Minority interest .................................................. 48,886 52,379
Commitments and contingencies (Note 9)
Members' equity .................................................... 425,122 499,748
Accumulated other comprehensive loss ............................... (6,237) (9,853)
----------- -----------
Total members' equity ............................................ 418,885 489,895
----------- -----------
TOTAL LIABILITIES AND MEMBERS' EQUITY .............................. $ 1,708,742 $ 1,865,036
=========== ===========
The accompanying notes are an integral part of these financial statements.
-23-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(In thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
--------- ---------- ---------
REVENUE:
Operating revenue ............................................... $ 483,397 $ 500,729 $ 552,335
Interest and other income ....................................... 4,025 9,353 13,503
--------- --------- ---------
Total revenue ................................................. 487,422 510,082 565,838
--------- --------- ---------
COSTS AND EXPENSES:
Fuel ............................................................ 118,334 121,736 121,022
Plant operations ................................................ 129,815 134,065 134,357
General and administrative ...................................... 4,416 6,899 10,205
Depreciation and amortization ................................... 87,665 82,055 82,911
Interest expense ................................................ 69,421 76,697 81,869
Asset impairment (Note 3) ....................................... 3,862 - 17,124
--------- --------- ---------
Total costs and expenses ...................................... 413,513 421,452 447,488
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES .......................... 73,909 88,630 118,350
Provision for income taxes ...................................... 15,721 9,559 28,538
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST ................................... 58,188 79,071 89,812
Minority interest ............................................... 20,847 20,757 15,618
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.. 37,341 58,314 74,194
Cumulative effect of change in accounting
principle, net of tax (Note 2) ................................ (2,467) - (15,386)
--------- --------- ---------
NET INCOME ........................................................ $ 34,874 $ 58,314 $ 58,808
========= ========= =========
OTHER COMPREHENSIVE INCOME:
Cumulative effect of change in accounting
principle, net of tax (Note 2) ................................ - - (5,954)
Unrealized gain (loss) on cash flow hedges, net of tax
of $(1,999), $1,438 and $1,161 ................................ 3,616 (2,157) (1,742)
--------- --------- ---------
COMPREHENSIVE INCOME .............................................. $ 38,490 $ 56,157 $ 51,112
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-24-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(In thousands)
ACCUMULATED
OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME(LOSS) TOTAL
--------- ------------- ---------
BALANCE, JANUARY 1, 2001 ................................................ $ 438,915 $ - $ 438,915
Distributions ......................................................... (22,650) - (22,650)
Net income ............................................................ 58,808 - 58,808
Other comprehensive income:
Initial implementation of SFAS 133 designated cash flow hedges, net
of tax of $(3,969) ................................................ - (5,954) (5,954)
Fair value adjustment on cash flow hedges, net of tax of $(1,161) ... - (1,742) (1,742)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 .............................................. 475,073 (7,696) 467,377
Distributions ......................................................... (33,639) - (33,639)
Net income ............................................................ 58,314 - 58,314
Other comprehensive income:
Fair value adjustment on cash flow hedges, net of tax of $(1,438) ... - (2,157) (2,157)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 .............................................. 499,748 (9,853) 489,895
Distributions ......................................................... (109,500) - (109,500)
Net income ............................................................ 34,874 - 34,874
Other comprehensive income:
Fair value adjustment on cash flow hedges, net of tax of $1,999 ..... - 3,616 3,616
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 .............................................. $ 425,122 $(6,237) $ 418,885
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
-25-
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 34,874 $ 58,314 $ 58,808
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization .............................................. 87,665 82,055 82,911
Provision for deferred income taxes ........................................ 8,657 10,490 3,377
Distributions to minority interest in excess of related income ............. (5,029) (5,222) (5,163)
Cumulative effect of change in accounting principle, net of tax ............ 2,467 - 15,386
Asset impairment/abandonment ............................................... 3,862 - 17,124
Amortization of deferred financing costs ................................... 1,488 1,824 1,836
Changes in other items:
Accounts receivable, net ................................................... 12,556 65,171 (39,149)
Inventories ................................................................ (216) (1,344) 3,719
Due to/from affiliates ..................................................... (1,057) 538 (2,260)
Accounts payable and other accrued liabilities ............................. (2,584) (12,397) (4,722)
Other assets ............................................................... 3,926 (1,882) (4,381)
--------- --------- ---------
Net cash flows from operating activities ................................. 146,609 197,547 127,486
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of warranty settlement ............................. (22,534) (28,640) (33,219)
Decrease (increase) in restricted cash ....................................... 7,880 (290) (4,391)
--------- --------- ---------
Net cash flows from investing activities ................................... (14,654) (28,930) (37,610)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of project loans ................................................... (40,568) (35,864) (31,201)
Repayment of Salton Sea notes and bonds ...................................... (28,087) (28,572) (23,658)
Repayment of Senior Secured bonds ............................................ (18,000) (20,600) (12,600)
Proceeds from related party note ............................................. 1,406 2,107 632
Distributions ................................................................ (109,500) (33,639) (22,100)
Decrease (increase) in restricted cash ....................................... 52,941 (43,213) (2,231)
--------- --------- ---------
Net cash flows from financing activities ................................... (141,808) (159,781) (91,158)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................ (9,853) 8,836 (1,282)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 43,706 34,870 36,152
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 33,853 $ 43,706 $ 34,870
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................................ $ 66,653 $ 74,067 $ 79,211
========= ========= =========
Income taxes paid ............................................................ $ 1,614 $ 1,199 $ 21,928
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-26-
CE GENERATION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
MidAmerican Energy Holdings Company ("MEHC") completed a strategic restructuring
in conjunction with its acquisition of MHC Inc. (formerly MidAmerican Energy
Holdings Company) in which MEHC's common stock interests in Magma Power Company,
FSRI Holdings, Inc. ("FSRI") and California Energy Development Corporation, and
their subsidiaries (which own the geothermal and natural gas-fired combined
cycle cogeneration facilities described below), were contributed by MEHC to the
newly created CE Generation, LLC ("CE Generation" or the "Company"). This
restructuring was completed in February 1999.
On March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE
Generation to El Paso CE Generation Holding Company ("El Paso").
On January 29, 2003, TransAlta USA Inc. ("TransAlta"), a wholly owned subsidiary
of TransAlta Corporation, purchased El Paso's 50% interest in CE Generation.
-27-
General
- -------
CE Generation is engaged in the independent power business. The following table
sets out information concerning CE Generation's projects:
PURCHASE
FACILITY NET POWER
CAPACITY NET MW AGREEMENT
OPERATING PROJECT (MW) OWNED LOCATION EXPIRATION
- ------------------------------------------ ------------ ------ ---------- -----------
GEOTHERMAL FACILITIES:
Salton Sea Projects
Salton Sea I.............................. 10 10 California 2017
Salton Sea II............................. 20 20 California 2020
Salton Sea III............................ 50 50 California 2019
Salton Sea IV............................. 40 40 California 2026
Salton Sea V.............................. 49 49 California Varies
--- ---
Total Salton Sea Projects................. 169 169
--- ---
Partnership Projects
Vulcan.................................... 34 34 California 2016
Elmore.................................... 38 38 California 2018
Leathers.................................. 38 38 California 2019
Del Ranch................................. 38 38 California 2019
CE Turbo.................................. 10 10 California Varies
--- ---
Total Partnership Projects................ 158 158
--- ---
Total geothermal facilities............... 327 327
--- ---
GAS FACILITIES:
Saranac................................... 240 180 New York 2009
Power Resources........................... 212 212 Texas 2005
Yuma...................................... 50 50 Arizona 2024
--- ---
Total gas facilities...................... 502 442
--- ---
TOTAL OPERATING PROJECTS.................. 829 769
=== ===
Salton Sea I, II, III, IV and V are referred as the Salton Sea Projects. Vulcan,
Elmore, Leathers, Del Ranch, and CE Turbo are referred to as the Partnership
Projects. The Salton Sea Projects and the Partnership Projects are collectively
referred to as the Imperial Valley Projects. Saranac, Power Resources and Yuma
are collectively referred to as the Gas Projects.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
These consolidated financial statements of CE Generation reflect the
consolidated financial statements of Magma Power Company and subsidiaries, FSRI
and subsidiaries and Yuma Cogeneration Associates, each a wholly-owned
subsidiary. All intercompany transactions and balances have been eliminated in
consolidation.
Based on the nature of the Company's products, production and distribution
processes, types of customers and the regulatory environment and the economic
characteristics of its operations, the Company has determined that it operates
in one reportable segment.
-28-
Reclassifications
- -----------------
Certain amounts in the fiscal 2002 and 2001 consolidated financial statements
and supporting note disclosures have been reclassified to conform to the fiscal
2003 presentation. Such reclassification did not impact previously reported net
income or retained earnings.
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
CE Generation considers all investment instruments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash is not
considered a cash equivalent.
Restricted Cash
- ---------------
The current restricted cash balance is composed of debt service funds that are
legally restricted as to their use and require the maintenance of specific
minimum balances equal to the next debt service payment. The non-current
restricted cash balance is composed of restricted accounts for capital
expenditures and major maintenance expenditures.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is based on the Company's assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is deterioration of a major customer's credit worthiness or
actual defaults are higher than the Company's historical experience, estimates
of the recoverability of amounts due it could be adversely affected.
Inventories
- -----------
Inventories consist of spare parts and supplies and are valued at the lower of
cost or market. Cost for large replacement parts is determined using the
specific identification method. For the remaining supplies, cost is determined
using the weighted average cost method.
Major Maintenance, Overhaul and Well Rework Costs
- -------------------------------------------------
CE Generation has changed its accounting policy for major maintenance, overhaul
and well rework costs. These costs, which had historically been accounted for
using deferral and accrual methods, are now expensed as incurred. The new policy
went into effect January 1, 2001 and the Company recorded a cumulative effect of
this change of approximately $15.4 million, net of tax of approximately $9.9
million.
Properties, Plants, Contracts and Equipment, Net
- ------------------------------------------------
Properties, plants and equipment are recorded at historical cost. The cost of
major additions and betterments are capitalized, while replacements,
maintenance, and repairs that do not improve or extend the lives of the
respective assets are expensed.
-29-
Impairment of Long-Lived Assets
- -------------------------------
The Company's long-lived assets consist primarily of properties, plants,
contracts and equipment. Depreciation of the operating power plant costs, net of
salvage value if applicable, is computed using the straight-line method based on
economic lives. The Company believes the useful lives assigned to the
depreciable assets, which generally range from 3 to 30 years, are reasonable.
Acquired power sales agreements are amortized separately on a straight-line
method over the remaining contract periods which have ranged from 7 to 30 years.
The Company periodically evaluates long-lived assets, including properties,
plants, contracts and equipment, when events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. Upon
the occurrence of a triggering event, the carrying amount of a long-lived asset
is reviewed to assess whether the recoverable amount has declined below its
carrying amount. The recoverable amount is the estimated net future cash flows
that the Company expects to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value that is based on discounted estimated cash flows from the future use
of the asset.
As a result of these impairment tests, the company wrote down $3.8 million of
equipment in 2003 and $17.1 million in 2001, $15 million of which relates to a
steam turbine and $2.1 million in other equipment.
Goodwill
- --------
On January 1, 2002, CE Generation adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes the accounting for acquired goodwill and other intangible assets,
and provides that goodwill and indefinite-lived intangible assets will not be
amortized, but will be tested for impairment on an annual basis. CE Generation's
related amortization consisted solely of goodwill amortization, which has no
income tax effect. Following is a reconciliation of net income as originally
reported for the years ended December 31, 2003, 2002 and 2001, to adjusted net
income as if SFAS 142 was effective for all years (in thousands):
2003 2002 2001
------- ------- -------
Reported net income ..... $34,874 $58,314 $58,808
Goodwill amortization ... - - 9,589
------- ------- -------
Adjusted net income ..... $34,874 $58,314 $68,397
======= ======= =======
The Company conducts its annual review pursuant to SFAS 142 during the fourth
quarter of 2003 using a discounted cash flow methodology. No impairment was
indicated as a result of the assessment.
Revenue Recognition
- -------------------
CE Generation recognizes revenue and related accounts receivable from sales of
electricity on an accrual basis. All of CE Generation's sales of electricity
(except for the Salton Sea V and CE Turbo Projects) are under long-term power
purchase contracts.
CE Generation's sales of electricity from the Imperial Valley Projects,
comprised approximately 39%, 37%, and 43%, respectively, of 2003, 2002, and 2001
electricity and steam revenues. Of these sales, approximately 90%, 95% and 59%
were to Southern California Edison ("Edison") in 2003, 2002 and 2001,
respectively. Sales of electricity from the Saranac Project comprised
approximately 39%, 37% and 31%, respectively, of the 2003, 2002 and 2001
electricity and steam revenues. Of these sales, approximately 98% were to New
York State Electric and Gas ("NYSE&G"). Sales of electricity from the Power
Resources Project comprised approximately 16%, 19% and 16%, respectively, of the
2003, 2002 and 2001 electricity and steam revenues. Of these sales approximately
97% were to TXU Generation Company LP ("TXU"). The Power Resources PPA with TXU
expired September 30, 2003. Accounts receivable, approximately $23.8 million of
which are from Edison and approximately $16.9 million from NYSE&G are primarily
uncollateralized receivables from long-term power purchase contracts.
-30-
Deferred Income Taxes
- ---------------------
CE Generation and its subsidiaries file a consolidated federal tax return.
Deferred tax assets and liabilities are recognized based on the difference
between the financial statement and tax bases of assets and liabilities using
estimated tax rates in effect for the year in which the differences are expected
to reverse.
Financial Instruments
- ---------------------
Effective January 1, 2001, the Company adopted SFAS 133/138, "Accounting for
Derivative Instruments and Hedging Activities", which requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. As
a result of the adoption of SFAS 133/138, CE Generation recorded the fair value
of the interest rate swap agreements at January 1, 2001, which was approximately
$6.0 million, net of tax of approximately $4.0 million. These interest rate swap
agreements are considered cash flow hedges and therefore the offset is recorded
in accumulated other comprehensive income.
CE Generation utilizes swap agreements to manage market risks and reduce its
exposure resulting from fluctuation in interest rates. For interest rate swap
agreements, the net cash amounts paid or received on the agreements are accrued
and recognized as an adjustment to interest expense. CE Generation's practice is
not to hold or issue financial instruments for trading purposes. These
instruments are either exchange traded or with counterparties of high credit
quality; therefore, the risk of nonperformance by the counterparties is
considered to be negligible. Fair values of financial instruments are estimated
based on quoted market prices for debt issues actively traded or on market
prices of similar instruments and/or valuation techniques using market
assumptions.
NEW ACCOUNTING PRONOUNCEMENTS
On 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 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's review identified legal retirement obligations for landfill and
plant abandonment costs. The Company used an expected cash flow approach to
measure the obligations. The following table reflects liability amounts as if
this statement had been applied during all periods (in thousands):
2003 2002
------ ----------
(Proforma)
Plant abandonment ...... $4,026 $3,798
Landfill abandonment ... $4,013 $3,663
-31-
Following is a reconciliation of net income as originally reported for the years
ended December 31, 2003, 2002 and 2001, to adjusted net income as if this
statement had been applied to all periods (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
------- -------- --------
Reported net income ................................. $34,874 $ 58,314 $ 58,808
Accretion and amortization expense .................. - (497) (469)
Cumulative effect of change in accounting principle.. 2,467 - -
------- -------- --------
Adjusted net income ................................. $37,341 $ 57,817 $ 58,339
======= ======== ========
The plant abandonment had no previously recorded liability. The landfill
abandonment had a previously recorded liability of $1.5 million.
In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which served to clarify guidance in FIN
46, "Consolidation of Variable Interest Entities" ("FIN 46") and provided
additional guidance surrounding the application of FIN 46. The adoption of FIN
46R as it relates to special purpose entities did not have a material effect on
the Company's financial position, results of operations or cash flows. The
Company will evaluate the provisions of FIN 46R related to non-special purpose
entities in the first quarter of 2004.
3. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT, NET AND INTANGIBLE ASSETS
Properties, plants, contracts and equipment comprise the following at December
31 (in thousands):
2003 2002
----------- ------------
Properties, plants, contracts and equipment, net:
Power plants ..................................... $ 1,297,186 $ 1,288,281
Wells and resource development ................... 190,079 180,151
Power sales agreements ........................... 338,716 338,716
Licenses and equipment ........................... 50,500 50,501
----------- -----------
Total operating assets ........................... 1,876,481 1,857,649
Accumulated depreciation and amortization ........ (709,122) (623,241)
----------- -----------
Properties, plants, contracts and equipment, net . $ 1,167,359 $ 1,234,408
=========== ===========
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
EPC Contract"). On March 7, 2002, 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.
-32-
Intangible Assets
- -----------------
The following tables summarize the acquired intangible assets as of December 31
(in thousands):
2003
---------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts ....... $338,716 $220,420
Patented Technology ............ 46,290 17,314
-------- --------
Total .......................... $385,006 $237,734
======== ========
2002
---------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized Intangible Assets:
Power Purchase Contracts ....... $338,716 $203,685
Patented Technology ............ 46,290 15,385
-------- --------
Total .......................... $385,006 $219,070
======== ========
Amortization expense on acquired intangible assets was $18.7 million, $18.3
million and $18.1 million for the years ended December 31, 2003, 2002 and 2001,
respectively. CE Generation expects amortization expense on acquired intangible
assets to be $15.8 million for each of the five succeeding fiscal years.
4. PROJECT LOANS
Each of CE Generation's direct or indirect subsidiaries is organized as a legal
entity separate and apart from CE Generation and its other subsidiaries and
MEHC. Pursuant to separate project financing agreements, the assets of each
subsidiary (excluding the Power Resources Project and the Yuma Project) 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", for purposes
of the immediately preceding two sentences, 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 and the Saranac Project.
The Power Resources Project had project financing debt with a consortium of
banks with interest and principal due quarterly over a 15-year period, beginning
March 31, 1989. The original principal carried a variable interest rate based on
the London Interbank Offer Rate ("LIBOR") with a .85% interest margin through
the 5th anniversary of the loan, a 1.00% interest margin from the 5th
anniversary through the 12th anniversary of the loan and a 1.25% interest margin
from the 12th anniversary through the end of the loan. The outstanding $21.7
million of project financing debt, at December 31, 2002, was repaid during 2003.
Effective June 5, 1989, in connection with the project financing debt, the Power
Resources Project entered into an interest rate swap agreement with the lender
as a means of hedging floating interest rate exposure related to its 15-year
term loan. The swap agreement was for initial notional amounts of $55.0 million
and $110.0 million,
-33-
declining in correspondence with the principal balances, and effectively fixed
the interest rates at 9.385% and 9.625%, respectively, excluding the interest
margin. The swap agreements were settled in cash based on the difference between
a fixed and floating (index based) price for the underlying debt. The interest
rate swap agreement was terminated in connection with the repayment of the
project financing debt on September 30, 2003. The notional values of these
financial instruments were $21.7 million at December 31, 2002. The fair value of
the swap as of December 31, 2002 was $1.1 million and was included in interest
rate swap liability in the balance sheet.
The interest rate on the project financing debt was increased by payments under
a Compensation Agreement included in the Power Resources Project term loan. The
Compensation Agreement, which entitled two of the term lenders to receive
quarterly payments equivalent to a percentage of the Power Resources Project's
discretionary cash flow as separately defined in the agreement, became effective
for a 13-year period that was scheduled to end on September 30, 2003. The Power
Resources Project recorded additional interest expense of $1.2 million, $1.3
million and $1.1 million for the years ended December 31, 2003, 2002 and 2001,
respectively, related to amounts owed under the Compensation Agreement. The
Compensation Agreement was terminated with the repayment of the project
financing debt.
In October 1994, Saranac Power Partners L.P. ("Saranac Partnership") signed a
14-year note payable agreement with a lender for an initial principal amount of
$204.6 million. Under the terms of the note payable agreement, interest rate
alternatives include an option to use a Eurodollar rate or the lender's base
rate. Each option includes an interest margin in addition to the applicable rate
selected. The selected interest rate plus interest margin at December 31, 2003,
2002, and 2001 was 2.27%, 2.92% and 3.72%, respectively.
Effective October 7, 1994, the Saranac Partnership entered into an interest rate
swap agreement with the lender as a means of hedging floating interest rate
exposure related to its 14-year note payable. The swap agreement was an initial
notional amount of $204.6 million and effectively fixes the interest rate at
8.185%, which increased to 8.31% in October 2001 and will increase to 8.56% in
October 2005. The Saranac Partnership is exposed to credit loss in the event of
nonperformance by the lender under the interest rate swap agreement. However,
the Saranac Partnership does not anticipate nonperformance by the lender. The
fair value of the swap as of December 31, 2003 and 2002 was $13.9 million and
$19.9 million, respectively, and is included in interest rate swap liability in
the balance sheet.
Annual repayments of the note payable for the years ending December 31 are as
follows (in thousands):
AMOUNT
--------
2004 .......... $ 22,100
2005 .......... 26,192
2006 .......... 31,104
2007 .......... 34,378
2008 .......... 8,799
--------
Total ......... $122,573
========
The note agreements are collateralized by all of the Saranac Partnership's
assets. The Saranac Partnership is restricted by the terms of the note payable
agreement from making distributions or withdrawing any capital accounts without
the consent of the lender. Under the terms of the note payable agreement,
distributions may be made to the partners in accordance with the terms of the
Saranac Partnership Agreement. The note payable agreement also requires the
Saranac Partnership to maintain certain covenants. The Saranac Partnership was
in compliance with these requirements at December 31, 2003.
The Saranac Partnership has issued an irrevocable letter of credit to its gas
supplier in the amount of approximately $15.4 million. The Saranac Partnership
has approximately $5.1 million available in additional
-34-
unissued letters of credit. Annual fees related to these letters of credit are
calculated as 1.75% of the issued balance and 0.5% of the unissued balance.
5. SALTON SEA NOTES AND BONDS
The Salton Sea Funding Corporation (the "Funding Corporation"), a wholly-owned
indirect subsidiary of CE Generation, has issued debt securities as follows (in
thousands):
SENIOR DECEMBER 31,
SECURED -----------------------
ISSUED DATE SERIES FINAL MATURITY DATE RATE 2003 2002
- ----------- -------- ------------------- ---- -------- ------------
July 21, 1995....... B Bonds May 30, 2005 7.37% $ 41,662 $ 56,662
July 21, 1995....... C Bonds May 30, 2010 7.84% 102,014 109,250
June 20, 1996....... E Bonds May 30, 2011 8.30% 43,322 46,322
October 13, 1998.... F Bonds November 30, 2018 7.48% 276,594 279,444
--------- ---------
$463,592 $491,678
======== ========
Principal and interest payments are made in semi-annual installments. The Salton
Sea Notes and Bonds are non-recourse to CE Generation.
The net revenues, equity distributions and royalties from the Salton Sea
Projects and the Partnership Projects are used to pay principal and interest
payments on outstanding senior secured bonds issued by Funding Corporation, the
final series of which is scheduled to mature in November 2018. Funding
Corporation debt is guaranteed by certain subsidiaries of Magma Power Company
and secured by the capital stock of certain subsidiaries of CE Generation. The
proceeds of Funding Corporation debt were loaned by Funding Corporation pursuant
to loan agreements and notes (the "Imperial Valley Project Loans") to certain
subsidiaries of Magma Power Company and used for construction of certain
Imperial Valley Projects, refinancing of certain indebtedness and other
purposes. Debt service on the Imperial Valley Project Loans is used to repay
debt service on Funding Corporation debt. The Imperial Valley Project Loans and
the guarantees of Funding Corporation debt are secured by substantially all of
the assets of the guarantors, including the Imperial Valley Projects, and by the
equity interests in the guarantors.
On October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285 million aggregate amount of 7.475% Senior Secured Series F
Bonds due November 30, 2018. A portion of the proceeds was used to fund the cost
of construction of, and was advanced to, the Zinc Recovery Project, which is
indirectly 100% owned by Salton Sea Minerals Corp., a MEHC affiliate not owned
by CE Generation. The direct and indirect owners of the Zinc Facility (the "Zinc
Guarantors", which include Salton Sea Minerals Corp. and Calenergy Minerals LLC
("Minerals")) are among the guarantors of the Funding Corporation debt. In
connection with the divestiture of 50% of CE Generation, MEHC guaranteed the
payment by the Zinc Guarantors of a specified portion of the scheduled debt
service on and certain prepayments of the Imperial Valley Project Loans,
including the current principal amount of approximately $136.4 million, which is
included in note receivable to related party in the accompanied consolidated
balance sheet and associated interest.
On January 30, 2004, Funding Corporation announced its election to redeem an
aggregate principal amount of approximately $136.4 million of its 7.475% Senior
Secured Series F Bonds due November 30, 2018, pro rata, at a redemption price of
100% of such aggregate outstanding principal amount, plus accrued interest to
the date of redemption. The trustee delivered a redemption notice to the holders
of the bonds on January 29, 2004. The record date for the redemption is February
15, 2004 and the redemption is expected to be completed on March 1, 2004.
Funding Corporation has made a demand on MEHC for the full amount remaining on
MEHC's guarantee of the Series F Bonds in order to fund the redemption. Upon the
expected payment under MEHC's guarantee, MEHC will no longer have any liability
with respect to its guarantee.
-35-
In May 2003, the previous $65.4 million Funding Corporation debt service reserve
letter of credit was replaced by a $32.7 million TransAlta letter of credit
which expires on May 30, 2004, and a $32.7 million MEHC letter of credit which
expires on June 6, 2006.
These new 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 2003, CE Generation distributed a total
of $109.5 million to MEHC and TransAlta.
Annual repayments of the Salton Sea Notes and Bonds for the years ending
December 31 are as follows (in thousands):
AMOUNT
--------
2004 .......... $165,215
2005 .......... 28,620
2006 .......... 25,917
2007 .......... 25,091
2008 .......... 28,065
Thereafter .... 190,684
--------
Total ......... $463,592
========
CE Generation's ability to obtain distributions from its investment in the
Salton Sea Projects and Partnership Projects is subject to the following
conditions:
o the depositary accounts for the Salton Sea Notes and Bonds must be
fully funded;
o there cannot have occurred and be continuing any default or event of
default under the Salton Sea Notes and Bonds;
o the historical debt service coverage ratio of Funding Corporation for
the prior four fiscal quarters must be at least 1.5 to 1.0; and
o there must be sufficient geothermal resources to operate the Salton
Sea Projects at their required levels.
6. SENIOR SECURED BONDS
On March 2, 1999, CE Generation issued $400 million of 7.416% Senior Secured
Bonds due 2018. These securities are senior secured debt which rank equally in
right of payment with CE Generation's other senior secured debt permitted under
the indenture for the Securities, share equally in the collateral with CE
Generation's other senior secured debt permitted under the indenture for the
Securities, and rank senior to any of CE Generation's subordinated debt
permitted under the indenture for the Securities. These securities are
effectively subordinated to the existing project financing debt and all other
debt of CE Generation's consolidated subsidiaries.
The Senior Secured Bonds are primarily secured by the following collateral:
o all available cash flow (as defined);
o a pledge of 99% of the equity interests in Salton Sea Power, LLC
("Salton Sea Power") and all of CE Generation's equity interests in
its other consolidated subsidiaries;
o a pledge of all of the capital stock of SECI Holding Inc.;
-36-
o a grant of a lien on and security interest in the depository accounts;
and
o to the extent possible, a grant of a lien on and security interest in
all of CE Generation's other tangible and intangible property, to the
extent assignable.
CE Generation has issued a debt service reserve letter of credit in the amount
of $24.3 million.
Annual repayments of the Senior Secured Bonds for the years ending December 31
are as follows (in thousands):
AMOUNT
--------
2004 .......... $ 14,600
2005 .......... 14,800
2006 .......... 19,200
2007 .......... 18,000
2008 .......... 28,200
Thereafter .... 243,600
--------
Total ......... $338,400
========
7. INCOME TAXES
Provision for income tax is comprised of the following at December 31 (in
thousands):
2003 2002 2001
-------- -------- --------
Current:
Federal ....... $ 5,161 $ (873) $ 20,412
State ......... 1,903 (58) 4,749
-------- -------- --------
7,064 (931) 25,161
-------- -------- --------
Deferred:
Federal ....... 6,410 8,991 3,762
State ......... 2,247 1,499 (385)
-------- -------- --------
8,657 10,490 3,377
-------- -------- --------
Total provision $ 15,721 $ 9,559 $ 28,538
======== ======== ========
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes follows:
2003 2002 2001
----- ----- -----
Federal statutory rate ........................ 35.0% 35.0% 35.0%
Increases (reductions) in taxes resulting from:
Percentage depletion .......................... (3.7) (18.1) (5.9)
Investment and energy tax credits ............. (1.3) (2.3) (1.7)
Goodwill amortization ......................... - - 2.8
State taxes, net of federal benefit ........... 3.6 3.3 2.4
Minority interest ............................. (9.9) (8.2) (4.6)
Other items, net .............................. (2.4) 1.1 (3.9)
----- ----- -----
Effective tax rate ............................ 21.3% 10.8% 24.1%
===== ===== =====
-37-
During 2002, the Company made considerable progress on several significant
income tax examination matters for prior tax years, including percentage of
depletion, which resulted in a decrease in income tax expense of $15.1 million
in 2002.
Income tax expense is only provided for the taxable earnings of the Company,
including its partnership interests. No provision for income taxes is provided
in the accompanying consolidated financial statements for the minority interests
share of the partnership earnings.
Deferred tax liabilities (assets) comprise the following at December 31 (in
thousands):
2003 2002
--------- ----------
Deferred tax liabilities:
Properties, plant, contracts and equipment ......... $ 274,436 $ 262,921
Other .............................................. 1,661 1,498
--------- ---------
Total deferred tax liabilities ................... 276,097 264,419
--------- ---------
Deferred tax assets:
Accruals not currently deductible for tax purposes.. (6,375) (4,919)
General business tax credits ....................... (12,677) (11,467)
--------- ---------
Total deferred tax assets ........................ (19,052) (16,386)
--------- ---------
Net deferred tax liabilities ......................... $ 257,045 $ 248,033
========= =========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts, which CE
Generation could realize in a current transaction.
The methods and assumptions used to estimate fair value are as follows:
Note receivable from related party--The fair value of the note receivable from
related party is estimated based on the quoted market price of the corresponding
debt issue.
Debt instruments - The fair value of all debt instruments has been estimated
based upon quoted market prices as supplied by third-party broker dealers, where
available, or at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risks. The Company is
unable to estimate a fair value for the project loans as there are no quoted
market prices available.
Other financial instruments - All other financial instruments of a material
nature are short-term and the fair value approximates the carrying amount.
-38-
The carrying amounts in the table below are included in the consolidated balance
sheets under the indicated captions (in thousands):
2003 2002
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- --------- ----------
Financial Assets:
Note receivable from related party... $136,383 $141,821 $137,789 $126,765
Financial Liabilities:
Interest rate swaps.................. 13,873 13,873 21,023 21,023
Project loans........................ 122,573 122,572 163,142 163,142
Salton Sea notes and bonds........... 463,591 483,312 491,678 464,552
Senior secured bonds................. 338,400 343,476 356,400 313,632
9. COMMITMENTS AND CONTINGENCIES
Edison and the California Power Exchange
- ----------------------------------------
Due to reduced liquidity, Southern California Edison Company ("Edison") had
failed to pay approximately $119 million owed under the power purchase
agreements with the Imperial Valley Projects (excluding the Salton Sea V and 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 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.
-39-
On July 10, 2003, Salton Sea IV's 40 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 $2.3 million.
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 established reserves of $1.7 million for capacity payments as of
December 31, 2003.
On October 9, 2003, Salton Sea III's 50 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
III returned to service on December 12, 2003. Edison failed to recognize the
uncontrollable force event and as such has not paid amounts otherwise due and
owing under the Salton Sea III Power Purchase Agreement totaling $0.7 million.
Salton Sea Power Generation, L.P., owner of Salton Sea III, served notice of
error on Edison for such unpaid amounts. As a result the Company has fully
reserved for this balance as of December 31, 2003.
Environmental
- -------------
The Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company's existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company's cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company's facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of December 31, 2003 and 2002, the
environmental liabilities recorded on the balance sheet were $4.6 million and
$5.3 million, respectively.
Other Commitments
- -----------------
Certain of 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 under
PURPA. 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.
-40-
The Saranac Partnership 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 minimum volumes under the
agreement for the years ending December 31 are included in the future minimum
payments under the contract as follows (in thousands):
AMOUNT
---------
2004................. $ 66,088
2005................. 68,544
2006................. 71,286
2007................. 74,137
2008................. 77,313
Thereafter........... 37,536
----------
Total................ $394,904
========
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.
Upon the Zinc Recovery Project reaching full production the Salton Sea V Project
expects to sell up to 19 MW of its output to Minerals. The remainder of the
Salton Sea V Project output is sold pursuant a power sales agreement with the
City of Riverside, California and a transaction agreement with TransAlta.
10. RELATED PARTY TRANSACTIONS
Pursuant to the Administrative Services Agreement, MEHC provides certain
administrative and management services to CE Generation, and MEHC's executive,
financial, legal, tax and other corporate staff departments perform certain
services for CE Generation. Expenses incurred by MEHC and allocated to CE
Generation were estimated based on the individual services and expense items
provided. The allocated expenses in 2003, 2002 and 2001 were $0.2 million, $0.2
million and $3.4 million, respectively, and are included in general and
administrative expense. On August 1, 2002, the Administrative Services Agreement
between MEHC and CE Generation was amended to provide for a fixed monthly fee in
lieu of certain expenses, which were being allocated. The fixed fee, which was
retroactive to January 1, 2002 and ends December 2004, is $3.1 million annually
and is included in general and administrative expense.
The Company participates in multi-employer pension plans sponsored by MEHC. The
Company's contributions to the various plans was approximately $2.3 million,
$1.8 million and $1.6 million in 2003, 2002 and 2001, respectively.
On September 29, 2000, Salton Sea Power and CE Turbo entered into an agreement
to sell all available power from the Salton Sea V Project and CE Turbo Project
to El Paso. Under the terms of the agreement, El Paso purchased and sold
available power on behalf of Salton Sea Power and CE Turbo, into the California
Independent System Operator markets. The purchase price for the available power
was equivalent to the value actually received by El Paso for the sale of such
power, including renewable premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and CE Turbo
Project to El Paso. Under the terms of the agreement, at the option of Salton
Sea Power and CE Turbo, El Paso purchased all available power from the Salton
Sea V Project and CE Turbo Project based on day-ahead price quotes received from
El Paso.
On March 27, 2001 and May 1, 2001, the owners of the Imperial Valley Projects
entered into Transaction Agreements to sell available power to El Paso based on
percentages of the Dow Jones SP-15 Index. On June 22, 2001, the owners of the
Imperial Valley Projects (excluding Salton Sea Power and CE Turbo) ceased
selling available power to El Paso and resumed power sales to Edison under both
the SO4 Agreements and negotiated
-41-
Power Purchase Agreements. Effective September 16, 2002 Salton Sea Power and CE
Turbo entered into Transaction Agreements to sell available power to El Paso at
increased percentages of the Dow Jones SP-15 Index.
Pursuant to these agreements, sales to El Paso from the Company totaled $1.2
million, $8.9 million and $102.8 million in 2003, 2002 and 2001, respectively.
As of December 31, 2003 and 2002, accounts receivable from El Paso were $ - and
$1.4 million, respectively.
Pursuant to a Transaction Agreement dated January 29, 2003, Salton Sea Power and
CE Turbo and began selling available power to 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; or (b) any other termination date mutually agreed to by the
parties. No such notice of termination has been given by either party. Pursuant
to this agreement, sales to TransAlta totaled $9.9 million in 2003. As of
December 31, 2003, accounts receivable from TransAlta were $1.6 million.
On January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 MW of generation, a "Green Tag") associated with
up to 931,800 MW of available generation of the Salton Sea V Project and CE
Turbo Project through December 31, 2008 to TransAlta Energy Marketing (US) Inc.
at a price of $10.00 per Green Tag. Salton Sea Power and CE Turbo expect to
commence sales under their agreement in July 2004.
Pursuant to the November 1, 1998 Amended and Restated Power Sales Agreements,
Salton Sea Power and CE Turbo are to provide Minerals with its full electrical
energy requirements at the market rates available to them, less wheeling costs.
Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled
$0.9 million, $0.4 million and $0.9 million for the years ended December 31,
2003, 2002 and 2001, respectively, and there were no sales to Minerals from CE
Turbo for the years ended December 31, 2003, 2002 or 2001. There were no
material accounts receivable balances at December 31, 2003 or 2002.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the respective persons acting as 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 December 31, 2003. Based on that evaluation, the
Company's management, including the respective persons acting as 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICER POSITION
- ----------------- --------
Stefan A. Bird President
Douglas L. Anderson Senior Vice President
Wayne F. Irmiter Vice President and Controller
Ian A. Bourne Director
J. Thomas Coyle Director
Patrick J. Goodman Director
Mitchell L. Pirnie Vice President, General Counsel and Director
STEFAN A. BIRD, 37, President of CE Generation, is responsible for independent
power plant operations and construction in the United States. Mr. Bird joined
MEHC in January 1998 as Project Development Manager and was promoted to Vice
President, Project Development in August 1999. Prior to joining MEHC, Mr. Bird
held various positions at Koch Industries from 1989 to 1997 including Director
of Finance, Latin America for Koch Industries International in Mexico City;
Director of Marketing and Risk Manager for Koch Power Services in Houston,
Texas; Senior Financial Analyst for Koch International Financial Services in
Fribourg, Switzerland; Project Manager, Corporate Development for Koch
Industries in Wichita, Kansas; and Project Engineer and Maintenance Planner for
Koch Refining Company in St. Paul, Minnesota.
DOUGLAS L. ANDERSON, 46, Senior Vice President and General Counsel of MEHC and a
Senior Vice President of CE Generation. Mr. Anderson joined MEHC in February
1993. Prior to that, Mr. Anderson was an attorney in private practice.
WAYNE F. IRMITER, 38, Vice President and Controller of CE Generation. Mr.
Irmiter joined MEHC as Vice President and Chief Accounting Officer in November
2002. Mr. Irmiter is a Certified Public Accountant and from 1988 to 1993 he
worked in public accounting. Most recently, Mr. Irmiter was with Gateway, Inc.
in various management positions including Director-Strategic Initiatives and
Director-Finance.
IAN A. BOURNE, 56, Executive Vice President and Chief Financial Officer of
TransAlta and a director of CE Generation. Mr. Bourne joined TransAlta in
January 1998 as senior vice president and chief financial officer and was
appointed to his current position June 1, 1998. Immediately prior to joining
TransAlta, Mr. Bourne had been senior vice president and chief financial officer
of Canada Post Corporation from 1992. Prior to 1992 Mr. Bourne gained extensive
financial experience with General Electric, including positions as European
treasurer, based in London; chief financial officer for GE Canada, and chief
financial officer for GE Medical Systems Europe, based in Paris.
J. THOMAS COYLE, 56, President of TransAlta Energy Marketing (U.S.) Inc. and a
director of CE Generation. Mr. Coyle joined TransAlta in 1998 as Director, Risk
Portfolio Management, Energy Marketing. Prior to joining TransAlta, Mr. Coyle
held various positions at Petro-Canada from 1986 to 1997 including Portfolio
Manager - Natural Gas Marketing, Manager Market Development - Natural Gas
Marketing and Risk Manager.
PATRICK J. GOODMAN, 37, Senior Vice President and Chief Financial Officer of
MEHC and a director of CE Generation. Mr. Goodman joined MEHC in 1995 and served
in various accounting positions including Senior Vice President and Chief
Accounting Officer. Prior to joining MEHC, Mr. Goodman was a financial manager
for National Indemnity Company and a senior associate at Coopers & Lybrand.
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MITCHELL L. PIRNIE, 45, Vice President, General Counsel and Director of CE
Generation. Mr. Pirnie joined MEHC in November 1997. Prior to joining MEHC, Mr.
Pirnie was engaged in the private practice of law in Omaha, Nebraska.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Company does not have a separately designated audit committee. No member of
the Board of Directors has the qualifications required to be considered an
independent audit committee financial expert for purposes of the SEC rules and
regulations. Currently, the Company is not required to have an audit committee
or an audit committee financial expert under the Sarbanes-Oxley Act of 2002 or
any other applicable regulation.
CODE OF ETHICS
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer and to its controller. The code of ethics
is filed as an exhibit to this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
CE Generation's directors and executive officers receive no remuneration for
serving in such capacities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Fifty percent of CE Generation's interests are owned by MEHC and the other 50%
are owned by TransAlta. There is no public trading market for CE Generation's
membership interests. None of the directors or executive officers beneficially
own any of the equity interests. MEHC's common stock is not publicly traded.
TransAlta is owned by TransAlta Corporation. TransAlta Corporation's common
stock is publicly traded on the New York Stock Exchange.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CE Generation is 50% owned by MEHC and 50% owned by TransAlta. CE Generation's
activities are restricted by the terms of the indenture for the Securities to:
(1) ownership of the Company's subsidiaries and related activities; (2) acting
as issuer of securities and other indebtedness as permitted under the indenture
and related activities; and (3) other activities which could not reasonably be
expected to result in a material adverse effect so long as the rating agencies
confirm that these activities will not result in a downgrade of their ratings of
the Securities. CE Generation and each of the assigning subsidiaries have been
organized and are operated as legal entities separate and apart from MEHC,
TransAlta and their other affiliates, and, accordingly, the Company's assets and
the assets of the assigning subsidiaries will not be generally available to
satisfy the obligations of MEHC, TransAlta or any of their other affiliates.
However, the Company's and the assigning subsidiaries' unrestricted cash and
other assets which are available for distribution may, subject to applicable law
and the terms of CE Generation's and the assigning subsidiaries' financing
arrangements, be advanced, loaned, paid as dividends or otherwise distributed or
contributed to MEHC, TransAlta or their affiliates. The securities are
non-recourse to MEHC and TransAlta.
MEHC entered into an administrative services agreement with CE Generation, which
provides CE Generation administrative services from MEHC in exchange for a fixed
fee through December 31, 2004. TransAlta has entered into Transaction Agreements
with Salton Sea Power and CE Turbo. Pursuant to the Transaction Agreements
Salton Sea Power and CE Turbo sell available power to TransAlta based on
percentages of the Dow Jones SP-15 Index. The agreement continues until
termination notice by either party. No such notice of termination has been
given. TransAlta Energy Marketing (US) Inc. has entered into a Green Energy Tag
Purchase and Sale Agreement with Salton Sea Power and CE Turbo to sell a
specified volume of non-power attributes (the non-power attributes made
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available 1 MWh of generation, a "Green Tag) made available by generation from
the Salton Sea V Project and the CE Turbo Project through December 31, 2008 at a
price of $10.00 per Green Tag.
CE Generation also has an agreement with MEHC and TransAlta to provide TransAlta
with a right of first refusal for the Company to participate in the development
of any future geothermal power projects or combined geothermal power and mineral
recovery projects proposed by MEHC in the area of the geothermal reservoir that
currently supplies geothermal resources to the Imperial Valley projects in
return for the payment of a royalty to MEHC. If TransAlta elects not to
participate, the agreement gives MEHC the right to develop the new project upon
a showing that there are sufficient geothermal resources for both the new
project and the Company's existing projects.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
As discussed in "Item 13. Certain Relationships and Related Transactions" MEHC
entered into an administrative services agreement with CE Generation. The
agreement includes principal accountant fees and services. CE Generation does
not have preapproval policies and procedures and does not specifically identify
principal accountant fees and services as they are part of the administrative
fees paid to MEHC. The fees and services of CE Generation's principal accountant
are preapproved by the audit committee of MEHC.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
(i) Financial Statements
Financial Statements are included in Part II of this Form
10-K
(ii) Financial Statement Schedules
See Schedule II on page 48. Schedules not listed above have
been omitted because they are either not applicable, not
required or the information required to be set forth therein
is included in the consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed
as part of this Annual Report.
(d) Financial statements required by Regulations S-X, which are
excluded from the Annual Report by Rule 14a-3(b).
Not Applicable
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SCHEDULE II
CE GENERATION, LLC
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(Amounts in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
DESCRIPTION OF YEAR TO INCOME DEDUCTIONS OF YEAR
- ----------- ---------- --------- ---------- --------
Allowance for doubtful accounts
Year ended 2003 ........................ $ 6,496 $ 2,433 $ (2,661) $ 6,268
Year ended 2002 ........................ $24,754 $ 2,661 $(20,919) $ 6,496
Year ended 2001 ........................ $ - $24,754 $ - $24,754
Reserves Not Deducted from Assets (1):
Year ended 2003 ........................ $ 6,300 $ 2,104 $ (2,780) $ 5,624
Year ended 2002 ........................ $ 6,132 $ 3,509 $ (3,341) $ 6,300
Year ended 2001 ........................ $ 9,102 $ 2,000 $ (4,970) $ 6,132
1) Reserves not deducted from assets include estimated liabilities
for litigation and environmental compliance at the Imperial
Valley Projects.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Omaha, State
of Nebraska, on this 27th day of February, 2004.
CE Generation, LLC
/s/ Stefan A. Bird
------------------
By: Stefan A. Bird
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Date
/s/ Stefan A. Bird February 27, 2004
- ----------------------------------
Stefan A. Bird
President
(Principal Executive Officer)
/s/ Wayne F. Irmiter February 27, 2004
- ----------------------------------
Wayne F. Irmiter
Vice President and Controller
(Principal Accounting Officer)
/s/ Ian A. Bourne February 27, 2004
- ----------------------------------
Ian A. Bourne
Director
/s/ J. Thomas Coyle February 27, 2004
- ----------------------------------
J. Thomas Coyle
Director
/s/ Patrick J. Goodman February 27, 2004
- ----------------------------------
Patrick J. Goodman
Director
/s/ Mitchell L. Pirnie February 27, 2004
- ----------------------
Mitchell L. Pirnie
Vice President, General Counsel and Director
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Certificate of Formation of CE Generation, LLC (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-4).
3.2 Amended and Restated Limited Liability Company Operating Agreement of CE
Generation, LLC.
3.3 First Amendment to Amended and Restated Limited Liability Company Operating
Agreement of CE Generation, LLC, dated as of October 28, 2002.
4.1 Indenture, dated as of March 2, 1999, by and between CE Generation, LLC and
Chase Manhattan Bank and Trust Company, National Association (incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-4).
4.2 Form of First Supplemental Indenture to be entered into by and between CE
Generation, LLC and Chase Manhattan Bank and Trust Company, National
Association, Trustee (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4).
4.3 Intentionally left blank.
4.4 Intentionally left blank.
4.5 Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated as
of March 2, 1999, by and among CE Generation, LLC, the banks named therein
and Credit Suisse First Boston, as Agent (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on Form S-4).
4.6 Deposit and Disbursement Agreement, dated as of March 2, 1999, by and among
CE Generation, LLC, Magma Power Company, Salton Sea Power Company, Falcon
Seaboard Resources, Inc., Falcon Seaboard Power Corporation, Falcon
Seaboard Oil Company, California Energy Development Corporation, CE Texas
Energy LLC and Chase Manhattan Bank and Trust Company, National
Association, as Collateral Agent and Depositary Bank (incorporated by
reference to Exhibit 4.6 to the Company's Registration Statement on Form
S-4).
4.7 Intercreditor Agreement, dated as of March 2, 1999, by and among CE
Generation, LLC, Magma Power Company, Salton Sea Power Company, Falcon
Seaboard Resources, Inc., Falcon Seaboard Power Corporation, Falcon
Seaboard Oil Company, California Energy Development Corporation, CE Texas
Energy LLC, Credit Suisse First Boston and Chase Manhattan Bank and Trust
Company, National Association, as Trustee, Collateral Agent and Depositary
Bank (incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-4).
4.8 Assignment and Security Agreement, dated as of March 2, 1999, by and among
Magma Power Company, Salton Sea Power Company, Falcon Seaboard Resources,
Inc., Falcon Seaboard Power Corporation, Falcon Seaboard Oil Company,
California Energy Development Corporation, CE Texas Energy LLC, Credit
Suisse First Boston and Chase Manhattan Bank and Trust Company, National
Association, as Collateral Agent (incorporated by reference to Exhibit 4.8
to the Company's Registration Statement on Form S-4).
4.9 Assignment and Security Agreement, dated as of March 2, 1999, by and
between CE Generation, LLC and Chase Manhattan Bank and Trust Company,
National Association, as Collateral Agent (incorporated by reference to
Exhibit 4.9 to the Company's Registration Statement on Form S-4).
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4.10 Pledge Agreement (SSPC Stock), dated as of March 2, 1999, by Magma Power
Company in favor of Chase Manhattan Bank and Trust Company, National
Association, as Collateral Agent (incorporated by reference to Exhibit 4.10
to the Company's Registration Statement on Form S-4).
4.11 Pledge Agreement (FSRI Holdings, Inc. Stock and California Energy
Development Corporation Stock), dated as of March 2, 1999 by CE Generation,
LLC in favor of Chase Manhattan Bank and Trust Company, National
Association, as Collateral Agent (incorporated by reference to Exhibit 4.11
to the Company's Registration Statement on Form S-4).
4.12 Securities Account Control Agreement, dated as of March 2, 1999, by and
among CE Generation, LLC, Magma Power Company, Salton Sea Power Company,
Falcon Seaboard Resources, Inc., Falcon Seaboard Power Corporation, Falcon
Seaboard Oil Company, California Energy Development Corporation, CE Texas
Energy LLC, Credit Suisse First Boston and Chase Manhattan Bank and Trust
Company, National Association, as Collateral Agent and Depositary Bank
(incorporated by reference to Exhibit 4.12 to the Company's Registration
Statement on Form S-4).
14.1 CE Generation, LLC - Code of Ethics for Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer.
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial 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 Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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