FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2002.
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________to_________________________
Commission File Number 333-83815
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Caithness Coso Funding Corp.
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(Exact name of registrant as specified in its charter)
Delaware 94-3328762
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Coso Finance Partners California 68-0133679
Coso Energy Developers California 94-3071296
Coso Power Developers California 94-3102796
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(Exact names of Registrants as (State or other jurisdiction (IRS Employer
specified in their characters) of incorporation) Identification No.)
565 Fifth Avenue, 29th Floor, New York, New York 10017-2478
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 921-9099
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Securities registered pursuant to Section 12(g) of the Act:
9.05% Series B Senior Secured Notes Due 2009
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(Title of class)
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 (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's 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. [ ]
The Registrant's Common Stock is not traded in a public market.
Aggregate market value of the voting stock held by non-affiliates
of the registrant:
Not applicable
Documents Incorporated by Reference
Not applicable
CAITHNESS COSO FUNDING CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Part I Page
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Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters (Not applicable) 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
Part III
Item 10. Directors and Executive Officers of the Registrants 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management (Not applicable) 27
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 31
Part I
Item 1. Business.
The Coso Projects
The Coso projects consist of three 80 MW geothermal power plants, called
Navy I, BLM and Navy II, certain transmission lines, wells, gathering system and
other related facilities. The Coso projects are located near one another in the
Mojave Desert approximately 150 miles northeast of Los Angeles, California, and
have been generating electricity since the late 1980s. Unlike fossil fuel-fired
power plants, the Coso projects' power plants use geothermal energy derived from
the natural heat of the earth's interior to generate electricity.
Coso Finance Partners (The Navy I partnership) owns Navy I and its related
facilities, Coso Energy Developers (the BLM partnership) owns BLM and its
related facilities and Coso Power Developers (the Navy II partnership) owns Navy
II and its related facilities (collectively, the Coso partnerships). The Coso
partnerships and their affiliates own the exclusive right to explore, develop
and use, currently without any known interference from any other power
developers, a portion of the Coso Known Geothermal Resource Area.
The geothermal power plants, each of which has three separate turbine
generator units, have consistently operated above their nominal capacities, and
the combined average capacity factor for the plants has been at least 100% or
more historically.
The Coso partnerships sell 100% of the electrical energy generated at the
plants to Southern California Edison (Edison) under three long-term Standard
Offer No. 4 power purchase agreements. Each power purchase agreement expires
after the last maturity date of the senior secured notes. (Edison is one of the
largest investor-owned electric utilities in the United States.) Under the power
purchase agreements, the Coso partnerships receive the following payments:
* Capacity payments for being able to produce electricity at certain
levels. Capacity payments are fixed throughout the lives of the power
purchase agreements;
* Capacity bonus payments if they are able to produce electricity above
a specified, higher level. The maximum capacity bonus payment
available is also fixed throughout the lives of the power purchase
agreements; and
* Energy payments based on the amount of electricity their respective
plants actually produce.
Energy payments were fixed for the first ten years of firm operation under
the power purchase agreements. Firm operation was achieved for each Coso
partnership when Edison and that Coso partnership under its power purchase
agreement agreed that each generating unit at a plant was a reliable source of
generation and could reasonably be expected to operate continuously at its
effective rating. After the first ten years of firm operation and until its
power purchase agreement expires, Edison is required to make energy payments to
the Coso partnership based on its avoided cost of energy. Edison's avoided cost
of energy is Edison's cost to generate electricity if Edison were to produce it
itself or buy it from another power producer rather than buy it from the
relevant Coso partnership. Future energy payments required to be paid by Edison
to the Coso partnerships will most likely be less than historical energy
payments because they will be paid based on Edison's avoided cost of energy,
instead of the fixed payments paid during the first ten years. The fixed energy
price period expired in August 1997 for the Navy I partnership, in March 1999
for the BLM partnership, and in January 2000 for the Navy II partnership. The
Edison power purchase agreements will expire in August 2011 for the Navy I
partnership; in March 2019 for the BLM partnership; and in January 2010 for the
Navy II partnership.
1
Edison entered into an agreement (the "Agreement") with the Coso
partnerships on June 19, 2001 that addressed renewable energy pricing and issues
concerning California's energy crisis. The Agreement, which was amended on
November 30, 2001, established May 1, 2002 as the date the Coso partnerships
began receiving a fixed energy rate of 5.37 cents per kWh for five (5) years.
Subsequent to the five year period, Edison will be required to make energy
payments to the Coso partnerships based on its avoided cost of energy until each
partnership's power purchase agreement expires.
AB1890 Energy Subsidy Payments
In addition to receiving payments under the power purchase agreements, the
Coso partnerships historically qualified for subsidy payments from a special
purpose state fund established under California Legislature AB1890 (AB1890). The
California Energy Commission administered the fund. AB1890, as amended,
provided, in part, for subsidy payments from 1998 through 2001 to power
generators using renewable sources of energy, including geothermal energy, and
who were being paid based on the avoided cost of energy. The funds were
distributed in the form of a production incentive payment that subsidizes
renewable energy producers when prices paid for their electricity were below
certain pre-determined target prices. Under AB1890, the Navy I partnership, the
BLM partnership and the Navy II partnership received subsidy payments for energy
delivered to Edison by the respective Coso partnership, if Edison's avoided cost
of energy fell below 3.0 cents per kWh. This subsidy payment was capped at 1.0
cent per kWh.
Purchase of CalEnergy Interests
On February 25, 1999, Caithness Acquisition Company, LLC (CAC), a wholly
owned subsidiary of Caithness Energy, LLC, (Caithness Energy) purchased all of
the interests in the Coso projects that were owned by CalEnergy Company Inc.
(CalEnergy), which is now known as MidAmerican Energy Holdings Company. The
purchase price consisted of $205.0 million in cash, plus the assumption of
CalEnergy's and its affiliates' share of debt outstanding on the Coso projects
which then totaled approximately $67.0 million. In order to complete the
purchase, CAC arranged for short-term debt financing in the principal amount of
approximately $211.5 million. CAC used a portion of the proceeds from the Series
A note offering that it received from the Coso partnerships, together with funds
from other sources, to repay all of this short-term borrowing.
Operating Strategy
The Coso partnerships seek to maximize their cash flow at the Coso projects
through active management of their cost structure and the geothermal resource.
After CAC'S purchase of all of CalEnergy's interests in the Coso projects, the
Coso partnerships retained Coso Operating Company, (COC) which is an affiliate,
to maintain all three plants, the transmission lines and the geothermal
resource, including well drilling. As a result of the change in operators and
restructuring of operator fees, the aggregate annual fees paid by the Coso
partnerships for such maintenance has been reduced significantly. Payments of
operator fees are subordinated to all payments made under the senior secured
notes. CAC, which purchased the managing partners' interest in the Coso
partnerships, has caused any management fees payable by each Coso partnership to
its partners to be subordinated to payments made under the senior secured notes.
The Coso projects qualify as Small Power Qualifying Facilities (QF) under
the Public Utility Regulatory Policies Act (PURPA) and the rules and regulations
promulgated under PURPA by the Federal Energy Regulatory Commission (FERC).
PURPA exempts the Coso projects from certain federal and state regulations. The
Coso projects must continue to satisfy certain ownership and fuel-use standards
to maintain their QF status. Since their inception, the Coso projects have
satisfied these standards and expect that they will continue to do so in the
future.
2
The Sponsor
Caithness Energy, the principal operating subsidiary of Caithness
Corporation, is a developer and owner of independent power projects and is the
sponsor of the Coso projects. Since 1966, the current owners of Caithness
Corporation have been involved in the development of long-term investment
opportunities involving natural resources. Caithness Corporation is one of the
two original sponsors of the Coso projects and formed Caithness Energy in 1995
to consolidate its ownership of independent power projects.
Caithness Energy believes that it is currently the second largest owner of
geothermal power projects in the United States, based on the total electrical
generating capacity of its power projects. Through its controlled affiliates,
Caithness Energy owns interests in six geothermal plants, including the Coso
projects, totaling 325 MW of generating capacity. Caithness Energy is also
seeking to develop additional natural gas power projects, and has interests in
other operating power generating facilities, including solar, wind and natural
gas, totaling an additional 696 MW of generating capacity.
Caithness Energy is headquartered in New York City and has additional
offices in California, Nevada, Colorado and Florida.
The Issuer
Caithness Coso Funding Corp. (Funding Corp.) is a special purpose
corporation and a wholly owned subsidiary of the Coso partnerships. It was
formed for the purpose of issuing the senior secured notes on behalf of the Coso
partnerships who have jointly, severally, and unconditionally guaranteed
repayment of the senior secured notes.
Funding Corp. has no material assets, other than the loans made to the Coso
partnerships, and does not conduct any business, other than issuing the senior
secured notes and making the loans to the Coso partnerships.
The Coso Known Geothermal Resource Area
The Coso projects are located in an area that has been designated as a
Known Geothermal Resources Area by the Bureau of Land Management pursuant to the
Geothermal Steam Act of 1970. The Bureau of Land Management designates an area
as a Known Geothermal Resource Area when it determines that a commercially
viable geothermal resource is likely to exist there. There are over 100 Known
Geothermal Resource Areas in the United States, most of which are located in the
western United States in tectonically active regions.
The Coso Known Geothermal Resource Area is located in Inyo County,
California, approximately 150 miles northeast of Los Angeles. The Coso
geothermal resource is a "liquid-dominated" hot water source contained within
the heterogeneous fractured granite rocks of the Coso Mountains. It is believed
the heat source for the Coso geothermal resource is a hot molten rock or "magma"
body located at a depth of six-to-seven miles beneath the surface of the field.
Geochemical studies indicate that the water in the Coso geothermal resource is
ancient water that has been there since the ice age or longer.
Steam Sharing Program
In 1994, the Coso partnerships entered into a Geothermal Exchange Agreement
which implemented a steam-sharing program among the Coso projects. The purpose
of the steam-sharing program is to enhance the management and optimize the
overall use of the Coso geothermal resource. Pursuant to the steam sharing
program, the Coso partnerships constructed an inter-project steam supply and
water injection system that links the three Coso projects and BLM North (see
page 5 BLM North) together via metered transfer lines through which the Coso
partnerships exchange steam and other geothermal resources with one another.
3
As part of the steam sharing program, the Coso partnerships plan to
conserve the geothermal resource whenever possible by, among other things,
transferring steam between and among the Coso projects and BLM North, rather
than drilling new wells at the Coso projects' sites prematurely, and expanding a
flexible field-wide water reinjection program. While the U.S. Navy and the
Bureau of Land Management have consented to the steam sharing program, each has
reserved the right, in its sole discretion, to withdraw its consent to such
transfers under certain circumstances.
In 2002, the Navy I partnership and the Navy II partnership incurred
aggregate royalties to the U.S Navy of approximately $1.6 million for steam
transferred by Navy I to Navy II and by Navy II to BLM under the steam sharing
program from geothermal resources located on the property on which Navy I or
Navy II, as the case may be, are situated. Of this amount, the Navy I and Navy
II partnerships each incurred approximately $0.8 million. The BLM partnership
reimbursed the Navy II partnership approximately $0.1 million of the royalties
incurred by the Navy II partnership. The BLM partnership incurs a royalty to the
U.S. Navy for electricity generated by BLM and sold to Edison for steam
transferred from U.S. Navy property.
Royalty and Revenue-Sharing Arrangements
The Coso partnerships are required to make royalty payments to, and are
subject to other revenue-sharing arrangements with, the U.S. Navy, the Bureau of
Land Management and certain other persons.
Navy I
The Navy I partnership pays a royalty for Unit I through reimbursement of
electricity supplied to the U.S. Navy by Edison from electricity generated at
the Navy I plant. The reimbursement is based on a pricing formula that is
included in the U.S. Navy Contract. This formula is primarily based on the
tariff rates charged by Edison, which was increased in 2001 by the California
Public Utilities Commission (CPUC), and is subject to future revision. Indices
utilized in the calculation of the Navy I partnership Unit 1 contract energy
pricing remained unchanged historically based on an agreement between the U.S.
Navy and the Navy I partnership. In October 2002 and November 2001,
modifications to the calculation of the reimbursement pricing formula were made
to the U.S. Navy Contract resulting in a reduction of accrued royalties of $1.3
million and $6.5 million, respectively, which was agreed to by the U.S. Navy.
The parties have currently agreed to a replacement index and true-up calculation
in favor of the Navy I partnership.
In addition, with respect to Unit 1 at Navy I, the Navy I partnership is
obligated to pay the U.S. Navy the sum of $25.0 million on or before December
31, 2009, the expiration date of the term of the U.S. Navy contract. Payment of
this obligation will be made from an established sinking fund to which the Navy
I partnership has been making payments since 1987.
For Units 2 and 3 at Navy I, the Navy I partnership's royalty expense is a
fixed percentage of its electricity sales to Edison. The royalty expense is
15.0% of revenues received by the Navy I partnership through 2003 and will
increase to 20.0% of revenues received from 2004 through 2009, the expiration
date of the U.S. Navy contract.
BLM
The BLM partnership pays royalties to the Bureau of Land Management under
the BLM lease. The royalty rate is 10% of the net value of the steam produced by
the BLM partnership. This royalty rate is fixed for the life of the BLM lease.
In addition to this royalty, the BLM partnership is obligated, in connection
with the assignment of the BLM lease to the BLM partnership, to pay a royalty of
5% based on the value of the steam produced to Coso Land Company, a general
partnership of which CAC and another affiliate of Caithness Energy are the
general partners. The royalty is subordinated to the payment of all the BLM
partnership's other royalties, all debt service and all operating costs of the
BLM partnership. No portion of the royalty accrued to Coso Land Company has been
paid to date.
4
BLM North
In December of 2000, the Bureau of Land Management allowed Coso Land
Company to assign each of the Coso partnerships an undivided one-third interest
in leases they had previously bought from the Los Angeles Department of Water
and Power (LADWP). The assignment required each Coso partnership to pay $8.00
per acre in additional rent to the Bureau of Land Management. When the leased
property commences to produce geothermal steam, the Coso partnerships will pay
monthly royalties under the LADWP leases of 10% of the value of steam produced,
5% of the value of any by-products, and 5% of the value of commercially
demineralized water. The Bureau of Land Management may establish minimum
production levels and reduce the foregoing royalties if necessary to encourage
greater recovery of leased resources.
Navy II
The Navy II partnership pays royalties to the U.S Navy under the U.S Navy
contract. The Navy II partnership's royalty expense is a fixed percentage of its
electricity sales to Edison. The royalty rate was 10.0% of electricity sales to
Edison through 1999, increased to 18.0% for 2000 through 2004 and will increase
to 20.0% from 2005 through the end of the Navy contract.
Operations and Maintenance
The operations and maintenance services for the Coso projects, including
the Navy I, BLM, and Navy II transmission lines, wells, gathering system, and
other related facilities, are performed by COC on behalf of the Coso
partnerships pursuant to the Operation and Maintenance agreements. COC is a
wholly owned subsidiary of CAC that was initially formed by CalEnergy to
facilitate the transfer of operational control of the Coso projects to a
Caithness Energy affiliate.
On February 26, 1999, CalEnergy ceased to be the operator of the Coso
projects, and FPL Energy Operating Services, Inc. (FPLEOSI), an indirect wholly
owned subsidiary of FPL Energy, Inc., assumed that role. An amended and restated
operation and maintenance agreement between FPLEOSI and the managing general
partners was implemented. Under that agreement, FPLEOSI became the plant
operator and under a separate operations and maintenance agreement COC was
responsible for maintenance of the geothermal resource. On October 17, 1999, the
operating agreement between FPLEOSI and the managing general partners was
terminated and COC became the sole operator of the plant and continued to
maintain the geothermal field.
Insurance
The Coso partnerships currently have property, business interruption,
catastrophe and general liability insurance. For the period February 25, 2002 to
February 24, 2003 the plants were insured up to their replacement cost for
general property damage and over $166.0 million in the aggregate for business
interruption, subject to a $250,000 deductible for property damage (and a
$500,000 deductible for the turbine generator sets), with a 60-day deductible
for business interruption (including machinery breakdown). Catastrophic
insurance (including earthquake and flood) was capped at $160.0 million for
property damage, subject to a minimum deductible of $2.5 million or 5.0% of the
loss. The deductible for flood damage is $250,000 for any one loss. Liability
insurance coverage was $53.0 million (occurrence based). Operators' extra
expense (control of well) insurance is $10.0 million per occurrence with a
$250,000 deductible.
5
Employees
Employees necessary for the operation of the Coso partnerships are provided
by COC, under their respective operation and maintenance agreements. COC
maintains a qualified technical staff covering a broad range of disciplines
including geology, geophysics, geochemistry, drilling technology, reservoir
engineering, plant engineering, construction management, maintenance services,
production management, electric power operation and certain accounting services.
As of December 31, 2002, COC employed 87 people to operate and maintain the Coso
projects.
Competition
The Coso partnerships sell all electrical energy generated at the plants to
Edison under three long-term Standard Offer No. 4 power purchase agreements. The
payments under these agreements have constituted 100% of the operating revenues
of each power plant since its inception.
Environmental and Regulatory Matters
The Coso partnerships are subject to environmental laws and regulations at
the federal, state and local levels in connection with the development,
ownership and operation of the Coso projects. These environmental laws and
regulations generally require that a wide variety of permits and governmental
approvals be obtained to construct and operate an energy-producing facility. The
facility must then operate in compliance with the terms of these permits and
approvals. If the Coso partnerships fail to operate their facilities in
compliance with applicable laws, permits and approvals, governmental agencies
could levy fines, curtail operations, or seek orders to cease operations.
The Coso partnerships believe they are in compliance in all material
respects with all environmental regulatory requirements applicable to the Coso
projects, and that maintaining compliance with current governmental requirements
will not require a material increase in capital expenditures or materially
adversely affect that Coso partnership's financial condition or results of
operations. It is possible, however, that future developments, such as more
stringent requirements of environmental laws and enforcement policies
thereunder, could affect capital and other costs at the Coso projects and the
manner in which the Coso partnerships conduct their business.
Financial Information
(in thousands)
Years Ended December 31,
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Navy I Partnership 2002 2001 2000
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Total Operating Revenue(g)(h) $ 92,065 $ 53,400 $ 52,419
Operating Income 58,689 24,218 23,295
Total Assets 195,072 193,114 198,409
6
Years Ended December 31,
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BLM Partnership 2002 2001 2000
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Total Operating Revenue(g)(h) $ 81,252 $ 44,041 $ 42,174
Operating Income 52,726 12,645 10,760
Total Assets 174,871 183,978 201,312
Years Ended December 31,
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Navy II Partnership 2002 2001 2000
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Total Operating Revenue(g)(h) $ 79,592 $ 36,389 $ 43,054
Operating Income 50,164 1,981 8,471
Total Assets 168,834 170,058 195,693
See Footnotes to Summary Selected Financial and Operating Data
Item 2. Properties
Plants
Navy I
Navy I and its steam resource are located on the United States Naval
Weapons Center at China Lake. In December of 2000, Navy I acquired an undivided
one-third interest in leases previously purchased from LADWP located on Bureau
of Land Management property. It commenced operations in 1987. Geothermal steam
for Navy I is produced using over 45 production and injection wells located
within a radius of approximately 3,000 feet of Navy I. Navy I consists of three
separate turbine generators, known as Units 1, 2 and 3, each with approximately
30 MW of electrical generating capacity. Navy I's steam gathering and piping
systems are cross-connected to Navy II via metered transfers to allow steam to
be transferred from wells located on the real property covered by the LADWP
leases to Navy I and between Navy I and Navy II, pursuant to the steam sharing
program. Unit 1 commenced firm operation in 1987, and Units 2 and 3 commenced
firm operation during 1988. Navy I has an aggregate gross electrical generating
capacity of approximately 90 MW, and operated at an average operating capacity
factor of 104.7% in 2002, 108.3% in 2001 and 111.8% in 2000, based on a stated
capacity of 80 MW.
BLM
BLM and its steam resource are located on Bureau of Land Management
property, within the boundaries of the United States Naval Weapons Center at
China Lake. In December of 2000, BLM acquired an undivided one-third interest in
leases previously purchased from LADWP which are also located on Bureau of Land
Management property. It commenced operations in 1989. BLM is comprised of
turbine generators located at two different power blocks: the BLM East site and
the BLM West site. The BLM East site is located approximately 1.3 miles east of
the BLM West site. Geothermal steam for BLM is produced using over 42 production
and injection wells located within a radius of approximately 4,000 feet from
either the BLM East or the BLM West site. BLM consists of three separate turbine
generators, known as Units 7, 8 and 9. Units 7 and 8 are located at the BLM East
site, each with a generating capacity of approximately 30 MW, while Unit 9 is
located at the BLM West site, with a generating capacity of approximately 30 MW.
All three units commenced firm operation during 1989. BLM's steam gathering and
piping systems are cross connected to Navy II via metered transfers to allow
steam to be transferred between Navy II and BLM pursuant to the steam sharing
program. BLM has an aggregate gross electrical generating capacity of
approximately 90 MW, and operated at an average operating capacity factor of
93.9% in 2002, 102.8% in 2001 and 109.4% in 2000, based on a stated capacity of
80 MW.
7
Navy II
Navy II and its steam resource are located on the United States Naval
Weapons Center at China Lake. In December of 2000, Navy II acquired an undivided
one-third interest in leases previously purchased from LADWP which are located
on Bureau of Land Management property. It commenced operations in 1989.
Geothermal steam for Navy II is produced using over 35 production and injection
wells located within a radius of approximately 6,000 feet of Navy II. Navy II
consists of three separate turbine generators, known as Units 4, 5 and 6, each
with approximately 30 MW of electrical generating capacity. All three Navy II
units commenced firm operation in 1990. Navy II's steam supply systems are
cross-connected to Navy I and BLM steam supply systems via metered transfers to
allow steam to be transferred between or among the plants pursuant to the steam
sharing program. Navy II has an aggregate gross electrical capacity of
approximately 90 MW, and operated at an average operating capacity factor of
100.4% in 2002, 104.9% in 2001 and 111.1% in 2000, based on a stated capacity of
80 MW.
Transmission Lines
The electricity generated by Navy I is conveyed over an approximately
28.8-mile 115 kilovolt ("kV") transmission line on the U.S. Navy and Bureau of
Land Management land that is connected to the Edison substation at Inyokern,
California. The Navy I partnership owns and uses this transmission line and its
related facilities. The electricity generated by BLM and Navy II is conveyed
over an approximately 28.8-mile 230 kV transmission line on U.S. Navy and Bureau
of Land Management land that is also connected to the Edison substation at
Inyokern, California. Coso Transmission Line Partners owns the BLM/Navy II
transmission line and related facilities.
Item 3. Legal Proceedings.
The Coso partnerships are currently parties to various items of litigation
relating to day-to-day operations. Management does not believe the outcome of
such proceedings will be material to the financial condition and results of
operations of the Coso partnerships, either individually or taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Not applicable.
Item 6. Selected Financial Data.
The selected fiscal year end financial data has been derived from the
audited financial statements of the Coso partnerships. The information contained
in the following tables should be read in conjunction with the audited financial
statements and notes thereto included elsewhere in this report.
8
Navy I Partnership
(Stand-alone)(a)
(In thousands, except ratio data)
Year Ended December 31,
-----------------------
2002(c) 2001(c) 2000(c) 1999(c) 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues(b)(g)(h)(i)......................... $ 92,065 $ 53,400 $ 52,419 $ 55,666 $ 53,153
Operating expenses..................................... (33,376) (29,182) (29,124) (32,129) (31,894)
-------- -------- -------- -------- --------
Operating income....................................... 58,689 24,218 23,295 23,537 21,259
Non-Operating income and (expense):
Interest expense....................................... (10,836) (11,732) (12,493) (11,573) (4,210)
Other expenses......................................... (315) (705) (520) (4,377) (1,046)
Interest and other income, net......................... 1,574 2,928 2,506 2,234 585
-------- -------- -------- -------- -------
Net income............................................. $ 49,112 $ 14,709 $ 12,788 $ 9,821 $ 16,588
====== ====== ====== ===== ======
Operating Data:
Operating capacity factor (d)(e)....................... 104.7% 108.3% 111.8% 95.4% 94.6%
kWh produced........................................... 733,877 758,890 785,624 668,388 662,560
See Footnotes to Summary Selected Financial and Operating Data
BLM Partnership
(Stand-alone)
(In thousands, except ratio data)
Year Ended December 31,
-----------------------
2002(c) 2001(c) 2000(c) 1999(c) 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues (b)(g)(h)(i)........................ $ 81,252 $ 44,041 $ 42,174 $ 49,877 $ 107,199
Operating expenses..................................... (28,526) (31,396) (31,414) (38,534) (44,687)
-------- -------- -------- -------- --------
Operating income....................................... 52,726 12,645 10,760 11,343 62,512
Non-Operating income and (expense):
Interest expense ...................................... (8,567) (8,958) (9,174) (8,725) (6,107)
Other expenses......................................... (255) (440) (318) (3,332) (1,113)
Interest and other income, net......................... 1,455 3,766 8,125 1,066 1,181
------- ------- ------- ------- -------
Net income............................................. $ 45,359 $ 7,013 $ 9,393 $ 352 $ 56,473
====== ===== ===== ====== ======
Operating Data:
Operating capacity factor (d)(e)....................... 93.9% 102.8% 109.4% 105.0% 104.4%
kWh produced........................................... 657,813 720,130 769,098 735,840 731,767
See Footnotes to Summary Selected Financial and Operating Data
9
Navy II Partnership
(Stand-alone)
(In thousands, except ratio data)
Year Ended December 31,
-----------------------
2002(c) 2001(c) 2000(c) 1999(c) 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenues (b)(g)(h)(i)........................ $ 79,592 $ 36,389 $ 43,054 $ 113,746 $ 119,564
Operating expenses..................................... (29,428) (34,408) (34,583) (43,577) (41,120)
-------- -------- -------- -------- --------
Operating income....................................... 50,164 1,981 8,471 70,169 78,444
Non-Operating income and (expense):
Interest expense....................................... (7,538) (8,128) (9,130) (11,947) (7,918)
Other expenses......................................... (217) (1,119) (769) (4,191) (1,868)
Interest and other income, net......................... 894 2,883 2,868 2,174 1,799
------- ------- ------- -------- -------
Net income (loss)...................................... $ 43,303 $ (4,383) $ 1,440 $ 56,205 $ 70,457
====== ======= ======= ====== =======
Operating Data:
Operating capacity factor (d)(e)....................... 100.4% 104.9% 111.1% 112.0% 108.6%
kWh produced........................................... 703,920 735,210 780,709 785,772 760,659
See Footnotes to Summary Selected Financial and Operating Data
10
As of December 31,
------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data (in thousands):
- ----------------------------------
Navy I Partnership (stand-alone)(a)
Cash and cash equivalents............................. $ 4,215 $ 264 $ 3,506 $ 7,821 $ --
Restricted cash and advances.......................... 28,692 21,325 22,996 25,001 7,524
Property, plant and equipment, net.................... 136,313 140,437 149,076 153,879 180,189
Power purchase agreement, net......................... 9,945 11,093 12,240 13,388 --
Total assets.......................................... 195,072 193,114 198,409 218,192 202,266
Project loans:
Existing project debt, payable to
Coso Funding Corp................................ -- -- -- -- 40,566
Project notes (f)..................................... 110,955 122,550 134,984 151,550 --
Partners' capital..................................... 65,408 52,425 46,871 49,362 149,933
BLM Partnership (stand-alone)
Cash and cash equivalents............................. $ 1,423 $ -- $ 5,862 $ 6,423 $ --
Restricted cash, investments and advances............. 6,646 7,368 14,502 9,806 290
Property, plant and equipment, net.................... 135,853 148,417 153,618 165,650 202,270
Power purchase agreement, net......................... 17,365 18,437 19,510 20,549 --
Total assets.......................................... 174,871 183,978 201,312 216,391 228,381
Project loans:
Existing project debt, payable to
Coso Funding Corp................................ -- -- -- -- 37,958
Project notes (f)..................................... 89,875 96,250 100,907 107,900 --
Partners' capital..................................... 56,603 52,762 69,245 79,350 163,191
Navy II Partnership (stand-alone)
Cash and cash equivalents............................. $ 824 $ -- $ 7,741 $ 6,020 $ 818
Restricted cash, investments and advances............. 10,855 5,517 10,214 54,338 --
Property, plant and equipment, net.................... 116,192 124,665 136,947 147,522 188,840
Power purchase agreement, net......................... 20,026 22,820 25,614 28,409 --
Total assets.......................................... 168,834 170,058 195,693 273,269 220,867
Project loans:
Existing project debt, payable to
Coso Funding Corp................................ -- -- -- -- 61,323
Project notes (f)..................................... 80,401 84,200 94,176 153,550 --
Partners' capital..................................... 85,361 62,220 87,423 104,331 153,661
See Footnotes to Summary Selected Financial and Operating Data
11
Footnotes to Summary Selected Financial and Operating Data
(a) Reflects the combined financial results of the Navy I partnership and Coso
Finance Partners II, a California general partnership ("CFP II"). The Navy
I partnership and CFP II were first formed as separate entities to
facilitate the initial bank financing for the construction and development
of Navy I. Initially, the Navy I partnership acquired all of the assets
relating to the first turbine generator unit at Navy I and CFP II acquired
all of the assets of Navy I relating to the second and third generator
units at Navy I. In 1988, CFP II assigned all of its rights and interests
in the second and third generator units at Navy I to the Navy I partnership
in return for a 5.0% royalty to be paid based on the Navy I partnership's
steam production. Since the Navy I partnership and CFP II operate under
common ownership and management control, the historical financial
statements of the entities have been combined after elimination of
intercompany amounts related to the royalty arrangement. CFP II merged with
and into the Navy I partnership and the accrued royalty was extinguished.
In addition, the royalty will no longer be accrued from and after the
Series A note offering.
(b) The fixed energy price periods expired for the Navy I partnership in August
1997, for the BLM partnership in March 1999 and for the Navy II partnership
in January 2000.
(c) After CAC's purchase of all of CalEnergy's interests in the Coso projects
on February 25, 1999, the Coso partnerships adopted a new basis of
accounting and, accordingly, the financial information for the period after
the acquisition is presented on a different cost basis than that for the
period before the acquisition and therefore is not comparable. The purchase
price was allocated to the portion of the assets and liabilities purchased
from CalEnergy based on their fair values, with the amount of fair value of
net assets in excess of the purchase price being allocated to long-lived
assets on a pro-rata basis.
(d) Based on a stated capacity of 80 MW.
(e) The variance in the operating capacity factors for the Navy I partnership,
the BLM partnership, and the Navy II partnership are due to the transfer of
steam from the Navy I partnership to the BLM and Navy II partnerships under
the steam sharing program.
(f) Reflects indebtedness owed to Funding Corp., which loaned all the proceeds
from the offering to the Coso partnerships at interest rates and maturities
identical to the interest rates and maturities of the senior secured notes.
(g) Reflects non-recognition of operating revenues for the period November 1,
2000 through March 26, 2001, based on non-collection of amounts due for
power generated and sold to Edison.
(h) Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
(i) Reflects recognition of operating revenue in 2002 resulting from collection
of amounts due for power generated and sold to Edison for the period
November 1, 2000 through March 26, 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Except for financial information contained herein, the matters discussed in
this annual report may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and subject to the safe
harbor created by the Securities Litigation Reform Act of 1995. Such statements
include declarations regarding the intent, belief or current expectations of
Caithness Coso Funding Corp. ("Funding Corp."), Coso Finance Partners ("the Navy
I partnership"), Coso Energy Developers ("the BLM partnership"), and Coso Power
Developers ("the Navy II partnership"), collectively, (the "Coso partnerships")
and their respective management. Such statements may be identified by terms such
as expected, anticipated, may, will, believe or other terms or variations of
such words. Any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties; actual results
could differ materially from those indicated by such forward-looking statements.
Among the important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements include but are not
limited to: (i) risks relating to the uncertainties in the California energy
market, (ii) the financial viability of Southern California Edison, ("Edison"),
(iii) the information is of a preliminary nature and may be subject to further
adjustment, (iv) risks related to the operation of power plants (v) the impact
of avoided cost pricing along with other pricing variables, (vi) general
operating risks, including resource availability and regulatory oversight, (vii)
the dependence on third parties, (viii) changes in government regulation, (ix)
the effects of competition, (x) the dependence on senior management, (xi)
fluctuations in quarterly results due in part to seasonality, (xii) affects of
September 11, 2001, including U.S. Navy activity and (xiii) the alleged
manipulation of the California energy market.
12
General
The Coso projects consist of three 80MW geothermal power plants, which are
referred to as Navy I, BLM and Navy II, and their transmission lines, wells,
gathering systems and other related facilities. The Coso projects are located
near one another at the United States Naval Air Weapons Center at China Lake,
California. The Navy I partnership owns Navy I and its related facilities. The
BLM partnership owns BLM and its related facilities. The Navy II partnership
owns Navy II and its related facilities. Affiliates of Caithness Corporation and
CalEnergy Company, Inc. ("CalEnergy"), which is now known as MidAmerican Energy
Holdings Company, formed the Coso partnerships in the 1980s to develop,
construct, own and operate the Coso projects. On February 25, 1999 Caithness
Acquisition Company, LLC, (CAC) purchased all of CalEnergy's interests in the
Coso projects for $205.0 million in cash, plus the assumption of CalEnergy's and
its affiliates' share of debt outstanding at the Coso projects which then
totaled approximately $67.0 million.
Each Coso partnership sells 100% of the electrical energy generated at its
plant to Edison under a long-term Standard Offer No.4 power purchase agreement.
Each power purchase agreement expires after the final maturity date of the 9.05%
Series B Senior Secured Notes issued by Funding Corp.
Each Coso partnership is entitled to the following payments under its power
purchase agreement:
* Capacity payments for being able to produce electricity at certain
levels. Capacity payments are fixed throughout the life of each power
purchase agreement;
* Capacity bonus payments if the Coso partnership is able to produce
electricity above a specified higher level. The maximum annual
capacity bonus payment available is also fixed throughout the life of
each power purchase agreement; and
* Energy payments which are based on the amount of electricity the Coso
partnership's plant actually produces.
Energy payments were fixed for the first ten years of firm operation under
each power purchase agreement. After the first ten years of firm operation and
until a Coso partnership's power purchase agreement expires, Edison makes energy
payments to the Coso partnership based on Edison's avoided cost of energy.
Edison's avoided cost of energy is Edison's cost to generate electricity if
Edison were to produce it itself or buy it from another power producer rather
than buy it from the Coso partnerships. The power purchase agreement for the
Navy I partnership will expire in August 2011, the power purchase agreement for
the BLM partnership will expire in March 2019, and the power purchase agreement
for the Navy II partnership will expire in January 2010. The fixed energy price
period expired in August 1997 for the Navy I partnership, in March 1999 for the
BLM partnership and in January 2000 for the Navy II partnership.
13
Edison entered into an agreement ("Agreement") with the Coso partnerships
on June 19, 2001 that addressed renewable energy pricing and issues concerning
California's energy crisis. The Agreement, which was amended on November 30,
2001, established May 1, 2002, as the date the Coso partnerships began receiving
a fixed energy rate of 5.37 cents per kWh for five (5) years. Subsequent to the
five-year period, Edison will be required to make energy payments to the Coso
partnerships based on its avoided cost of energy until each partnership's power
purchase agreement expires. Estimates of Edison's future avoided cost of energy
may vary significantly and it is not possible to predict with accuracy the
likely level of future avoided cost of energy prices.
From January 1, 2002 through April 30, 2002, the Coso partnerships elected
to receive from Edison a fixed energy rate of 3.25 cents per kWh. Starting May
1, 2002, the Coso partnerships received 5.37 cents per kWh, pursuant to the
agreement discussed above. The average rate of energy paid to the Coso
partnerships for the years ended December 31, 2002, 2001 and 2000 was 4.66, 7.46
and 5.76 cents per kWh, respectively.
In 1994, the Coso partnerships implemented a steam-sharing program, under
the Coso Geothermal Exchange Agreement. The purpose of the steam-sharing program
is to enhance the management of the Coso geothermal resource and to optimize the
resource's overall benefits to the Coso partnerships by transferring steam among
the Coso projects. Under the steam sharing program, the partnership receiving
the steam transfer splits revenue earned from electricity generated with the
partnership that transferred the steam.
The Coso partnerships are required to make royalty payments to the U.S.
Navy and the Bureau of Land Management. The Navy I partnership pays a royalty
for Unit I through reimbursement of electricity supplied to the U.S. Navy by
Edison from electricity generated at the Navy I plant. The reimbursement is
based on a pricing formula that is included in the U.S. Navy Contract. This
formula is primarily based on the tariff rates charged by Edison, which was
increased in 2001 by the California Public Utilities Commission (CPUC), and is
subject to future revision. Indices utilized in the calculation of the Navy I
partnership Unit 1 contract energy pricing remained unchanged historically based
on an agreement between the U.S. Navy and the Navy I partnership. In October
2002 and November 2001, modifications to the calculation of the reimbursement
pricing formula were made to the U.S. Navy Contract resulting in a reduction of
accrued royalties of $1.3 million and $6.5 million, respectively, which was
agreed to by the U.S. Navy. The parties have currently agreed to a replacement
index and true-up calculation in favor of the Navy I partnership. For Units 2
and 3, the Navy I partnership's royalty expense paid to the U.S. Navy is a fixed
percentage of electricity sales at 15% of revenue received by the Navy I
partnership through 2003 and will increase to 20% from 2004 through 2009. In
addition, the Navy I partnership is required to pay the U.S. Navy $25.0 million
in December 2009, the date their contract expires. The payment is secured by
funds placed on deposit monthly, which funds plus accrued interest are
anticipated to aggregate $25.0 million by the expiration date of the contract.
Currently, the monthly amount deposited is approximately $60,000. The BLM
partnership pays a 10% royalty to the Bureau of Land Management based on the net
value of steam produced. The Navy II partnership pays a royalty to the U.S. Navy
based on a fixed percentage of electricity sales to Edison. The royalty rate was
10% of electricity sales through 1999, and increased to 18% for 2000 through
2004 and will increase to 20% from 2005 through the end of the contract term.
The Coso partnerships also pay other royalties, at various rates which in the
aggregate are not material.
Funding Corp is a special purpose corporation and a wholly owned subsidiary
of the Coso partnerships. It was formed for the purpose of issuing the senior
secured notes on behalf of the Coso partnerships who have jointly, severally,
and unconditionally guaranteed repayment of the senior secured notes.
On May 28, 1999, Funding Corp. issued $110.0 million of 6.80% senior
secured notes that were due in 2001, and were paid off on December 15, 2001, and
$303.0 million of 9.05% senior secured notes due in 2009. The proceeds from the
notes were loaned to the Coso partnerships and are payable to Funding Corp from
payments of principal and interest on the notes. Funding Corp. does not conduct
any other operations apart from issuing the notes.
14
Under the depository agreement with the trustee for the notes, the Coso
partnerships established accounts with a depository and pledged those accounts
as security for the benefit of the holders of the senior secured notes. All
amounts deposited with the depository are, at the direction of the Coso
partnerships, invested by the depository in permitted investments. All revenues
or other proceeds actually received by the Coso partnerships are deposited in a
revenue account and withdrawn upon receipt by the depository of a certificate
from the relevant Coso partnerships detailing the amounts to be paid from funds
in its respective revenue account.
Periodic increases in natural gas prices and imbalances between supply and
demand, among other factors, have at times led to significant increases in
wholesale electricity prices in California. During those periods, Edison had
fixed tariffs with their retail customers that were significantly below the
wholesale prices it paid in California. This resulted in significant
under-recoveries by Edison of its electricity purchase costs. On January 16,
2001, Edison announced that it was temporarily suspending payments for energy
provided, including the energy provided by the Coso partnerships, pending a
permanent solution to its liquidity crisis. This cash flow shortfall adversely
affected Edison's liquidity and in turn it did not pay the Coso partnerships for
energy delivered from November 2000 through March 26, 2001. As of December 31,
2001, the Coso partnerships were unable to determine the time frame during which
any future payments would be received. Due to the uncertainty surrounding
Edison's ability to make payment on past due amounts, collection was not
reasonably assured and the Navy I, BLM and Navy II partnerships had not
recognized revenue of $22.0 million, $21.8 million and $22.7 million,
respectively, from Edison for Energy delivered during the period January 1, 2001
through March 26, 2001. The provision for doubtful accounts previously recorded
as of December 31, 2000 by the Navy I, BLM and Navy II partnerships of $15.2
million, $15.3 million and $15.3 million, respectively, was reclassified to
conform with the 2001 presentation.
Pursuant to a CPUC order, Edison resumed making payments to the Coso
partnerships beginning with power generated on March 27, 2001. Edison also made
a payment equal to 10% of the unpaid balance for power generated from November
1, 2000 to March 26, 2001, and paid interest on the outstanding amount at 7% per
annum. That payment was made pursuant to the Agreement between Edison and the
Coso partnerships described above. On March 1, 2002, Edison reached certain
financing milestones and paid Navy I, BLM and Navy II $37.3 million, $37.1
million and $38.0 million, respectively, for revenue generated but not
recognized for the period November 1, 2000 through March 26, 2001.
On September 23, 2002, the United States Court of Appeals for the Ninth
Circuit issued an opinion and order on appeal from a district court's stipulated
judgment, which affirmed the stipulated judgment in part and referred questions
based on California state law to the California Supreme Court. The appeals court
stated that if the Agreement violated California state law, then the appeals
court would be required to void the stipulated judgment. The California Supreme
Court has accepted the Ninth Circuit Court of Appeals request to address the
issues referred to it in the September 23, 2002 ruling. Pending the findings of
the California Supreme Court on matters relating to state law, the Agreement
remains in full force and effect.
On March 27, 2001, the CPUC instituted a new formula to measure Edison's
short run avoided costs ("SRAC"), which is the basis for a portion of the
payments that Edison makes to the Coso Partnerships under their respective power
purchase agreement. In a decision dated September 4, 2002, the California Court
of Appeals ruled that the CPUC erred in not considering the possible retroactive
application of the revised SRAC formula to deliveries beginning on December 1,
2000. The California Court of Appeals remanded the matter back to the CPUC to
make such a consideration.
Edison filed a petition for a writ of review of the January 2001 CPUC
decision, claiming that the "floor" line loss factor of 0.95 for renewable
generators violated the Public Utility Regulatory Policies Act of 1978 (PURPA).
Subsequently, the California Court of Appeals issued a decision on August 20,
2002 in response to the writs affirming the January 2001 CPUC decision, except
for the 0.95 "floor", which it rejected as an abuse of discretion by the CPUC.
Based on these decisions it may be determined that payments between January 2001
and May 2002 that applied the 0.95 minimum line loss factor resulted in
overpayments to the Coso partnerships and that the Coso partnerships may have
future payments offset by such amounts deemed overpayments. While this matter
was appealed to the California Supreme Court, the petition for review was
denied. The Coso partnerships are currently evaluating potential actions to
redress this issue. The Coso partnerships' Agreements set a 1.0 line loss factor
for all energy sold between May 2002 through May 2007.
15
The Coso partnerships cannot predict whether any subsequent action regarding
this matter will be successful.
Capacity Utilization
For purposes of consistency in financial presentation, the plant capacity
factor for each of the Coso partnerships is based on a nominal capacity amount
of 80MW (240MW in the aggregate). The Coso partnerships have a gross operating
capacity that allows for the production of electricity in excess of their
nominal capacity amounts. Utilization of this operating margin is based upon a
number of factors and can be expected to vary throughout the year under normal
operating conditions.
The following data includes the operating capacity factor, capacity and
electricity production (in kWh) for each Coso partnership on a stand-alone
basis:
Year Ended December 31,
-----------------------
2002 2001 2000
Navy I Partnership (stand alone) ---- ---- ----
Operating capacity factor 104.7% 108.3% 111.8%
Capacity (MW) (average) 83.78 86.63 89.44
kWh produced (000s) 733,877 758,890 785,624
BLM Partnership (stand alone)
Operating capacity factor 93.9% 102.8% 109.4%
Capacity (MW) (average) 75.09 82.21 87.56
kWh produced (000s) 657,813 720,130 769,098
Navy II Partnership (stand alone)
Operating capacity factor 100.4% 104.9% 111.1%
Capacity (MW) (average) 80.36 83.93 88.88
kWh produced (000s) 703,920 735,210 780,709
Total energy production for the BLM partnership was 657.8 million kWh for
2002, as compared to 720.1 million kWh for 2001, a decrease of 8.7%. This
decrease in energy production was primarily due to a decline in steam which
management is attempting to remediate through well maintenance and capital
improvements. The declines in total energy production for the Navy I and Navy II
partnerships for 2002 as compared to 2001 were not significant.
Total energy production for the BLM partnership was 720.1 million kWh for
2001, as compared to 769.1 million kWh in 2000, a decrease of 6.4%. Total energy
production for the Navy II partnership was 735.2 million kWh for 2001, as
compared to 780.7 million kWh in 2000, a decrease of 5.8%. These decreases in
energy production were primarily due to the deferment of certain capital and
maintenance projects by the Coso partnerships, due to non-payment by Edison for
energy delivered during the period November 1, 2000 through March 26, 2001.
These projects have been resumed, as Edison has resumed payment for production
starting in late March 2001.
16
Results of Operations for the years ended December 31, 2002, 2001, and 2000.
- ----------------------------------------------------------------------------
The following discusses the results of operations of the Coso partnerships
for the years ended December 31, 2002, 2001 and 2000 (dollar amounts in tables
are in thousands, except per kWh data):
Revenue
2002 2001 2000
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Total Operating Revenues
Navy I partnership 92,065 12.5 53,400 7.0 52,419 6.7
BLM partnership 81,252 12.4 44,041 6.1 42,174 5.5
Navy II partnership 79,592 11.3 36,389 5.0 43,054 5.5
Capacity & Bonus Revenues
Navy I partnership 16,159 2.2 13,210 1.7 13,429 1.7
BLM partnership 15,763 2.4 12,908 1.8 13,122 1.7
Navy II partnership 15,836 2.2 12,978 1.8 13,195 1.7
Energy Revenues
Navy I partnership 75,906 10.3 40,190 5.3 38,990 5.0
BLM partnership 65,489 10.0 31,133 4.3 29,052 3.8
Navy II partnership 63,756 9.1 23,411 3.2 29,859 3.8
Total operating revenues for the Navy I, BLM and Navy II partnerships,
which consist of capacity payments, capacity bonus payments and energy payments,
were $92.1 million, $81.3 million and $79.6 million, respectively, for 2002, as
compared to $53.4 million, $44.0 million and $36.4 million, respectively, for
2001, increases of 72.5%, 84.8% and 118.7%, respectively. Capacity and capacity
bonus revenues for the Navy I, BLM and Navy II partnerships were $16.2 million,
$15.8 million and $15.8 million, respectively, for 2002, as compared to $13.2
million, $12.9 million and $13.0 million, respectively, for 2001, increases of
22.7%, 22.5%, and 21.5%, respectively. Energy revenues for the Navy I, BLM and
Navy II partnerships were $75.9 million, $65.5 million and $63.8 million,
respectively, for 2002, as compared to $40.2 million, $31.1 million and $23.4
million, respectively, for 2001, increases of $35.7 million, $34.4 million and
$40.4 million, respectively. The Coso partnerships' increases in operating
revenues, capacity and bonus revenues and energy revenues for 2002, as compared
to 2001, were primarily due to recognition of revenues generated but not
recognized for the period from November 1, 2000 through March 26, 2001 discussed
above. On March 1, 2002, the Navy I, BLM and Navy II partnerships received
payment and recognized revenue of $37.3 million, $37.1 million and $38.0
million, respectively. The Navy I, BLM and Navy II partnerships had not
recognized revenues of $22.0 million, $21.8 million and $22.7 million,
respectively, for 2001. These increases were partially offset by a decrease in
production during 2002 as compared to 2001.
Total operating revenues for the Navy II partnership, which consist of
capacity payments, capacity bonus payments and energy payments, were $36.4
million for 2001, as compared to $43.1 million in 2000, a decrease of 15.5%.
Total energy revenues for the Navy II partnership were $23.4 million for 2001,
as compared to $29.9 million in 2000, a decrease of 21.7%. The decreases in
total operating revenues and energy revenues for 2001 were primarily due to
nonpayment by Edison for electricity delivered from January 1, 2001 through
March 26, 2001, as compared to non-recognition of November and December revenues
in 2000, resulting from the Edison's liquidity crisis discussed above, partially
offset by decreases in steam transfer revenues and the previously discussed
decrease in power generation.
17
Interest and Other Income
2002 2001 2000
---- ---- -----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I partnership 1,574 0.2 2,928 0.4 2,506 0.3
BLM partnership 1,455 0.2 3,766 0.5 8,125 1.1
Navy II partnership 894 0.1 2,883 0.4 2,868 0.4
The Navy I partnership's interest and other income was $1.6 million in
2002, as compared to $2.9 million in 2001, a decrease of 44.8% The decrease in
interest and other income for 2002, as compared to 2001, was primarily due to
interest on amounts in arrears, owed by Edison in 2001, that were settled and
paid by Edison on March 1, 2002. The amount was also partially offset by the
collection of insurance proceeds in 2002 of $0.8 million for lost revenue caused
by equipment failure.
The BLM and Navy II partnerships interest and other income were $1.5
million and $0.9 million for 2002, respectively, as compared to $3.8 million and
$2.9 million, respectively for 2001, decreases of 60.5% and 69.0%, respectively.
The decreases in interest and other income for 2002, as compared to 2001, were
primarily due to interest on amounts in arrears, owed by Edison in 2001, that
were settled and paid by Edison on March 1, 2002.
The Navy I partnership's interest and other income was $2.9 million in
2001, as compared to $2.5 million in 2000, an increase of 16.0%. The increase
was primarily due to interest on amounts in arrears owed by Edison in 2001. The
BLM partnership's interest and other income was $3.8 million in 2001, as
compared to $8.1 million in 2000, a decrease of 53.1%. This decrease was
primarily due to legal settlements paid during 2000, of $6.1 million from Dow
Chemical Company and $600,000 for legal fees related to the Edison litigation,
partially offset by an increase in interest income on amounts in arrears owed by
Edison in 2001.
Plant Operations
2002 2001 2000
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I partnership 9,832 1.3 9,010 1.2 8,609 1.1
BLM partnership 11,748 1.8 10,221 1.4 12,008 1.6
Navy II partnership 10,304 1.5 9,679 1.3 9,409 1.2
Operating expenses, including operating and general and administrative
expense for the Navy I, BLM and Navy II partnerships were $9.8 million, $11.7
million and $10.3 million, respectively, for 2002, as compared to $9.0 million,
$10.2 million and $9.7 million, respectively, for 2001, increases of 8.9%, 14.7%
and 6.2%, respectively. The Coso partnerships' increases in operating expenses,
including operating and general and administrative expenses for 2002, as
compared to 2001, were primarily due to increases in insurance costs, property
taxes and repair and maintenance projects that had been deferred in 2001 due to
Edison's non-payment, partially offset by a reduction in legal costs associated
with the Edison's non-payment. The increases in 2002 property taxes for the Navy
I, BLM and Navy II partnerships of $670,000, $720,000 and $610,000,
respectively, resulted from a correction by Inyo county to the 2001 assessment.
The BLM partnership's operating expenses, including operating and general
and administrative expenses were $10.2 million in 2001, as compared to $12.0
million in 2000, a decrease of 15.0%. The decrease in operating expenses for
2001 as compared to 2000, was primarily due to a reduction in current property
taxes by an offset of a partial refund of an appealed amount and lower well
maintenance and workover costs during 2001.
18
Royalty Expenses
2002 2001 2000
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I partnership 12,914 1.8 9,950 1.3 10,921 1.4
BLM partnership 2,436 0.4 5,203 0.7 4,045 0.5
Navy II partnership 6,961 1.0 9,377 1.3 10,104 1.3
The Navy I partnership's royalty expense was $12.9 million for 2002, as
compared to $10.0 million in 2001, an increase of 29.0%. The increase was
primarily due to a $6.5 million royalty reimbursement in 2001 that resulted from
the modification to the calculation of the Unit 1 royalty reimbursement pricing
formula. The increase was partially offset by reduced royalties resulting from
the decrease in the rate of energy from 7.5 cents per kWh in 2001 to 4.7 cents
per kWh in 2002, and a $1.3 million royalty reimbursement in 2002 resulting from
the final modification to the calculation of the Unit 1 royalty reimbursement
pricing formula.
The BLM partnership's royalty expense was $2.4 million for 2002, as
compared to $5.2 million in 2001, a decrease of 53.8%. The decrease was
primarily due to reduced royalties resulting from the decrease in the rate of
energy from 7.5 cents per kWh in 2001 to 4.7 cents per kWh in 2002 and a
decrease in production in 2002 as compared to 2001.
The Navy II partnership's royalty expense was $7.0 million for 2002, as
compared to $9.4 million in 2001, a decrease of 25.5%. The decrease was
primarily due to reduced royalties resulting from the decrease in the rate of
energy from 7.5 cents per kWh in 2001 to 4.7 cents per kWh in 2002.
The Navy I partnership's royalty expenses were $10.0 million for 2001, as
compared to $10.9 million in 2000, a decrease of 8.3%. The decrease was
primarily due to a $6.5 million royalty reimbursement resulting from the
modification to the calculation of the Unit 1 royalty reimbursement pricing
formula. The decrease was partially offset by higher royalty charges due to
increased energy revenues caused by the increase in the average avoided cost of
energy from 5.8 cents per kWh in 2000, to 7.5 cents per kWh in 2001. The BLM
partnership's royalty expenses were $5.2 million for 2001, as compared to $4.0
million in 2000, an increase of 30.0%. The increase was due to an increase in
energy revenues caused by the increase in the average avoided cost of energy
from 5.8 cents per kWh in 2000, to 7.5 cents per kWh in 2001. The Navy II
partnership's royalty expenses were $9.4 million for 2001, as compared to $10.1
million in 2000, a decrease of 6.9%. The decrease was due to a decrease in
internally-produced steam over the same period in 2000.
Depreciation and Amortization
2002 2001 2000
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I partnership 10,630 1.4 10,222 1.3 9,594 1.2
BLM partnership 14,342 2.2 15,972 2.2 15,361 2.0
Navy II partnership 12,163 1.7 15,352 2.1 15,070 1.9
The BLM partnership's depreciation and amortization expense was $14.3
million for 2002, as compared to $16.0 million in 2001, a decrease of 10.6%. The
Navy II partnership's depreciation and amortization expense was $12.2 million
for 2002, as compared to $15.4 million in 2001, a decrease of 20.8%. These
decreases in depreciation and amortization expense for 2002, as compared to the
same period in 2001, were due to older wells being fully depreciated during
2002.
The Navy I partnership's depreciation and amortization expense was $10.2
million for 2001, as compared to $9.6 million in 2000, an increase of 6.3%. The
Navy I Partnership's increase in depreciation and amortization expense for 2001,
as compared to the same period in 2000, was primarily due to an increase in
capitalized assets in 2001.
19
Interest Expense
2002 2001 2000
---- ---- ----
$ cents/kWh $ cents/kWh $ cents/kWh
- --------- - --------- - ---------
Navy I partnership 10,836 1.5 11,732 1.5 12,493 1.6
BLM partnership 8,567 1.3 8,958 1.2 9,174 1.2
Navy II partnership 7,538 1.1 8,128 1.1 9,130 1.2
The Navy I partnership's interest expense was $10.8 million for 2002, as
compared to $11.7 million in 2001, a decrease of 7.7%. The Navy II partnership's
interest expense was $7.5 million for 2002, as compared to $8.1 million in 2001,
a decrease of 7.4%. These decreases in interest expense for 2002, as compared to
the same period in 2001, were due to reductions in the principal amount of the
project loan from Funding Corp.
The Navy I partnership's interest expense was $11.7 million for 2001, as
compared to $12.5 million in 2000, a decrease of 6.4%. The Navy II partnership's
interest expense was $8.1 million for 2001, as compared to $9.1 million in 2000,
a decrease of 11.0%. These decreases in interest expense for 2001, as compared
to the same period in 2000, were due to reductions in the principal amount of
the project loan from Funding Corp.
Liquidity and Capital Resources
Each of the Navy I partnership, the BLM partnership and the Navy II
partnership derive substantially all of their cash flow from Edison under their
power purchase agreements and from interest income earned on funds on deposit.
As of December 2001, the 6.8% notes were repaid, subsequently leaving the Coso
partnerships with more cash flow annually. The Coso partnerships have used their
cash primarily for capital expenditures for power plant improvements, resource
and operating costs, distributions to partners and payments with respect to the
project debt.
The Coso partnerships ability to meet their obligations as they come due
will depend upon the ability of Edison to meet its obligations under the terms
of the standard offer No. 4 power purchase agreements and ability to continue to
generate electricity. Edison's shortfall in collections, coupled with its near
term capital requirements, materially and adversely affected its liquidity
during 2000 and 2001. In resolution of that issue, Edison settled with the CPUC
on October 2, 2001, enabling it to recover in retail electric rates its
historical shortfall in electric purchase costs. On September 23, 2002, the
United States Court of Appeals for the Ninth Circuit issued an opinion and order
on appeal from the district court's stipulated judgment which affirmed the
stipulated judgment in part and referred questions based on California state law
to the Supreme Court of California. The appeals court stated that if the
Agreement violated California state law then the appeals court would be required
to void the stipulated judgment. Pending a response from the California Supreme
Court, the Agreement remains in full force and effect. Immediately after this
settlement, Edison and each of the Coso partnerships entered into an amendment
of their respective Agreement (referenced above) pertaining to partial payment
and interest payments relating to Edison's past due obligations for the period
from November 1, 2000 through March 26, 2001. The Agreement, as amended, was
approved by CPUC in January of 2002, and established the fixed energy rates
discussed above and set payment terms for the past due amounts owed to the Coso
partnerships by Edison. Edison's failure to pay its future obligations may have
a material adverse effect on the Coso partnerships ability to make debt service
payments to Funding Corp., as they come due under the Funding Corp. notes.
On March 1, 2002, Edison reached certain financing milestones and paid the
Coso partnerships for revenue generated but not recognized for the period from
November 1, 2000 through March 26, 2001. In the first quarter of 2002, the Navy
I, BLM and Navy II partnerships recognized revenue for energy delivered during
that period of $37.3 million, $37.1 million and $38.0 million, respectively.
20
The following table sets forth a summary of each Coso partnership's cash
flows for the years ended December 31, 2002, December 31, 2001, and December 31,
2000.
2002 2001 2000
---- ---- ----
Navy I partnership (stand alone)
Net cash provided by operating activities $ 64,399 $ 17,112 $ 29,168
Net cash provided by (used in) investing activities (12,724) 1,235 (1,638)
Net cash (used in) financing activities (47,724) (21,589) (31,845)
-------- -------- --------
Net change in cash and cash equivalents $ 3,951 $ (3,242) $ (4,315)
======== ======== ========
BLM partnership (stand alone)
Net cash provided by operating activities $ 49,215 $ 24,722 $ 32,806
Net cash provided by (used in) investing activities 101 (2,431) (6,876)
Net cash (used in) financing activities (47,893) (28,153) (26,491)
-------- -------- --------
Net change in cash and cash equivalents $ 1,423 $ (5,862) $ (561)
======== ======== ========
Navy II partnership (stand alone)
Net cash provided by operating activities $ 30,881 $ 18,504 $ 36,887
Net cash provided by (used in) investing activities (6,096) 4,551 42,556
Net cash (used in) financing activities (23,961) (30,796) (77,722)
-------- -------- --------
Net change in cash and cash equivalents $ 824 $ (7,741) $ 1,721
======== ======== ========
The Navy I partnership's cash flows from operating activities increased by
$47.3 million in 2002, as compared to 2001, primarily due to an increase in net
income resulting from Edison's payment received for revenue generated but not
recognized for the period from November 1, 2000 through March 26, 2001 and a
decrease in amounts due from related parties.
Cash used in investing activities at the Navy I partnership increased by
$13.9 million in 2002, as compared to 2001, primarily due to an increase in
restricted cash requirements associated with the project loan from Funding Corp.
and an increase in capital expenditures in 2002.
The Navy I partnership's cash used in financing activities increased by
$26.1 million in 2002, as compared to 2001, due to an increase in partner
distributions in 2002.
The BLM partnership's cash flows from operating activities increased by
$24.5 million in 2002, as compared to 2001, primarily due to an increase in net
income resulting from Edison's payment received for revenue generated but not
recognized for the period from November 1, 2000 through March 26, 2001,
partially offset by increases in amounts due to related parties and trade
payables.
Cash used in investing activities at the BLM partnership decreased by $2.5
million in 2002, as compared to 2001, primarily due to a decrease in capital
expenditures partially offset by an increase in restricted cash requirements
associated with the project loan from Funding Corp.
The BLM partnership's cash used in financing activities increased by $19.7
million in 2002, as compared to 2001, due to an increase in partner
distributions in 2002.
The Navy II partnership's cash flows from operating activities increased by
$12.4 million in 2002, as compared to 2001, primarily due to an increase in net
income resulting from Edison's payment received for revenue generated but not
recognized for the period from November 1, 2000 through March 26, 2001,
partially offset by increases in amounts due to related parties and trade
payables.
21
Cash used in investing activities at the Navy II Partnership increased by
$10.6 million in 2002, as compared to 2001, primarily due to an increase in
restricted cash requirements associated with the project loan from Funding Corp.
and an increase in capital expenditures in 2002.
The Navy II partnership's cash used in financing activities decreased by
$6.8 million in 2002, as compared to 2001, due to lower repayments of the
project loan from Funding Corp.
The Navy I partnership's cash flows from operating activities decreased by
$12.1 million in 2001 as compared to 2000, primarily due to increases in
accounts receivable and related parties receivables.
Cash from investing activities at the Navy I partnership increased by $2.9
million in 2001 as compared to 2000, primarily due to a decrease in capital
expenditures in 2001.
The Navy I partnership's cash flows used in financing activities decreased
by $10.3 million in 2001 as compared to 2000, primarily due to a decrease in the
payment amount on the project loan from Funding Corp., and a reduction in the
distributions paid in 2001.
The BLM partnership's cash flows from operating activities decreased by
$8.1 million in 2001 as compared to 2000, primarily due to an increase in
accounts receivable, partially offset by increases in related parties payables.
Cash used in investing activities at the BLM partnership decreased by $4.4
million in 2001 as compared to 2000, primarily due to a decrease in restricted
cash requirements associated with the project loan from Funding Corp., partially
offset by an increase in capital expenditures in 2001.
The BLM partnership's cash used in financing activities increased by $1.7
million in 2001 as compared to 2000, primarily due to an increase in
distributions in 2001, partially offset by lower repayments of the project loan
from Funding Corp.
The Navy II partnership's cash flows from operating activities decreased by
$18.4 million in 2001 as compared to 2000, primarily due to the increase in
accounts receivable, partially offset by an increase in amounts due to related
parties.
Cash flows from investing activities at the Navy II partnership decreased
by $38.0 million in 2001 as compared to 2000, primarily due to lower repayments
of the project loan from Funding Corp., and decreases in 2001 capital
expenditures.
The Navy II partnership's cash used in financing activities decreased by
$46.9 million in 2001 as compared to 2000, primarily due to lower repayments of
the project loan from Funding Corp.
The following is a summary of the Coso partnerships material contractual
obligations (in millions):
Less than 1-3 4-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ----- ------ ----- ----- -------
Project Loans.................... $ 281,231 $ 27,618 $ 66,812 $ 85,705 $ 101,096
Other long-term obligations...... 5,040 720 1,440 1,440 1,440
------- ------ ------ ------ -------
$ 286,271 $ 28,338 $ 68,252 $ 87,145 $ 102,536
The project loans were issued under an indenture dated as of May 28, 1999
between Funding Corp. and the trustee, U.S. Bank Trust NA. (see Item 8).
Other long-term obligations relate to Unit 1 at Navy 1, whereby the Navy I
partnership is obligated to pay the U.S. Navy the sum of $25.0 million on or
before December 31, 2009, the expiration date of the term of the U.S. Navy
contract. Payment of this obligation will be made from an established sinking
fund which the Navy I partnership has been making payments to since 1987. The
payment is secured by funds placed on deposit monthly, which funds plus accrued
interest will aggregate $25.0 million. Currently, the monthly amount to be
deposited is approximately $60,000 (see Item 8).
22
Critical Accounting Policies and Estimates
Preparation of this Annual Report on Form 10-K requires the Coso
partnerships to make estimates and assumptions that affect the reported amount
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the Coso partnerships' financial statements, and the reported
amounts of revenue and expenses during the reporting period. The Coso
partnerships' critical accounting policies, including the assumptions and
judgments underlying them, are disclosed under the caption "Summary of
Significant Accounting Policies" under Item 8. These policies have been
consistently applied and address such matters as revenue recognition,
depreciation methods and asset impairment recognition. While policies associated
with estimates and judgments may be affected by different assumption or
condition, the Coso partnerships' believes its estimates and judgments
associated with the reported amounts are appropriate. Actual results may differ
from those estimates.
The Company considers the policies discussed below as critical to an
understanding of the Coso partnerships' financial statements as application of
these policies places the most significant demands on management's judgment,
with financial reporting results relying on the estimation of matters that are
uncertain.
Accounts Receivable and Revenue Recognition - Operating revenues are
recognized as income during the period in which electricity is delivered to
Edison. In the event that Edison is not able to make payment on amounts due, and
collection is not reasonably assured, the Coso partnerships' will not recognize
revenue for energy delivered, until payment is collected.
Impairment of Long-Lived Assets - Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Asset Retirement Obligations - The fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is incurred
if a reasonable estimate of a fair value can be made, and that the associated
asset retirement costs be capitalized as part of the carrying amount of the
long-lived asset. This policy will be applied to the financial statements for
the Coso partnerships' for the fiscal year beginning January 1, 2003.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Risk Factors
Operating the Coso projects involves, among other things, general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond management's control. Changes in these factors could make it more
expensive to operate the Coso projects, or require additional capital
expenditures, or reduce certain benefits currently available to the Coso
partnerships. There are a variety of other risks that affect the Coso projects,
some of which are beyond management's control, including:
* One or more of the Coso projects could perform below expected levels
of output or efficiency;
* In light of the uncertainty of the Western energy markets, Edison's
financial viability may be considered uncertain. If Edison were to
enter into bankruptcy proceedings, the power purchase contracts could
be amended and any accounts receivable from Edison could be reduced or
eliminated;
23
* The Coso geothermal resource could be interrupted or unavailable;
* Operating and royalty costs could increase;
* Changes in the regulatory structure which govern the current
operations of the Coso partnerships.
* Future competition may lead to an accelerated depletion of the
resource;
* Energy prices paid by Edison could decrease or terminate;
* Delivery of electrical energy to Edison could be disrupted;
* Environmental problems could arise which could lead to fines or a
shutdown of one or more plants;
* Plant units and equipment have broken down or failed in the past and
could break down or fail in the future;
* The operators of the Coso projects could suffer labor disputes;
* The government could change permit or governmental approval
requirements restricting operations;
* Third parties could fail to perform their contractual obligations to
the Coso partnerships; and
* Catastrophic events, such as fires, earthquakes, explosions, floods,
severe storms or other occurrences including terrorism or war, could
affect one or more of the Coso projects, the Navy or Edison.
In addition, the Coso partnerships must meet specified performance
requirements under their respective power purchase agreements during the months
of June through September to continue to qualify for the maximum capacity and
capacity bonus payments. If one or more of the events listed above occur and
substantially affect the performance of one or more of the plants during these
months, operating revenues would be significantly decreased.
Item 8. Financial Statements and Supplementary Data.
CAITHNESS COSO FUNDING CORP. AND
COSO OPERATING PARTNERSHIPS
Index Page
----- ----
Caithness Coso Funding Corp:
- ----------------------------
KPMG LLP Independent Auditors' Report F-1
Balance Sheets as of December 31, 2002 and 2001 F-2
Statement of Income for the years ended
December 31, 2002, 2001 and 2000 F-3
Statement of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-4
Notes to Financial Statements F-5
Coso Finance Partners:
- ----------------------
KPMG LLP Independent Auditors' Report F-6
Balance Sheets as of December 31, 2002 and 2001 F-7
Statement of Operations for the years ended
December 31, 2002, 2001 and 2000 F-8
Statement of Partners' Capital for the years ended
December 31, 2002, 2001 and 2000 F-9
Statement of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-10
Notes to Financial Statements F-11
Coso Energy Developers:
- -----------------------
KPMG LLP Independent Auditors' Report F-12
Balance Sheets as of December 31, 2002 and 2001 F-13
Statement of Operations for the years ended
December 31, 2002, 2001 and 2000 F-14
Statement of Partners' Capital for the years ended
December 31, 2002, 2001 and 2000 F-15
Statement of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-16
Notes to Financial Statements F-17
Coso Power Developers:
- ----------------------
KPMG LLP Independent Auditors' Report F-18
Balance Sheets as of December 31, 2002 and 2001 F-19
Statement of Operations for the years ended
December 31, 2002, 2001 and 2000 F-20
Statement of Partners' Capital for the years ended
December 31, 2002, 2001 and 2000 F-21
Statement of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-22
Notes to Financial Statements F-23
Supplemental Unaudited Condensed quarterly Financial
information for 2002, 2001 and 2000 F-24
Coso Partnerships:
- ------------------
Supplemental Condensed Combined Financial
Information for the Coso Partnerships:
Unaudited Condensed Combined Balance Sheets as
of December 31, 2002 and 2001 F-25
Unaudited Condensed Combined Statements of
Operations for the years ended
December 31, 2002, 2001 and 2000 F-26
Unaudited Condensed Combined Statements of
Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-27
Notes to the Unaudited Condensed Combined
Financial Statements F-28
Independent Auditors' Report
The Partners
Caithness Coso Funding Corp.:
We have audited the accompanying balance sheets of Caithness Coso Funding Corp.
as of December 31, 2002 and 2001, and the related statements of income and cash
flows for each of the years in the three-year period ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caithness Coso Funding Corp. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
February 28, 2003
/s/ KPMG, LLP
- -------------
KPMG, LLP
F-1
CAITHNESS COSO FUNDING CORP.
Balance Sheets
December 31, 2002 and 2001
(Dollars in thousands)
Assets 2002 2001
------------ ------------
Accrued interest receivable $ 1,130 1,225
Project loan to Coso Finance Partners 110,955 122,550
Project loan to Coso Energy Developers 89,875 96,250
Project loan to Coso Power Developers 80,401 84,200
------------ ------------
Total assets $ 282,361 304,225
============ ============
Liabilities and Stockholders' Equity
Senior secured notes:
Accrued interest payable $ 1,130 1,225
9.05% notes due December 15, 2009 281,231 303,000
------------ ------------
Total liabilities 282,361 304,225
Stockholders' equity (note 5) -- --
------------ ------------
Total liabilities and stockholders' equity $ 282,361 304,225
============ ============
See accompanying notes to financial statements.
F-2
CAITHNESS COSO FUNDING CORP.
Statements of Income
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands)
2002 2001 2000
-------------- -------------- --------------
Revenue:
Interest income $ 26,931 28,820 30,799
Expense:
Interest expense (26,931) (28,820) (30,799)
-------------- -------------- --------------
Net income $ -- -- --
============== ============== ==============
See accompanying notes to financial statements.
F-3
CAITHNESS COSO FUNDING CORP.
Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands)
2002 2001 2000
--------------- --------------- ---------------
Cash flows from investing activities $ 21,864 27,128 83,039
--------------- --------------- ---------------
Cash flows from financing activities (21,864) (27,128) (83,039)
--------------- --------------- ---------------
Net changes in cash -- -- --
Cash at beginning of year -- -- --
--------------- --------------- ---------------
Cash at end of year $ -- -- --
=============== =============== ===============
Supplemental cash flow disclosures:
Interest paid $ 27,026 28,881 30,905
See accompanying notes to financial statements.
F-4
CAITHNESS COSO FUNDING CORP.
Notes to Financial Statements
December 31, 2002, 2001, and 2000
(Dollars in thousands)
(1) Organization of the Corporation
Caithness Coso Funding Corp. (Funding Corp.), which was incorporated on
April 22, 1999, is a single-purpose Delaware corporation formed to issue
senior secured notes (Notes) for its own account and as an agent acting on
behalf of Coso Finance Partners (CFP), Coso Energy Developers (CED), and
Coso Power Developers (CPD), collectively, the "Partnerships." The
Partnerships are California general partnerships.
On May 28, 1999, Funding Corp. sold $413,000 of Notes (see note 4).
Pursuant to separate credit agreements between Funding Corp. and each
partnership (Credit Agreements), the net proceeds from the offering of the
Notes were loaned to the Partnerships. Payment of the Notes is provided for
by payments made by the Partnerships under their respective project loans
(see note 3). Funding Corp. has no material assets, other than the project
loans, and does not conduct any operations apart from issuing the Notes and
making the project loans to the Partnerships.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, stockholders' equity, and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(b) Fair Value of Financial Instruments
Based on quoted market rates of the Notes, the fair value of the
project loans and underlying Notes as of December 31, 2002 and 2001 is
$281,231 and $303,000, respectively.
(c) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, Accounting for Assets
Retirement Obligations. This Statement addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs
and amends FASB No. 19, Financial Accounting and Reporting by Oil and
Gas Producing Companies. The Statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of a fair
value can be made, and that the associated asset retirement costs be
capitalized as part of the carrying amount of the long-lived asset.
The Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The effect of this standard on
Funding Corp.'s results of operations and financial position is being
evaluated. Funding Corp. cannot currently estimate the financial
impact at the date of adoption as Funding Corp. has not yet completed
its evaluation.
The FASB issued FAS Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This is an
interpretation of FASB Statements No. 5, Accounting for Contingencies,
No. 57, Related Party Disclosures, and No. 107, Disclosures about Fair
Value of Financi