Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission File No. 333-89521
CE Generation, LLC.
(Exact name of registrant as specified in its charter)
Delaware 47-0818523
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
302 South 36th Street, Suite 400 Omaha, NE 68131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 341-4500
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ X ]
The members equity accounts are held 50% by MidAmerican Energy Holdings
Company and 50% by El Paso CE Generation Holding Company as of March 28, 2001.
TABLE OF CONTENTS
Part I....................................................................... 1
Item 1. Business......................................................... 1
General.................................................................. 1
The Projects............................................................ 2
Geothermal Facilities................................................... 2
Gas Facilities.......................................................... 4
Description of the Securities............................................ 5
General.................................................................. 5
Collateral for the Securities............................................ 6
Payment of Interest and Principal........................................ 6
Interest................................................................. 6
Principal................................................................ 6
Priority of Payments..................................................... 8
Debt Service Reserve Account............................................. 8
Optional Redemption...................................................... 8
Mandatory Redemption--At Par............................................. 8
Mandatory Redemption--With Yield Maintenance Premium..................... 8
Distributions............................................................ 8
Nature of Recourse on the Securities..................................... 9
Covenants................................................................ 9
Employees................................................................ 9
Item 2. Properties......................................................... 9
Item 3. Legal Proceedings.................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders................ 11
Part II...................................................................... 12
Item 5. Market for Registrant's Common Equity and Related Stockholder's
Matters ............................................................. 12
Item 6. Selected Financial Data............................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 14
Item 7A. Qualitative and Quantitative Disclosures About Market Risk........ 14
Item 8. Financial Statements and Supplementary Data........................ 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 45
Part III......................................................................46
Item 10. Directors and Executive Officers..................................46
Item 11. Executive Compensation............................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management ....48
Item 13. Certain Relationships and Related Transactions....................48
Part IV.......................................................................49
Item 14. Exhibits, Financial Statements Schedule and Reports on Form 8-K....49
SIGNATURES....................................................................50
Exhibit Index.................................................................51
PART I
Item 1. Business
General
CE Generation, LLC ("CE Generation" or the "Company"), is a special purpose
Delaware limited liability company created by MidAmerican Energy Holdings
Company ("MEHC" or "MidAmerican") on February 8, 1999, for the sole purpose of
issuing securities and holding the equity investments in certain subsidiaries.
On March 3, 1999, MEHC sold 50% of its ownership interests in CE Generation to
El Paso CE Generation Holding Company which was merged into El Paso Merchant
Energy Holding Company on December 31, 2000 ("El Paso Power"), a subsidiary of
El Paso Corporation ("El Paso"). The principal executive office of CE Generation
is located at 302 South 36th Street, Omaha, Nebraska 68131 and its telephone
number is (402) 341-4500.
Due to the then pending merger of MEHC with an electric utility, MEHC was
required to divest a portion of its ownership interests in the Company's power
projects in order to permit those projects to maintain their status as
qualifying facilities ("QFs") under the Public Utilities Regulatory Policies Act
of 1978. This law requires that a non-electric utility own at least 50% of a QF.
The sale to El Paso Power, which does not own an electric utility, was intended
to permit the Company's power projects to satisfy this ownership requirement. By
maintaining QF status, the Company's power projects are entitled to an exemption
from federal and state utility regulation under the Public Utilities Regulatory
Policies Act and are able to maintain compliance with the provisions of their
current power purchase agreements which require that they be QFs during the term
of those agreements.
The Company's limited liability company operating agreement provides that
MidAmerican and El Paso Power each are entitled to appoint 50% of the directors
and are entitled to 50% of the distributions made by the Company.
CE Generation owns all of the common stock interests in Magma Power Company
("Magma"), FSRI Holdings, Inc. ("FSRI") and California Energy Development
Corporation ("CEDC") and their subsidiaries. Through its subsidiaries, CE
Generation is primarily engaged in the development, ownership and operation of
environmentally responsible independent power production facilities in the
United States utilizing geothermal and natural gas resources. CE Generation has
an aggregate net ownership interest of 756 MW of electrical generating capacity
in power plants in operation or under construction in the United States, which
have an aggregate net capacity of 816 MW.
The Projects
The following table sets out information concerning CE Generation projects:
PROJECT..FUEL..... COMMERCIAL CAPACITY LOCATION
OPERATION
Vulcan Geothermal 1986 34 MW California
Del Ranch Geothermal 1989 38 MW California
Elmore Geothermal 1989 38 MW California
Leathers Geothermal 1990 38 MW California
CE Turbo Geothermal 2000 10 MW California
Salton Sea I Geothermal 1987 10 MW California
Salton Sea II Geothermal 1990 20 MW California
Salton Sea III Geothermal 1989 49.8 MW California
Salton Sea IV Geothermal 1996 39.6 MW California
Salton Sea V Geothermal 2000 49 MW California
Power Resources Gas 1988 200 MW Texas
Yuma Gas 1994 50 MW Arizona
Saranac Gas 1994 240 MW New York
Geothermal Facilities
CE Generation affiliates currently operate ten geothermal plants in the Imperial
Valley in California. The Partnership Projects consist of the Vulcan, Hoch (Del
Ranch), Elmore, Leathers and CE Turbo projects (the "Vulcan Project," the "Hoch
(Del Ranch) Project," the "Elmore Project", the "Leathers Project" and "CE
Turbo" or "Turbo Project" respectively). The Turbo Project, a wholly owned
subsidiary of Magma, commenced operations in 2000.
The remaining five operating Imperial Valley Project plants (the "Salton Sea
Projects") are wholly owned by subsidiaries of Magma. These geothermal power
plants consist of the Salton Sea I project (the "Salton Sea I Project"), the
Salton Sea II project (the "Salton Sea II Project"), the Salton Sea III project
(the "Salton Sea III Project") and the Salton Sea IV project (the "Salton Sea IV
Project"). The fifth plant, the Salton Sea V Project (the "Salton Sea V
Project") commenced commercial operations in 2000.
The Vulcan Project contracts to sell electricity to Southern California Edison
("Edison") under a 30-year Standard Offer No. 4 Agreement ("SO4 Agreement") that
commenced on February 10, 1986. The Vulcan Project has a contract capacity and
contract nameplate of 29.5 MW and 34 MW, respectively. Under the SO4 Agreement,
Edison is obligated to pay the Vulcan Project a capacity payment, a capacity
bonus payment and an energy payment. The price for contract capacity payments is
fixed for the life of such SO4 Agreement. The as-available capacity price is
based on a payment schedule as approved by the CPUC from time to time. The
contract energy payment increased each year for the first ten years, which
period expired on February 9, 1996. Thereafter, the energy payments are based on
Edison's Avoided Cost of Energy.
The Hoch (Del Ranch) Project contracts to sell electricity to Edison under a
30-year SO4 Agreement that commenced on January 2, 1989. The contract capacity
and contract nameplate are 34 MW and 38 MW, respectively. The provisions of such
SO4 Agreement are substantially the same as the SO4 Agreement with respect to
the Vulcan Project. The price for contract capacity payments is fixed for the
life of the SO4 Agreement. The fixed price period for energy payments per kWh
expired on January 1, 1999. Thereafter, the energy payments are based on
Edison's Avoided Cost of Energy.
The Elmore Project contracts to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 1, 1989. The contract capacity and contract
nameplate are 34 MW and 38 MW, respectively. The provisions of such SO4
Agreement are substantially the same as the SO4 Agreement with respect to the
Vulcan Project. The price for contract capacity payments is fixed for the life
of SO4 Agreement. The fixed price period for energy payments per kWh expired on
December 31, 1998. Thereafter, the energy payments are based on Edison's Avoided
Cost of Energy.
The Leathers Project contracts to sell electricity to Edison pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract capacity
and contract nameplate are 34 MW and 38 MW, respectively. The provisions of such
SO4 Agreement are substantially the same as the SO4 Agreement with respect to
the Vulcan Project. The price for contract capacity payments is fixed for the
life of the SO4 Agreement which expired on December 31, 1999. Thereafter, the
energy payments will be based on Edison's Avoided Cost of Energy.
The Salton Sea I Project contracts to sell electricity to Edison pursuant to a
30-year negotiated power purchase agreement, as amended (the "Salton Sea I
PPA"), which provides capacity and energy payments. The contract capacity and
contract nameplate are each 10 MW. The capacity payment is based on the firm
capacity price which is currently $132.58 per kW-year. The contract capacity
payment adjusts quarterly based on a basket of energy indices for the term of
the Salton Sea I PPA. The energy payment is calculated using a Base Price
(defined as the initial value of the energy payment (4.701 cents per kWh for the
second quarter of 1992)), which is subject to quarterly adjustments based on a
basket of indices. The time period weighted average energy payment for Salton
Sea I was 5.7 cents per kWh during 2000. As the Salton Sea I PPA is not an SO4
Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy.
The Salton Sea II Project contracts to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on April 5, 1990. The contract
capacity and contract nameplate are 15 MW (16.5 MW during on-peak periods) and
20 MW, respectively. The contract requires Edison to make capacity payments,
capacity bonus payments and energy payments. The price for contract capacity and
contract capacity bonus payments is fixed for the life of the modified SO4
Agreement. The energy payments for the first ten-year period, which period
expired on April 4, 2000, were levelized at a time period weighted average of
10.6 cents per kWh. Thereafter, the monthly energy payments are based on
Edison's Avoided Cost of Energy. Edison is entitled to receive, at no cost, 5%
of all energy delivered in excess of 80% of contract capacity through September
30, 2004.
The Salton Sea III Project contracts to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on February 13, 1989. The contract
capacity is 47.5 MW and the contract nameplate is 49.8 MW. The SO4 Agreement
requires Edison to make capacity payments, capacity bonus payments and energy
payments for the life of the SO4 Agreement. The price for contract capacity
payments and capacity bonus payments is fixed at $175/kW per year. The energy
payments for the first ten-year period, which period expired on February 12,
1999, were levelized at a time period weighted average of 9.8 cents per kWh.
Thereafter, the monthly energy payments are based on Edison's Avoided Cost of
Energy.
The Salton Sea IV Project contracts to sell electricity to Edison pursuant to a
modified SO4 Agreement which provides for contract capacity payments on 34 MW of
capacity at two different rates based on the respective contract capacities
deemed attributable to the original Salton Sea I PPA option (20 MW) and to the
original Salton Sea IV SO4 Agreement ("Fish Lake PPA") (14 MW). The capacity
payment price for the 20 MW portion adjusts quarterly based upon specified
indices and the capacity payment price for the 14 MW portion is a fixed
levelized rate. The energy payment (for deliveries up to a rate of 39.6 MW) is
at a fixed price for 55.6% of the total energy delivered by Salton Sea IV and is
based on an energy payment schedule for 44.4% of the total energy delivered by
Salton Sea IV. The contract has a 30-year term but Edison is not required to
purchase the 20 MW of capacity and energy originally attributable to the Salton
Sea I PPA option after September 30, 2017, the original termination date of the
Salton Sea I PPA.
The Turbo Project, which commenced commercial operation in the third quarter of
2000, sold its output through market transactions The Turbo Project may sell its
output to a zinc facility, which is owned by a subsidiary of MidAmerican and is
expected to commence operations in mid-2001.
Salton Sea Unit V Project, which commenced operations in the third quarter of
2000, will sell approximately one-third of its net output to a zinc facility,
which is owned by a subsidiary of MidAmerican and is expected to commence
operations in mid-2001. The remainder of the Salton Sea Unit V output in 2000
was sold through other market transactions.
On January 17, 2001, Salton Sea Power and CE Turbo entered into an agreement to
sell available power from Salton Sea Unit V and CE Turbo to El Paso Merchant
Energy, L.P. ("EPME"). Under the terms of the agreement, at the option of Salton
Sea Power and CE Turbo, EPME will purchase all available power from the Salton
Sea Unit V and CE Turbo based on day ahead price quotes received from EPME.
Gas Facilities
The Yuma Project is a 50 net MW natural gas-fired cogeneration project in Yuma,
Arizona providing 50 MW of electricity to San Diego Gas & Electric Company
("SDG&E") under an existing 30-year power purchase contract ("Yuma PPA"). The
energy is sold at SDG&E's Avoided Cost of Energy and the capacity is sold to
SDG&E at a fixed price for the life of the Yuma PPA. The power is wheeled to
SDG&E over transmission lines constructed and owned by Arizona Public Service
Company ("APS"). The Yuma Project commenced commercial operation in May 1994.
The project entity, Yuma Cogeneration Associates ("YCA"), has executed steam
sales contracts with Queen Carpet, Inc. to act as its thermal host. Since the
industrial entity has the right under its agreement to terminate the agreement
upon one year's notice if a change in its technology eliminates its need for
steam, and in any case to terminate the agreement at any time upon three years
notice, there can be no assurance that the Yuma Project will maintain its status
as a QF. However, if the industrial entity terminates the agreement, YCA
anticipates that it will be able to locate an alternative thermal host in order
to maintain its status as a QF. A natural gas supply and transportation
agreement has been executed with Southwest Gas Corporation, terminable under
certain circumstances by YCA and Southwest Gas Corporation.
The Saranac Project is a 240 net MW natural gas-fired cogeneration facility
located in Plattsburgh, New York, which began commercial operation in June 1994.
The Saranac Project has entered into a 15-year power purchase agreement (the
"Saranac PPA") with New York State Electric & Gas ("NYSEG"). The Saranac Project
is a QF and has entered into 15-year steam purchase agreements (the "Saranac
Steam Purchase Agreements") with Georgia-Pacific Corporation and Tenneco
Packaging, Inc. The Saranac Project has a 15-year natural gas supply contract
(the "Saranac Gas Supply Agreement") with Shell Canada Limited ("Shell Canada")
to supply 100% of the Saranac Project's fuel requirements. Shell Canada is
responsible for production and delivery of natural gas to the U.S.-Canadian
border; the gas is then transported by the North Country Gas Pipeline
Corporation ("NCGP") the remaining 22 miles to the plant. NCGP is a wholly-owned
subsidiary of Saranac Power Partners, L.P. (the "Saranac Partnership") and the
Saranac Partnership also owns the Saranac Project. NCGP also transports gas for
NYSEG and Georgia-Pacific. Each of the Saranac PPA, the Saranac Steam Purchase
Agreements and the Saranac Gas Supply Agreement contains rates that are fixed
for the respective contract terms. The 2000 Saranac PPA rates escalate at a
higher percentage than fuel rates. The Saranac Partnership is indirectly owned
by subsidiaries of CE Generation, Tomen Corporation ("Tomen") and General
Electric Capital Corporation ("GECC").
On February 14, 1995, NYSEG filed with the FERC a Petition for a Declaratory
Order, Complaint, and Request for Modification of Rates in Power Purchase
Agreements Imposed Pursuant to the Public Utility Regulatory Policies Act of
1978 ("Petition") seeking FERC (i) to declare that the rates NYSEG pays under
the Saranac PPA, which was approved by the New York Public Service Commission
(the "PSC"), were in excess of the level permitted under PURPA and (ii) to
authorize the PSC to reform the Saranac PPA. On March 14, 1995, the Saranac
Partnership intervened in opposition to the Petition asserting, inter alia, that
the Saranac PPA fully complied with PURPA, that NYSEG's action was untimely and
that the FERC lacked authority to modify the Saranac PPA. On April 12, 1995, the
FERC by a unanimous (5-0) decision issued an order denying the various forms of
relief requested by NYSEG and finding that the rates required under the Saranac
PPA were consistent with PURPA and the FERC's regulations. On May 11, 1995,
NYSEG requested rehearing of the order and, by order issued July 19, 1995, the
FERC unanimously (5-0) denied NYSEG's request. On June 14, 1995, NYSEG
petitioned the United States Court of Appeals for the District of Columbia
Circuit (the "Court of Appeals") for review of FERC's April 12, 1995 order. FERC
moved to dismiss NYSEG's petition for review on July 28, 1995. On July 11, 1997,
the Court of Appeals dismissed NYSEG's appeal from FERC's denial of the petition
on jurisdictional grounds.
On August 7, 1997, NYSEG filed a complaint in the U.S. District Court for the
Northern District of New York against the FERC, the PSC (and the Chairman,
Deputy Chairman and the Commissioners of the PSC as individuals in their
official capacity), the Saranac Partnership and Lockport Energy Associates, L.P.
("Lockport") concerning the power purchase agreements that NYSEG entered into
with Saranac Partners and Lockport. NYSEG's suit asserts that the PSC and the
FERC improperly implemented PURPA in authorizing the pricing terms that NYSEG,
the Saranac Partnership and Lockport agreed to in those contracts. The action
raises similar legal arguments to those rejected by the FERC in its April and
July 1995 orders. NYSEG in addition asks for retroactive reformation of the
contracts as of the date of commercial operation and seeks a refund of $281
million from the Saranac Partnership. The Saranac Partnership and other parties
have filed motions to dismiss and oral arguments on those motions were heard on
March 2, 1998 and again on March 3, 1999. On September 30, 2000 the District
Court granted the motions to dismiss. NYSEG filed a Notice of Appeal on October
25, 2000 appealing the decision to the United States Court of Appeals for the
Second Circuit. NYSEG filed its appellate brief on February 9, 2001. On March
12, 2001 Saranac filed its appellate brief. Oral arguments on the appeal are
expected to occur during the second quarter of 2001. The Saranac Partnership
believes that NYSEG's claims are without merit for the same reasons described in
the FERC's orders and the District Court's decision.
The Power Resources Project is a 200 net MW natural gas-fired cogeneration
project located near Big Spring, Texas, which has a 15-year power purchase
agreement (the "Power Resources PPA") with Texas Utilities Electric Company. The
Power Resources Project began commercial operation in June 1988. The Power
Resources Project is a QF and the project entity, Power Resources Ltd. ("Power
Resources"), has entered into a 15-year steam purchase agreement (the "Power
Resources Steam Purchase Agreement") with Fina Oil and Chemical Company
("Fina"), a subsidiary of Petrofina S.A. of Belgium. Power Resources has entered
into an agreement (the "CE Texas Gas Supply Agreement") with CE Texas Gas L.P.
("CE Texas Gas") for Power Resources' fuel requirements through December 2003.
In June 1995, CE Texas Gas and Louis Dreyfus Natural Gas Corp. ("Dreyfus")
executed an eight-year natural gas supply agreement (the "CE Texas Gas-Dreyfus
Gas Supply Agreement"), with which CE Texas Gas will fulfill its supply
commitment to the Power Resources Project from October 1995 to the end of the
term of the Power Resources PPA. Each of the Power Resources PPA, the Power
Resources Steam Purchase Agreement and the CE Texas Gas Supply Agreement
contains rates that are fixed for the respective contract terms. Revenues
escalate at a higher rate than fuel costs. The Power Resources Project is wholly
owned by subsidiaries of the Company.
DESCRIPTION OF THE SECURITIES
The following is a description of important provisions of the securities. The
following information does not purport to be a complete description of the
securities and is subject to, and qualified in its entirety by, reference to the
securities and the indenture. Unless otherwise specified, the following
description applies to all of the securities.
General
The securities are direct senior obligations of CE Generation, issued under the
indenture for the securities and secured by the collateral. The old securities
were issued in fully registered form and in denominations of $100,000 and any
integral multiple of $1,000 in excess of $100,000.
On March 2, 1999, CE Generation issued securities in a single series in the
aggregate principal amount of $400 million, bearing interest from their date of
issuance at 7.416% per annum and finally maturing on December 15, 2018. These
securities were issued in reliance on exemptions from the registration
requirements of the Securities Act. On March 6, 2000, CE Generation exchanged
$400,000,000 principal amount of these securities for $400,000,000 principal
amount of securities which have been registered under the Securities Act. The
form and terms of these new securities are identical in all material respects to
the securities for which they were exchanged except that transfer restrictions
and registration rights applicable to the old securities do not apply to the new
securities.
The indenture provides for the issuance of the securities and other series of
senior notes or securities as from time to time may be authorized by us, subject
to the limitations set forth in the indenture.
Collateral for the Securities
The securities are secured by the following collateral: (a) all available cash
flow of the assigning subsidiaries deposited with the depository bank; (b) a
pledge of 99% of the equity interests in Salton Sea Power Company and all of the
equity interests in CE Texas Gas LLC, the assigning subsidiaries (other than
Magma Power Company), and California Energy Yuma Corporation; (c) upon the
redemption of, or earlier release of security interests under, Magma's 9 7/8%
promissory notes, a pledge of all of the capital stock of Magma; (d) a pledge of
all of the capital stock of SECI Holdings Inc.; (e) a grant of a lien on and
security interest in the depository accounts; and a grant of a lien on and
security interest in all of CE Generation's other tangible and intangible
property, to the extent it is possible to grant a lien on the property.
Payment of Interest and Principal
Interest
Interest on the securities is payable semiannually in arrears on each June 15
and December 15 to the registered holders at the close of business on the
preceding June 1 or December 1. Interest is calculated on the basis of a 360-day
year, consisting of twelve 30-day months.
Principal
The principal of the securities will be payable in semiannual installments,
commencing June 15, 2000, as follows:
PAYMENT DATE PERCENTAGE OF
PRINCIPAL AMOUNT
PAYABLE
June 15, 2000 1.300%
December 15, 2000 1.300%
June 15, 2001 1.575%
December 15, 2001 1.575%
June 15, 2002 2.575%
December 15, 2002 2.575%
June 15, 2003 2.250%
December 15, 2003 2.250%
June 15, 2004 1.825%
December 15, 2004 1.825%
June 15, 2005 1.850%
December 15, 2005 1.850%
June 15, 2006 2.400%
December 15, 2006 2.400%
June 15, 2007 2.250%
December 15, 2007 2.250%
June 15, 2008 3.525%
December 15, 2008 3.525%
June 15, 2009 3.075%
December 15, 2009 3.075%
June 15, 2010 1.775%
December 15, 2010 1.775%
June 15, 2011 1.900%
December 15, 2011 1.900%
June 15, 2012 2.560%
December 15, 2012 2.560%
June 15, 2013 2.550%
December 15, 2013 2.550%
June 15, 2014 3.225%
December 15, 2014 3.225%
June 15, 2015 3.380%
December 15, 2015 3.380%
June 15, 2016 3.660%
December 15, 2016 3.660%
June 15, 2017 3.780%
December 15, 2017 3.780%
June 15, 2018 4.545%
December 15, 2018 4.545%
Priority of Payments
All available cash flows received by CE Generation shall be paid into the
Revenue Account maintained by a Depository. Amounts paid into the Revenue
Account shall be distributed in the following order: (a) to pay operating and
administrative costs of CE Generation and it's subsidiaries, excluding those
costs payable to affiliated parties; (b) to pay certain administrative costs of
the agents for the secured parties under the Financing Documents; (c) to pay
principal of, premium (if any) and interest on the Securities and the Debt
Service Reserve Bonds, if any, and interest and certain fees payable to the Debt
Service Reserve LOC provider; (d) to pay principal of Debt Service Reserve LOC
Loans and certain related fees and charges; (e) to replenish any shortfall in
the Debt Payment Account; (f) to replenish any shortfall in the Debt Service
Reserve Account; (g) to pay any remaining amounts to the Distribution Suspense
Account.
Debt Service Reserve Account
A Debt Service Reserve Fund for the benefit of the Security Holders issued by
Credit Suisse First Boston and Lehman Commercial Paper Inc., which has been
funded by a Debt Service Reserve Letter of Credit Provider has been established
under the Depository Agreement. If the amounts available to be drawn under the
Debt Service Reserve Letter of Credit and all other amounts held in the Debt
Service Reserve Account from time to time do not equal the then current debt
service reserve required balance, the Debt Service Reserve Fund shall be funded
from the Revenue Account subject to the funding of requests described above. The
debt service reserve required balance on any date equals the maximum semiannual
principal and interest payment due on the securities for the remaining term. Any
Debt Service Reserve Letter of Credit must be issued by a financial institution
rated at least "A" by S&P and "A2" by Moody's.
Optional Redemption
The securities are subject to optional redemption, in whole or in part, at any
time on any business day, at a price equal to the redemption price plus a
premium calculated to "make whole" to comparable U.S. Treasury Securities plus
50 basis points.
Mandatory Redemption--At Par
The securities are subject to mandatory redemption, at par plus accrued interest
to the Redemption Date, (a) upon the occurrence of certain events of loss,
expropriation or title defects related to CE Generation or its subsidiaries; or
(b) if a permitted power contract buy-out occurs unless the Rating Agencies
confirm the then current rating of the securities.
Mandatory Redemption--With Yield Maintenance Premium
The securities are subject to mandatory redemption, at par plus accrued interest
and a yield maintenance premium to the Redemption Date upon certain project
refinancing or project debt refinancing or upon certain asset or equity
interests sales.
Distributions
Distributions may be made only from and to the extent of monies on deposit in
the Distribution Suspense Account, on any funding date on which the following
conditions are satisfied:
(a) the debt payment account and the debt service reserve account are
funded to the then current required levels and the payments
described in the first, second, sixth and seventh priorities of
payments described above are satisfied in full;
(b) no default or event of default under the indenture shall have
occurred and be continuing;
(c) the debt service coverage ratio for the preceding four fiscal
quarters ending on or prior to the funding date, measured as one
period, is greater or equal to 1.5 to 1.0;
(d) the projected debt service coverage ratio for the succeeding four
fiscal quarters, including the quarter in which the distribution
is to be made, measured as one period, is greater than or equal to
1.5 to 1.0; and
(e) no material default or event of default has occurred and is
continuing under any project financing document for the Saranac
Project, the Power Resources Project, the Yuma Project or the
Imperial Valley Projects.
Nature of Recourse on the Securities
The obligation to pay principal of, premium (if any) and interest on the
securities are obligations solely of CE Generation, secured by the collateral.
Neither MidAmerican nor El Paso, nor any affiliate, shareholder, member,
officer, director or employee of CE Generation or of MidAmerican or El Paso will
guarantee the payment of the securities or has any obligation with respect to
the securities (other than the assignment by the assigning subsidiaries of their
available cash flows to secure the obligation to make payments on the
securities).
Covenants
Principal covenants under the indenture require CE Generation, among other
things, (a) to maintain its existence, (b) comply with applicable laws and
governmental approach, (c) perform required obligations under the financing
documents, (d) maintain the liens on the collateral in favor of the collateral
agent, (f) not to incur any debt except permitted debt and lien upon any of its
properties except permitted liens, and (g) not form any subsidiaries, make
investments, loans or advances or acquisitions, in each case other than as
permitted under the indenture.
Employees
Employees necessary for the operation of the CE Generation projects are provided
by CalEnergy Operating Corporation ("CEOC") and Falcon Power Operating Company
("FPOC"), indirect subsidiaries of CE Generation, under operation and
maintenance agreements. As of December 31, 2000, CEOC and FPOC, employed 197 and
62 people full-time, respectively.
MidAmerican agreed to provide administrative and management services, including
accounting, legal, human resources, cash management and energy production
oversight services, to the Company under an administrative services agreement.
MidAmerican is reimbursed for its actual costs and expenses of providing the
services. Other affiliates of El Paso agreed to provide power marketing and fuel
management services to the Company in return for reimbursement of its actual
costs and expenses of providing the services. These agreements each have an
initial term of one year and then continue from year to year until terminated by
either party. The Company also entered into an agreement with MidAmerican and El
Paso Power to provide El Paso Power with a right of first refusal for the
Company to participate in the development of any future geothermal power
projects or combined geothermal power and mineral recovery projects proposed by
MidAmerican in the area of the geothermal reservoir that currently supplies
geothermal resources to the Imperial Valley projects in return for the payment
of a royalty to MidAmerican. If the Company elects not to participate, the
agreement gives MidAmerican the right to develop the new project upon a showing
that there are sufficient geothermal resources for both the new project and the
Company's existing projects.
Item 2. Properties
The Company's most significant physical properties, are its current interest in
operating power facilities, its plants under construction and related real
property interests. The Company also maintains an inventory of approximately
75,000 acres of geothermal property leases. Certain of the producing acreage
owned by Magma is leased to Mammoth-Pacific as owner and operator of the Mammoth
Plants, and Magma, as lessor, receives royalties from the revenues earned by
such power plants. The Company, as lessee, pays certain royalties and other fees
to the property owners and other royalty interest holders from the revenue
generated by the Imperial Valley Project.
Lessors and royalty holders are generally paid a monthly or annual rental
payment during the term of the lease or mineral interest unless and until the
acreage goes into production, in which case the rental typically stops and the
(generally higher) royalty payments begin. Leases of federal property are
transacted with the Department of Interior, Bureau of Land Management, pursuant
to standard geothermal leases under the Geothermal Steam Act and the regulations
promulgated thereunder (the "Regulations"), and are for a primary term of 10
years, extendible for an additional five years if drilling is commenced within
the primary term and is diligently pursued for two successive five-year periods
upon certain conditions set forth in the Regulations. A secondary term of up to
40 years is available so long as geothermal resources from the property are
being produced or used in commercial quantities. Leases of state lands may vary
in form. Leases of private lands vary considerably, since their terms and
provisions are the product of negotiations with the landowners.
Item 3. Legal Proceedings
In addition to the proceedings described in Part 1, "The Projects, CE Generation
Gas Facilities, Saranac Project" above, some of the projects are currently
parties to various minor items of litigation, none of which, if determined
adversely, would have a material adverse effect on those projects.
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. CE
Generation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, CE Generation understands that Edison has not made
payments to other qualifying facilities ("QFs") from which Edison purchases
power and has not made scheduled payments of debt service. Edison's senior
unsecured debt obligations are currently rated Caa2 (on watch for possible
downgrade) by Moody's and D by S&P.
CE Generation is aware that there have been public announcements that Edison,
other industry participants and governmental entities have taken actions in
response to Edison's financial condition. These actions include the following:
o The Federal Energy Regulatory Commission ("FERC") has issued an order
eliminating requirements that Edison and other California utilities
purchase power from the structured power market in California known as the
California Power Exchange in order to provide them with an opportunity to
obtain power from alternative sources at a lower cost.
o The State of California has enacted legislation to provide for the
California Department of Water Resources to purchase wholesale power and
sell it to retail customers, which will be funded by a surcharge on retail
rates. The California legislature is also considering other legislation to
improve the financial condition of the California electric utilities.
o The California Public Utilities Commission ("CPUC") approved a decision on
March 27, 2001 to increase retail electricity rates by approximately 40%.
In another decision that day, the CPUC and ordered Edison to pay the QFs on
a go forward basis within 15 days of the invoice modified the purportedly
calculation of Short Run Avoided Cost.
o The State of California and Edison have announced a preliminary agreement
for the State to purchase Edison's transmission assets for $2.7 billion and
to allow Edison to issue bonds for a substantial portion of its
undercollection of revenues.
CE Generation can give no assurance as to the likely result of any of the
actions described above or as to whether such actions will have a positive
effect on the financial condition of Edison or its willingness to make payments
under the Power Purchase Agreements.
Edison has failed to pay approximately $76 million due under the Power Purchase
Agreements for power delivered in November and December 2000 and January 2001,
although the Power Purchase Agreements provide for billing and payment on a
schedule where payments would have normally been received in early January,
February and March 2001. Edison has not notified the Imperial Valley Projects as
to when they can expect to receive these payments. This continued non-payment by
Edison could result in an untenable situation for the continued operation of the
Imperial Valley Projects unless additional funds are obtained in the near
future.
On February 21, 2001, the Imperial Valley Projects filed a lawsuit against
Edison in California's Imperial County Superior Court seeking a court order
requiring Edison to make the required payments under the Power Purchase
Agreements. The lawsuit also requested, among other things, that the court order
permit the Imperial Valley Projects to suspend deliveries of power to Edison and
to permit the Imperial Valley Projects to sell such power to other purchasers in
California.
On March 22, 2001, the Superior Court granted the Imperial Valley Projects'
Motion for Summary Adjudication and a Declaratory Judgment ordering that: 1)
under the Power Purchase Agreements, the Imperial Valley Projects have the right
to temporarily suspend deliveries of capacity and energy to Edison, 2) the
Imperial Valley Projects are entitled to resell the energy and capacity to other
purchasers and 3) the interim suspension of deliveries to Edison shall not in
any respect result in the modifications or termination of the Power Purchase
Agreements and the Power Purchase Agreements shall in all respects continue in
full force and effect other than the temporary suspension of deliveries to
Edison. The Imperial Valley Projects intend to vigorously pursue their other
remedies in this action in light of Edison's continuing non-payment.
CE Generation is hopeful that the current Edison situation is temporary and the
proceedings in the legal, regulatory, financial and political arenas will lead
to the improvement of Edison's financial condition in the near future and the
payment by Edison of amounts due under the Power Purchase Agreements. However,
no assurance can be given that this will be the case.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of Edison's credit ratings,
Moody's has downgraded the ratings for the Salton Sea Funding Corporation (the
"Funding Corporation") Securities to Caa2 (negative outlook) and S&P has
downgraded the ratings for the Funding Corporation Securities to BBB- and has
placed the Securities on "credit watch negative". Accordingly, the Funding
Corporation does not believe it is currently able to obtain funds in the banking
or capital markets. However, a failure by Edison to make these payments as well
as subsequent monthly payments, for a substantial period of time after the
payments are due, is not expected to have a material adverse effect on the
ability of CE Generation to make payments on the CE Generation bonds due to cash
flows from the Gas Projects. However, there can be no assurance that such a
failure by Edison would not cause a material adverse effect.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters
Not applicable.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
The selected data presented below as of December 31, 2000, 1999, 1998 and 1997
and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 are derived
from CE Generation's audited consolidated financial statements. The consolidated
financial statements reflect the consolidated financial statements of Magma and
subsidiaries (excluding wholly-owned subsidiaries retained by MidAmerican), FSRI
Holdings, Inc. and subsidiaries and Yuma Cogeneration Associates, each a
wholly-owned subsidiary of CE Generation. The consolidated financial statements
present CE Generation's financial position, results of operations and cash flows
as if CE Generation were a separate legal entity for all periods presented. The
selected data presented below as of December 31, 1996 are derived from unaudited
consolidated financial statements and reflect all adjustments necessary in the
opinion of our management for a fair presentation of the data.
YEAR ENDED DECEMBER 31,
2000(1) 1999(2) 1998 1997 1996(3)
Statement of Operations Data:
Sales of electricity and thermal energy $ 499,926 $ 295,787 $ 395,560 $ 381,458 $ 281,307
Total revenue 510,796 340,683 436,175 407,138 304,843
Income before minority interest and
extraordinary item 89,148 61,970 93,778 69,996 46,211
Minority interest (15,613) --- --- --- ---
Extraordinary item (4) --- (17,478) --- --- ---
Net income 73,535 44,492 93,778 69,996 46,211
AS OF DECEMBER 31,
2000(1) 1999 1998 1997 1996(3)
Balance Sheet Data:
Total assets $1,987,323 $1,725,411 $1,782,385 $1,560,874 $ 1,611,087
Project loans, including current portion 230,221 76,261 90,529 103,334 114,571
Salton Sea notes and bonds, including
current portion 543,908 568,980 626,816 448,754 538,982
Senior Secured Bonds, including current
portion 389,600 400,000 --- --- ---
Total liabilities 1,479,944 1,333,131 1,245,438 1,096,734 1,156,184
Net investments and advances
(members' equity at
December 31, 2000 and 1999) 438,915 392,280 536,947 464,140 454,903
(1) Reflects full consolidation of the Saranac Project, which was previously
accounted for as an equity investment. The 2000 results also reflect the
addition of Salton Sea Unit V and CE Turbo Projects which commenced operations
in 2000.
(2) The decrease in revenue and net income in 1999 was due to the expiration of
the fixed price periods for the Elmore, Del Ranch and Salton Sea III Projects.
(3) Reflects the acquisition of the remaining 50% of the Elmore, Vulcan, Del
Ranch and Leathers projects on April 17, 1996 and the acquisition of Falcon
Seaboard Resources on August 7, 1996.
(4) The extraordinary item recognized in the year ended December 31, 1999
reflects the early redemption of substantially all of the outstanding 9 7/8%
Limited Recourse Senior Secured Notes Due 2003.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of significant factors
which have affected CE Generation's financial condition and results of
operations during the periods included in the accompanying statements of
operations. The Company's actual results in the future could differ
significantly from the historical results.
Business
MidAmerican completed a strategic restructuring in conjunction with its
acquisition of MHC Inc. (formerly MidAmerican Energy Holdings Company) in which
MidAmerican's common stock interests in Magma, FSRI and CEDC, and their
subsidiaries (which own the geothermal and natural gas-fired combined cycle
cogeneration facilities described below), were contributed by MidAmerican to CE
Generation. This restructuring was completed in February 1999.
On March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE
Generation to El Paso CE Generation Holding Company, which was merged into El
Paso Merchant Energy Holding Company on December 31, 2000 ("El Paso Power"). El
Paso Power is an affiliate of El Paso Corporation.
The consolidated financial statements reflect the consolidated financial
statements of Magma and subsidiaries (excluding wholly-owned subsidiaries
retained by MidAmerican), FSRI and subsidiaries and YCA, each a wholly-owned
subsidiary. The consolidated financial statements present CE Generation's
financial position, results of operations and cash flows as if CE Generation
were a separate legal entity for all periods presented. The basis in assets and
liabilities have been carried over from MidAmerican. All material intercompany
transactions and balances have been eliminated in consolidation.
The Vulcan Project, Del Ranch Project, Elmore Project, Leathers Project and CE
Turbo Project are referred to as the Partnership Projects. The Salton Sea I
Project, Salton Sea II Project, Salton Sea III Project, Salton Sea IV Project
and Salton Sea V Project are referred to as the Salton Sea Projects. The
Partnership Projects and the Salton Sea Projects are collectively referred to as
the Imperial Valley Projects. The Power Resources Project, Yuma Project and
Saranac Project are collectively referred to as the Gas Projects.
Factors Affecting Results of Operations
The capacity factor for a particular project is determined by dividing total
quantity of electricity sold by the product of the project's capacity and the
total hours in the year. The capacity factors for Vulcan Project, Hoch (Del
Ranch) Project, Elmore Project, Leathers Project, and Turbo Project plants are
based on capacity amounts of 34, 38, 38, 38 and 10 net megawatts, respectively.
The capacity factors for Salton Sea Unit I Project, Salton Sea Unit II Project,
Salton Sea Unit III Project, Salton Sea Unit IV Project, and Salton Sea Unit V
Project plants are based on capacity amounts of 10, 20, 49.8, 39.6, and 49.8 net
megawatts, respectively. The capacity factors for the Saranac Project, Power
Resources Project and Yuma Project plants are based on capacity amounts of 240,
200 and 50 net megawatts, respectively. Each plant possesses an operating margin
which allows for production in excess of the amount listed above. Utilization of
this operating margin is based upon a variety of factors and can be expected to
vary throughout the year under normal operating conditions. The amount of
revenues received by these projects is affected by the extent to which they are
able to operate and generate electricity. Accordingly, the capacity and capacity
factor figures provide information on operating performance that has affected
the revenues received by these projects.
Effective January 2000, CE Generation's economic ownership in the Saranac
Project increased to approximately 64%. This increase resulted from TPC Saranac
achieving an after tax return of 8.35%. This achievement resulted in lower cash
flows to TPC Saranac and higher cash flows to CE Generation. Due to the
increased ownership, the project is now fully consolidated into CE Generation's
results of operations. The project was previously accounted for as an equity
investment.
Power Purchase Agreements
Imperial Valley Projects. The Partnership Projects (excluding CE Turbo) contract
to sell all electricity generated by the respective plants under four long-term
SO4 Agreements between the Partnership Projects and Edison. These SO4 Agreements
provide for capacity payments, capacity bonus payments and energy payments.
Edison makes fixed annual capacity and capacity bonus payments to the
Partnership Projects to the extent that capacity factors exceed benchmarks set
forth in the agreements. The price for capacity and capacity bonus payments is
fixed for the life of the SO4 Agreements. Energy is sold at increasing fixed
rates for the first ten years after firm operation and thereafter at rates based
on the cost that Edison avoids by purchasing energy from the Imperial Valley
Partnership Projects instead of obtaining the energy from other sources.
The scheduled energy price periods of the Partnership Projects' long-term
agreements extended until February 1996, December 1998, December 1998 and
December 1999 for each of the Vulcan Project, Del Ranch Project, Elmore Project
and Leathers Project, respectively.
Salton Sea Unit I Project contracts to sell electricity to Edison under a
30-year negotiated power purchase agreement, which provides for capacity and
energy payments. The energy payment is calculated using a base price which is
subject to quarterly adjustments based on a basket of indices. The time period
weighted average energy payment for Salton Sea Unit I was 5.7 cents per
kilowatt-hour during 2000. As the Salton Sea Unit I PPA is not a SO4 Agreement,
the energy payments do not revert to payments based on the cost that Edison
avoids by purchasing energy from Salton Sea Unit I instead of obtaining the
energy from other sources. The capacity payment is approximately $1.1 million
per annum.
Salton Sea Unit II Project and Salton Sea Unit III Project contract to sell
electricity to Edison under 30-year modified SO4 Agreements that provide for
capacity payments, capacity bonus payments and energy payments. The price for
contract capacity and contract capacity bonus payments is fixed for the life of
the modified SO4 Agreements. The energy payments for each of the first ten year
periods, which periods expired in April 2000 for Salton Sea II and expired in
February 1999 for Salton Sea III, are levelized at a time period weighted
average of 10.6 cents per kilowatt-hour and 9.8 cents per kilowatt-hour for
Salton Sea Unit II and Salton Sea Unit III, respectively. Thereafter, the
monthly energy payments are based on the cost that Edison avoids by purchasing
energy from Salton Sea Unit II or III instead of obtaining the energy from other
sources. For Salton Sea Unit II only, Edison is entitled to receive, at no cost,
5% of all energy delivered in excess of 80% of contract capacity through
September 30, 2004. The annual capacity and bonus payments for Salton Sea Unit
II and Salton Sea Unit III are approximately $3.3 million and $9.7 million,
respectively.
Salton Sea Unit IV Project contracts to sell electricity to Edison under a
modified SO4 Agreement which provides for contract capacity payments on 34
megawatts of capacity at two different rates based on the respective contract
capacities deemed attributable to the original Salton Sea Unit I PPA option (20
megawatts) and to the original Fish Lake PPA (14 megawatts). The capacity
payment price for the 20 megawatts portion adjusts quarterly based upon
specified indices and the capacity payment price for the 14 megawatts portion is
a fixed levelized rate. The energy payment (for deliveries up to a rate of 39.6
megawatts) is at a fixed rate for 55.6% of the total energy delivered by Salton
Sea Unit IV and is based on an energy payment schedule for 44.4% of the total
energy delivered by Salton Sea Unit IV. The contract has a 30-year term but
Edison is not required to purchase the 20 megawatts of capacity and energy
originally attributable to the Salton Sea Unit I PPA option after September 30,
2017, the original termination date of the Salton Sea Unit I PPA.
The Turbo Project, which commenced commercial operation in the third quarter of
2000, sells its output through other market transactions. The Turbo Project may
sell its output to a zinc facility, which is owned by a subsidiary of
MidAmerican and is expected to commence operations in mid-2001.
Salton Sea Unit V Project, which commenced operations in the third quarter of
2000, will sell approximately one-third of its net output to a zinc facility,
which is owned by a subsidiary of MidAmerican and is expected to commence
operations in mid-2001. The remainder of the Salton Sea Unit V output in 2000
was sold through other market transactions.
On January 17, 2001, Salton Sea Power and CE Turbo entered into an agreement to
sell available power from Salton Sea Unit V and CE Turbo to EPME. Under the
terms of the agreement, at the option of Salton Sea Power and CE Turbo, EPME
will purchase all available power from Salton Sea Unit V and CE Turbo based on
day ahead price quotes received from EPME.
For the years ended December 31, 2000 and 1999, Edison's average Avoided Cost of
Energy was 5.8 cents and 3.1 cents per kilowatt-hour, respectively. The Company
cannot predict the likely level of energy prices under the SO4 Agreements and
the modified SO4 Agreements at the expiration of the fixed payment periods. See
discussion in Item 3, Legal Proceedings on page 10.
Gas Projects. The Saranac Project sells electricity to NYSEG under the Saranac
PPA, which provides for capacity and energy payments. Capacity payments, which
in 2000 totaled 2.47 cents per kilowatt-hour, are received for electricity
produced during "peak hours" as defined in the Saranac PPA and escalate at
approximately 4.1% annually for the remaining term of the contract. Energy
payments, which averaged 7.21 cents per kilowatt-hour in 2000, escalate at
approximately 4.4% annually for the remaining term of the Saranac PPA. The
Saranac PPA expires in June of 2009.
The Power Resources Project sells electricity to Texas Utilities Electric
Company under the Power Resources PPA, which provides for capacity and energy
payments. Capacity payments and energy payments, which in 2000 are $3.4 million
per month and 3.3 cents per kilowatt-hour, respectively, escalate at 3.5%
annually for the remaining term of the Power Resources PPA. The Power Resources
PPA expires in September 2003.
The Yuma Project sells electricity to SDG&E under the Yuma PPA. The energy is
sold at a price based on the cost that SDG&E avoids by purchasing energy from
the Yuma Project instead of obtaining the energy from other sources. The
capacity is sold to SDG&E at a fixed price for the life of the Yuma PPA. The
power is delivered to SDG&E over transmission lines constructed and owned by
APS.
Results of Operations for the Years Ended December 2000, 1999 and 1998
Sales of electricity and steam increased to $499.9 million in the year ended
December 31, 2000 from $295.8 million in the year ended December 31, 1999, a 69%
increase. Approximately $170 million of this increase reflects the full
consolidation of the Saranac Project. Approximately $21 million of the increase
is related to higher energy rates at the Yuma Project and the Imperial Valley
Projects. Sales of electricity and steam decreased to $295.8 million in the year
ended December 31, 1999 from $395.6 million in the year ended December 31, 1998,
a 25% decrease. This decrease was primarily a result of the expiration of the
fixed price periods for the Elmore and Del Ranch Projects and for the Salton Sea
Unit III Project. These periods ended in December 1998, December 1998 and
February 1999, respectively.
The following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
2000 1999 1998
Overall capacity factor 87.7% 98.2% 98.2%
Megawatt-hours produced 2,296,800 2,300,700 2,299,400
Capacity (net megawatts)
(weighted average) 298.3 267.4 267.4
The overall capacity factor for the Imperial Valley Projects decreased in 2000
as significant overhauls and outage work was scheduled due to the construction
and tie in of the upgraded brine facilities and the start-up of Salton Sea Unit
V and Turbo.
The following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
2000 1999 1998
Overall capacity factor 86.48% 83.5% 81.6%
Megawatt-hours produced 3,722,401 4,258,606 4,072,620
Capacity (net megawatts)
(weighted average) 490 557 570
The overall capacity factor of the Gas Projects reflects the effect of
contractual curtailments. The capacity factors adjusted for these contractual
curtailments are 86.5%, 92.5%, and 92.2% for 2000, 1999, and 1998, respectively.
The decrease in megawatt hours produced and capacity from 1999 to 2000 is due to
the transfer of a formerly owned project to a third party. The changes in the
overall capacity factor in 2000, 1999, and 1998 were due primarily to major
maintenance downtime and lower electricity production at the Saranac Project due
to 1998 winter snow and ice storms which caused transmission curtailment.
The decrease in equity earnings of subsidiaries in 2000 to $0 from $22.9 million
in 1999 reflects the full consolidation of the Saranac Project in 2000. The
increase in equity earnings of subsidiaries in 1999 to $22.9 million from $10.7
million in 1998 was primarily due to lower electricity production at the Saranac
Project in 1998 due to severe winter snow and ice storms which caused
transmission curtailments.
Interest and other income decreased to $10.9 million in 2000 from $22.0 million
in 1999 was due to reduced royalty income at the Imperial Valley Projects.
Interest and other income decreased to $22.0 million in the year ended December
31, 1999 from $29.9 million in the year ended December 31, 1998. These decreases
were primarily due to reduced royalty income at the Imperial Valley Projects,
and decreased interest income as cash balances were used to fund construction
projects.
Plant operating expenses increased to $229.9 million in the year ended December
31, 2000 from $112.8 million in the year ended December 31, 1999. Approximately
$86 million of this increase, related to the full consolidation of the Saranac
Project in 2000. The remaining increase relates to chemicals, waste removal and
demolition costs at the Imperial Valley Projects. These costs include operating,
maintenance, resource, fuel and other plant operating expenses. Plant operating
expenses decreased marginally to $112.8 million in the year ended December 31,
1999 from $114.1 million in the year ended December 31, 1998.
General and administrative expenses increased to $5.5 million in the year ended
December 31, 2000 from $4.6 million in the year ended December 31, 1999. These
costs include administrative services provided to CE Generation, including
executive, financial, legal, tax and other corporate functions. The increase in
2000 reflects increased legal and tax/consulting expenses.
Depreciation and amortization increased to $80.7 million in 2000 from $57.9
million in 1999. Approximately $23.0 million of the increase reflects the full
consolidation of the Saranac Project in 2000. Depreciation and amortization
decreased to $57.9 million in 1999 from $96.8 million in 1998. The decrease was
primarily due to reduced step up depreciation after the end of the fixed price
periods for the Del Ranch, Elmore and Salton Sea Unit III Projects as a result
of greater value being assigned to the fixed price periods for the contracts
relating to these projects at the time of acquisition.
Interest expense, less amounts capitalized increased to $84.2 million in 2000
from $72.5 million in 1999. This increase reflects the full consolidation of the
Saranac Project and a full year of interest on the CE Generation Securities.
Interest expense, less amounts capitalized, decreased in 1999 to $72.5 million
from $74.3 million in 1998, a decrease of 2.4%. Lower interest expense resulted
from the paydown of the Salton Sea Funding Corporation and Power Resources
Project debt offset by Salton Sea Funding Corporation's Series F issuance in
October 1998 and CE Generation's issuance of Securities in March 1999.
The provision for income taxes decreased to $21.4 million in 2000 from $30.9
million in 1999. The provision for income taxes decreased to $30.9 million in
1999 from $52.2 million in 1998. The effective tax rate was 19.4%, 33.3% and
35.8% in 2000, 1999 and 1998, respectively. The changes from year to year in the
effective rate are due primarily to the generation and utilization of energy tax
credits and depletion deductions.
The extraordinary item of $17.5 million in 1999 reflects the remaining
unamortized premium paid and deferred finance costs associated with the
repayment of its 9 7/8% Limited Recourse Senior Secured Notes.
Liquidity and Capital Resources
Cash and cash equivalents were $36.2 million at December 31, 2000 as compared to
$29.1 million at December 31, 1999. In addition, restricted cash was $24.4
million and $32.6 million at December 31, 2000 and December 31, 1999,
respectively. The decrease in restricted cash was primarily due to the use of
the proceeds from issuance of Salton Sea Funding Corporation bonds for the
construction of Salton Sea Unit V Project and the CE Turbo Project and the
construction of upgrades to the brine facilities at some of the Imperial Valley
Projects.
Edison, a wholly-owned subsidiary of Edison International, is a public utility
primarily engaged in the business of supplying electric energy to retail
customers in Central and Southern California, excluding Los Angeles. CE
Generation is aware that there have been public announcements that Edison's
financial condition has deteriorated as a result of reduced liquidity. Based on
public announcements, CE Generation understands that Edison has not made
payments to other qualifying facilities ("QFs") from which Edison purchases
power and has not made scheduled payments of debt service. Edison's senior
unsecured debt obligations are currently rated Caa2 (on watch for possible
downgrade) by Moody's and D by S&P.
CE Generation is aware that there have been public announcements that Edison,
other industry participants and governmental entities have taken actions in
response to Edison's financial condition. These actions include the following:
o The Federal Energy Regulatory Commission ("FERC") has issued an order
eliminating requirements that Edison and other California utilities
purchase power from the structured power market in California known as the
California Power Exchange in order to provide them with an opportunity to
obtain power from alternative sources at a lower cost.
o The State of California has enacted legislation to provide for the
California Department of Water Resources to purchase wholesale power and
sell it to retail customers, which will be funded by a surcharge on retail
rates. The California legislature is also considering other legislation to
improve the financial condition of the California electric utilities.
o The California Public Utilities Commission ("CPUC") approved a decision on
March 27, 2001 to increase retail electricity rates by approximately 40%.
In another decision that day, the CPUC and ordered Edison to pay the QFs on
a go forward basis within 15 days of the invoice modified the purportedly
calculation of Short Run Avoided Cost.
o The State of California and Edison have announced a preliminary agreement
for the State to purchase Edison's transmission assets for $2.7 billion and
to allow Edison to issue bonds for a substantial portion of its
undercollection of revenues.
CE Generation can give no assurance as to the likely result of any of the
actions described above or as to whether such actions will have a positive
effect on the financial condition of Edison or its willingness to make payments
under the Power Purchase Agreements.
Edison has failed to pay approximately $76 million due under the Power Purchase
Agreements for power delivered in November and December 2000 and January 2001,
although the Power Purchase Agreements provide for billing and payment on a
schedule where payments would have normally been received in early January,
February and March 2001. Edison has not notified the Imperial Valley Projects as
to when they can expect to receive these payments. This continued non-payment by
Edison could result in an untenable situation for the continued operation of the
Imperial Valley Projects unless additional funds are obtained in the near
future.
On February 21, 2001, the Imperial Valley Projects filed a lawsuit against
Edison in California's Imperial County Superior Court seeking a court order
requiring Edison to make the required payments under the Power Purchase
Agreements. The lawsuit also requested, among other things, that the court order
permit the Imperial Valley Projects to suspend deliveries of power to Edison and
to permit the Imperial Valley Projects to sell such power to other purchasers in
California.
On March 22, 2001, the Superior Court granted the Imperial Valley Projects'
Motion for Summary Adjudication and a Declaratory Judgment ordering that: 1)
under the Power Purchase Agreements, the Imperial Valley Projects have the right
to temporarily suspend deliveries of capacity and energy to Edison, 2) the
Imperial Valley Projects are entitled to resell the energy and capacity to other
purchasers and 3) the interim suspension of deliveries to Edison shall not in
any respect result in the modifications or termination of the Power Purchase
Agreements and the Power Purchase Agreements shall in all respects continue in
full force and effect other than the temporary suspension of deliveries to
Edison. The Imperial Valley Projects intend to vigorously pursue their other
remedies in this action in light of Edison's continuing non-payment.
CE Generation is hopeful that the current Edison situation is temporary and the
proceedings in the legal, regulatory, financial and political arenas will lead
to the improvement of Edison's financial condition in the near future and the
payment by Edison of amounts due under the Power Purchase Agreements. However,
no assurance can be given that this will be the case.
As a result of Edison's failure to make the payments due under the Power
Purchase Agreements and the recent downgrades of Edison's credit ratings,
Moody's has downgraded the ratings for the Salton Sea Funding Corporation (the
"Funding Corporation") Securities to Caa2 (negative outlook) and S&P has
downgraded the ratings for the Funding Corporation Securities to BBB- and has
placed the Securities on "credit watch negative". Accordingly, the Funding
Corporation does not believe it is currently able to obtain funds in the banking
or capital markets. However, a failure by Edison to make these payments as well
as subsequent monthly payments, for a substantial period of time after the
payments are due, is not expected to have a material adverse effect on the
ability of CE Generation to make payments on the CE Generation bonds due to cash
flows from the Gas Projects. However, there can be no assurance that such a
failure by Edison would not cause a material adverse effect.
Salton Sea Unit V Project, which commenced operations in the third quarter of
2000, will sell approximately one-third of its net output to a zinc facility,
which is owned by a subsidiary of MidAmerican and is expected to commence
operations in mid-2001. The remainder of the Salton Sea Unit V output in 2000
was sold through other market transactions. On January 17, 2001, Salton Sea
Power, LLC entered into a transaction agreement with El Paso Merchant Energy,
L.P. ("EPME") in which Salton Sea Unit V Project's available power is sold to
EPME on a day ahead basis.
The Turbo Project, which commenced commercial operation in the third quarter of
2000, sells its output through other market transactions. On January 17, 2001,
Salton Sea Power LLC entered into a transaction agreement, with EPME, in which
the Turbo Project's available power is sold to EPME on a day ahead basis. The
Turbo Project may sell its output to a zinc facility, which is owned by a
subsidiary of MidAmerican and is expected to commence operations in mid-2001.
The net revenues, equity distributions and royalties from the Partnership
Projects are used to pay principal and interest payments on outstanding senior
secured bonds issued by the Salton Sea Funding Corporation, the final series of
which is scheduled to mature in November 2018. The Salton Sea Funding
Corporation debt is guaranteed by subsidiaries of Magma and secured by the
capital stock of the Salton Sea Funding Corporation. The proceeds of the Salton
Sea Funding Corporation debt were loaned by the Salton Sea Funding Corporation
under loan agreements and notes to subsidiaries of Magma and used for
construction of Salton Sea Unit V Project and the CE Turbo Project, refinancing
of indebtedness and other purposes. Debt service on the Imperial Valley loans is
used to repay debt service on the Salton Sea Funding Corporation debt. The
Imperial Valley loans and the guarantees of the Salton Sea Funding Corporation
debt are secured by substantially all of the assets of the guarantors, including
the Imperial Valley projects, and by the equity interests in the guarantors.
The proceeds of Series F of the Salton Sea Funding Corporation debt are being
used in part to construct the zinc facility, and the direct and indirect owners
of the zinc facility are among the guarantors of the Salton Sea Funding
Corporation debt. MidAmerican has guaranteed the payment by the zinc guarantors
of a specified portion of the scheduled debt service on the Imperial Valley
loans described in the preceding paragraph, including the current principal
amount of approximately $140.5 million and associated interest.
Environmental Liabilities
The Company may be exposed to environmental costs in the ordinary course of
business. Expenditures for ongoing compliance with environmental regulations
that relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating sites, other companies' clean-up experience and data
released by the Environmental Protection Agency or other organizations. These
estimated liabilities are subject to revision in future periods based on actual
costs or new circumstances, and are included in the accompanying balance sheets
at their undiscounted amounts. As of December 31, 2000 and 1999, the
environmental liabilities recorded on the balance sheet were not material.
Inflation
Inflation has not had a significant impact on CE Generation's cost structure.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and amended by SFAS 138. SFAS 133/138 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. CE
Generation implemented the new standards on January 1, 2001. The initial
adoption of SFAS 133/138 did not have a material impact on CE Generation's
financial position, results of operations or any impact on its cash flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. CE Generation has not determined if the ultimate resolution of those
issues would have a material impact on its financial statements.
Accounting Policy Change
The Company is considering adopting a new policy of accounting for major
maintenance, overhaul and well workover costs. These costs, which have
historically been accounted for using deferral and accrued methods, would be
expensed as incurred. As of January 1, 2001, the cumulative effect of this
change would be a decrease in net income of approximately $15.1 million, net of
tax.
Forward-Looking Statements
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development and construction
uncertainty, operating uncertainty, uncertainties relating to doing business
outside of the United States, uncertainties relating to economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy, industry deregulation and competition. The Company assumes no
responsibility to update forward-looking information contained herein.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk
At December 31, 2000, the Company had fixed-rate long-term debt of $933.5
million with a fair value of $807.7 million. These instruments are fixed-rate
and therefore do not expose us to the risk of earnings loss due to changes in
market interest rates. However, the fair value of these instruments would
decrease by approximately $30.2 million if interest rates were to increase by
10% from their levels at December 31, 2000. In general, a decrease in fair value
would impact earnings and cash flows only if the Company were to reacquire all
or a portion of these instruments prior to their maturity.
At December 31, 2000, the Company had floating-rate obligations of $230.2
million which exposes the Company to the risk of increased interest expense in
the event of increases in short-term interest rates. The Company has entered
into interest rate swap agreements for the purpose of completely offsetting
these interest rate fluctuations. The interest rate differential is reflected as
an adjustment to interest expense over the life of the instruments. At December
31, 2000, these interest rate swaps had an aggregate notional amount of $230.2
million, which the Company could terminate at a cost of approximately $12.3
million. A decrease of 10% in the December 31, 2000 level of interest rates
would increase the cost of terminating the swaps by approximately $4.2 million.
These termination costs would impact the Company's earnings and cash flows only
if all or a portion of the swap instruments were terminated prior to their
expiration.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
PAGE
Consolidated Financial Statements of CE Generation, LLC:
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 2000 and 1999 24
Consolidated Statements of Operations for the Three Years Ended
December 31, 2000 25
Consolidated Statement of Members' Equity for the Three Years
Ended December 31, 2000 26
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2000 27
Notes to Consolidated Financial Statements 28
INDEPENDENT AUDITORS' REPORT
Board of Directors
CE Generation, LLC
We have audited the accompanying consolidated balance sheets of CE
Generation, LLC as of December 31, 2000 and 1999, and the related consolidated
statements of operations, members' equity, and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of CE Generation, LLC'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, such consolidated financial statements present fairly,
in all material respects, the financial position of CE Generation, LLC as of
December 31, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
January 18, 2001
(March 27, 2001 as to Note 9A)
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(Amounts in Thousands)
2000 1999
ASSETS
Cash and cash equivalents $ 36,152 $ 29,120
Restricted cash 14,794 6,776
Accounts receivable 89,883 40,688
Prepaid expenses 19,981 10,461
Inventory 27,424 19,734
Due from affiliates --- 3,794
Deferred income taxes 2,878 9,256
Total current assets 191,112 119,829
Restricted cash 9,618 25,836
Properties, plants, contracts and equipment, net 1,355,345 1,017,342
Equity investments --- 118,637
Excess of cost over fair value of net assets acquired,
net 276,294 285,888
Note receivable from related party (Note 6) 140,528 140,528
Deferred financing charges and other assets 14,426 17,359
Total assets $ 1,987,323 $ 1,725,419
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other accrued liabilities $ 68,700 $ 41,322
Due to affiliates 2,578 ---
Current portion of long term debt 67,473 51,520
Total current liabilities 138,751 92,842
Project loan 199,006 60,173
Salton Sea notes and bonds 520,250 543,948
Senior secured bonds 377,000 389,600
Deferred income taxes 244,937 246,576
Total liabilities 1,479,944 1,333,139
Minority interest 68,464 ---
Commitments and contingencies (Notes 4 and 9)
Members' equity 438,915 392,280
Total liabilities and equity $ 1,987,323 $ 1,725,419
The accompanying notes are an integral part of these financial statements.
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(Amounts in Thousands)
2000 1999 1998
Revenue:
Sales of electricity and steam $ 499,926 $ 295,787 $ 395,560
Equity earnings in subsidiaries --- 22,861 10,732
Interest and other income 10,870 22,035 29,883
Total revenues 510,796 340,683 436,175
Cost and Expenses:
Plant operations 229,875 112,801 114,092
General and administrative 5,461 4,594 4,963
Depreciation and amortization 80,710 57,869 96,818
Interest expense 88,491 77,515 74,653
Less interest capitalized (4,291) (4,978) (347)
Total expenses 400,246 247,801 290,179
Income before provision for income taxes 110,550 92,882 145,996
Provision for income taxes 21,402 30,912 52,218
Income before minority interest and extraordinary item 89,148 61,970 93,778
Minority interest 15,613 --- ---
Income before extraordinary item 73,535 61,970 93,778
Extraordinary item, net of tax (Note 8) --- (17,478) ---
Net income $ 73,535 $ 44,492 $ 93,778
The accompanying notes are an integral part of these financial statements.
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(Amounts in Thousands)
BALANCE, January 1, 1998 $ 464,140
Distribution, net of advances (20,971)
Net income 93,778
BALANCE, December 31, 1998 536,947
Distribution, net of advances (122,080)
Distribution of non-cash assets to MEHC (67,079)
Net income 44,492
BALANCE, December 31, 1999 392,280
Distribution, net of advances (26,900)
Net income 73,535
BALANCE, December 31, 2000 $ 438,915
The accompanying notes are an integral part of these financial statements.
CE GENERATION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(Amounts in Thousands)
2000 1999 1998
Cash flows from operating activities:
Net income $ 73,535 $ 44,492 $ 93,778
Adjustments to reconcile to cash flows from
operating activities:
Extraordinary item, net of tax --- 17,478 ---
Depreciation and amortization 80,710 57,869 96,818
Provision for deferred income taxes 3,348 (832) (6,144)
Distribution from equity investments in excess of
equity earnings --- 6,399 6,171
Distributions to minority interest in excess of
related income (8,043) --- ---
Changes in other items, net of Saranac conversion:
Accounts receivable (34,096) 26,941 (14,557)
Inventory (2,371) (4,292) (3,191)
Due from affiliates 4,138 (3,794) ---
Accounts payable and other accrued liabilities 19,568 1,504 (9,125)
Other assets (6,174) 8,632 7,524
Net cash flows from operating activities 130,615 154,397 171,274
Cash flows from investing activities:
Capital expenditures (59,280) (183,508) (46,222)
Consolidation of former equity investment's cash 2,559 --- ---
Decrease (increase) in restricted cash 23,696 75,840 (101,366)
Net cash flows from investing activities (33,025) (107,668) (147,588)
Cash flows from financing activities:
Repayment of Salton Sea notes and bonds (25,072) (57,836) (106,938)
Proceeds from Salton Sea notes and bonds --- --- 285,000
Repayment of Senior Secured bonds (10,400) --- ---
Proceeds from Senior Secured bonds --- 400,000 ---
Note receivable from related party --- --- (140,528)
Repayment of note payable to related party (13,000) (269,300) (131)
Proceeds from related party note 13,000 --- ---
Repayment of project loans (27,137) (14,268) (12,805)
Deferred charge relating to debt financing --- --- (4,943)
Distributions, net of advances (26,900) (122,080) (20,971)
Decrease (increase) in restricted cash (1,049) 20,101 (20,280)
Net cash flows from financing activities (90,558) (43,383) (21,596)
Net increase in cash and cash equivalents 7,032 3,346 2,090
Cash and cash equivalents at beginning of year 29,120 25,774 23,684
Cash and cash equivalents at end of year $ 36,152 $ 29,120 $ 25,774
Supplemental disclosure:
Interest paid $ 83,106 $ 78,944 $ 73,283
Income taxes paid $ 16,411 $ 31,744 $ 58,362
See Note 3 regarding conversion of Saranac from equity investment to
consolidated subsidiary.
The accompanying notes are an integral part of these financial statements.
CE GENERATION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
1. Business
MidAmerican Energy Holdings Company ("MidAmerican") completed a strategic
restructuring in conjunction with its acquisition of MHC Inc. (formerly
MidAmerican Energy Holdings Company) in which MEHC's common stock interests in
Magma Power Company, Falcon Seaboard Resources, Inc. and California Energy
Development Corporation, and their subsidiaries (which own the geothermal and
natural gas-fired combined cycle cogeneration facilities described below), were
contributed by MEHC to the newly created CE Generation, LLC ("CE Generation").
This restructuring was completed in February 1999.
On March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE
Generation to El Paso CE Generation Holding Company, which was merged into El
Paso Merchant Energy Holding Company on December 31, 2000 ("El Paso Power"). El
Paso Power is an affiliate of El Paso Corporation.
Basis of Presentation--These consolidated financial statements of CE Generation,
LLC reflect the consolidated financial statements of Magma Power Company and
subsidiaries (excluding wholly-owned subsidiaries retained by MEHC), Falcon
Seaboard Resources, Inc. and subsidiaries and Yuma Cogeneration Associates, each
a wholly-owned subsidiary. The consolidated financial statements present the
financial position, results of operations and cash flows of CE Generation as if
CE Generation was a separate legal entity for all periods presented. CE
Generation has accounted for MEHC's contribution of assets and liabilities to CE
Generation in accordance with Interpretation No. 39 of APB Opinion No. 16,
Transfers and Exchanges Between Companies Under Common Control. Accordingly,
MEHC's basis in these assets and liabilities, has been carried over and
reflected in CE Generation's financial statements. All material intercompany
transactions and balances have been eliminated in consolidation.
General--CE Generation is engaged in the independent power business. The
following table sets out information concerning CE Generation's projects:
PROJECT FUEL COMMERCIAL CAPACITY LOCATION
OPERATION
Vulcan Geothermal 1986 34 MW California
Del Ranch Geothermal 1989 38 MW California
Elmore Geothermal 1989 38 MW California
Leathers Geothermal 1990 38 MW California
CE Turbo Geothermal 2000 10 MW California
Salton Sea I Geothermal 1987 10 MW California
Salton Sea II Geothermal 1990 20 MW California
Salton Sea III Geothermal 1989 49.8 MW California
Salton Sea IV Geothermal 1996 39.6 MW California
Salton Sea V Geothermal 2000 49 MW California
Power Resources Gas 1988 200 MW Texas
Yuma Gas 1994 50 MW Arizona
Saranac Gas 1994 240 MW New York
Vulcan, Del Ranch, Elmore, Leathers and CE Turbo are referred to as the
Partnership Projects. Salton Sea I, II, III, IV and V are referred as the Salton
Sea Projects. The Partnership Projects and the Salton Sea Projects are
collectively referred to as the Imperial Valley Projects. Power Resources, Yuma,
and Saranac are referred to as the Gas Projects.
2. Summary of Significant Accounting Policies
Cash Equivalents--CE Generation considers all investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
Restricted cash is not considered a cash equivalent.
Restricted Cash--The restricted cash balance is composed of restricted accounts
for debt service, capital expenditures and major maintenance expenditures. The
debt service funds are legally restricted as to their use and require the
maintenance of specific minimum balances equal to the next debt service payment.
Well Costs--The cost of drilling and equipping production wells and other direct
costs, are capitalized and amortized on a straight-line basis over their
estimated useful lives when production commences. The estimated useful lives of
production wells are twenty years.
Deferred Well and Rework Costs--Geothermal well rework costs are deferred and
amortized over the estimated period between reworks ranging from 18 months to 24
months. These deferred costs, net of accumulated amortization, are $6.7 million
and $5.9 million at December 31, 2000 and 1999, respectively, and are included
in other assets.
Inventories--Inventories consist of spare parts and supplies and are valued at
the lower of cost or market. Cost for large replacement parts is determined
using the specific identification method. For the remaining supplies, cost is
determined using the weighted average cost method.
Properties, Plants, Contracts, Equipment and Depreciation--The cost of major
additions and betterments are capitalized, while replacements, maintenance, and
repairs that do not improve or extend the lives of the respective assets are
expensed.
Depreciation of the operating power plant costs, net of salvage value if
applicable, is computed on the straight line method over the estimated useful
life of 30 years. Depreciation of furniture, fixtures and equipment is computed
on the straight line method over the estimated useful lives of the related
assets, which range from 3 to 10 years.
The acquisitions of Magma Power Company, Falcon Seaboard Resources, Inc. and
Edison Mission Energy's partnership interests by CE Generation have been
accounted for as purchase business combinations. All identifiable assets
acquired and liabilities assumed were assigned a portion of the cost of
acquiring the respective companies equal to their values at the date of the
acquisition and includes power sales agreements which are amortized separately
on a straight-line basis over (1) for the Edison Partnership interests and Magma
acquisitions, the remaining portion of the scheduled price periods of the power
sales agreements which ranged from 1 to 5 years, (2) for the Edison Partnership
interests and Magma acquisitions, the 20 year avoided cost periods of the power
sales agreements and (3) over the remaining contract periods which ranged from 7
to 30 years.
Excess of Cost Over Fair Value--Total acquisition costs in excess of the fair
values assigned to the net assets acquired are amortized over a 40 year period
for the Magma acquisition and a 25 year period for the Falcon Seaboard
acquisition, both using the straight line method. Accumulated amortization was
$52.2 million and $42.6 million at December 31, 2000 and 1999, respectively.
Maintenance and Repair Reserves--Major maintenance and repair reserves are
recorded monthly based on CE Generation's long-term scheduled major maintenance
plans for the Gas Projects and included in accrued liabilities. Other
maintenance and repairs are charged to expense as incurred.
Capitalization of Interest and Deferred Financing Costs--Prior to the
commencement of operations, interest is capitalized on the costs of the plants
and geothermal resource development to the extent incurred. Capitalized interest
and other deferred charges are amortized over the lives of the related assets.
Deferred financing costs are amortized over the term of the related financing
using the effective interest method.
Revenue Recognition--Revenues are recorded based upon electricity and steam
delivered to the end of the month. See Note 4 for contractual terms of power
sales agreements. Royalties earned from providing geothermal resources to power
plants operated by other geothermal power producers are recorded when delivered.
Income Taxes--CE Generation and its subsidiaries had historically been included
in the consolidated federal income tax returns of MEHC. CE Generation's
provision for income taxes was computed on a separate return basis. Beginning
March 3, 1999, CE Generation became a separate consolidated federal taxpayer. CE
Generation recognizes deferred tax assets and liabilities based on the
difference between the financial statement and tax bases of assets and
liabilities using estimated tax rates in effect for the year in which the
differences are expected to reverse.
Financial Instruments--CE Generation utilizes swap agreements to manage market
risks and reduce its exposure resulting from fluctuation in interest rates. For
interest rate swap agreements, the net cash amounts paid or received on the
agreements are accrued and recognized as an adjustment to interest expense. CE
Generation's practice is not to hold or issue financial instruments for trading
purposes. These instruments are either exchange traded or with counterparties of
high credit quality; therefore, the risk of nonperformance by the counterparties
is considered to be negligible.
Fair values of financial instruments are estimated based on quoted market prices
for debt issues actively traded or on market prices of similar instruments
and/or valuation techniques using market assumptions.
Impairment of Long-Lived Assets--CE Generation reviews long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized, based on discounted cash
flows or various models, whenever evidence exists that the carrying value is not
recoverable.
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 and liabilities 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.
Accounting Pronouncements-- In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", which was delayed by SFAS 137 and amended by SFAS 136. SFAS 133/138
requires an entity to recognize all of its derivatives as either assets or
liabilities in its statement of financial position and measure those instruments
at fair value. CE Generation implemented the new standards on January 1, 2001.
The initial adoption of SFAS 133/138 did not have a material impact in CE
Generation's financial position, results of operations or any impact on its cash
flows.
The FASB's Derivatives Implementation Group continues to identify and provide
guidance on various implementation issues related to SFAS 133/138 that are in
varying stages of review and clearance by the Derivative Implementation Group
and FASB. CE Generation has not determined if the ultimate resolution of those
issues would have a material impact on its financial statements.
The Company is considering adopting a new policy of accounting for major
maintenance, overhaul and well workover costs. These costs, which have
historically been accounted for using deferral and accrual methods, would be
expensed as incurred. As of January 1, 2001, The cumulative effect of this
change would be a decrease in net income of approximately $15.1 million, net of
tax.
3. Equity Investments
CE Generation indirectly holds noncontrolling general and limited partnership
interests in Saranac Power Partners, L.P. (Saranac) which was formed to build,
own and operate natural gas fired combined cycle cogeneration facilities. Under
the Saranac partnership agreement, the economic interests of the partners flip
after certain limited partners achieve fixed rates of return. In January 2000,
TPC Saranac, a limited partner, achieved an after tax return of 8.35%. Following
this achievement, CE Generation's economic interest in the partnership increased
to approximately 64%. Effective January 2000, the Saranac Project investment is
no longer reported as an equity investment but is fully consolidated into CE
Generation financial results. The following is summarized financial information
for Saranac as of December 31, 1999 (in thousands).
Cash and investments $2,559
Restricted cash 7,223
Accounts receivable 15,099
Property, plant and equipment, net 349,105
Other assets 13,683
Current liabilities 9,022
Project loans 181,108
Due to affiliates 2,223
Total equity 195,316
4. Properties, Plants, Contracts and Equipment
Properties, plants, contracts and equipment comprise the following at
December 31 (in thousands):
2000 1999
Operating facilities:
Power plants $ 1,322,691 $ 716,809
Wells and resource development 162,481 151,996
Power sales agreements 287,653 287,653
Licenses and equipment 49,374 47,905
----------------- -----------------
Total operating facilities 1,822,199 1,204,363
Less accumulated depreciation and amortization (466,854) (326,042)
----------------- -----------------
Net operating facilities 1,355,345 878,321
Construction in progress:
Salton Sea Unit V --- 89,072
Turbo and Region 2 Brine Facilities Construction --- 42,612
Other development --- 7,337
----------------- -----------------
Total $ 1,355,345 $ 1,017,342
Significant Customers and Contracts--CE Generation's sales of electricity from
the Imperial Valley Projects, comprised approximately 41%, 66% and 74%
respectively, of 2000, 1999 and 1998 electricity and steam revenues. Of these
sales approximately 86%, 100% and 100% are to Southern California Edison, in
2000, 1999 and 1998, respectively. Accounts receivable, approximately $45
million of which are from Edison, are primarily uncollateralized receivables
from long-term power purchase contracts described below. If the customers were
unable to perform, CE Generation could incur an accounting loss equal to $89.9
million and $40.7 million at December 31, 2000 and 1999, respectively.
Imperial Valley Projects--The Partnership Projects (except CE Turbo) contract to
sell all electricity generated by the respective plants pursuant to four
long-term standard offer no. 4, or SO4, agreements between the Projects and
Edison that are based on this standard form. These SO4 Agreements provide for
capacity payments, capacity bonus payments and energy payments. Edison makes
fixed annual capacity and capacity bonus payments to the Projects to the extent
that capacity factors exceed certain benchmarks. The price for capacity and
capacity bonus payments is fixed for the life of the SO4 Agreements. Energy is
sold at increasing fixed rates for the first ten years after firm operation and
thereafter at a rate which is based on the cost that Southern California Edison
avoids by purchasing energy from the project instead of obtaining the energy
from other sources.
The scheduled energy price periods of the Partnership Projects SO4 Agreements
extended until February 1996, December 1998, December 1998 and December 1999 for
each of the Vulcan, Del Ranch, Elmore and Leathers Partnerships, respectively.
Salton Sea I contracts to sell electricity to Edison pursuant to a 30-year
negotiated power purchase agreement, as amended (the Salton Sea I PPA), which
provides for capacity and energy payments. The energy payment is calculated
using a Base Price which is subject to quarterly adjustments based on a basket
of indices. The time period weighted average energy payment for Salton Sea I was
5.7 cents per kWh during 2000. As the Salton Sea I PPA is not an SO4 Agreement,
the energy payments do not revert to Edison's Avoided Cost of Energy. The
capacity payment is approximately $1.1 million per annum.
Salton Sea II and Salton Sea III contract to sell electricity to Edison pursuant
to 30-year modified SO4 Agreements that provide for capacity payments, capacity
bonus payments and energy payments. The price for contract capacity and contract
capacity bonus payments is fixed for the life of the modified SO4 Agreements.
The energy payments for each of the first ten year periods, which periods
expired in April 2000 for Salton Sea II and expired in February 1999 for Salton
Sea III, respectively, are levelized at a time period weighted average of 10.6
cents per kWh and 9.8 cents per kWh for Salton Sea II and Salton Sea III,
respectively. Thereafter, the monthly energy payments are at Edison's Avoided
Cost of Energy. For Salton Sea II only, Edison is entitled to receive, at no
cost, 5% of all energy delivered in excess of 80% of contract capacity through
September 30, 2004. The annual capacity and bonus payments for Salton Sea II and
Salton Sea III are approximately $3.3 million and $9.7 million, respectively.
Salton Sea IV contracts to sell electricity to Edison pursuant to a modified SO4
Agreement which provides for contract capacity payments on 34 MW of capacity at
two different rates based on the respective contract capacities deemed
attributable to the original Salton Sea PPA option (20 MW) and to the original
Fish Lake PPA (14 MW). The capacity payment price for the 20 MW portion adjusts
quarterly based upon specified indices and the capacity payment price for the 14
MW portion is a fixed levelized rate. The energy payment (for deliveries up to a
rate of 39.6 MW) is at a fixed rate for 55.6% of the total energy delivered by
Salton Sea IV and is based on an energy payment schedule for 44.4% of the total
energy delivered by Salton Sea IV. The contract has a 30-year term but Edison is
not required to purchase the 20 MW of capacity and energy originally
attributable to the Salton Sea I PPA option after September 30, 2017, the
original termination date of the Salton Sea I PPA.
For the years ended December 31, 2000 and 1999, Edison's average Avoided Cost of
Energy was 5.8 cents and 3.1 cents per kWh, respectively. CE Generation cannot
predict the level of Avoided Cost of Energy prices under the SO4 Agreements and
the modified SO4 Agreements.
The Imperial Valley Projects other than Salton Sea Unit I receive transmission
service from the Imperial Irrigation District to deliver electricity to Southern
California Edison near Mirage, California. These projects pay a rate based on
the Imperial Irrigation District's cost of service which was $1.58 per month per
kilowatt of service provided for 2000 and is recalculated annually. The
transmission service and interconnection agreements expire in 2015 for the
Partnership Projects, 2019 for Salton Sea Unit III, 2020 for Salton Sea Unit II
and 2026 for Salton Sea Unit IV. Salton Sea Unit V and the CE Turbo projects
have entered into 30-year agreements with similar terms with the Imperial
Irrigation District. Salton Sea Unit I delivers energy to Southern California
Edison at the project site and has no transmission service agreement with the
Imperial Irrigation District.
Gas Projects--The Saranac Project sells electricity to New York State Electric &
Gas pursuant to a 15 year negotiated power purchase agreement (the Saranac PPA),
which provides for capacity and energy payments. Capacity payments, which in
2000 total 2.47 cents per kWh, are received for electricity produced during
"peak hours" as defined in the Saranac PPA and escalate at approximately 4.1%
annually for the remaining term of the contract. Energy payments, which averaged
7.21 cents per kWh in 2000, escalate at approximately