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, 2002
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 47-0790493
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(State of Incorporation) (IRS Employer
Identification No.)
Salton Sea Brine Processing L.P. California 33-0601721
Salton Sea Power Generation L.P. California 33-0567411
Fish Lake Power LLC Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Corporation Delaware 33-0268085
Salton Sea Royalty LLC Delaware 47-0790492
VPC Geothermal LLC Delaware 91-1244270
San Felipe Energy Company California 33-0315787
Conejo Energy Company California 33-0268500
Niguel Energy Company California 33-0268502
Vulcan/BN Geothermal Power Company Nevada 33-3992087
Leathers, L.P. California 33-0305342
Del Ranch, L.P. California 33-0278290
Elmore, L.P. California 33-0278294
Salton Sea Power L.L.C. Delaware 47-0810713
CalEnergy Minerals LLC Delaware 47-0810718
CE Turbo LLC Delaware 47-0812159
CE Salton Sea Inc. Delaware 47-0810711
Salton Sea Minerals Corp. Delaware 47-0811261
302 S. 36th Street, Suite 400, Omaha, NE 68131
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(Address of principal executive offices of (Zip Code of
Salton Sea Funding Corporation) Salton Sea Funding Corporation)
Salton Sea Funding Corporation'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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [ ] No [X]
All common stock of Salton Sea Funding Corporation is held by Magma Power
Company. 100 shares of Common Stock were outstanding on March 28, 2003.
TABLE OF CONTENTS
PART I
Item 1. Business ............................................................ 3
Item 2. Properties ..........................................................18
Item 3. Legal Proceedings....................................................18
Item 4. Submission of Matters to a Vote of Security Holders..................19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder's Matters ............................................20
Item 6. Selected Financial Data ............................................20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .....................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........30
Item 8. Financial Statements and Supplementary Data ........................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Data.....................................82
PART III
Item 10. Directors and Executive Officers of the Registrant...................83
Item 11. Executive Compensation ..............................................84
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................84
Item 13. Certain Relationships and Related Transactions ......................84
Item 14. Controls and Procedures..............................................85
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....86
SIGNATURES ................................................................87
CERTIFICATIONS...............................................................107
Exhibit Index ...............................................................110
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PART I
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 Salton Sea Funding Corporation's intentions,
plans, expectations and beliefs and are subject to risks, uncertainties and
other factors. Many of these factors are outside Salton Sea Funding
Corporation'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
Salton Sea Funding Corporations facilities are located;
o governmental, statutory, regulatory or administrative initiatives affecting
Salton Sea Funding Corporation 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 availability of qualified personnel;
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; and
o other business considerations that may be disclosed from time to time in
SEC filings or in other publicly disseminated written documents.
Salton Sea Funding Corporation 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.
ITEM 1. BUSINESS.
GENERAL
Salton Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned
subsidiary of CE Generation, LLC ("CE Generation"), is a Delaware corporation
formed for the sole purpose of issuing securities in its individual capacity as
principal and as agent acting on behalf of the Guarantors (as defined below).
The principal executive office of the Funding Corporation is located at 302
South 36th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is
(402) 341-4500.
CE Generation owns all of the capital stock of Magma Power Company ("Magma"),
which owns all of the outstanding capital stock of Funding Corporation. 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. CE Generation has an aggregate net ownership interest of 757 MW of
electrical generating capacity in power plants in operation in the United
States, which have an aggregate net capacity of 817 MW (including its interests
in the Salton Sea Projects and the Partnership Projects as defined below).
All of the outstanding stock of Magma was contributed by MidAmerican Energy
Holdings Company ("MEHC") to CE Generation in February 1999. In March 1999, MEHC
sold a 50% interest in CE Generation to El Paso CE Generation Holding Company,
which was merged into El Paso Merchant Energy North American Company ("EPME") on
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December 31, 2000, an affiliate of El Paso Corporation ("El Paso"). On January
29, 2003, EPME sold all its interest in CE Generation to TransAlta USA Inc.
("TransAlta"), an affiliate of TransAlta Corporation.
Magma directly or indirectly owns all of the capital stock of or partnership
interests in the Funding Corporation and the Guarantors, except for CalEnergy
Minerals LLC ("Minerals") and Salton Sea Minerals Corp., which are owned by
MEHC. The Guarantors are comprised of the Salton Sea Guarantors, the Partnership
Guarantors (collectively, the "Imperial Valley Projects"), and the Royalty
Guarantor (collectively, the "Guarantors").
The Salton Sea Guarantors include Salton Sea Brine Processing L.P. ("SSBP"),
Salton Sea Power Generation L.P. ("SSPG"), Salton Sea Power L.L.C. (Salton Sea
Power), and Fish Lake Power LLC ("Fish Lake") (collectively, the "Salton Sea
Guarantors"), which own five operating geothermal power plants located in
Imperial Valley, California known as Salton Sea I, Salton Sea II, Salton Sea
III, Salton Sea IV and Salton Sea V (the "Salton Sea Projects").
The Partnership Guarantors include the Vulcan/BN Geothermal Power Company
("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"), Del Ranch,
L.P. ("Del Ranch"), and CE Turbo LLC ("CE Turbo"), each of which owns an
operating geothermal power plant located in Imperial Valley, California known as
the Vulcan Project, the Elmore Project, the Leathers Project, the Del Ranch
Project and CE Turbo Project, respectively (the "Partnership Projects"). The
Partnership Guarantors also include Minerals, which has constructed a zinc
recovery project in the Imperial Valley, California. Finally, the Partnership
Guarantors include CalEnergy Operating Corporation ("CEOC"), Vulcan Power
Company ("VPC"), San Felipe Energy Company ("San Felipe"), Conejo Energy Company
("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC ("VPCG"),
Salton Sea Minerals Corp. and CE Salton Sea Inc. VPC and VPCG, collectively own
100% of the partnership interests in Vulcan. CEOC and Niguel, San Felipe and
Conejo, collectively own 90% partnership interests in Elmore, Leathers and Del
Ranch, respectively. Salton Sea Minerals Corporation owns Minerals. CE Salton
Sea Inc. owns Salton Sea Power and CE Turbo.
Magma owns the remaining 10% interest in each of Elmore, Leathers and Del Ranch.
CEOC is entitled to receive from Magma, as payment for certain data and services
provided by CEOC, all of the partnership distributions Magma receives with
respect to its 10% ownership interests in each of the Elmore, Leathers and Del
Ranch Projects and Magma's special distributions equal to 4.5% of total energy
revenue from the Leathers Project.
Salton Sea Royalty LLC ("SSRC" or the "Royalty Guarantor") is the Royalty
Guarantor. SSRC received an assignment of certain fees and royalties
("Royalties") paid by three Partnership Projects: Elmore, Leathers, and Del
Ranch.
CEOC currently operates the Imperial Valley Projects. Affiliates of Magma
control, through a variety of fee, leasehold, and royalty interests, rights to
geothermal resources for power production in the Salton Sea Known Geothermal
Resource Area ("SSKGRA"). The Funding Corporation believes that such resources
will be sufficient to operate the Imperial Valley Projects at contract capacity
under their respective power purchase agreements through the final maturity date
of the securities described beginning on page 8.
The principal executive offices of the Salton Sea Guarantors are located at 302
South 36th Street, Suites 400-B, 400-D, 400-E, 400-K and 400-N, Omaha, Nebraska
68131. The principal executive offices of the Partnership Guarantors is 302
South 36th Street, Suite 400-F, 400-G, 400-I, 400-J, 400-L, 400-M, 400-N, 400-O,
400-P, 400-Q, 400-R, 400-S, 400-T, and 400-U, Omaha, Nebraska 68131. The
principal executive office of the Royalty Guarantor is 302 South 36th Street,
Suite 400-H, Omaha, Nebraska 68131.
In this Annual Report references to kW means kilowatt, kWh means kilowatt-hour,
MW means megawatts, MWh means megawatt hours, MMBtus means million British
thermal units, and NMW means net megawatts.
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THE PROJECTS
Set forth below is a table describing certain characteristics of the Imperial
Valley Projects, and the Guarantors' collective interests therein. All the
projects are located in the Imperial Valley, California.
POWER
FACILITY NET NET MW DATE OF PURCHASE POWER
CAPACITY MMW OWNED COMMERCIAL AGREEMENT PURCHASER
POWER PROJECT (1) (1) FUEL OPERATION EXPIRATION (2)
- ------------------------------ ------------ ------ ---------- ---------- ---------- ---------
Salton Sea Projects
Salton Sea I................ 10 10 Geothermal 7/1987 2017 Edison
Salton Sea II............... 20 20 Geothermal 4/1990 2020 Edison
Salton Sea III.............. 50 50 Geothermal 2/1989 2019 Edison
Salton Sea IV............... 40 40 Geothermal 6/1996 2026 Edison
Salton Sea V................ 49 49 Geothermal 6/2000 Year-to-year El Paso/Minerals(3)
--- ---
Total Salton Sea Projects. 169 169
--- ---
Partnership Projects
Vulcan...................... 34 34 Geothermal 2/1986 2016 Edison
Elmore...................... 38 34 Geothermal 1/1989 2018 Edison
Leathers.................... 38 34 Geothermal 1/1990 2019 Edison
Del Ranch................... 38 34 Geothermal 1/1989 2019 Edison
CE Turbo.................... 10 10 Geothermal 8/2000 Year-to-year El Paso/Minerals(3)
--- ---
Total Partnership Projects 158 147
--- ---
Total power projects........ 327 316
=== ===
ESTIMATED DATE OF
METRIC TONS COMMERIAL
Operating Project - PER YEAR OPERATION
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Zinc Recovery Project......... 30,000 12/2002
=========== =========
(1) Actual MW may vary depending on operating and reservoir conditions and
plant design. Facility Net Capacity (in MW) represents facility gross
capacity (in MW) less parasitic load. Parasitic load is electrical output
used by the facility and not made available for sale to utilities or other
outside purchasers. Net MW owned indicates current legal ownership, but, in
some cases, does not reflect the current allocation of partnership
distributions.
(2) Southern California Edison Company ("Edison"); El Paso Corporation ("El
Paso"); and Minerals.
(3) Each contract governing power purchases by the Zinc Recovery Project will
expire 33 years from the date of the initial power delivery under such
contract. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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. Such agreement will expire on October 31, 2003.
Each of the Imperial Valley Projects, excluding the Salton Sea V and the CE
Turbo Projects, sells electricity to Southern California Edison ("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, subject to the agreement. The power
purchase agreements provide for energy payments, capacity payments and capacity
bonus payments. Edison makes fixed annual capacity payments and capacity bonus
payments to the applicable projects to the extent that capacity factors exceed
certain benchmarks. Except as described, the price for capacity is fixed for the
life of the SO4 Agreements and is significantly higher in the months of June
through September.
Energy payments for the SO4 Agreements 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 ("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
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the five-year period, the energy payments revert back to Edison's Avoided Cost
of Energy.
For the years ended December 31, 2002, 2001 and 2000, respectively, Edison's
Average Avoided Cost of Energy was 3.5 cents per kWh, 7.4 cents per kWh and 5.8
cents per kWh, respectively. Estimates of Edison's future Avoided Cost of Energy
vary substantially from year to year.
The Imperial Valley Projects, other than Salton Sea I, receive transmission
service from the Imperial Irrigation District ("IID"), to deliver electricity to
Edison near Mirage, California. These projects pay a rate based on the IID's
cost of service, which was $1.70 per month per kW of service provided for 2002
and recalculated annually. The transmission service and interconnection
agreements expire in 2015 for the Partnership Projects, 2019 for Salton Sea III,
2020 for Salton Sea II and 2026 for Salton Sea IV. Salton Sea V and the CE Turbo
Projects have entered into 30-year agreements with similar terms with the IID.
Salton Sea I delivers energy to Edison at the project site and has no
transmission service agreement with the IID.
SALTON SEA PROJECTS
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 $154.45 per kW-year. The capacity payment is approximately
$1.1 million per annum. 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 indices. The time period weighted average energy payment for Salton
Sea I was 5.8 cents per kWh during 2002. As the Salton Sea I PPA is not an SO4
Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy.
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 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. The annual
capacity and bonus payments are approximately $3.3 million. The energy payments
for the first ten-year period, which period expired on April 4, 2000, were
levelized at a time period weighted average of 10.6 cents per kWh. Thereafter,
the monthly energy payment was based on Edison's Avoided Cost of Energy. 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. The annual capacity and bonus payments are approximately $9.7
million. The energy payments for the first ten-year period, which period expired
on February 12, 1999, were levelized at a time period weighted average of 9.8
cents per kWh. Thereafter, the energy payment has been based on Edison's Avoided
Cost of Energy.
The Salton Sea IV Project contracts to sell electricity to Edison pursuant to a
modified SO4 Agreement which provides for contract capacity payments on 34 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 ("Fish Lake PPA") (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 2002, 2001 and 2000 were
approximately $5.5 million, $5.7 million and $5.4 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 Salton Sea IV and is based on an energy payment schedule for 44.4%
of the total energy delivered by Salton Sea IV. 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.
The Salton Sea V Project, which commenced operations in the third quarter of
2000, expects to sell up to 22 MW of its net output to Minerals, pursuant to a
33 year power sales agreement. 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 through other market
transactions.
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PARTNERSHIP PROJECTS
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. The 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. The 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. The annual capacity
and bonus payments are approximately $7.5 million. The energy payment is based
on Edison's Avoided Cost of Energy.
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. The annual capacity and
bonus payments are approximately $7.9 million.
The CE Turbo Project, which commenced commercial operation in the third quarter
of 2000, sells its output through market transactions. 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.
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 EPME based on day ahead price quotes received from EPME under
the original agreement and based on percentages of the Dow Jones SP-15 Index
thereafter. 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. Such agreement will
expire on October 31, 2003.
ZINC RECOVERY PROJECT
Minerals developed and owns the rights to proprietary processes for the
extraction of zinc from elements in solution in the geothermal brine and fluids
utilized at the company's Imperial Valley Projects. A plant has successfully
produced commercial quality zinc at the projects. The affiliates of Minerals may
develop facilities for the extraction of manganese, silica and other products as
it further develops the extraction technology.
Minerals constructed the Zinc Recovery Project, which is recovering zinc from
the geothermal brine (the "Zinc Recovery Project"). Facilities have been
installed near the Imperial Valley Projects sites to extract a zinc chloride
solution from the geothermal brine through an ion exchange process. This
solution is being transported to a central processing plant where zinc ingots
are being produced through solvent extraction, electrowinning and casting
processes. The Zinc Recovery Project is designed to have a capacity of
approximately 30,000 metric tons per year. Limited production began during
December 2002 and full production is expected by late-2003. In September 1999,
Minerals entered into a sales agreement whereby all high-grade zinc produced by
the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the
agreement expires in December 2005.
ROYALTY PROJECTS
The Royalty Guarantor has received an assignment from Magma of certain Royalties
received from the Elmore Leathers and Del Ranch Projects in exchange for the
provision to those projects of the rights to use certain geothermal resources.
Substantially all of the assigned Royalties are based on a percentage of energy
and capacity revenue of the respective projects. Pursuant to the assignment, the
Royalty Guarantor is entitled to receive the aggregate percentages of such
project's energy and capacity revenue as illustrated in the chart below. The
Partnership Guarantors are also entitled to receive Royalties from the
Partnership Projects as illustrated in the chart below. Royalties are subject to
netting and reduction from time to time to reflect various operating costs, as
reflected in the financial statements herein. All such Royalties (other than the
various operating costs, as reflected in the financial statements) are payable
from revenue which will constitute Partnership Guarantor's collateral.
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ROYALTIES TO BE PAID TO ROYALTY ROYALTIES TO BE PAID TO
GUARANTOR PARTNERSHIP GUARANTORS
------------------------------- ---------------------------
% of Energy % of Capacity % of Energy % of Capacity
Revenues Revenues Revenues Revenues
----------- ------------- ----------- ------------
Del Ranch....... 23.33% 1.00% 5.67% 3.00%
Elmore.......... 23.33 1.00 5.67 3.00
Leathers........ 21.50 0.00 7.50 3.00
Vulcan.......... 0.00 0.00 4.17 0.00
DESCRIPTION OF THE SECURITIES
The Funding Corporation is a Delaware corporation formed for the sole purpose of
issuing securities in its individual capacity as principal and as agent acting
on behalf of its affiliates, which guarantee the securities described below.
The Funding Corporation has completed the following issuances and exchanges of
securities (together, the "Securities"):
o On July 21, 1995, the Funding Corporation issued (1) $232.8 million of
6.69% Senior Secured Series A Notes Due 2000 (the "Series A Securities"),
(2) $133.0 million of 7.37% Senior Secured Series B Bonds Due 2005 (the
"Series B Securities") and (3) $109.3 million of 7.84% Senior Secured
Series C Bonds Due 2010 (the "Series C Securities"). The Series A
Securities were repaid in full on May 30, 2000.
o On June 20, 1996, the Funding Corporation issued (1) $70.0 million of 7.02%
Senior Secured Series D Bonds Due 2000 (the "Series D Securities") and (2)
$65.0 million of 8.30% Senior Secured Series E Bonds Due 2011 (the "Series
E Securities"). The Series D Securities were repaid in full on May 30,
2000.
o On October 13, 1998, the Funding Corporation issued $285.0 million of
7.475% Senior Secured Series F Bonds Due 2018 (the "Series F Securities").
The Securities have received ratings of "Ba3" by Moody's Investors Service, Inc.
("Moody's") and "BB" by Standard & Poor's Ratings Group ("S&P"). The Securities
will be equivalent in right of payment and in the right to share in the
collateral. On December 31, 2002, the aggregate principal amount of all
Securities outstanding was $491.7 million.
STRUCTURE OF AND COLLATERAL FOR THE SECURITIES
The Funding Corporation will make payments on the Securities with the principal
of and interest paid on promissory notes issued by the Guarantors to the Funding
Corporation (the "Project Notes"). The Securities are secured by a pledge of the
Funding Corporation's common stock and are guaranteed by the Guarantors. These
guarantees are secured by:
o in the case of the guarantee issued by the Salton Sea Guarantors, by a lien
on substantially all of the assets of the Salton Sea Guarantors and a
pledge of the equity interests in the Salton Sea Guarantors;
o in the case of the guarantee issued by the Partnership Guarantors, by a
lien on substantially all of the assets of the Partnership Project
Companies, a lien on the equity cash flows and royalties of the Initial
Partnership Guarantors and a pledge of the common stock of and other equity
interests in the Partnership Guarantors; and
o in the case of the guarantee issued by the Royalty Guarantor, by a lien on
all royalties paid to the Royalty Guarantor and a pledge of the common
stock of the Royalty Guarantor.
The guarantees issued by the Salton Sea Guarantors are unlimited. However, the
guarantees issued by the Partnership Guarantors and the Royalty Guarantor are
limited to the following amounts:
o for any Initial Partnership Guarantor or the Royalty Guarantor, the total
equity cash flows and royalties received by the Guarantor, minus, without
duplication, (1) any royalties paid, (2) all operating and maintenance
costs, (3) all capital expenditures and (4) debt service;
-8-
o for any Additional Partnership Guarantor, the total revenue received by the
Guarantor, minus, without duplication (1) any royalties paid, (2) all
operating and maintenance costs, (3) all capital expenditures and (4) debt
service.
The structure has been designed to cross-collateralize cash flows from each
Guarantor without cross-collateralizing all of the Guarantors' assets.
Therefore, if a Guarantor defaults under its guarantee or its promissory note
issued to the Funding Corporation, without causing a payment default on the
Securities, then the trustee may direct the collateral agent to exercise
remedies only with respect to the collateral securing that Guarantor's
obligations. If, however, the default causes a payment default on the
Securities, then the trustee may accelerate the Securities and direct the
collateral agent to exercise remedies against all of the collateral and, if
different, the collateral pledged by the Salton Sea Guarantors.
The Funding Corporation is a special purpose finance subsidiary of Magma. Its
ability to make payments on the Securities will be entirely dependent on the
Guarantors' performance of their obligations under the Project Notes and the
Guarantees. As is common in non-recourse, project finance structures, the assets
and cash flows of the Guarantors are the sole source of repayment of the Project
Notes and the Guarantees. The Salton Sea Guarantors conduct no other business
and own no other significant assets except those related to the ownership or
operation of the Salton Sea Projects. The Partnership Guarantors conduct no
business other than owning their respective ownership interests in the
Partnership Projects and providing operation, maintenance, administrative and
technical services for Magma, and the Imperial Valley Projects. The Royalty
Guarantor has been organized solely to receive royalty payments owed by the
Partnership Projects and conducts no other business and owns no other assets. In
the event of a default by any Guarantor under a Project Note, Credit Agreement
or Guarantee, there is no assurance that the exercise of remedies under such
Project Note, Credit Agreement or Guarantee, including foreclosure on the assets
of such Guarantor, would provide sufficient funds to pay such Guarantor's
obligation under the Project Notes and the Guarantees. Moreover, unless such
default causes a payment default under the Indenture (in which case remedies may
be exercised against the defaulting Guarantor's and the Salton Sea Guarantors'
assets), remedies may be exercised only against the assets of the defaulting
Guarantors. No shareholders, partners, or affiliates of the Funding Corporation
(other than the Guarantors) and no directors, officers or employees of the
Funding Corporation or the Guarantors will guarantee or be in any way liable for
the payment of the Securities, the Project Notes or the Guarantees except the
guarantee by MEHC for the direct and indirect owners of the Zinc Recovery
Project of a specified portion of the scheduled debt service on the Series F
Securities including the current principal amount of approximately $137.8
million and associated interest. In addition, the obligations of the Partnership
Guarantors and the Royalty Guarantor under the Guarantees are limited to the
available cash flows of such Guarantors. As a result, payment of amounts owed
pursuant to the Project Notes, the Guarantees, and the Securities is dependent
upon the availability of sufficient revenue and royalty payments from the
Guarantors' businesses or holdings, after the payment of operating expenses and
the satisfaction of certain other obligations.
-9-
PAYMENT OF INTEREST AND PRINCIPAL
The interest payment dates for the Securities are May 30 and November 30.
The remaining balance of the $133.0 million initial principal amount of the
7.37% Series B Securities due May 30, 2005 is payable in semiannual installments
as follows:
PERCENTAGE OF
PAYMENT INITIAL PRINCIPAL
DATE AMOUNT PAYABLE
-------------------- -----------------
May 30, 2003 ....... 5.64%
November 30, 2003 .. 5.64%
May 30, 2004 ....... 7.58%
November 30, 2004 .. 7.58%
May 30, 2005 ....... 16.17%
The $109.3 million initial principal amount of the 7.84% Series C Securities due
May 30, 2010 is payable in semiannual installments, commencing May 30, 2003, as
follows:
PERCENTAGE OF
PAYMENT INITIAL PRINCIPAL
DATE AMOUNT PAYABLE
-------------------- -----------------
May 30, 2003 ....... 3.31%
November 30, 2003 .. 3.31%
May 30, 2004 ....... 1.66%
November 30, 2004 .. 1.66%
May 30, 2005 ....... 0.83%
November 30, 2005 .. 0.83%
May 30, 2006 ....... 9.86%
November 30, 2006 .. 9.86%
May 30, 2007 ....... 9.84%
November 30, 2007 .. 9.84%
May 30, 2008 ....... 10.09%
November 30, 2008 .. 10.09%
May 30, 2009 ....... 10.01%
November 30, 2009 .. 10.01%
May 30, 2010 ....... 8.81%
-10-
The remaining balance of the $65.0 million initial principal amount of the 8.30%
Series E Securities due May 30, 2011 is payable in semiannual installments as
follows:
PERCENTAGE OF
PAYMENT INITIAL PRINCIPAL
DATE AMOUNT PAYABLE
-------------------- -----------------
May 30, 2003 ....... 2.31%
November 30, 2003 .. 2.31%
May 30, 2004 ....... 2.50%
November 30, 2004 .. 2.50%
May 30, 2005 ....... 2.69%
November 30, 2005 .. 2.69%
May 30, 2006 ....... 1.92%
November 30, 2006 .. 1.92%
May 30, 2007 ....... 1.92%
November 30, 2007 .. 1.92%
May 30, 2008 ....... 2.69%
November 30, 2008 .. 2.69%
May 30, 2009 ....... 2.50%
November 30, 2009 .. 2.50%
May 30, 2010 ....... 10.38%
November 30, 2010 .. 10.38%
May 30, 2011 ....... 17.42%
-11-
The remaining balance of the $285.0 million initial principal amount of the
7.475% Series F Securities due November 30, 2018 is payable in semiannual
installments as follows:
PERCENTAGE OF
PAYMENT INITIAL PRINCIPAL
DATE AMOUNT PAYABLE
-------------------- -----------------
May 30, 2003 ....... 0.50%
November 30, 2003 .. 0.50%
May 30, 2004 ....... 0.63%
November 30, 2004 .. 0.63%
May 30, 2005 ....... 0.63%
November 30, 2005 .. 0.63%
May 30, 2006 ....... 0.65%
November 30, 2006 .. 0.65%
May 30, 2007 ....... 0.38%
November 30, 2007 .. 0.38%
May 30, 2008 ....... 0.88%
November 30, 2008 .. 0.88%
May 30, 2009 ....... 0.38%
November 30, 2009 .. 0.38%
May 30, 2010 ....... 1.25%
November 30, 2010 .. 1.25%
May 30, 2011 ....... 3.00%
November 30, 2011 .. 3.00%
May 30, 2012 ....... 5.75%
November 30, 2012 .. 5.75%
May 30, 2013 ....... 5.08%
November 30, 2013 .. 5.08%
May 30, 2014 ....... 6.00%
November 30, 2014 .. 6.00%
May 30, 2015 ....... 6.55%
November 30, 2015 .. 6.55%
May 30, 2016 ....... 7.05%
November 30, 2016 .. 7.05%
May 30, 2017 ....... 6.88%
November 30, 2017 .. 6.88%
May 30, 2018 ....... 3.45%
November 30, 2018 .. 3.45%
PRIORITY OF PAYMENTS
All revenue received by the Salton Sea Guarantors from the Salton Sea Projects,
all revenue received by the Partnership Guarantors and all Royalties received by
the Royalty Guarantor shall be paid into a Revenue Fund maintained by the
depository agent. Amounts paid into the Revenue Fund shall be distributed in the
following order of priority: (a) to pay operating and maintenance costs of the
Guarantors; (b) to pay certain administrative costs of the agents for the
secured parties under the Financing Documents; (c) to pay principal of, premium
(if any) and interest on the Securities and the debt service reserve bonds, if
any, and interest and certain fees payable to the debt service reserve letter of
credit provider; (d) to pay principal of debt service reserve letter of credit
loans and certain related fees and charges; (e) to replenish any shortfall in
the Debt Service Reserve Fund; (f) to pay certain breakage costs in respect of
debt service reserve letter of credit loans, and indemnification and other
expenses to the secured parties, and (g) to the Distribution Fund or
Distribution Suspense Fund, as applicable.
-12-
DEBT SERVICE RESERVE FUND
The Funding Corporation is obligated at all times to maintain a Debt Service
Reserve Fund and/or an acceptable letter of credit. The Debt Service Reserve
Fund is funded from available funds in accordance with the priority of payments
until the aggregate amount of the fund and letter of credit are equal to:
o through December 31, 1999, the maximum semiannual principal and interest
payments on the Securities for the remaining term of the Securities;
o after December 31, 1999 through payment in full of the Initial Securities
and the Supplemental Securities, the maximum annual principal and interest
payments on the Securities for the remaining term of the Securities; and
o after payment in full of the Initial Securities and the Supplemental
Securities, (a) the maximum annual principal and interest payments on the
Series F Securities for the remaining term or (b) if the Funding
Corporation obtains a confirmation of the current ratings of the
Securities, the maximum semiannual principal and interest payments on the
Series F Securities.
The Debt Service Reserve Letter of Credit, which was being provided by Credit
Suisse First Boston, must be issued by a financial institution rated at least
"A" by S&P and "A2" by Moody's. As a result of the uncertainties related to
Edison, the letter of credit that supports the debt service reserve fund at
Salton Sea Funding Corporation has not been extended beyond its current 2004
expiration date, and as such cash distributions are not available to CE
Generation until the Salton Sea Funding Corporation debt service reserve fund of
approximately $67.6 million, has been funded or the letter of credit and has
been extended beyond its current 2004 expiration date or replaced. The fund has
a cash balance of $46.3 million as of December 31, 2002.
OPTIONAL REDEMPTION
The Series B Securities, Series C Securities, Series E Securities and Series F
Securities are subject to optional redemption, in whole or in part, pro rata at
par plus accrued interest to the redemption date plus a premium calculated to
"make whole" to comparable U.S. Treasury securities plus 50 basis points.
MANDATORY REDEMPTION
The Securities are subject to mandatory redemption, pro rata within each
maturity, at par plus accrued interest to the redemption date, (a) if a
permitted power contract buy-out occurs unless the rating agencies confirm the
then current rating of the Securities; (b) upon the acceleration of a Project
Note in an amount equal to the principal amount of such note plus accrued
interest; (c) upon the occurrence of certain events of loss, condemnation, title
defects or similar events related to the Salton Sea Projects or the Partnership
Projects; or (d) in certain circumstances if any New Project fails to achieve
substantial completion by the applicable guaranteed substantial completion date
or receives certain net performance liquidated damages under the construction
contract for such Project or (e) upon the foreclosure by the Collateral Agent of
collateral securing the Guarantor's obligations under the Salton Sea Guarantee,
the Partnership Guarantee or Royalty Guarantee.
DISTRIBUTIONS
Distributions may be made only from and to the extent of monies on deposit in
the Distribution Fund. Such distributions are subject to the prior satisfaction
of the following conditions:
(1) the amounts contained in the Principal Fund and the Interest Fund shall be
equal to or greater than the aggregate scheduled principal and interest
payments next due on the Securities;
(2) no default or event of default under the Indenture shall have occurred and
be continuing;
(3) the debt service coverage ratio for the preceding four fiscal quarters,
measured as one annual period, is equal to or greater than 1.4 to 1, if
such distribution date occurs prior to the year 2000, and, if in or
subsequent to the year 2000, is equal to or greater than 1.5 to 1, as
certified by an officer of the Funding Corporation;
-13-
(4) the projected debt service coverage ratio of the Securities for the
succeeding four fiscal quarters measured as one annual period is equal to
or greater than 1.4 to 1, if such distribution date occurs prior to the
year 2000, and, if such distribution date occurs in or subsequent to the
year 2000, is equal to or greater than 1.5 to 1, as certified by an officer
of the Funding Corporation;
(5) the debt service reserve fund shall have a balance equal to or greater than
the debt service reserve fund required balance or one or more Debt Service
Reserve Letter (or Letters) of Credit at least equal to (collectively with
the balance, if any, in the Debt Service Reserve Fund) the debt service
reserve fund required balance;
(6) an officer of the Funding Corporation provides a certificate (based on
customary assumptions) that there are sufficient geothermal resources to
operate the Salton Sea Projects and the Partnership Projects at contract
capacity through the final maturity date of the Securities; and
(7) substantial completion of each New Project shall have occurred on or prior
to such New Project's guaranteed substantial completion date unless the
required amount of Securities shall have been redeemed as described above
under "Mandatory Redemption" or (ii) the rating agencies shall have
confirmed that no rating downgrade would result from such delay; provided
that such condition will apply to a New Project only (x) after such New
Project's guaranteed substantial completion date or (y) if such New Project
has been abandoned.
INCURRENCE OF ADDITIONAL DEBT
The Funding Corporation shall not incur any debt other than "Permitted Debt".
"Permitted Debt" means:
(1) The Securities;
(2) Debt incurred to acquire the East Mesa Project in whole or in part;
provided that no such Debt may be incurred unless at the time of such
incurrence (i) no default or event of default has occurred and is
continuing and (ii) the rating agencies confirm that the incurrence of
such debt will not result in a rating downgrade;
(3) Debt incurred to develop, construct, own, operate or acquire additional
permitted facilities in the Imperial Valley ("Additional Projects");
provided that no such debt may be incurred unless at the time of such
incurrence (i) no default or event of default has occurred and is
continuing and (ii) the rating agencies confirm that the Securities will
maintain an investment grade rating after giving effect to such debt;
(4) Debt incurred to finance the making of capital improvements to the Salton
Sea Projects, the Partnership Projects or Additional Projects required to
maintain compliance with applicable law or anticipated changes therein;
provided that no such debt may be incurred unless at the time of such
incurrence the independent engineer confirms as reasonable (i) a
certification by the Funding Corporation (containing customary
qualifications) that the proposed capital improvements are reasonably
expected to enable such Project to comply with applicable or anticipated
legal requirements and (ii) the calculations of the Funding Corporation
that demonstrate, after giving effect to the incurrence of such debt, the
minimum projected debt service coverage ratio (x) for the next four
consecutive fiscal quarters, commencing with the quarter in which such
debt is incurred, taken as one annual period, and (y) for each subsequent
fiscal year through the final maturity date, will not be less than 1.2 to
1;
(5) Debt incurred to finance the making of capital improvements to the Salton
Sea Projects, the Partnership Projects or Additional Projects not
required by applicable law so long as after giving effect to the
incurrence of such debt (i) no default or event of default has occurred
and is continuing, and (ii) (A) the independent engineer confirms as
reasonable (x) the calculations of the Funding Corporation that
demonstrate that the minimum projected debt service coverage ratio for
the next four consecutive quarters, taken as one annual period, and each
subsequent fiscal year, will not be less than 1.4 to 1, and (y) the
calculations of the Funding Corporation that demonstrate the average
projected debt service coverage ratio for all succeeding fiscal years
until the final maturity date will not be less than 1.7 to 1 or (B) the
Rating Agencies confirm that the incurrence of such debt will not result
in a rating downgrade;
(6) Working capital debt in an aggregate amount not to exceed $15,000,000;
-14-
(7) Debt incurred under the Debt Service Reserve LOC Reimbursement Agreement;
(8) Debt incurred in connection with certain permitted interest rate swap
arrangements;
(9) Debt incurred by the Funding Corporation in an aggregate amount not to
exceed $30,000,000, in connection with the development, construction,
ownership, operation, maintenance or acquisition of Permitted Facilities;
and
(10) Subordinated debt from affiliates in an aggregate amount not to exceed
$200,000,000 which shall be used to finance capital, operating or other
costs with respect to the Projects or Additional Projects.
All Permitted Debt incurred by the Funding Corporation shall be loaned to the
Guarantors and guaranteed by the Guarantors.
PRINCIPAL INDENTURE COVENANTS
Principal covenants under the Indenture require the Funding Corporation to
agree, except as permitted under the Indenture, (a) not to exercise any remedies
or waive any defaults under the Credit Agreements and the Project Notes, except
as otherwise permitted under the Indenture; (b) not to incur (i) any Debt except
Permitted Debt or (ii) any Lien upon any of its properties except Permitted
Liens and (c) not to enter into any transaction of merger or consolidation or
change its form of organization or its business.
PRINCIPAL CREDIT AGREEMENT COVENANTS
Principal covenants under the Credit Agreements require each Guarantor to agree,
subject to certain exceptions and qualifications, (a) not to enter into any
transaction of merger or consolidation, change its form of organization,
liquidate, wind-up or dissolve itself; (b) not to enter into non-arm's length
transactions or agreements with Affiliates; (c) not to incur (i) any debt except
Permitted Guarantor Debt and (ii) any liens except for permitted liens; (d) not
to engage in any business other than as contemplated by the respective Credit
Agreement; and (e) not to amend, terminate or otherwise modify the Project
Documents to which they are a party except as permitted under the respective
Credit Agreements. In addition to these principal covenants, in the Salton Sea
Credit Agreement and the Partnership Credit Agreement, the Salton Sea Guarantors
and the Partnership Guarantors have agreed (a) not to sell, lease or transfer
any property or assets material to the Salton Sea Projects or the Partnership
Projects, as applicable, except in the ordinary course of business; and (b) to
maintain insurance as is generally carried by companies engaged in similar
businesses and owning similar properties.
CONSIDERATIONS REGARDING LIMITATION ON REMEDIES
A significant portion of the proceeds of the Initial Offering were distributed
to MEHC to repay certain non-recourse indebtedness incurred by MEHC in
connection with the acquisition of Magma (including the Guarantors). The Royalty
Guarantor has purchased an assignment of the royalties from Magma pursuant to
the Magma Assignment Agreement. Magma has also agreed to make certain payments
to CEOC pursuant to the Magma Services Agreement and to secure such payment
obligation with a collateral assignment of certain cash flows. The Guarantors
have executed Guarantees with respect to the entire amount of Securities. Under
certain circumstances (including a proceeding under Title 11 of the United
States Code or any similar proceeding), it is possible that a creditor of a
Guarantor or Magma could make a claim, under federal or state fraudulent
conveyance laws, that the Funding Corporation's claims under the Credit
Agreements, the Security Holders' claims under the Guarantees, the Royalty
Guarantor's interest pursuant to the Magma Assignment Agreement or CEOC's rights
under the Magma Services Agreement should be subordinated or not enforced in
accordance with such instruments' terms or that payments thereunder (including
payments to the Holders of the Securities) should be recovered. In order to
prevail on such a claim, a claimant would have to demonstrate that the
obligations incurred under any Guarantor's Credit Agreement or Guarantee or the
transfers made under the Magma Assignment Agreement or the Magma Services
Agreement were not incurred in good faith or that any Guarantor or Magma did not
receive fair consideration in connection with such obligations and transfers,
and that any Guarantor or Magma is and was insolvent at the time of entering
into the Credit Agreement, Guarantee, the Magma Assignment Agreement and/or the
Magma Services Agreement or that it did not have and will not have sufficient
capital for carrying on its business or was not and will not be able to pay its
debts as they mature.
-15-
POWER PRICE AND SALES UNCERTAINTY
The Power Purchase Agreements pursuant to which each of the Vulcan, Del Ranch,
Elmore, Leathers, Salton Sea II and Salton Sea III Projects sell electricity to
Edison are SO4 Agreements. These agreements provide for both capacity payments
and energy payments for a term of 30 years. While the basis for the capacity
payment is fixed for the entire 30-year term, the price of energy payments is
fixed only for the first ten years of the term. Thereafter, the required energy
payment converted to Edison's Avoided Cost of Energy, as determined by a
methodology approved by, and subject to change by, the California Public Utility
Commission. 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 rate in lieu of Edison's Avoided Cost of Energy. The fixed energy
payment was 3.25 cents per kW-hour from December 1, 2001 through April 30, 2002
and 5.37 cents per kW-hour 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 year ended December 2002, 2001 and 2000, Edison's average avoided cost
of energy was 3.5 cents, 7.4 cents and 5.8 cents per kWh, respectively.
Estimates of Edison's future avoided cost of energy vary substantially from year
to year. The Funding Corporation and the Guarantors cannot predict the likely
level of avoided cost of energy prices under these agreements.
Although up to 22 MW of the net electrical output of Salton Sea V is expected to
be sold for use by the Zinc Recovery Project pursuant to a power purchase
agreement and power from the CE Turbo Project may also be used by the Zinc
Recovery Project pursuant to a separate power purchase agreement, neither Salton
Sea V nor the CE Turbo Project currently has any power sales agreements for any
portion of the capacity of such Projects. The strategy for Salton Sea V and the
CE Turbo Project is to sell output not needed by the Zinc Recovery Project in
short term transactions through established energy markets or in such other
transactions from time to time as may be found to be more advantageous than
those conducted through established energy markets. Energy prices are expected
to have the characteristics of short-term spot prices and to fluctuate from time
to time in a manner that cannot be predicted with accuracy and is not within the
control of the Funding Corporation, the Guarantors or any other person.
RELIANCE ON SINGLE UTILITY CUSTOMER
Each of the Vulcan, Del Ranch, Elmore, Leathers and Salton Sea I-IV Projects
relies on an agreement with Edison to generate 100% of its operating revenue.
The payments (excluding those for power sales from March 22 through June 22,
2001) under these agreements have constituted 100% of the operating revenue of
each Project since its inception, and may do so for the life of the Securities.
Any material failure of Edison to fulfill its contractual obligations under the
Power Purchase Agreements could have a material adverse effect on the ability of
the Funding Corporation to pay principal of and interest on the Securities.
ZINC PRICE AND SALES UNCERTAINTY
In September 1999, Minerals entered into a sales agreement whereby all
high-grade zinc produced by the Zinc Recovery Project will be sold to Cominco,
Ltd. The initial term of the agreement expires in December 2005.
Because most of the Zinc Recovery Project's revenue are and will be derived from
the sale of zinc, earnings are and will be directly related to the price of zinc
in the domestic and world markets. However, zinc prices fluctuate and are
affected by numerous factors, including expectations of inflation, speculative
activities, currency exchange rates, interest rates, global and regional demand
and production, political and economic conditions, discovery of new deposits,
and production costs in major producing regions. The aggregate effect of these
factors, all of which are beyond the control of the Funding Corporation or the
Guarantors, is impossible for the Funding Corporation to predict.
OPERATIONAL UNCERTAINTY
Although several of the power projects have been operating for a number of years
and the Zinc Recovery Project is producing limited quantities, full production
at the Zinc Recovery Project is not expected until late-2003, and is subject to
customary risks associated with the operation of metals processing plants
including operational risks, cost overruns and failures to perform in accordance
with contract terms. In addition, while each of the individual process steps to
be utilized in the Zinc Recovery Project (including ion exchange, solvent
extraction and electrowinning) has been in operation for more than twenty years
and the demonstration plant at the SSKGRA has successfully recovered zinc
through this integrated process, the integrated process for the production of
zinc from geothermal brine has not been
-16-
attempted in a large scale commercial facility for an extended period of time.
Any material unremedied,
UNCERTAINTIES RELATING TO EXPLORATION AND DEVELOPMENT OF GEOTHERMAL ENERGY
RESOURCES
Geothermal exploration, development and operations are subject to uncertainties,
which vary among different geothermal reservoirs and are similar to those
typically associated with oil and gas exploration and development, including dry
holes and uncontrolled releases. Because of the geological complexities of
geothermal reservoirs, the geographic area and sustainable output of geothermal
reservoirs can only be estimated and cannot be definitively established. There
is, accordingly, a risk of an unexpected decline in the capacity of geothermal
wells and a risk of geothermal reservoirs not being sufficient for sustained
generation of the electrical power capacity desired.
In addition, both the cost of operations and the operating performance of
geothermal power plants may be adversely affected by a variety of operating
factors. Production and injection wells can require frequent maintenance or
replacement. Corrosion caused by high-temperature and high-salinity geothermal
fluids may require the replacement or repair of certain equipment, vessels or
pipelines. New production and injection wells may be required for the
maintenance of current operating levels, thereby requiring substantial capital
expenditures.
INSURANCE
The Salton Sea Projects and the Partnership Projects currently possess property,
business interruption, catastrophic and general liability insurance. Proceeds of
insurance received in connection with the Salton Sea Projects will be payable to
the Depositary for the account of the Salton Sea Guarantors and will be applied
as required under the financing documents. 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 Salton Sea
Guarantors and the Partnership Guarantors are or will be insured will cover all
potential losses.
Because geothermally active areas such as the area in which the 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 the 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 Guarantors are 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 Guarantors 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
Guarantors and the Projects also remain 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 Guarantors and the Projects which could have an adverse
impact on their 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 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 Guarantors and Projects, which
would result in increased compliance costs could have a material adverse effect
on the Guarantors' and the Projects' results of operations.
-17-
EMPLOYEES
Employees necessary for the operation of the Imperial Valley Projects are
provided by CEOC. As of December 31, 2002, CEOC employed 276 people at the
projects, collectively. CEOC maintains a qualified technical staff covering a
broad range of disciplines including geology, geophysics, geochemistry,
hydrology, volcanology, drilling technology, reservoir engineering, plant
engineering, construction management, maintenance services, production
management, and electric power operation. CEOC employees are not covered by any
collective bargaining agreement. The Funding Corporation believes that CEOC's
employee relations are good.
ITEM 2. PROPERTIES.
See page 5 for a schedule of the Guarantors' facilities.
ITEM 3. LEGAL PROCEEDINGS.
In addition to the proceedings described below, some of the projects are
currently parties to various minor items of litigation in the normal course of
business none of which, if determined adversely, would have a material adverse
effect on those projects financial position, results of operations or cash
flows.
Edison/California Power Exchange - Past Due Amounts
- ---------------------------------------------------
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. Due to
reduced liquidity, Edison failed to pay approximately $119 million owed under
the power purchase agreements with certain Guarantors (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 Guarantors had established an allowance for
doubtful accounts of approximately $21.0 million as of December 31, 2001.
As a result of uncertainties related to Edison, the letter of credit that
supports the debt service reserve fund at the Funding Corporation has not been
extended beyond its current July 2004 expiration date, and as such cash
distributions are not available to CE Generation until the Funding Corporation
debt service reserve fund of approximately $67.6 million has been funded or the
letter of credit has been extended beyond its July 2004 expiration date or
replaced. The fund has a cash balance of $46.3 million as of December 31, 2002.
Pursuant to a settlement agreement the final payment of past due amounts by
Edison was received March 1, 2002. Following the receipt of Edison's final
payment of past due balances, the Guarantors 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 certain Guarantors 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 the contractual
obligations, certain Guarantors have established an allowance for doubtful
accounts of approximately $2.7 million as of December 31, 2002. The Project
entities are vigorously pursuing collection of the capacity bonus payments.
On March 25, 2002, Salton Sea II's 10 MW turbine went out of service due to an
uncontrollable force event. Such uncontrollable force event ended and Salton Sea
II returned to service on December 17, 2002. Edison has failed to recognize the
uncontrollable force event and, as such, has not paid amounts otherwise due and
owing, and has improperly derated Salton Sea II from 15 MW to 12.5 MW under the
Salton Sea II power purchase agreement. On January 29, 2003, Salton Sea Power
Generation L.P., owner of Salton Sea II, served a complaint on Edison for such
unpaid amount and to rescind such deration.
In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a
result, the Salton Sea V and CE Turbo Projects have not received payment for
power sold under the Transaction Agreements during December 2000 and January
2001 of approximately $3.8 million. The Guarantors have established an allowance
for doubtful accounts for the full amount of this receivable.
-18-
Kvaerner Arbitration
- --------------------
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, Minerals issued notices of default termination and
demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC
Contract due to failure to meet performance obligations. As a result of
Kvaerner's failure to pay monetary obligations under the contract, the
Guarantors drew $29.6 million under the EPC contract letter of credit on July
20, 2001. The liquidated damages have been accounted for as a reduction of the
capitalized costs of the project. The Guarantors have entered into a time and
materials reimbursable engineer, procure and construction management contract
with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On July 11, 2001, Kvaerner filed an Amended Demand for Arbitration against
Minerals characterizing the nature of the dispute as concerns regarding change
orders and performance penalties. Kvaerner did not state the amount of its
claim. On August 7, 2001, Minerals filed an Answering Statement and Counterclaim
against Kvaerner. Minerals denied all material allegations in Kvaerner's Amended
Demand for Arbitration, and asserted a counterclaim against Kvaerner for breach
of contract and specific performance. Minerals alleged that its total estimated
damage for Kvaerner's breach of contract are in excess of approximately $60
million; however, Minerals has offset approximately $42.5 million of these
damages by exercising its rights under the EPC Contract to claim the retainage
and by drawing on a letter of credit.
On May 23, 2002, Minerals and Kvaerner entered into a Settlement Agreement.
Under the terms of the agreement, Minerals retained the amounts drawn under the
letter of credit, the EPC retainage amounts and the EPC contract balance and
will pay to Kvaerner three equal installments of $2.25 million payable in
January of 2003, 2004 and 2005.
Stone & Webster
- ---------------
The Salton Sea V and CE Turbo Projects were constructed by Stone & Webster, Inc.
(formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of
the Shaw Group ("Stone & Webster"), pursuant to date certain, fixed-price,
turnkey engineering, procure, construct and manage contracts (collectively, the
"Salton Sea V and CE Turbo Projects EPC Contracts"). On March 7, 2002, Power
L.L.C., Vulcan, Del Ranch, and CE Turbo, (collectively, the "Salton Sea V and CE
Turbo Project Owners", the owners of the Salton Sea V and CE Turbo Projects,
filed a Demand for Arbitration against Stone & Webster for breach of contract
and breach of warranty arising from deficiencies in Stone & Webster's design,
engineering, construction and procurement of equipment for the Salton Sea V and
CE Turbo Projects pursuant to the Salton Sea V and CE Turbo Projects EPC
Contracts. On November 25, 2002, the CE Turbo Project Owner entered into a
Settlement Agreement with Stone & Webster. The breach of contract and breach of
warranty claims made by the owners of the Salton Sea V Project are still pending
and the hearing is scheduled to commence in April 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA.
Salton Sea Funding Corporation
- ------------------------------
The following tables set forth selected historical financial and operating data
of the Funding Corporation. The data should be read in conjunction with the
financial statements and related notes and other financial information appearing
elsewhere in this Form 10-K (in thousands).
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998(1)
--------- --------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Total revenue ........................... $ 39,755 $ 41,791 $ 43,718 $ 48,538 $ 39,329
Income (loss) before cumulative effect of
change in accounting principle ........ 85 (37) 174 1,123 1,783
Net income (loss) ....................... (125) (137) 174 1,123 1,783
BALANCE SHEET DATA:
Total assets ............................ $ 570,503 $ 540,580 $565,375 $585,648 $659,337
Senior secured notes and bonds .......... 491,678 520,250 543,908 568,980 626,816
Total liabilities ....................... 557,085 527,482 552,140 572,587 647,399
Total stockholder's equity .............. 13,418 13,098 13,235 13,061 11,938
(1) On October 13, 1998 Funding Corporation issued additional securities of
$285.0 million of Salton Sea Notes and Bonds Series F.
Salton Sea Guarantors
- ---------------------
The following tables set forth selected historical combined financial and
operating data of the Salton Sea Guarantors. The data should be read in
conjunction with the financial statements and related notes and other financial
information appearing elsewhere in this Form 10-K (in thousands).
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002(1) 2001 2000(2) 1999(3) 1998
--------- --------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Operating revenue ....................... $ 84,176 $ 110,941 $ 98,057 $ 81,850 $106,274
Total revenue ........................... 87,893 113,228 98,410 83,718 107,091
Income (loss) before cumulative effect of
change in accounting principle ........ (12,957) (807) 28,323 23,045 45,939
Net income (loss) ....................... (33,975) (9,550) 28,323 23,045 45,939
BALANCE SHEET DATA:
Total assets ............................ $ 584,279 $ 629,950 $626,543 $633,014 $628,515
Senior secured project note ............. 246,419 266,899 284,217 293,954 310,030
Total liabilities ....................... 296,309 308,005 295,048 329,842 348,388
(1) 2002 net loss includes a $21.0 million impairment of goodwill recognized as
a cumulative effect of change in accounting principle.
(2) Salton Sea V commenced operations in the third quarter of 2000.
(3) In 1999 the fixed price period for the Salton Sea III project expired.
-20-
Partnership Guarantors
- ----------------------
The following tables set forth selected historical combined financial and
operating data of the Partnership Guarantors. The data should be read in
conjunction with the financial statements and related notes, and other financial
information appearing elsewhere in this Form 10-K (in thousands).
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002(1) 2001 2000(2) 1999(3) 1998
--------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Operating revenue ....................... $ 94,697 $119,738 $103,250 $105,921 $165,779
Total revenue ........................... 96,440 126,318 108,184 114,988 172,565
Income (loss) before cumulative effect of
change in accounting principles ....... (10,828) 22,975 27,180 25,481 37,134
Net income (loss) ....................... (10,828) 16,085 27,180 25,481 37,134
BALANCE SHEET DATA:
Total assets ............................ $ 970,197 $938,342 $921,701 $901,892 $907,819
Senior secured project note ............. 244,116 248,742 250,650 261,212 293,576
Total liabilities ....................... 368,909 370,763 370,207 377,578 408,986
(1) During December 2002, the Zinc Recovery Project became partially
operational.
(2) CE Turbo commenced operations in the third quarter of 2000.
(3) The decrease in revenue and net income in 1999 was primarily due to the
expiration of the fixed price periods for the Elmore and Del Ranch
Projects.
Royalty Guarantor
- -----------------
The following tables set forth selected historical financial and operating data
of the Royalty Guarantor. The data should be read in conjunction with the
financial statements and related notes and other financial information appearing
elsewhere in this Form 10-K (in thousands).
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000 1999 1998(1)
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Total revenue ............... $12,577 $16,882 $14,130 $26,274 $51,703
Net income .................. 8,171 10,092 7,352 19,222 19,497
BALANCE SHEET DATA:
Total assets ................ $83,989 $79,300 $73,670 $71,116 $77,432
Senior secured project note . 1,147 4,607 9,041 13,814 23,210
Total liabilities ........... 1,154 4,636 9,098 13,896 39,434
(1) In 1998, the Royalty Guarantor received $25.0 million in a settlement
related to the Geo East Mesa payments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the Funding Corporation and Guarantors financial
condition and results of operations during the periods included in the
accompanying statements of operations. This discussion should be read in
conjunction with "Selected Consolidated Financial and Operating Data" and the
Funding Corporation and Guarantors historical financial statements and the notes
to those statements included elsewhere in this report.
-21-
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes. Note 2 to the
Financial Statements in this Annual Report on Form 10-K describes the
significant accounting policies and methods used in the preparation of the
Financial Statements. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, impairment of long-lived assets and
contingent liabilities. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used by management in the preparation of the Financial
Statements.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is based on the Guarantors' 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 Guarantors' historical experience,
estimates of the recoverability of amounts due could be adversely affected.
Impairment of Long-Lived Assets
- -------------------------------
The Guarantors' long-lived assets consist primarily of property, plant and
equipment and intangible assets with useful lives that range from 3 to 40 years,
and acquired goodwill. The Guarantors' believe the useful lives of its
long-lived assets are reasonable. The Guarantors' also evaluate long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Triggering events include a
significant change in the extent or manner in which long-lived assets are being
used or in its physical condition, in legal factors, or in the business climate
that could affect the value of the long-lived assets, including changes in
regulation. The interpretation of such events requires judgment from management
as to whether such an event has occurred and is required. If an event occurs
that could effect the carrying value of the asset and management does not
identify it as a triggering event, future results of operations could be
significantly affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Guarantor's expect to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value, which is based on discounted estimated cash flows from the future
use of the asset.
The estimated cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Guarantors' would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2002 AND 2001
For purposes of consistency in financial presentation, plant capacity factors
for the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV, and Salton
Sea V plants, are based on nominal capacity amounts of 10, 20, 50, 40 and 49 net
MW, respectively and for the Vulcan, Elmore, Leathers, Del Ranch, and CE Turbo
plants are based on capacity amounts of 34, 38, 38, 38, and 10 net MW,
respectively. Each plant possesses an operating margin, which allows for
production in excess of the amounts 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.
-22-
The following operating data represents the aggregate capacity and electricity
production of Salton Sea I and II, Salton Sea III, Salton Sea IV and Salton Sea
V:
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
--------- ---------
Overall capacity factor ........... 78.4% 80.1%
Capacity NMW (weighted average) ... 168.4 168.4
MWh produced ...................... 1,156,800 1,180,900
Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
--------- ---------
Overall capacity factor ........... 101.5% 100.0%
Capacity NMW (weighted average) ... 158.0 158.0
MWh produced ...................... 1,405,000 1,384,700
The Salton Sea Guarantors' operating revenue decreased to $84.2 million for the
year ended December 31, 2002 from $110.9 million for the same period in 2001.
The decrease was primarily due to lower energy rates and lower production due to
more overhauls in 2002. Due to uncertainties associated with Edison's financial
condition, Edison's failure to pay and the bankruptcy of PX, the Salton Sea
Guarantors established an allowance for doubtful accounts of approximately $9.8
million in the year ended December 31, 2001 as a reduction in operating revenue.
As of December 31, 2002, the balance of the allowance for doubtful accounts is
$3.8 million.
The Salton Sea Guarantors' interest and other income increased to $3.7 million
for the year ended December 31, 2002 from $2.3 million for the same period in
2001. The increase was due to a business interruption insurance recovery for
lost revenue at Unit 2 from an equipment failure partially offset by lower
interest income due to fewer months of interest earned on the past due balances
from Edison compared to 2001.
The Partnership Guarantors' operating revenue decreased to $94.7 million for the
year ended December 31, 2002 from $119.7 million for the same period in 2001.
The decrease was due to lower rates offset by higher production in 2002. Due to
uncertainties associated with Edison's financial condition, Edison's failure to
pay and the bankruptcy of PX, the Partnership Guarantors' established an
allowance for doubtful accounts of approximately $14.9 million in the year ended
December 31, 2001 as a reduction in operating revenue. As of December 31, 2002,
the balance of the allowance for doubtful accounts is $2.7 million.
The Partnership Guarantors' interest and other income for the year ended
December 31, 2002 decreased to $1.7 million from $6.6 million for the same
period in 2001. The decrease was due to lower interest income due to fewer
months interest earned on the past due balances from Edison compared to 2001.
The Royalty Guarantors' revenue decreased to $12.6 million for the year ended
December 31, 2002 from $16.9 million for the same period in 2001. The decrease
was the result of lower energy revenue at the Partnership Projects resulting in
lower royalty income.
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, decreased to $59.2 million for the year
ended December 31, 2002, from $61.6 million for the same period in 2001
primarily due to lower royalty costs due to lower revenue.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $88.0 million
for the year ended December 31, 2002, from $62.7 million for the same period in
2001. The increase in expenses from 2001 to 2002 was primarily due to start up
expenses at the Zinc plant.
The Royalty Guarantors' operating expenses decreased to $3.3 million for the
year ended December 31, 2002 from $4.4 million for the year ended December 31,
2001. The decrease in expenses from 2001 to 2002 was primarily due to lower
royalty revenue from the Partnership Projects.
The Salton Sea Guarantors' depreciation and amortization increased to $21.2
million for the year ended December 31, 2002 from $17.3 million for the year
ended December 31, 2001. The increase was due to additional equipment
-23-
bought in 2002 partially offset by the decrease in goodwill amortization of $1.3
million due the discontinuation of goodwill amortization in 2002.
The Partnership Guarantors' depreciation and amortization increased to $23.2
million for the year ended December 31, 2002 from $22.8 million for the year
ended December 31, 2001. The increase was due primarily to additional equipment
bought in 2002 partially offset by the decrease in goodwill amortization of $3.6
million due the discontinuation of goodwill amortization in 2002.
The Royalty Guarantors' depreciation and amortization decreased to $0.9 million
for the year ended December 31, 2002 from $1.8 million for the year ended
December 31, 2001. The decrease was due to discontinuation of goodwill
amortization in 2002.
The Salton Sea Guarantors' interest expense increased to $20.4 million for the
year ended December 31, 2002 from $20.1 million for the year ended December 31,
2001. The increase was due primarily to the discontinuance of capitalizing
interest on the minerals extraction process partially offset by reduced
indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased to $9.1 million for the year ended December 31, 2002 from $6.1 million
for the year ended December 31, 2001. The increase was due to the discontinuance
of capitalizing interest on the minerals extraction process partially offset by
reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $0.3 million for the year
ended December 31, 2002 from $0.6 million for the year ended December 31, 2001.
The decrease was due to lower indebtedness.
The asset impairment at the Salton Sea Guarantors in 2001 reflects the write off
of the book value of a steam turbine. The Salton Sea Guarantors determined that
the turbine, which had been held in storage for use in new development projects,
no longer had any significant value.
The Salton Sea Guarantors are substantially comprised of partnerships. Income
taxes are the responsibility of the partners and Salton Sea Guarantors have no
obligation to provide funds to the partners for payment of any tax liabilities.
Accordingly, the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' income tax provision, decreased to a benefit of
$13.1 million for the year ended December 31, 2002 from an expense of $11.7
million for the year ended December 31, 2001. The decrease was due to lower
pre-tax income. The effective tax rate was 54.8% and 33.8% in 2002 and 2001,
respectively. The changes from year to year in the effective rate are due
primarily to the generation and utilization of energy tax credits, the
resolution of certain tax issues, primarily related to depletion, and depletion
deductions. Income taxes will be paid by the parent of the Guarantors from
distributions to the parent company by the Guarantors, which occur after payment
of operating expenses and debt service. During 2002, the Partnership Guarantors
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 $3.1 million in 2002.
During 2002, the Guarantors adopted Statement of Financial Accounting Standards
("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. In accordance
with SFAS 142, the Guarantors' completed their transitional and annual goodwill
impairment test during the second and fourth quarters of 2002, primarily using a
discounted cash flow methodology as of January 1, 2002 and October 31, 2002,
respectively. The transitional impairment test indicated a potential goodwill
impairment at the Salton Sea Guarantors and the Partnership Guarantors. During
the fourth quarter, the Salton Sea Guarantors and the Partnership Guarantors
completed their assessment of the implied fair value of goodwill. As a result,
an impairment of goodwill was recognized as a cumulative effect of change in
accounting principle of $21.0 million at the Salton Sea Guarantors as of January
1, 2002. However, as a result of this test, no goodwill impairment was
recognized at the Partnership Guarantors as of January 1, 2002. Additionally,
the Guarantors annual goodwill impairment tests indicated no goodwill impairment
existed at October 31, 2002.
During 2001, the Guarantors changed their policy of accounting for overhaul and
well rework costs. These costs, which had historically been accounted for using
deferral methods, are now expensed as incurred. The new policy went into effect
January 1, 2001 and during 2001, the Salton Sea Guarantors recorded a cumulative
effect of this change of $8.7 million and the Partnership Guarantors recorded a
cumulative effect of this change of $6.9 million, net of tax.
-24-
The Funding Corporation's net loss was $0.1 million for the year ended December
31, 2002 compared to a net loss of $0.1 million for the year ended December 31,
2001, which represented interest income and expense, net of applicable tax, and
the Funding Corporation's 1% equity in earnings of the Guarantors.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2001 AND 2000
For purposes of consistency in financial presentation, plant capacity factors
for the Salton Sea I, Salton Sea II, Salton Sea III, Salton Sea IV, and Salton
Sea V plants, are based on nominal capacity amounts of 10, 20, 50, 40 and 49 net
MW, respectively and for the Vulcan, Elmore, Leathers, Del Ranch, and CE Turbo
plants are based on capacity amounts of 34, 38, 38, 38, and 10 net MW,
respectively. Each plant possesses an operating margin, which allows for
production in excess of the amounts 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 following operating data represents the aggregate capacity and electricity
production of Salton Sea I and II, Salton Sea III, Salton Sea IV and Salton Sea
V:
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
--------- ---------
Overall capacity factor ........... 80.1% 76.1%
Capacity NMW (weighted average) ... 168.4 146.1
MWh produced ...................... 1,180,900 976,500
Vulcan, Elmore, Leathers, Del Ranch and CE Turbo:
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
--------- ---------
Overall capacity factor ........... 100.0% 98.8%
Capacity NMW (weighted average) ... 158.0 152.1
MWh produced ...................... 1,384,700 1,320,300
The Salton Sea Guarantors' operating revenue increased to $110.9 million for the
year ended December 31, 2001 from $98.1 million for the same period in 2000. The
increase was primarily due to higher energy rates in 2001, the start up of
Salton Sea V in the third quarter of 2000 and scheduled overhauls in 2000, which
were more extensive compared to 2001. Due to uncertainties associated with
Edison's financial condition and failure to pay and the bankruptcy of PX, the
Salton Sea Guarantors established an allowance for doubtful accounts of
approximately $9.8 million in the year ended December 31, 2001.
The Salton Sea Guarantors' interest and other income increased to $2.3 million
in 2001 from $0.4 million in 2000. The increase was due to interest income
earned on past due balances from Edison in 2001.
The Partnership Guarantors' operating revenue increased to $119.7 million for
the year ended December 31, 2001 from $103.3 million for the same period in
2000. The increase was due to higher energy rates, the start up of CE Turbo in
the third quarter of 2000 and more production due to fewer outages compared to
2000. Due to uncertainties associated with Edison's financial condition and
failure to pay and the bankruptcy of PX, the Partnership Guarantors' established
an allowance for doubtful accounts of approximately $14.9 million in the year
ended December 31, 2001.
The Partnership Guarantors interest and other income for the year ended December
31, 2001 increased to $6.6 million from $4.9 million for the same period in
2000. The increase was due to interest income earned on past due balances from
Edison in 2001.
The Royalty Guarantor revenue increased to $16.9 million for the year ended
December 31, 2001 from $14.1 million for the same period in 2000. The increase
was the result of higher energy revenue at the Partnership Projects resulting in
higher royalties.
-25-
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, increased to $61.6 million for the year
ended December 31, 2001, from $40.8 million for the same period in 2000. The
increase in expenses from 2000 to 2001 was primarily due to higher operating
costs resulting from Salton Sea V costs for an entire year, higher brine
disposal costs and higher royalty costs due to higher revenue.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, increased to $62.7 million
for the year ended December 31, 2001, from $53.0 million for the same period in
2000. The increase in costs from 2000 to 2001 was due primarily to higher
royalty expense due to higher revenue, start up of the CE Turbo Project in the
third quarter of 2000 and higher brine disposal costs.
The Royalty Guarantors' operating expenses increased to $4.4 million for the
year ended December 31, 2001 from $3.9 million for the year ended December 31,
2000. The increase from 2000 to 2001 was due to higher royalties from higher
energy revenue from the Partnership projects.
The Salton Sea Guarantors' depreciation and amortization increased to $17.3
million for the year ended December 31, 2001 from $16.0 million for the year
ended December 31, 2000. The increase was due to a full year of depreciation at
Salton Sea V.
The Partnership Guarantors' depreciation and amortization increased to $22.8
million for the year ended December 31, 2001 from $19.7 million for the same
period in 2000. The increase was primarily due to the upgraded brine handling
system and the start up of the CE Turbo Project in the third quarter of 2000.
The Royalty Guarantor's amortization decreased to $1.8 million for the year
ended December 31, 2001 from $2.0 million for the same period in 2000. The
changes are consistent with the Company's scheduled amortization of the royalty
stream and the excess of cost over fair value related to the Magma acquisition.
The Salton Sea Guarantors' interest expense, net of capitalized amounts,
increased to $20.1 million for the year ended December 31, 2001 from $13.3
million for the same period in 2000. The increase was due primarily to the
discontinuance of capitalizing interest on the minerals extraction process and
Salton Sea V partially offset by reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased to $6.1 million for the year ended December 31, 2001 from $0.6 million
for the same period in 2000. The increase is a result of the discontinuance of
capitalizing interest on the minerals extraction process partially offset by
reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $0.6 million for the year
ended December 31, 2001 from $1.0 million for the same period in 2000. The
decrease was due to the repayment of debt.
The asset impairment at the Salton Sea Guarantors in 2001 reflects the write off
of the book value of a steam turbine. The Salton Sea Guarantors determined that
the turbine, which had been held in storage for use in new development projects,
no longer had any significant value.
The Salton Sea Guarantors are substantially comprised of partnerships. Income
taxes are the responsibility of the partners and Salton Sea Guarantors have no
obligation to provide funds to the partners for payment of any tax liabilities.
Accordingly, the Salton Sea Guarantors have no tax obligations.
The Partnership Guarantors' income tax provision increased to $11.7 million for
the year ended December 31, 2001 from $7.7 million for the same period in 2000.
The effective tax rate was 33.8% and 22.1% in 2001 and 2000, respectively. The
changes from year to year in the effective rate are due primarily to the
generation and utilization of energy tax credits and depletion deductions.
Income taxes will be paid by the parent of the Guarantors from distributions to
the parent company by the Guarantors, which occur after payment of operating
expenses and debt service.
During 2001, the Guarantors changed their policy of accounting for overhaul and
well rework costs. These costs, which had historically been accounted for using
deferral methods, are now expensed as incurred. The new policy went into effect
January 1, 2001 and during 2001, the Salton Sea Guarantors recorded a cumulative
effect of this change of $8.7 million and the Partnership Guarantors recorded a
cumulative effect of this change of $6.9 million,
-26-
net of tax. If Salton Sea Guarantors and Partnership Guarantors had adopted the
policy as of January 1, 2000, net income would have been $1.1 million lower and
$4.9 million higher, respectively, in 2000 on a proforma basis.
The Funding Corporation's net loss was $0.1 million for the year ended December
31, 2001 compared to a net income of $0.2 million for the year ended December
31, 2000, which represented interest income and expense, net of applicable tax,
and the Funding Corporation's 1% equity in earnings of the Guarantors.
RELATED PARTY TRANSACTIONS
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 EPME. Under the terms of the agreement, EPME purchased and sold available
power on behalf of Salton Sea Power and CE Turbo, into the California ISO
markets. The purchase price for the available power was equivalent to the value
actually received by EPME for the sale of such power, including renewable
premiums.
On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction
Agreement to sell available power from the Salton Sea V Project and CE Turbo
Project to EPME. Under the terms of the agreement, at the option of Salton Sea
Power and CE Turbo, EPME purchased all available power from the Salton Sea V
Project and CE Turbo Project based on day ahead price quotes received from EPME.
On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into
Transaction Agreements to sell available power to EPME based on percentages of
the Dow Jones SP-15 Index. On June 22, 2001, the Imperial Valley Projects
(excluding the Salton Sea V Project and CE Turbo Project) ceased selling
available power to EPME and resumed power sales to Edison under the Power
Purchase Agreements ("PPAs"). Effective September 16, 2002 Salton Sea Power and
CE Turbo entered into Transaction Agreements to sell available power to EPME at
increased percentages of the Dow Jones SP-15 Index.
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. Such agreement will expire on
October 15, 2003.
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.
Effective August 1, 2002, Salton Sea Power and CE Turbo amended their respective
power sale agreements with Minerals to provide for a fixed price of $31.00 per
megawatt hour for all hours of August 1, 2002 through December 31, 2002.
Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled
$0.4 million and $0.9 million for the years ended December 31, 2002 and 2001,
respectively, and there were no sales to Minerals from CE Turbo for the years
ended December 31, 2002 and 2001, respectively. There were no material accounts
receivable balances at December 31, 2002 and 2001.
On October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285.0 million aggregate amount of 7.475% Senior Secured Series F
bonds due November 30, 2018. A portion of the proceeds were 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 Minerals) are
among the guarantors of the Funding Corporation debt. In connection with the
divestiture of CE Generation in 1999, MEHC guaranteed the payment by the Zinc
Guarantors of a specified portion of the scheduled debt service on the Imperial
Valley Project Loans including the current principal amount of approximately
$137.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The operating Salton Sea Guarantors' only source of revenue is payments received
pursuant to long-term power sales agreements with Edison, other than Salton Sea
V Project revenue and interest earned on funds on deposit. The operating
Partnership Guarantors' primary source of revenue is payments received pursuant
to long term power sales agreements with Edison, other than CE Turbo Project and
Zinc Recovery Project revenue and interest earned on funds on deposit. The
Royalty Guarantor's only source of revenue is royalties received pursuant to
resource lease agreements with the Partnership Projects. Because of the
Guarantor's dependence on Edison, if Edison fails to fulfill
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its obligations to the projects, it could significantly impair the ability, of
the Guarantors, to fund operating and maintenance expenses, payments of interest
and principal on the Securities, projected capital expenditures and debt service
reserve fund requirements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Funding Corporation has contractual obligations and commercial commitments
that may affect its financial condition. Contractual obligations to make future
payments arise primarily from long-term debt. Contractual obligations that could
make future payments arise primarily from lines of credit and standby letters of
credit. The following tables identify material obligations and commitments as of
December 31, 2002 (in thousands):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
Less Than 2-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- ------- ------- --------
Contractual cash obligations-
Long-term debt ................ $491,678 $28,086 $60,962 $53,890 $348,740
======== ======= ======= ======= ========
COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------------
Less Than 2-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- ------- ------- --------
Other commercial commitments:
Lines of credit(1) .............. $ 15,000 $15,000 $ -- $ -- $ --
Standby letters of credit(2) .... 67,600 -- 67,600 -- --
-------- ------- ------- ------- --------
Total commercial commitments .. $ 82,600 $15,000 $67,600 -- --
======== ======= ======= ======= ========
(1) The line of credit represent the unused borrowing capacity available to the
Funding Corporation, as of December 31, 2002.
(2) The Standby Letter of Credit matures in July 2004.
Zinc Recovery Project
- ---------------------
Minerals developed and owns the rights to proprietary processes for the
extraction of zinc from elements in solution in the geothermal brine and fluids
utilized at the Imperial Valley Projects. A plant has successfully produced
commercial quality zinc at the projects. The affiliates of Minerals may develop
facilities for the extraction of manganese, silica and other products as it
further develops the extraction technology.
Minerals constructed the Zinc Recovery Project, which is recovering zinc from
the geothermal brine (the "Zinc Recovery Project"). Facilities have been
installed near the Imperial Valley Projects sites to extract a zinc chloride
solution from the geothermal brine through an ion exchange process. This
solution is being transported to a central processing plant where zinc ingots
are being produced through solvent extraction, electrowinning and casting
processes. The Zinc Recovery Project is designed to have a capacity of
approximately 30,000 metric tons per year. Limited production began during
December 2002 and full production is expected by late-2003. In September 1999,
Minerals entered into a sales agreement whereby all high-grade zinc produced by
the Zinc Recovery Project will be sold to Cominco, Ltd. The initial term of the
agreement expires in December 2005.
Total capital costs, excluding interest during construction, of the Zinc
Recovery Project are approximately $151.6 million, net of payments for
liquidated damages, through December 31, 2002. Minerals anticipates incurring
$16.3 million in capital expenditures during 2003 to optimize production.
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, Minerals issued notices of default termination and
demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC
Contract due to failure to meet performance obligations. As a result of
Kvaerner's failure to pay monetary obligations under the contract, the
Guarantors drew $29.6 million under the EPC contract le