CE GENERATION LLC - 10-K Annual Report

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, 2004

Commission File No. 333-89521

CE GENERATION, LLC

(Exact name of registrant as specified in its charter)

Delaware		47-0818523
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

302 South 36^th Street, Suite 400
Omaha, Nebraska		68131
(Address of principal executive offices)		(Zip Code)

(402) 341-4500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: N/A

Securities registered pursuant to Section 12(g) of the Act: N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of each of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

Yes o No x

The members’ equity accounts are held 50% by MidAmerican Energy Holdings Company and 50% by TransAlta USA Inc. as of February 25, 2005.

TABLE OF CONTENTS

PART I

Item 1.	Business	4
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	11

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	12
Item 6.	Selected Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	40
Item 9A.	Controls and Procedures	40
Item 9B.	Other Information	41

PART III

Item 10.	Directors and Executive Officers of the Registrant	42
Item 11.	Executive Compensation	43
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13.	Certain Relationships and Related Transactions	43
Item 14.	Principal Accountant Fees and Services	44

PART IV

Item 15.	Exhibits and Financial Statement Schedules	45
Signatures		47
Exhibit Index		48

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," "could," "project," "believe," "anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast," and similar terms. These statements represent CE Generation, LLC’s intentions, plans, expectations and beliefs and are subject to risks, uncertainties and other factors. Many of these factors are outside CE Generation, LLC’s control and could cause actual results to differ materially from such forward-looking statements. These factors include, among others:

·	general economic and business conditions in the jurisdictions in which CE Generation, LLC’s facilities are located;

·	the financial condition and creditworthiness of our significant customers and suppliers;

·	governmental, statutory, regulatory or administrative initiatives or ratemaking actions affecting CE Generation, LLC or the power generation industries;

·	weather effects on sales and revenue;

·	general industry trends;

·	increased competition in the power generation industry;

·	fuel and power prices and availability;

·	changes in business strategy, development plans or customer or vendor relationships;

·	availability of qualified personnel;

·	unscheduled outages or repairs;

·	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;

·	other risks or unforeseen events, including wars, the effects of terrorism, embargos and other catastrophic events; and

·	other business or investment considerations that may be disclosed from time to time in SEC filings or in other publicly disseminated written documents.

CE Generation, LLC undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exclusive.

PART I

Item 1. Business.

General

CE Generation, LLC ("CE Generation" or the "Company"), is a Delaware limited liability company created by MidAmerican Energy Holdings Company ("MEHC") on February 8, 1999, for the sole purpose of issuing securities and holding the equity investments in certain subsidiaries. On March 3, 1999, MEHC sold 50% of its ownership interest in CE Generation to El Paso CE Generation Holding Company ("El Paso").

On January 29, 2003, El Paso sold all its interest in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta Corporation.

The Company’s limited liability company operating agreement provides that MEHC and TransAlta each are entitled to appoint 50% of the directors and are entitled to 50% of the distributions made by the Company.

CE Generation owns all of the common stock interests in Magma Power Company ("Magma"), FSRI Holdings, Inc. ("FSRI") and California Energy Development Corporation and their subsidiaries. Through its subsidiaries, CE Generation is primarily engaged in the development, ownership and operation of environmentally responsible independent power production facilities in the United States utilizing geothermal and natural gas resources.

The principal executive office of CE Generation is located at 302 South 36^th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is (402) 341-4500.

In this Annual Report, references to kW means kilowatts, MW means megawatts, kWh means kilowatt hours, and MWh means megawatt hours.

The Projects

CE Generation has an aggregate net ownership interest of 769 MW of electrical generating capacity in domestic power plants, which have an aggregate net capacity of 829 MW. Set forth below is a table describing certain characteristics of CE Generation’s projects as of December 31, 2004:

	Facility			Power Purchase
	Net Capacity	Net MW		Agreement	Power
Operating Project	(MW) ⁽¹⁾	Owned ⁽¹⁾	Location	Expiration	Purchaser ⁽²⁾

Salton Sea Projects:
Salton Sea I	10	10	California	2017	Edison
Salton Sea II	20	20	California	2020	Edison
Salton Sea III	50	50	California	2019	Edison
Salton Sea IV	40	40	California	2026	Edison
Salton Sea V	49	49	California	Varies	Various ⁽³⁾
Total Salton Sea Projects	169	169

Partnership Projects:
Vulcan	34	34	California	2016	Edison
Elmore	38	38	California	2018	Edison
Leathers	38	38	California	2019	Edison
Del Ranch	38	38	California	2019	Edison
CE Turbo	10	10	California	Varies	Various ⁽³⁾
Total Partnership Projects	158	158
Total geothermal facilities	327	327

Gas Facilities:
Saranac	240	180	New York	2009	NYSE&G
Power Resources	212	212	Texas	2005	ONEOK
Yuma	50	50	Arizona	2024	SDG&E
Total gas facilities	502	442
Total operating projects	829	769

(1)

Represents nominal net generating capability (contract capacity for most). Actual MW may vary depending on operating and reservoir conditions and plant design. Facility Net Capacity (in MW) represents facility gross capacity less parasitic load. Parasitic load is electrical output used by the facility and not made available for sale. Net MW Owned indicates current legal ownership.

(2)

Southern California Edison Company ("Edison"); New York State Electric & Gas Corporation ("NYSE&G"); ONEOK Energy, Marketing and Trading Company, L.P. ("ONEOK"); and San Diego Gas & Electric Company ("SDG&E").

(3)

Salton Sea Power LLC ("Salton Sea Power") which owns the Salton Sea V Project, and CE Turbo LLC ("CE Turbo"), which owns the CE Turbo Project, began selling available power to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index (the “TransAlta Transaction Agreement”). The TransAlta Transaction Agreement shall continue until the earlier of: (a) 30 days following a written notice of termination; or (b) any other termination date mutually agreed to by the parties. No such notice of termination has been given by either party.

Additionally, the Salton Sea V and CE Turbo Projects have 33-year contracts, which commenced in July 2000, to sell electricity to CalEnergy Minerals LLC (“CalEnergy Minerals”) and the Salton Sea V Project has a 10-year contract, which commenced in May 2003, to sell up to 20 MW to the City of Riverside, California (“Riverside”).

Effective July 1, 2004, Salton Sea Power and CE Turbo began selling the environmental attributes associated with up to 931,800 MWh to TransAlta Marketing (US) Inc. (“TransAlta Marketing”) through December 31, 2008.

Geothermal Facilities

CE Generation affiliates currently own and operate ten geothermal plants in the Imperial Valley in California known as the Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea IV Project and Salton Sea V Project (collectively, the "Salton Sea Projects"), the Vulcan Project, Elmore Project, Leathers Project, Del Ranch Project and CE Turbo Project (collectively the "Partnership Projects" and, together with the Salton Sea Projects the “Imperial Valley Projects”).

Each of the Imperial Valley Projects, excluding the Salton Sea V and CE Turbo Projects, sells electricity to Edison pursuant to either a separate Standard Offer No. 4 Agreement ("SO4 Agreement") or a negotiated power purchase agreement. Each power purchase agreement is independent of the others, and the performance requirements specified within one such agreement apply only to the project which is subject to the agreement. The power purchase agreements provide for capacity payments, capacity bonus payments and energy payments. Edison makes fixed annual capacity payments and capacity bonus payments to the applicable projects to the extent that capacity factors exceed certain benchmarks. The price for capacity is fixed for the life of the SO4 Agreements and is significantly higher in the months of June through September.

Energy payments under the Imperial Valley Projects’ SO4 Agreements, excluding the Salton Sea IV Project, were at a rate based on the cost that Edison avoids by purchasing energy from the project instead of obtaining the energy from other sources ("Edison’s Avoided Cost of Energy"). In June and November 2001, the Imperial Valley Projects which receive Edison’s Avoided Cost of Energy, entered into agreements that provide for amended energy payments under the SO4 Agreements. The amendments provide for fixed energy payments per kWh in lieu of Edison’s Avoided Cost of Energy. For a five-year period, commencing May 1, 2002, the fixed energy payment is 5.37 cents per kWh. Following the five-year period, the energy payments revert back to Edison’s Avoided Cost of Energy.

For the years ended December 31, 2004, 2003 and 2002, Edison’s Avoided Cost of Energy was 5.9 cents per kWh, 5.4 cents per kWh and 3.5 cents per kWh, respectively. Estimates of Edison’s Avoided Cost of Energy in the future vary substantially from year-to-year based primarily on the estimated future cost of natural gas.

The Salton Sea I Project has contracted 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 specified indices for the term of the Salton Sea I PPA and is currently $174.53 per kW-year. The capacity payment was approximately $1.5 million, $1.5 million and $1.1 million in 2004, 2003 and 2002, respectively. 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 specified indices. The time period weighted average energy payment for Salton Sea I Project was 6.3 cents per kWh during 2004.

The Salton Sea II Project has contracted 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. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $3.3 million. Edison was entitled to receive, at no cost, 5% of all energy delivered in excess of 80% of contract capacity through March 31, 2004.

The Salton Sea III Project has contracted to sell electricity to Edison pursuant to a 30-year modified SO4 Agreement (the "Salton Sea III PPA") that commenced on February 13, 1989. The contract capacity and contract nameplate are 47.5 MW and 49.8 MW, respectively. The price for contract capacity payments and capacity bonus payments is fixed at $175 per kW per year. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $9.7 million.

The Salton Sea IV Project has contracted to sell electricity to Edison pursuant to a modified SO4 Agreement (the "Salton Sea IV PPA") which provides for contract capacity payments on 40 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea I PPA option (20 MW) and to the original Salton Sea IV SO4 Agreement (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The capacity and bonus payments in 2004, 2003 and 2002 were approximately $5.5 million, $3.9 million and $5.5 million, respectively. For deliveries up to 39.6 MW, the energy payment is at a base price, adjusted quarterly based on specified indices, for 55.6% of the total energy delivered by the Salton Sea IV Project and is based on an energy payment schedule for 44.4% of the total energy delivered by the Salton Sea IV Project. For deliveries over 39.6 MW, the energy payment is at Edison’s Avoided Cost of Energy. The contract has a 30-year term, but Edison is not required to purchase the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA option after September 30, 2017, the original termination date of the Salton Sea I PPA.

On May 20, 2003, Salton Sea Power entered into a Power Sales Agreement with Riverside. Under the terms of the agreement, Salton Sea Power sells up to 20 MW of energy generated from the Salton Sea V Project to Riverside at 6.1 cents per kWh. Sales under the agreement commenced June 1, 2003 and will terminate May 31, 2013. The Salton Sea V Project previously sold a portion of its net output to CalEnergy Minerals for the Zinc Recovery Project’s full electrical energy requirements. The agreement provided for energy payments based on the market rates available to the Salton Sea V Project, adjusted for wheeling costs. On September 10, 2004, CalEnergy Minerals ceased operations of the Zinc Recovery Project. Accordingly, except for sales during the dismantling and decommissioning phases of the Zinc Recovery Project, no further sales to CalEnergy Minerals are expected. The Salton Sea V Project sells its remaining output to TransAlta under the TransAlta Transaction Agreement.

Commencing March 27, 2001, Salton Sea Power and CE Turbo entered into a series of transaction agreements to sell available power from the Salton Sea V Project and CE Turbo Project to El Paso Merchant Energy Company (“EPME”) based on percentages of the Dow Jones SP-15 Index. On February 11, 2003, Salton Sea Power and CE Turbo ceased selling available power to EPME. Pursuant to the TransAlta Transaction Agreement, Salton Sea Power and CE Turbo began selling available power from the Salton Sea V Project and CE Turbo Project to TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15 Index. The TransAlta Transaction Agreement shall continue until the earlier of: (a) 30 days following a written notice of termination; or (b) any other termination date mutually agreed to by the parties. No such notice of termination has been given by either party.

On January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power attributes made available by one MWh of generation, a "Green Tag") associated with up to 931,800 MWh of available generation at the Salton Sea V and CE Turbo Projects through December 31, 2008 to TransAlta Marketing at a market price per Green Tag. Sales under this agreement commenced in July 2004.

The Vulcan Project has contracted to sell electricity to Edison under a 30-year SO4 Agreement that commenced on February 10, 1986. The Vulcan Project has a contract capacity and contract nameplate of 29.5 MW and 34 MW, respectively. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $5.5 million.

The Elmore Project has contracted to sell electricity to Edison under a 30-year SO4 Agreement that commenced on January 1, 1989. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $7.9 million.

The Leathers Project has contracted to sell electricity to Edison pursuant to a 30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $7.5 million.

The Del Ranch Project has contracted to sell electricity to Edison under a 30-year SO4 Agreement that commenced on January 2, 1989. The contract capacity and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments are approximately $7.9 million.

The CE Turbo Project sells its available power under the TransAlta Transaction Agreement.

The Imperial Valley Projects, other than the Salton Sea I Project, 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 $1.66 per month per kW of service provided for 2004 and is recalculated annually. The transmission service and interconnection agreements expire in 2015 for the Partnership Projects, 2019 for the Salton Sea III Project, 2020 for the Salton Sea II Project and 2026 for the Salton Sea IV Project. The Salton Sea V and CE Turbo Projects have entered into agreements with similar terms with the IID, which expire in 2030. The Salton Sea I Project delivers energy to Edison at the project site and has no transmission service agreement with the IID.

Gas Facilities

CE Generation affiliates currently operate three gas fired facilities (the "Gas Projects") located in New York, Texas and Arizona. The Gas Projects consist of the "Saranac Project", the "Power Resources Project", and the "Yuma Project", respectively.

The Saranac Project is a 240 net MW natural gas-fired cogeneration facility located in Plattsburgh, New York. The Saranac Project provides electricity to NYSE&G under an existing 15-year power purchase agreement (the "Saranac PPA"), which expires in June 2009. The Saranac Project provides steam to Georgia-Pacific Corporation and Pactiv Corporation under 15-year steam purchase agreements (the "Saranac Steam Purchase Agreements"), which expire in June 2009. The Saranac Project has a 15-year natural gas supply contract (the "Saranac Gas Supply Agreement"), which expires in June 2009, with Coral Energy to supply 100% of the Saranac Project’s fuel requirements. Coral Energy is responsible for production and delivery of natural gas to the U.S.-Canadian border; the gas is then transported by the North Country Gas Pipeline Corporation ("NCGP") the remaining 22 miles to the plant. NCGP is a wholly-owned subsidiary of Saranac Power Partners, L.P. (the "Saranac Partnership") and the Saranac Partnership also owns the Saranac Project. NCGP also transports gas for NYSE&G and Georgia-Pacific Corporation. Each of the Saranac PPA, the Saranac Steam Purchase Agreements and the Saranac Gas Supply Agreement contains rates that are fixed for the respective contract terms. The Saranac PPA rates escalate at a higher percentage than the Saranac Gas Supply Agreement rates. The Saranac Partnership is indirectly owned by subsidiaries of CE Generation, ArcLight Capital Holdings and General Electric Capital Corporation.

The Power Resources Project, a 212 net MW natural gas-fired cogeneration project owned by Power Resources, Ltd. ("Power Resources"), an indirect wholly-owned subsidiary of CE Generation, sold electricity to TXU Power Generation Company, LP ("TXU") as a qualifying facility ("QF") within the meaning of the Public Utility Regulatory Policies Act of 1978, pursuant to a 15-year negotiated power purchase agreement (the "Power Resources PPA"), which provided for capacity and energy payments. The contractual capacity payments in 2003 and 2002 were $3.7 million and $3.6 million per month, respectively. The average energy payments in 2003 and 2002 were 3.6 and 3.5 cents per kWh, respectively. The Power Resources PPA expired September 30, 2003. The Power Resources Project sold steam to ALON USA, LP ("ALON") under a 15-year agreement that also expired September 30, 2003.

On August 5, 2003, Power Resources entered into a Tolling Agreement with ONEOK. The agreement