10-K 1 march10k2004.txt FORM 10-K (Mark One) [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended December 31, 2003. ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________to_________________________ Commission File Number 333-83815 --------- Caithness Coso Funding Corp. ---------------------------- (Exact name of registrant as specified in its charter) Delaware 94-3328762 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Coso Finance Partners California 68-0133679 Coso Energy Developers California 94-3071296 Coso Power Developers California 94-3102796 --------------------- ---------- ---------- (Exact names of Registrants as (State or other jurisdiction (IRS Employer specified in their characters) of incorporation) Identification No.) 565 Fifth Avenue, 29th Floor, New York, New York 10017-2478 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 921-9099 -------------- Securities registered pursuant to Section 12(g) of the Act: 9.05% Series B Senior Secured Notes Due 2009 -------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The Registrant's Common Stock is not traded in a public market. Aggregate market value of the voting stock held by non-affiliates of the registrant: Not applicable Documents Incorporated by Reference Not applicable CAITHNESS COSO FUNDING CORP. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002 Part I Page ------ ---- Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (Not applicable) 7 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 Part III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management (Not applicable) 20 Item 13. Certain Relationships and Related Transactions 22 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 Part I Item 1. Business. The Coso Projects The Coso projects consist of three 80 MW geothermal power plants, called Navy I, BLM and Navy II, certain transmission lines, wells, gathering system and other related facilities. The Coso projects are located near one another in the Mojave Desert approximately 150 miles northeast of Los Angeles, California, and have been generating electricity since the late 1980s. Unlike fossil fuel-fired power plants, the Coso projects' power plants use geothermal energy derived from the natural heat of the earth's interior to generate electricity. Coso Finance Partners (The Navy I partnership) owns Navy I and its related facilities, Coso Energy Developers (the BLM partnership) owns BLM and its related facilities and Coso Power Developers (the Navy II partnership) owns Navy II and its related facilities (collectively, the Coso partnerships). The Coso partnerships and their affiliates own the exclusive right to explore, develop and use, currently without any known interference from any other power developers, a portion of the Coso Known Geothermal Resource Area. The Coso partnerships sell 100% of the electrical energy generated at the plants to Southern California Edison (Edison) under three long-term Standard Offer No. 4 power purchase agreements. Each power purchase agreement expires after the last maturity date of the senior secured notes. (Edison is one of the largest investor-owned electric utilities in the United States.) Under the power purchase agreements, the Coso partnerships receive the following payments: o Capacity payments for being able to produce electricity at certain levels. Capacity payments are fixed throughout the lives of the power purchase agreements; o Capacity bonus payments if they are able to produce electricity above a specified, higher level. The maximum capacity bonus payment available is also fixed throughout the lives of the power purchase agreements; and o Energy payments based on the amount of electricity their respective plants actually produce. Energy payments were fixed for the first ten years of firm operation under the power purchase agreements. Firm operation was achieved for each Coso partnership when Edison and that Coso partnership under its power purchase agreement agreed that each generating unit at a plant was a reliable source of generation and could reasonably be expected to operate continuously at its effective rating. After the first ten years of firm operation and until its power purchase agreement expires, Edison is required to make energy payments to the Coso partnership based on its avoided cost of energy. Edison's avoided cost of energy is Edison's cost to generate electricity if Edison were to produce it itself or buy it from another power producer rather than buy it from the relevant Coso partnership. Future energy payments required to be paid by Edison to the Coso partnerships will most likely be less than historical energy payments because they will be paid based on Edison's avoided cost of energy, instead of the fixed payments paid during the first ten years. The fixed energy price period expired in August 1997 for the Navy I partnership, in March 1999 for the BLM partnership, and in January 2000 for the Navy II partnership. The Edison power purchase agreements will expire in August 2011 for the Navy I partnership; in March 2019 for the BLM partnership; and in January 2010 for the Navy II partnership. Edison entered into an agreement (the "Agreement") with the Coso partnerships on June 19, 2001 that addressed renewable energy pricing and issues concerning California's energy crisis. The Agreement, which was amended on November 30, 2001, established May 1, 2002 as the date the Coso partnerships began receiving a fixed energy rate of 5.37 cents per kWh for five (5) years. Subsequent to the five year period, Edison will be required to make energy payments to the Coso partnerships based on its avoided cost of energy until each partnership's power purchase agreement expires. 1 Operating Strategy The Coso partnerships seek to maximize their cash flow at the Coso projects through active management of their cost structure and the geothermal resource. The Coso partnerships engage Coso Operating Company (COC), which is an affiliate of Caithness Acquisition Company, LLC (CAC), a wholly owned subsidiary of Caithness Energy, LLC (Caithness Energy) to maintain all three plants, the transmission lines and the geothermal resource, including well drilling. Payments of operator fees are subordinated to all payments made under the senior secured notes. The Coso projects qualify as Small Power Qualifying Facilities (QF) under the Public Utility Regulatory Policies Act (PURPA) and the rules and regulations promulgated under PURPA by the Federal Energy Regulatory Commission (FERC). PURPA exempts QFs, such as the Coso projects from certain federal and state regulations. The Coso projects must continue to satisfy certain ownership and fuel-use standards to maintain their QF status. Since their inception, the Coso projects have satisfied these standards and expect that they will continue to do so in the future. The Sponsor Caithness Energy, through its controlled affiliates, is a developer and owner of independent power projects and is the sponsor of the Coso projects. Caithness Equities Corporation (formerly known as Caithness Corporation), the controlling member of Caithness Energy has been involved in the development of long-term investment opportunities involving natural resources for more than 23 years. Caithness Equities Corporation is one of the two original sponsors of the Coso projects and formed Caithness Energy in 1995 to consolidate its ownership of independent power projects. Caithness Energy believes that it is currently the second largest owner of geothermal power projects in the United States, based on the total electrical generating capacity of its power projects. Through its controlled affiliates, Caithness Energy owns interests in six geothermal plants, including the Coso projects, totaling 325 MW of generating capacity. Caithness Energy has interests in other operating power generating facilities, including solar, wind and natural gas, totaling an additional 806 MW of generating capacity. Caithness Energy is headquartered in New York City and has affiliate offices in California, Nevada, Colorado and Florida. The Issuer Caithness Coso Funding Corp. (Funding Corp.) is a special purpose corporation and a wholly owned subsidiary of the Coso partnerships. It was formed for the purpose of issuing the senior secured notes (Notes) on behalf of the Coso partnerships who have jointly, severally, and unconditionally guaranteed repayment of the senior secured notes. Funding Corp. has no material assets, other than the loans made to the Coso partnerships, and does not conduct any business, other than issuing the senior secured notes and making the loans to the Coso partnerships. The Coso Known Geothermal Resource Area The Coso projects are located in an area that has been designated as a Known Geothermal Resources Area by the Bureau of Land Management pursuant to the Geothermal Steam Act of 1970. The Bureau of Land Management designates an area as a Known Geothermal Resource Area when it determines that a commercially viable geothermal resource is likely to exist there. There are over 100 Known Geothermal Resource Areas in the United States, most of which are located in the western United States in tectonically active regions. 2 The Coso Known Geothermal Resource Area is located in Inyo County, California, approximately 150 miles northeast of Los Angeles. The Coso geothermal resource is a "liquid-dominated" hot water source contained within the heterogeneous fractured granite rocks of the Coso Mountains. It is believed the heat source for the Coso geothermal resource is a hot molten rock or "magma" body located at a depth of six-to-seven miles beneath the surface of the field. Geochemical studies indicate that the water in the Coso geothermal resource is ancient water that has been there since the ice age or longer. Steam Sharing Program In 1994, the Coso partnerships entered into a Geothermal Exchange Agreement which implemented a steam-sharing program among the Coso projects. The purpose of the steam-sharing program is to enhance the management and optimize the overall use of the Coso geothermal resource. Pursuant to the steam sharing program, the Coso partnerships constructed an inter-project steam supply and water injection system that links the three Coso projects and BLM North (see page 4, BLM North) together via metered transfer lines through which the Coso partnerships exchange steam and other geothermal resources with one another. As part of the steam sharing program, the Coso partnerships plan to conserve the geothermal resource whenever possible by, among other things, transferring steam between and among the Coso projects and BLM North, rather than drilling new wells at the Coso projects' sites prematurely, and expanding a flexible field-wide water reinjection program. While the U.S. Navy and the Bureau of Land Management have consented to the steam sharing program, each has reserved the right, in its sole discretion, to withdraw its consent to such transfers under certain circumstances. In 2003, the Navy I partnership and the Navy II partnership incurred aggregate royalties to the U.S Navy of approximately $2.1 million for steam transferred by Navy I to Navy II and by Navy II to BLM under the steam sharing program from geothermal resources located on the property on which Navy I or Navy II, as the case may be, are situated. Of this amount, the Navy I and Navy II partnerships each incurred approximately $1.0 million. The BLM partnership reimbursed the Navy II partnership approximately $0.2 million of the royalties incurred by the Navy II partnership. The BLM partnership incurs a royalty to the U.S. Navy for electricity generated by BLM and sold to Edison for steam transferred from U.S. Navy property. Royalty and Revenue-Sharing Arrangements The Coso partnerships are required to make royalty payments to, and are subject to other revenue-sharing arrangements with, the U.S. Navy, the Bureau of Land Management and certain other persons. Navy I The Navy I partnership pays a royalty for its first generating unit (Unit 1) through reimbursement of electricity supplied to the U.S. Navy by Edison from electricity generated at the Navy I plant. The reimbursement is based on a pricing formula that is included in the U.S. Navy Contract. This formula is primarily based on the tariff rates charged by Edison, as agreed to by the California Public Utilities Commission (CPUC), and are subject to future revision. On July 10, 2003, the CPUC approved a settlement between Edison and other parties to lower retail electric rates effective as of August 1, 2003. These rates are in effect for one year, after which new rates will be established in accordance with CPUC guidelines. Indices utilized in the calculation of the royalties under the Navy I partnership Unit 1 contract remained unchanged historically based on an agreement between the U.S. Navy and the Navy I partnership. In November 2001 and October 2002, modifications to the calculation of the reimbursement pricing formula were made to the U.S. Navy Contract resulting in a reduction of accrued royalties of $6.5 million and $1.3 million for those periods, respectively, which was agreed to by the U.S. Navy. The parties have agreed to a replacement index and true-up calculation in favor of the Navy I partnership. 3 In addition, with respect to Unit 1 at Navy I, the Navy I partnership is obligated to pay the U.S. Navy the sum of $25.0 million on or before December 31, 2009, the expiration date of the term of the U.S. Navy Contract. Payment of this obligation will be made from an established sinking fund to which the Navy I partnership has been making payments since 1987. For the second and third generating units (Unit 2 and Unit 3), respectively, at Navy I, the Navy I partnership's royalty expense is a fixed percentage of its electricity sales to Edison. The royalty expense is 15% of revenues received by the Navy I partnership through 2003 and will increase to 20% of revenues received from 2004 through 2009, the expiration date of the U.S. Navy Contract. BLM The BLM partnership pays royalties to the Bureau of Land Management under the BLM lease. The royalty rate is 10% of the net value of the steam produced by the BLM partnership. This royalty rate is fixed for the life of the BLM lease. In addition to this royalty, the BLM partnership is obligated, in connection with the assignment of the BLM lease to the BLM partnership, to pay to Coso Land Company (CLC), a general partnership of which CAC and another affiliate of Caithness Energy are the general partners, a royalty of 5% based on the value of the steam produced. The royalty is subordinated to the payment of all the BLM partnership's other royalties, all debt service and all operating costs of the BLM partnership. No portion of the royalty accrued to CLC has been paid to date. BLM North In December 2000, the Bureau of Land Management allowed CLC to assign each of the Coso partnerships an undivided one-third interest in leases CLC had previously bought from the Los Angeles Department of Water and Power (LADWP). The assignment required each Coso partnership to pay $8.00 per acre in additional rent to the Bureau of Land Management. When the leased property commences to produce geothermal steam, the Coso partnerships will pay monthly royalties under the LADWP leases of 10% of the value of steam produced, 5% of the value of any by-products, and 5% of the value of commercially demineralized water. The Bureau of Land Management may establish minimum production levels and reduce the foregoing royalties if necessary to encourage greater recovery of leased resources. Navy II The Navy II partnership pays royalties to the U.S Navy under the U.S Navy Contract. The Navy II partnership's royalty expense is a fixed percentage of its electricity sales to Edison. The royalty rate was 10.0% of electricity sales to Edison through 1999, increased to 18.0% for 2000 through 2004 and will increase to 20.0% from 2005 through the end of the Navy Contract. Operations and Maintenance The operations and maintenance services for the Coso projects, including the Navy I, BLM, and Navy II transmission lines, wells, gathering system, and other related facilities, are performed by COC on behalf of the Coso partnerships pursuant to the Operation and Maintenance agreements. COC maintains a qualified technical staff covering a broad range of disciplines including geology, geophysics, geochemistry, drilling technology, reservoir engineering, plant engineering, construction management, maintenance services, production management, electric power operation and certain accounting services. As of December 31, 2003, COC employed 88 people to operate and maintain the Coso projects. 4 Insurance The Coso partnerships renew their insurance policy annually and currently have property, business interruption, catastrophe and general liability insurance. For the period February 25, 2003 to February 24, 2004 the plants were insured up to their replacement cost for general property damage and business interruption on an actual loss sustained basis with an indemnity period of 12 months, subject to a $250,000 deductible for property damage (and a $500,000 deductible for the turbine generator sets), with a 60-day deductible for business interruption (including machinery breakdown). Catastrophic insurance (including earthquake and flood) was capped at $150 million for property damage, subject to a minimum deductible of $2.5 million or 5.0% of the loss. The deductible for flood damage is $250,000 for any one loss. Liability insurance coverage was $51 million (occurrence based). Operators' extra expense (control of well) insurance is $10 million per occurrence with a $250,000 deductible. Competition The Coso partnerships sell all electrical energy generated at the plants to Edison under three long-term Standard Offer No. 4 power purchase agreements. The payments under these agreements have constituted 100% of the operating revenues of each power plant since its inception. Environmental and Regulatory Matters The Coso partnerships are subject to environmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of the Coso projects. These environmental laws and regulations generally require that a wide variety of permits and governmental approvals be obtained to construct and operate an energy-producing facility. The facility must then operate in compliance with the terms of these permits and approvals. If the Coso partnerships fail to operate their facilities in compliance with applicable laws, permits and approvals, governmental agencies could levy fines, curtail operations, or seek orders to cease operations. The Coso partnerships believe they are in compliance in all material respects with all environmental regulatory requirements applicable to the Coso projects, and that maintaining compliance with current governmental requirements will not require a material increase in capital expenditures or materially adversely affect that Coso partnership's financial condition or results of operations. It is possible, however, that future developments, such as more stringent requirements of environmental laws and enforcement policies thereunder, could affect capital and other costs at the Coso projects and the manner in which the Coso partnerships conduct their business. Financial Information (in thousands)
Years Ended December 31, ------------------------ Navy I Partnership 2003 2002 2001 ---- ---- ---- Total Operating Revenue(e)(f) $ 59,792 $ 92,065 $ 53,400 Operating Income 26,117 58,689 24,218 Total Assets 184,800 195,072 193,114 5 Years Ended December 31, ------------------------ BLM Partnership 2003 2002 2001 ---- ---- ---- Total Operating Revenue(e)(f) $ 46,869 $ 81,252 $ 44,041 Operating Income 22,049 52,726 12,645 Total Assets 170,556 174,871 183,978 Years Ended December 31, ------------------------ Navy II Partnership 2003 2002 2001 ---- ---- ---- Total Operating Revenue(e)(f) $ 46,149 $ 79,592 $ 36,389 Operating Income 18,739 50,164 1,981 Total Assets 162,001 168,834 170,058
See Footnotes to Selected Financial and Operating Data Item 2. Properties Plants Navy I Navy I and its steam resource are located on the United States Naval Weapons Center at China Lake. In December 2000, Navy I acquired an undivided one-third interest in leases previously purchased from LADWP located on Bureau of Land Management property. It commenced operations in 1987. Geothermal steam for Navy I is produced using 45 production and injection wells located within a radius of approximately 3,000 feet of Navy I. Navy I consists of three separate turbine generators, known as Units 1, 2 and 3, each with approximately 30 MW of electrical generating capacity. Navy I's steam gathering and piping systems are cross-connected to Navy II via metered transfers to allow steam to be transferred from wells located on the real property covered by the LADWP leases to Navy I and between Navy I and Navy II, pursuant to the steam sharing program. Unit 1 commenced firm operation in 1987, and Units 2 and 3 commenced firm operation during 1988. Navy I has an aggregate gross electrical generating capacity of approximately 90 MW, and operated at an average operating capacity factor of 100.3% in 2003, 104.7% in 2002 and 108.3% in 2001, based on a stated capacity of 80 MW. BLM BLM and its steam resource are located on Bureau of Land Management property, within the boundaries of the United States Naval Weapons Center at China Lake. In December 2000, BLM acquired an undivided one-third interest in leases previously purchased from LADWP which are also located on Bureau of Land Management property. It commenced operations in 1989. BLM is comprised of turbine generators located at two different power blocks: the BLM East site and the BLM West site. The BLM East site is located approximately 1.3 miles east of the BLM West site. Geothermal steam for BLM is produced using 42 production and injection wells located within a radius of approximately 4,000 feet from either the BLM East or the BLM West site. BLM consists of three separate turbine generators, known as Units 7, 8 and 9. Units 7 and 8 are located at the BLM East site, each with a generating capacity of approximately 30 MW, while Unit 9 is located at the BLM West site, with a generating capacity of approximately 30 MW. All three units commenced firm operation during 1989. BLM's steam gathering and piping systems are cross connected to Navy II via metered transfers to allow steam to be transferred between Navy II and BLM pursuant to the steam sharing program. BLM has an aggregate gross electrical generating capacity of approximately 90 MW, and operated at an average operating capacity factor of 89.8% in 2003, 93.9% in 2002 and 102.8% in 2001, based on a stated capacity of 80 MW. 6 Navy II Navy II and its steam resource are located on the United States Naval Weapons Center at China Lake. In December 2000, Navy II acquired an undivided one-third interest in leases previously purchased from LADWP which are located on Bureau of Land Management property. It commenced operations in 1989. Geothermal steam for Navy II is produced using 35 production and injection wells located within a radius of approximately 6,000 feet of Navy II. Navy II consists of three separate turbine generators, known as Units 4, 5 and 6, each with approximately 30 MW of electrical generating capacity. All three Navy II units commenced firm operation in 1990. Navy II's steam supply systems are cross-connected to Navy I and BLM steam supply systems via metered transfers to allow steam to be transferred between or among the plants pursuant to the steam sharing program. Navy II has an aggregate gross electrical capacity of approximately 90 MW, and operated at an average operating capacity factor of 103.4% in 2003, 100.4% in 2002 and 104.9% in 2001, based on a stated capacity of 80 MW. Transmission Lines The electricity generated by Navy I is conveyed over an approximately 28.8-mile 115 kilovolt ("kV") transmission line on the U.S. Navy and Bureau of Land Management land that is connected to the Edison substation at Inyokern, California. The Navy I partnership owns and uses this transmission line and its related facilities. The electricity generated by BLM and Navy II is conveyed over an approximately 28.8-mile 230 kV transmission line on U.S. Navy and Bureau of Land Management land that is also connected to the Edison substation at Inyokern, California. Coso Transmission Line Partners, which is jointly owned by the BLM and Navy II partnerships, owns the BLM/Navy II transmission line and related facilities. Item 3. Legal Proceedings. The Coso partnerships are currently parties to various items of litigation relating to day-to-day operations. Management does not believe the outcome of such proceedings will be material to the financial condition and results of operations of the Coso partnerships, either individually or taken as a whole. Item 4. Submission of Matters to a Vote of Security Holders. None Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Not applicable. Item 6. Selected Financial Data. The selected fiscal year end financial data has been derived from the audited financial statements of the Coso partnerships. The information contained in the following tables should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this report. 7
Navy I Partnership (Stand-alone)(a) (In thousands, except ratio data) Year Ended December 31, ----------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Statement of Operations Data: Operating revenues(a)(e)(f)(g)........................ $ 59,792 $ 92,065 $ 53,400 $ 52,419 $ 55,666 Operating expenses.................................... (33,675) (33,376) (29,182) (29,124) (32,129) -------- -------- -------- -------- -------- Operating income...................................... 26,117 58,689 24,218 23,295 23,537 Non-Operating income (expense): Interest expense...................................... (9,738) (10,836) (11,732) (12,493) (11,573) Other expenses........................................ (2,299) (315) (705) (520) (4,377) Interest and other income, net........................ 1,624 1,574 2,928 2,506 2,234 ------- -------- ------- ------- ------- Net income............................................ $ 15,704 $ 49,112 $ 14,709 $ 12,788 $ 9,821 ======= ====== ====== ====== ======= Operating Data: Operating capacity factor (b)(c)...................... 100.3% 104.7% 108.3% 111.8% 95.4% kWh produced.......................................... 702,850 733,877 758,890 785,624 668,388 See Footnotes to Selected Financial and Operating Data BLM Partnership (Stand-alone) (In thousands, except ratio data) Year Ended December 31, ----------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Statement of Operations Data: Operating revenues (a)(e)(f)(g)........................ $ 46,869 $ 81,252 $ 44,041 $ 42,174 $ 49,877 Operating expenses..................................... (24,820) (28,526) (31,396) (31,414) (38,534) -------- -------- -------- -------- -------- Operating income....................................... 22,049 52,726 12,645 10,760 11,343 Non-Operating income (expense): Interest expense ................................... (8,018) (8,567) (8,958) (9,174) (8,725) Other expenses...................................... (1,291) (255) (440) (318) (3,332) Interest and other income, net...................... 1,141 1,455 3,766 8,125 1,066 ------- ------- ------- ------- ------- Net income.......................................... $ 13,881 $ 45,359 $ 7,013 $ 9,393 $ 352 ======= ======= ======= ======= ======= Operating Data: Operating capacity factor (b)(c)....................... 89.8% 93.9% 102.8% 109.4% 105.0% kWh produced........................................... 629,470 657,813 720,130 769,098 735,840 See Footnotes to Selected Financial and Operating Data 8
Navy II Partnership (Stand-alone) (In thousands, except ratio data) Year Ended December 31, ----------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Statement of Operations Data: Operating revenues (a) (e) (f) (g)..................... $ 46,149 $ 79,592 $ 36,389 $ 43,054 $ 113,746 Operating expenses..................................... (27,410) (29,428) (34,408) (34,583) (43,577) -------- -------- -------- -------- -------- Operating income....................................... 18,739 50,164 1,981 8,471 70,169 Non-Operating income (expense): Interest expense.................................... (7,070) (7,538) (8,128) (9,130) (11,947) Other expenses...................................... (2,207) (217) (1,119) (769) (4,191) Interest and other income, net...................... 426 894 2,883 2,868 2,174 ------- ------- ------- ------- -------- Net income (loss)................................... $ 9,888 $ 43,303 $ (4,383) $ 1,440 $ 56,205 ======= ======= ======= ======= ======== Operating Data: Operating capacity factor (b)(c)....................... 103.4% 100.4% 104.9% 111.1% 112.0% kWh produced........................................... 724,600 703,920 735,210 780,709 785,772 See Footnotes to Selected Financial and Operating Data 9
As of December 31, ------------------ 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Balance Sheet Data (in thousands): ---------------------------------- Navy I Partnership (stand-alone) Cash and cash equivalents.............................. $ 1,429 $ 4,215 $ 264 $ 3,506 $ 7,821 Restricted cash and advances........................... 24,657 28,692 21,325 22,996 25,001 Property, plant and equipment, net..................... 134,778 136,313 140,437 149,076 153,879 Power purchase contract, net........................... 8,798 9,945 11,093 12,240 13,388 Total assets........................................... 184,800 195,072 193,114 198,409 218,192 Project loan (d)....................................... 97,547 110,955 122,550 134,984 151,550 Partners' capital...................................... 66,676 65,408 52,425 46,871 49,362 BLM Partnership (stand-alone) Cash and cash equivalents.............................. $ 603 $ 1,423 $ -- $ 5,862 $ 6,423 Restricted cash, investments and advances.............. 10,155 6,646 7,368 14,502 9,806 Property, plant and equipment, net..................... 130,519 135,853 148,417 153,618 165,650 Power purchase contract, net........................... 16,293 17,365 18,437 19,510 20,549 Total assets........................................... 170,556 174,871 183,978 201,312 216,391 Project loan (d)....................................... 84,821 89,875 96,250 100,907 107,900 Partners' capital...................................... 54,817 56,603 52,762 69,245 79,350 Navy II Partnership (stand-alone) Cash and cash equivalents.............................. $ 78 $ 824 $ -- $ 7,741 $ 6,020 Restricted cash, investments and advances.............. 8,281 10,855 5,517 10,214 54,338 Property, plant and equipment, net..................... 114,839 116,192 124,665 136,947 147,522 Power purchase contract, net........................... 17,232 20,026 22,820 25,614 28,409 Total assets........................................... 162,001 168,834 170,058 195,693 273,269 Project loan (d)....................................... 71,246 80,401 84,200 94,176 153,550 Partners' capital...................................... 85,084 85,361 62,220 87,423 104,331 See Footnotes to Selected Financial and Operating Data 10
Footnotes to Selected Financial and Operating Data (a) The fixed energy price periods expired for the Navy I partnership in August 1997, for the BLM partnership in March 1999 and for the Navy II partnership in January 2000. (b) Based on a stated capacity of 80 MW. (c) The variance in the operating capacity factors for the Navy I partnership, the BLM partnership, and the Navy II partnership are due to the transfer of steam from the Navy I partnership to the BLM and Navy II partnerships under the steam sharing program. (d) Reflects indebtedness owed to Funding Corp., which loaned all the proceeds from the Notes to the Coso partnerships at interest rates and maturities identical to the interest rates and maturities of the senior secured notes. (e) Reflects non-recognition of operating revenues for the period November 1, 2000 through March 26, 2001, based on non-collection of amounts due for power generated and sold to Edison. (f) Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. (g) Reflects recognition of operating revenue in 2003 resulting from collection of amounts due for power generated and sold to Edison for the period November 1, 2000 through March 26, 2001. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Except for financial information contained herein, the matters discussed in this annual report may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding the intent, belief or current expectations of Caithness Coso Funding Corp. ("Funding Corp."), Coso Finance Partners ("the Navy I partnership"), Coso Energy Developers ("the BLM partnership"), and Coso Power Developers ("the Navy II partnership"), collectively, (the "Coso partnerships") and their respective management. Such statements may be identified by terms such as expected, anticipated, may, will, believe or other terms or variations of such words. Any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause future operating results to differ materially from those anticipated include, but are not limited to: (i) risks relating to the uncertainties in the California energy market, (ii) the financial viability of Southern California Edison, ("Edison"), (iii) risks related to the operation of geothermal power plants (iv) the impact of avoided cost pricing along with other pricing variables, (v) general operating risks, including resource availability and regulatory oversight, (vi) changes in government regulation, (vii) the effects of competition and (viii) the alleged manipulation of the California energy market. Capacity Utilization For purposes of consistency in financial presentation, the plant capacity factor for each of the Coso partnerships is based on a nominal capacity amount of 80MW (240MW in the aggregate). The Coso partnerships have a gross operating capacity that allows for the production of electricity in excess of their nominal capacity amounts. Utilization of this operating margin is based upon a number of factors and can be expected to vary throughout the year under normal operating conditions. 11 The following data includes the operating capacity factor, capacity and electricity production (in kWh) for each Coso partnership on a stand-alone basis:
Year Ended December 31, ----------------------- 2003 2002 2001 Navy I Partnership (stand alone) ---- ---- ---- Operating capacity factor 100.3% 104.7% 108.3% Capacity (MW) (average) 80.23 83.78 86.63 kWh produced (000s) 702,850 733,877 758,890 BLM Partnership (stand alone) Operating capacity factor 89.8% 93.9% 102.8% Capacity (MW) (average) 71.86 75.09 82.21 kWh produced (000s) 629,470 657,813 720,130 Navy II Partnership (stand alone) Operating capacity factor 103.4% 100.4% 104.9% Capacity (MW) (average) 82.72 80.36 83.93 kWh produced (000s) 724,600 703,920 735,210
Total energy production for the Navy I and BLM partnerships, decreased in 2003 as compared to 2002, due to a decline in steam, which management is attempting to remediate through well maintenance and capital improvements, including the enhancement of existing production wells and additional steam-field piping modifications that were completed in 2003. The Coso partnerships expect to further enhance the steam utilization and efficiency of the projects through a turbine enhancement program and additional steam-field piping modifications. With respect to the reservoir, an injection augmentation program, aimed at improving reservoir pressure and minimizing resource decline, is currently in the engineering design phase. The funds necessary to implement the capital improvement program are available from reserves established under the Notes and from excess cash flow generated after debt service. Total energy production for the Navy II partnership, increased in 2003 as compared to 2002, due to the success of the effort to increase production overall, whereby the Coso partnerships have implemented the above mentioned projects. Total energy production for the Coso partnerships, decreased in 2002 as compared to 2001, due to the decline in steam which management is attempting to remediate through the well maintenance and capital improvements programs discussed above. Results of Operations for the years ended December 31, 2003, 2002, and 2001. ---------------------------------------------------------------------------- The following discusses the results of operations of the Coso partnerships for the years ended December 31, 2003, 2002 and 2001 (dollar amounts in tables are in thousands, except per kWh data): Revenue
2003 2002 2001 ---- ---- ---- $ cents/kWh $ cents/kWh $ cents/kWh - --------- - --------- - --------- Total Operating Revenues including steam transfers Navy I partnership 59,792 8.5 92,065 12.5 53,400 7.0 BLM partnership 46,869 7.4 81,252 12.4 44,041 6.1 Navy II partnership 46,149 6.4 79,592 11.3 36,389 5.0
12 The Coso partnerships sell all electricity generated to Edison under their respective power purchase agreement. Total operating revenues consist of capacity payments, capacity bonus payments, and energy payments, including steam transfers discussed above. Total operating revenues for the Coso partnerships decreased in 2003 as compared to 2002, due to the recognition of revenues generated but not recognized for the period from November 1, 2000 through March 26, 2001. On March 1, 2002, the Navy I, BLM and Navy II partnerships received payment and recognized revenue of $37.3 million, $37.1 million and $38.0 million, respectively, for energy generated in 2000 and 2001. The decreases in operating revenue at the Navy I and BLM partnerships were caused by their decline in steam discussed above. The decreases for each of the Coso partnerships were partially offset by the increase in the fixed energy rate to 5.37 cents per kWh paid during 2003, as compared to the average fixed energy rate of 4.66 cents per kWh paid in 2002. Total operating revenues for the Coso partnerships increased in 2002 as compared to 2001 due to the recognition of revenue generated but not recognized for the period November 1, 2000 through March 26, 2001, resulting from the Edison's liquidity crisis, partially offset by decreases in steam transfer revenues and the previously discussed decline in steam. Plant Operating Expense
2003 2002 2001 ---- ---- ---- $ cents/kWh $ cents/kWh $ cents/kWh - --------- - --------- - --------- Navy I partnership 9,951 1.4 9,832 1.3 9,010 1.2 BLM partnership 12,722 2.0 11,748 1.8 10,221 1.4 Navy II partnership 9,777 1.3 10,304 1.5 9,679 1.3
Plant operating expense consists of labor and related expenses, supplies and maintenance, property taxes, insurance, workovers and administrative expense. Plant operating expenses have been consistent from year to year with the following exceptions; insurance expense for each Coso partnerships increased by approximately $75,000 in 2003 as compared to 2002, while property taxes decreased for the Navy I, BLM, and Navy II partnerships by $670,000, $720,000 and $610,000, respectively, in 2003 as compared to 2002. The significant decrease in property taxes in 2002 resulted from a correction by Inyo county to the 2001 assessment received and paid in 2002. Plant operating expenses for the Navy I partnership increased in 2003 as compared to 2002, due to increased insurance costs, well workovers and an allowance for doubtful accounts of $216,000 established based on a dispute with Edison regarding the payment for capacity, offset by the reduction in property tax. Plant operating expenses for the BLM partnership increased in 2003 as compared to 2002, due to increased insurance costs, well workovers, partially offset by the reduction in property tax. Plant operating expenses for the Navy II partnership decreased in 2003 as compared to 2002, due to the reduction in property tax and lower well workovers partially offset by the increased insurance costs and an allowance for doubtful accounts established based on a dispute with Edison regarding payment for capacity of $82,000. Plant operating expenses for the Coso partnerships increased in 2002 as compared to 2001, due to increases in insurance costs, property taxes and repair and maintenance projects, partially offset by a reduction in legal costs associated with Edison's non-payment. The increase in property taxes resulted from the correction to the 2001 assessment received and paid in 2002 discussed above. The increase in repair and maintenance projects resulted from the deferral in 2001 due to Edison's non-payment. 13 Royalty Expenses
2003 2002 2001 ---- ---- ---- $ cents/kWh $ cents/kWh $ cents/kWh - --------- - --------- - --------- Navy I partnership 13,081 1.9 12,914 1.8 9,950 1.3 BLM partnership 2,778 0.4 2,436 0.4 5,203 0.7 Navy II partnership 7,520 1.0 6,961 1.0 9,377 1.3
The royalty expenses for the Coso partnerships increased slightly in 2003 as compared to 2002 primarily due to the increase in the fixed energy rate to 5.37 cents per kWh from 4.66 cents per kWh in 2002. Royalty expenses for the Navy I partnership increased in 2002 as compared to 2001 primarily due to a $6.5 million royalty reimbursement in 2001 that resulted from the modification to the calculation of the Unit 1 royalty reimbursement pricing formula. The increase was partially offset by reduced royalties resulting from the decrease in the rate of energy from 7.5 cents per kWh in 2001 to 4.7 cents per kWh in 2002, and a $1.3 million royalty reimbursement in 2002 resulting from the final modification to the calculation of the Unit I royalty reimbursement pricing formula. Royalty expenses for the BLM partnership decreased in 2002 as compared to 2001 primarily due to the decrease in the rate of energy from 7.5 cents per kWh in 2001 to 4.7 cents per kWh in 2002 and a decrease in production in 2002 as compared to 2001. Royalty expenses for the Navy II partnership decreased in 2002 as compared to 2001 primarily due to the decrease in the rate of energy from 7.5 cents per kWh in 2001 to 4.7 cents per kWh in 2002. Depreciation and Amortization Depreciation and amortization for the Coso partnerships decreased in 2003 as compared to 2002 due to older wells and plant overhauls being fully depreciated during 2003. The decrease for the Navy I partnership was offset by an increase in capitalized assets associated with the new well placed in service in 2002. Depreciation and amortization for the Coso partnerships decreased in 2002 as compared to 2001 due to older wells being fully depreciated during 2002. The decrease for the Navy I partnership was offset by the increase in capitalized assets associated with the new well placed in service in 2002. Interest and Other Income Interest and other income for the Coso partnerships decreased in 2003 as compared to 2002 due to a decrease in the rate of return on investments due to lower market rates for fixed income investments during those periods in 2003 and decreased interest income on amounts in arrears, owed by Edison in 2001, that were settled and paid by Edison on March 1, 2002. The decrease for the Navy I partnership was partially offset by a one-time credit of $0.5 million from the California Department of Water Resources resulting from a refund related to the energy crisis of 2001. Interest and other income for the Coso partnerships decreased in 2002 as compared to 2001 due to interest on amounts in arrears, owed by Edison in 2001, that were settled and paid by Edison on March 1, 2002. 14 Interest Expense Interest expense for the Coso partnerships decreased in 2003 as compared to 2002 and 2002 as compared to 2001 due to the reduction in the principle amount of the project loan from Funding Corp. Liquidity and Capital Resources Each of the Navy I partnership, the BLM partnership and the Navy II partnership derive substantially all of their cash flow from Edison under their power purchase agreements and from interest income earned on funds on deposit. As of December 2001, the 6.8% notes were repaid, subsequently leaving the Coso partnerships with more cash flow annually. The Coso partnerships have used their cash primarily for capital expenditures for power plant improvements, resource and operating costs, distributions to partners and payments with respect to the project debt. The Coso partnerships' cash flow obligations over the next several years consist of debt service payments to Funding Corp., as they come due under the Funding Corp. Senior Secured (Notes). The Coso partnerships expect to be able to meet these obligations from operating cash flow. Historically, any excess cash after debt service have either been reserved for capital improvements or distributed to the partners. The Coso partnerships' ability to meet their obligations as they come due will depend upon the ability of Edison to meet its obligations under the terms of the standard offer No. 4 power purchase agreements and the Coso partnerships' ability to continue to generate electricity. Edison's shortfall in collections, coupled with its near term capital requirements, materially and adversely affected its liquidity during 2000 and 2001. In resolution of that issue, Edison settled with the CPUC on October 2, 2001, enabling it to recover in retail electric rates its historical shortfall in electric purchase costs. On September 23, 2002, the United States Court of Appeals for the Ninth Circuit issued an opinion and order on appeal from the district court's stipulated judgment which affirmed the stipulated judgment in part and referred questions based on California state law to the Supreme Court of California. The appeals court stated that if the Agreement violated California state law then the appeals court would be required to void the stipulated judgment. California Supreme Court has accepted the Ninth Circuit Court of Appeals request to address the issues referred to it in the September 23, 2002 ruling. The California Supreme Court found that the stipulated judgment did not violate state laws. Consequently, the Agreement remains in full force and effect and it is unknown if any additional appeals are planned. Immediately after this settlement, Edison and each of the Coso partnerships entered into an amendment of their respective Agreement (referenced above) pertaining to partial payment and interest payments relating to Edison's past due obligations for the period from November 1, 2000 through March 26, 2001. The Agreement, as amended, was approved by CPUC in January of 2002, and established the fixed energy rates discussed above and set payment terms for the past due amounts owed to the Coso partnerships by Edison. Edison's failure to pay its future obligations may have a material adverse effect on the Coso partnerships ability to make debt service payments to Funding Corp. On March 1, 2002, Edison reached certain financing milestones and paid the Coso partnerships for revenue generated but not recognized for the period from November 1, 2000 through March 26, 2001. In the first quarter of 2002, the Navy I, BLM and Navy II partnerships recognized revenue for energy delivered during that period of $37.3 million, $37.1 million and $38.0 million, respectively. Since, March 27, 2001 Edison has been current with payments for the energy portion of the Coso partnerships' revenue. Under the depository agreement with the trustee for the notes, the Coso partnerships established accounts with a depository and pledged those accounts as security for the benefit of the holders of the senior secured notes. All amounts deposited with the depository are, at the direction of the Coso partnerships, invested by the depository in permitted investments. All revenues or other proceeds actually received by the Coso partnerships are deposited in a revenue account and withdrawn upon receipt by the depository of a certificate from the relevant Coso partnerships detailing the amounts to be paid from funds in its respective revenue account. 15 Net cash from operating activities for the Coso partnerships decreased in 2003 as compared to 2002 and increased in 2002 as compared to 2001 primarily due to Edison's payment received in 2002 for revenue generated but not recognized for the period from November 1, 2000 through March 26, 2001. Net cash from investing activities for the Coso partnerships decreased in 2003 as compared to 2002 due to the increase in restricted cash requirements associated with the notes. The decrease for the BLM partnership was offset by a decrease in capital expenditures for 2003. Net cash flow from investing activities for the Coso partnerships increased in 2002 as compared to 2001 due to the decrease in restricted cash requirements associated with the notes. The increase for the BLM partnership was offset by a decrease in capital expenditures for 2002. Net cash flow from financing activities for the Coso partnerships increased in 2003 as compared to 2002 primarily due to a decrease in partner distributions in 2003. Net cash flow from financing activities for the Navy I and BLM partnerships decreased in 2002 as compared to 2001 due to an increase in partner distributions in 2002. The Navy II partnerships cash flow from financing activities decreased in 2002 as compared to 2001 due to lower repayments of the notes. The following is a summary of the Coso partnerships' material contractual obligations (in millions):
Less than 2-3 4-5 More than Contractual Obligations Total 1 Year Years Years 5 Years ----------------------- ----- ------ ----- ----- ------- Project Loans..................... $ 253,614 $ 31,332 $ 73,766 $ 47,419 $ 101,097 Other long-term obligations....... 9,324 1,332 2,664 2,664 2,664 ------- ------ ------ ------ ------- $ 262,938 $ 32,664 $ 76,430 $ 50,083 $ 103,761
The project loans were issued under an indenture dated as of May 28, 1999 between Funding Corp. and the trustee, U.S. Bank Trust NA. (see Item 8). Other long-term obligations relate to Unit 1 at Navy 1, whereby the Navy I partnership is obligated to pay the U.S. Navy the sum of $25.0 million on or before December 31, 2009, the expiration date of the term of the U.S. Navy contract. Payment of this obligation will be made from an established sinking fund which the Navy I partnership has been making payments to since 1987. The payment is secured by funds placed on deposit monthly, which funds plus accrued interest will aggregate $25.0 million. Currently, the monthly amount to be deposited is approximately $111,000 (see Item 8). Critical Accounting Policies and Estimates Preparation of this Annual Report on Form 10-K requires the Coso partnerships to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Coso partnerships' financial statements, and the reported amounts of revenue and expenses during the reporting period. The Coso partnerships' critical accounting policies, including the assumptions and judgments underlying them, are disclosed under the caption "Summary of Significant Accounting Policies" under Item 8. These policies have been consistently applied and address such matters as revenue recognition, depreciation methods and asset impairment recognition. While policies associated with estimates and judgments may be affected by different assumption or condition, the Coso partnerships' believes its estimates and judgments associated with the reported amounts are appropriate. Actual results may differ from those estimates. 16 The Company considers the policies discussed below as critical to an understanding of the Coso partnerships' financial statements as application of these policies places the most significant demands on management's judgment, with financial reporting results relying on the estimation of matters that are uncertain. Accounts Receivable and Revenue Recognition - Operating revenues are recognized as income during the period in which electricity is delivered to Edison. In the event that Edison is not able to make payment on amounts due, and collection is not reasonably assured, the Coso partnerships' will not recognize revenue for energy delivered, until payment is collected. Impairment of Long-Lived Assets - Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Asset Retirement Obligations - The fair value of a liability for an asset retirement obligation should be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs should be capitalized as part of the carrying amount of the long-lived asset. This policy was applied to the financial statements for the Coso partnerships' for the fiscal year beginning January 1, 2003. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Risk Factors Operating the Coso projects involves, among other things, general economic, financial, competitive, legislative, legal, regulatory and other factors that are beyond management's control. Changes in these factors could make it more expensive to operate the Coso projects, or require additional capital expenditures, or reduce certain benefits currently available to the Coso partnerships. There are a variety of other risks that affect the Coso projects, some of which are beyond management's control, including: * One or more of the Coso projects could perform below expected levels of output or efficiency which would reduce revenue; * In light of the uncertainty of the Western energy markets, Edison's financial viability may be considered uncertain. If Edison were to enter into bankruptcy proceedings, the power purchase contracts could be amended and any accounts receivable from Edison could be reduced or eliminated; * The Coso geothermal resource could be interrupted or unavailable; * Operating and royalty costs could increase; * Changes in the regulatory structure which govern the current operations of the Coso partnerships. * Future competition may lead to an accelerated depletion of the resource; * Energy prices paid by Edison could decrease or terminate; * Delivery of electrical energy to Edison could be disrupted; 17 * Environmental problems or regulation changes could arise which could lead to fines or a shutdown of one or more plants; * Plant units and equipment have broken down or failed in the past and could break down or fail in the future; * The operators of the Coso projects could suffer labor disputes; * The government could change permit or governmental approval requirements restricting operations; * Third parties could fail to perform their contractual obligations to the Coso partnerships; and * Catastrophic events, such as fires, earthquakes, explosions, floods, severe storms or other occurrences including terrorism or war, could affect one or more of the Coso projects, the Navy or Edison. In addition, the Coso partnerships must meet specified performance requirements under their respective power purchase agreements during the months of June through September to continue to qualify for the maximum capacity and capacity bonus payments. If one or more of the events listed above occur and substantially affect the performance of one or more of the plants during these months, operating revenues would be significantly decreased. Item 8. Financial Statements and Supplementary Data. CAITHNESS COSO FUNDING CORP. AND COSO OPERATING PARTNERSHIPS Index Page ----- ---- Caithness Coso Funding Corp: ---------------------------- KPMG LLP Independent Auditors' Report F-1 Balance Sheets as of December 31, 2003 and 2002 F-2 Statement of Income for the years ended December 31, 2003, 2002 and 2001 F-3 Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-4 Notes to Financial Statements F-5 Coso Finance Partners: ---------------------- KPMG LLP Independent Auditors' Report F-6 Balance Sheets as of December 31, 2003 and 2002 F-7 Statement of Operations for the years ended December 31, 2003, 2002 and 2001 F-8 Statement of Partners' Capital for the years ended December 31, 2003, 2002 and 2001 F-9 Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-10 Notes to Financial Statements F-11 Coso Energy Developers: ----------------------- KPMG LLP Independent Auditors' Report F-12 Balance Sheets as of December 31, 2003 and 2002 F-13 Statement of Operations for the years ended December 31, 2003, 2002 and 2001 F-14 Statement of Partners' Capital for the years ended December 31, 2003, 2002 and 2001 F-15 Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-16 Notes to Financial Statements F-17 Coso Power Developers: ---------------------- KPMG LLP Independent Auditors' Report F-18 Balance Sheets as of December 31, 2003 and 2002 F-19 Statement of Operations for the years ended December 31, 2003, 2002 and 2001 F-20 Statement of Partners' Capital for the years ended December 31, 2003, 2002 and 2001 F-21 Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-22 Notes to Financial Statements F-23 Supplemental Unaudited Condensed quarterly Financial information for 2003, 2002 and 2001 F-24 Coso Partnerships: ------------------ Supplemental Condensed Combined Financial Information for the Coso Partnerships: Unaudited Condensed Combined Balance Sheets as of December 31, 2003 and 2002 F-25 Unaudited Condensed Combined Statements of Operations for the years ended December 31, 2003, 2002 and 2001 F-26 Unaudited Condensed Combined Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-27 Notes to the Unaudited Condensed Combined Financial Statements F-28 Independent Auditors' Report Caithness Coso Funding Corp.: We have audited the accompanying balance sheets of Caithness Coso Funding Corp. as of December 31, 2003 and 2002, and the related statements of income and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Caithness Coso Funding Corp. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. February 6, 2004 New York, New York /s/ KPMG, LLP ------------- KPMG, LLP F-1 CAITHNESS COSO FUNDING CORP. Balance Sheets December 31, 2003 and 2002 (Dollars in thousands)
Assets 2003 2002 ------------ ------------ Accrued interest receivable $ 1,008 1,130 Project loan to Coso Finance Partners 97,547 110,955 Project loan to Coso Energy Developers 84,821 89,875 Project loan to Coso Power Developers 71,246 80,401 ------------ ------------ Total assets $ 254,622 282,361 ============ ============ Liabilities and Stockholders' Equity Senior secured notes: Accrued interest payable $ 1,008 1,130 9.05% notes due December 15, 2009 253,614 281,231 ------------ ------------ Total liabilities 254,622 282,361 Stockholders' equity (note 5) -- -- ------------ ------------ Total liabilities and stockholders' equity $ 254,622 282,361 ============ ============
See accompanying notes to financial statements. F-2
CAITHNESS COSO FUNDING CORP. Statements of Income Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 -------------- -------------- -------------- Revenue: Interest income $ 24,828 26,931 28,820 Expense: Interest expense (24,828) (26,931) (28,820) -------------- -------------- -------------- Net income $ -- -- -- ============== ============== ==============
See accompanying notes to financial statements. F-3
CAITHNESS COSO FUNDING CORP. Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 --------------- --------------- --------------- Cash flows from investing activities - repayment of project loans $ 27,739 21,864 27,128 --------------- --------------- --------------- Cash flows from financing activities - repayment of 9.05% notes (27,739) (21,864) (27,128) --------------- --------------- --------------- Net changes in cash -- -- -- Cash at beginning of year -- -- -- --------------- --------------- --------------- Cash at end of year $ -- -- -- =============== =============== =============== Supplemental cash flow disclosures: Interest paid $ 24,950 27,026 28,881
See accompanying notes to financial statements. F-4 CAITHNESS COSO FUNDING CORP. Notes to Financial Statements December 31, 2003, 2002, and 2001 (Dollars in thousands) (1) Organization of the Corporation Caithness Coso Funding Corp. (Funding Corp.), which was incorporated on April 22, 1999, is a single purpose Delaware corporation formed to issue senior secured notes (Notes) for its own account and as an agent acting on behalf of Coso Finance Partners (CFP), Coso Energy Developers (CED), and Coso Power Developers (CPD), collectively, the "Partnerships." The Partnerships are California general partnerships. On May 28, 1999, Funding Corp. sold $413,000 of Notes (see note 4). Pursuant to separate credit agreements between Funding Corp. and each partnership (Credit Agreements), the net proceeds from the offering of the Notes were loaned to the Partnerships. Payment of the Notes is provided for by payments made by the Partnerships under their respective project loans (see note 3). Funding Corp. has no material assets, other than the project loans, and does not conduct any operations apart from having issued the Notes and making the project loans to the Partnerships. (2) Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders' equity, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments Based on quoted market rates of the Notes, the fair value of the project loans and underlying Notes as of December 31, 2003 and 2002 is $253,614 and $281,231, respectively. New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued FAS Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This is an interpretation of FASB Statements No. 5, Accounting for Contingencies, No. 57, Related Party Disclosures, and No. 107, Disclosures about Fair Value of Financial Instruments and Rescission of FASB Interpretation No. 34, Disclosures of Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Statement is being applied prospectively, to guarantees issued or modified after December 31, 2003. FIN 45 has no impact on Funding Corp.'s financial statements. (3) Project Loans to the Partnerships Pursuant to each Credit Agreement, each partnership shall make project loan payments in scheduled installment amounts which, in the aggregate, are sufficient to enable Funding Corp. to pay scheduled principal and interest on the Notes (see note 4). The Notes are general obligations of Funding Corp., and are secured and perfected by: (1) first priority pledge of the promissory notes evidencing each Partnership's obligation to repay the loan; (2) first priority lien on the funds in the debt service cash accounts of the Partnerships; and (3) first priority pledge of all of the outstanding capital stock of Funding Corp. These obligations are unconditionally guaranteed by the Partnerships and are secured and perfected by substantially all assets of the Partnerships and the equity interests in the Partnerships. Funding Corp., CPD, CED, and CFP are jointly and severally liable for the repayment of the Notes. (4) Senior Secured Notes On May 28, 1999, Funding Corp. completed a $413,000 underwritten public debt offering consisting of $110,000 6.8% Notes due 2001 and $303,000 9.05% Notes due 2009. The Notes were issued under an indenture dated as of May 28, 1999 between Funding Corp. and the trustee, U.S. Bank Trust N.A. Payment of the Notes is provided for by payments to be made by the Partnerships on their respective project loans (see note 3). Interest is payable each June 15 and December 15. The annual maturity of the Notes for each year ending December 31 is as follows: Amount ------------ 2004 $ 31,332 2005 35,480 2006 38,286 2007 47,419 2008 49,261 Thereafter 51,836 ------------ $ 253,614 ============ The Note indentures contain certain restrictive covenants that, among other things, limit the ability to incur additional indebtedness, release funds from reserve accounts, make distributions, create loans, and enter into any transaction, merger, or consolidation. (5) Stockholders' Equity Funding Corp. is authorized to issue 1,000 shares of common stock, one cent par value per share. Upon incorporating in 1999, Funding Corp. issued 100 common shares each to CFP, CED, and CPD. (6) Risks and Uncertainties The Partnerships sell 100% of the electrical energy generated to Southern California Edison (Edison) under a long-term power purchase contracts, and are significantly impacted by risks beyond their control. Among the important factors that could cause actual results to differ materially from those anticipated include, but are not limited to: (i) risks relating to the uncertainties in the California energy market, (ii) the financial viability of Edison, (iii) risks related to the operation of power plants, (iv) the impact of avoided cost pricing along with other pricing variables, (v) general operating risks, including resource availability and regulatory oversight, (vi) changes in government regulations, (vii) the effects of competition, (viii) the alleged manipulation of the California energy market, and (ix) acts of terrorism directed at the project or other facilities affecting the normal course of business. F-5 Independent Auditors' Report The Partners and Management Committee Coso Finance Partners: We have audited the accompanying balance sheets of Coso Finance Partners as of December 31, 2003 and 2002, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coso Finance Partners as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2 to the financial statements, effective January 1, 2003, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. February 6, 2004 New York, New York /s/ KPMG, LLP ------------- KPMG, LLP F-6 COSO FINANCE PARTNERS Balance Sheets December 31, 2003 and 2002 (Dollars in thousands)
Assets 2003 2002 --------------- --------------- Cash and cash equivalents $ 1,429 4,215 Restricted cash and investments (note 2) 24,657 28,692 Accounts receivable, net (note 2) 6,925 7,431 Prepaid expenses and other assets 872 1,068 Amounts due from related parties (note 7) 1,286 1,190 Property, plant, and equipment, net (note 4) 134,778 136,313 Advances to New CLPSI Company, LLC (note 3) 4,162 4,010 Power purchase contract, net (note 2) 8,798 9,945 Deferred financing costs, net (note 2) 1,893 2,208 --------------- --------------- Total assets $ 184,800 195,072 =============== =============== Liabilities and Partners' Capital Accounts payable and accrued liabilities (notes 5) $ 4,500 5,764 Amounts due to related parties (note 7) 474 467 Other liabilities (notes 2 and 5) 15,603 12,478 Project loans (note 6) 97,547 110,955 --------------- --------------- Total liabilities 118,124 129,664 Commitments and contingencies (notes 5, 6, and 9) Partners' capital 66,676 65,408 --------------- --------------- Total liabilities and partners' capital $ 184,800 195,072 =============== ===============
See accompanying notes to financial statements. F-7
COSO FINANCE PARTNERS Statements of Operations Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ------------------ ------------------ ------------------ Revenue: Energy revenues (notes 2, 7, and 9) $ 45,526 75,906 40,190 Capacity and bonus payments 14,266 16,159 13,210 ------------------ ------------------ ------------------ Total revenue 59,792 92,065 53,400 ------------------ ------------------ ------------------ Operating expenses: Plant operating expenses 9,951 9,832 9,010 Royalty expense (note 5) 13,081 12,914 9,950 Depreciation and amortizatio 10,643 10,630 10,222 ------------------ ------------------ ------------------ Total operating expenses 33,675 33,376 29,182 ------------------ ------------------ ------------------ Operating income 26,117 58,689 24,218 ------------------ ------------------ ------------------ Other (income) expenses: Interest and other income (1,624) (1,574) (2,928) Interest expense on project loan 9,738 10,836 11,732 Noncash interest expense 519 315 705 ------------------ ------------------ ------------------ Total other expenses 8,633 9,577 9,509 ------------------ ------------------ ------------------ Income before cumulative effect of change in accounting principle 17,484 49,112 14,709 Cumulative effect of cahnge in accounting principle (note 2) 1,780 -- -- ------------------ ------------------ ------------------ Net income $ 15,704 49,112 14,709 ================== ================== ==================
See accompanying notes to financial statements. F-8
COSO FINANCE PARTNERS Statements of Partner's Capital Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) New CLOC ESCA Company, LLC LLC Total ------------------ ------------------ ------------------- Balance at December 31, 2000 $ 26,607 20,264 46,871 Net income 7,884 6,825 14,709 Distributions to partners (4,907) (4,248) (9,155) ------------------ ------------------ ------------------- Balance at December 31, 2001 29,584 22,841 52,425 Net income 26,324 22,788 49,112 Distributions to partners (19,365) (16,764) (36,129) ------------------ ------------------ ------------------- Balance at December 31, 2002 36,543 28,865 65,408 Net income 8,417 7,287 15,704 Distributions to partners (7,738) (6,698) (14,436) ------------------ ------------------ ------------------- Balance at December 31, 2003 $ 37,222 29,454 66,676 ================== ================== ===================
See accompanying notes to financial statements. F-9
COSO FINANCE PARTNERS Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ------------------ ----------------- ----------------- Cash flows from operating activities: Net income $ 15,704 49,112 14,709 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,643 10,630 10,222 Noncash interest expense 519 315 705 Provision for doubtful account 216 -- -- Cumulative effect of change in accounting principle 1,780 -- -- Changes in operating assets and liabilities: Accounts receivable, prepaid expenses, and other assets 486 (4,395) (2,774) Advances to New CLPSI Company, LLC (152) (5) 67 Accounts payable and accrued liabilities (1,264) (716) 486 Amounts due from related parties (96) 8,172 (7,402) Amounts due to related parties 7 (94) (136) Other 883 1,380 ------------------ ----------------- ----------------- Net cash provided by operating activities 28,726 64,399 17,112 ------------------ ----------------- ----------------- Cash flows from investing activities: Capital expenditures (7,703) (5,357) (436) Decrease (increase) in restricted cash 4,035 (7,367) 1,671 ------------------ ----------------- ----------------- Net cash (used in) provided by investing activities (3,668) (12,724) 1,235 ------------------ ----------------- ----------------- Cash flows from financing activities: Distributions to partners (14,436) (36,129) (9,155) Repayment of project financing loans (13,408) (11,595) (12,434) ------------------ ----------------- ----------------- Net cash used in financing activities (27,844) (47,724) (21,589) ------------------ ----------------- ----------------- Net change in cash and cash equivalents (2,786) 3,951 (3,242) Cash and cash equivalents at beginning of year 4,215 264 3,506 ------------------ ----------------- ----------------- Cash and cash equivalents at end of year $ 1,429 4,215 264 ================== ================= ================= Supplemental cash flow disclosure: Cash paid for interest $ 9,798 10,880 11,763
See accompanying notes to financial statements. F-10 COSO FINANCE PARTNERS Notes to Financial Statements December 31, 2003, 2002, and 2001 (Dollars in thousands) (1) Organization, Operation, and Business of the Partnership Coso Finance Partners (CFP or the Partnership) was formed on July 7, 1987 in connection with the refinancing of the construction of a geothermal power plant on land at the China Lake Naval Air Weapons Station, Coso Hot Springs, China Lake, California. CFP is a general partnership owned by ESCA LLC (ESCA) and New CLOC Company, LLC (New CLOC), both of which are affiliated Delaware limited liability companies. The power plant is located on land owned by the U.S. Navy (Navy). Under the terms of the contract, CFP develops geothermal energy and pays a royalty to the Navy (see note 5). The Partnership sells all electricity produced to Southern California Edison (Edison) under a 24-year power purchase contract (PPC) expiring in 2011. Under the terms of the PPC, Edison makes payments to CFP as follows: * Contractual payments for energy delivered escalated at an average rate of approximately 7.6% for the first ten years after the date of firm operation (scheduled energy price period). After the scheduled energy price period, the energy payment adjusted to the actual avoided energy cost experienced by Edison. In August 1997, the Partnership completed the first ten-year period. At that time, Edison ceased paying the scheduled energy rates. Edison entered into an agreement (the Agreement) with the Partnership on June 19, 2001 that addressed renewable energy pricing and issues concerning California's energy crisis. The Agreement, which was amended on November 30, 2001, established May 1, 2002 as the date from which the Partnership receives a fixed energy rate of 5.37 cents per kilowatt (kWh) for five (5) years. From January 1, 2002 through April 30, 2002, CFP elected to receive from Edison a fixed energy rate of 3.25 cents per kWh. The average rate of energy paid to the Partnership for the years ended December 31, 2003, 2002, and 2001 was 5.37, 4.66, and 7.46 cents per kWh, respectively. Starting May 1, 2002, CFP received 5.37 cents per kWh, pursuant to the Agreement discussed above. Subsequent to the five-year period, Edison will be required to make energy payments to the Partnership based on its avoided cost of energy until the PPC expires. Beyond the five-year period, the Partnership cannot predict the likely level of avoided cost of energy prices under the PPC and, accordingly, the revenues generated by the Partnership could fluctuate significantly; * Capacity payments which remain fixed over the life of the PPC to the extent that actual energy delivered exceeds minimum levels of the plant capacity defined in the PPC; and * Bonus payments to the extent that actual energy delivered exceeds 85% of the plant capacity stated in the PPC. In 2003, 2002, and 2001, the bonus payments aggregated $2,176, $2,176, and $2,176, respectively. Coso Operating Company LLC (COC), an affiliated Delaware limited liability company, provides for the operation and maintenance of the geothermal power facilities and administrative services through December 31, 2009 pursuant to certain operation and maintenance agreements with New CLOC, the managing general partner. The partnership agreement provides for distributable cash flow to be allocated 53.6% and 46.4% to ESCA and New CLOC, respectively. For purposes of allocating net income to partners' capital accounts, profits and losses are allocated based on the aforementioned cash flow percentages. For income tax purposes, certain deductions and credits are subject to special allocations as defined in the partnership agreements. (2) Summary of Significant Accounting Policies Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under the PPC. As of December 31, 2003, the Partnership established an allowance for doubtful accounts of $216, based on a dispute with Edison regarding a payment for capacity. In October and November, Edison limited generation to complete their transmission system maintenance resulting in lower capacity payments. CFP is disputing Edison's claim that the reduction in generation was the result of scheduled maintenance which would have been completed in a more expeditious fashion. In addition, the U.S. Navy (Navy) reimburses CFP for electricity paid on its behalf (see note 5). As of December 31, 2003 and 2002, the balance due from the Navy was $732 and $1,300, respectively and is included in accrued liabilities offsetting the royalty payable to the Navy (see note 5). Operating revenues are recognized as income during the period in which electricity is delivered to Edison. Revenue was recognized based on the payment rates scheduled in CFP's PPC with Edison through August 1997. From August 1997 through December 31, 2001, and subsequent to the five-year period stated in the Agreement, except for the period January 1, 2002 through April 30, 2002, as discussed in note 1, revenue is recognized based on Edison's avoided energy cost until the Partnership's PPC expires. Periodic increases in natural gas prices and imbalances between supply and demand, among other factors, have at times led to significant increases in wholesale electricity prices in California. During those periods, Edison had fixed tariffs with its retail customers that were significantly below the wholesale prices it paid in California. That resulted in significant under-recoveries by Edison of its electricity purchase costs. On January 16, 2001, Edison announced that it was temporarily suspending payments for energy provided, including the energy provided by the Partnership, pending a permanent solution to its liquidity crisis. Subsequently, pursuant to a California Public Utilities Commission (CPUC) order, Edison resumed making payments to the Partnership beginning with power generated on March 27, 2001. Edison also made a payment equal to 10% of the unpaid balance for power generated from November 1, 2000 to March 26, 2001, and paid interest on the outstanding amount at 7% per annum. That payment was made pursuant to the Agreement between Edison and the Partnership described in note 1. The Agreement, as amended, which received CPUC approval in January 2002, established the fixed energy rates discussed above and set payment terms for past due amounts owed to the Partnership by Edison. Due to the uncertainty surrounding Edison's ability to make payment on past due amounts, collection was not reasonably assured and the Partnership did not recognize revenue of $37,253 from Edison for energy delivered during the period November 1, 2000 through March 26, 2001. On March 1, 2002, Edison reached certain financing milestones and paid the Partnership $37,253 for electricity generated during the period November 1, 2000 through March 26, 2001. The Partnership recognized revenue for such electricity deliveries in March 2002. Fixed Assets and Depreciation The costs of major additions and betterments are capitalized, while replacements, maintenance, and repairs which do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation of the operating power plant and transmission line is computed on a straight-line basis over their estimated useful lives of 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Impairment of Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Partnership adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Partnership's financial statements. Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Wells and Resource Development Costs Wells and resource development costs include costs incurred in connection with the exploration and development of geothermal resources. All such costs, which include dry hole costs, the cost of drilling and equipping production wells, and administrative and interest costs directly attributable to the project, are capitalized and amortized over their estimated useful lives when production commences. The estimated useful lives of production wells are 10 years each; exploration costs and development costs, other than production wells, are amortized over 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Deferred Plant Overhaul Costs and Well Rework Costs Plant overhaul costs are deferred and amortized over the estimated period between overhauls, as these costs extend the useful life of the respective assets. These deferred costs of $58 and $215 at December 31, 2003 and 2002, respectively, are included in property, plant, and equipment. Currently, plant overhauls are amortized over three to four years from the point of completion. Production and injection rework costs included in plant operating expenses are expensed as incurred. For the years ended December 31, 2003, 2002, and 2001, such costs were $577, $305, and $561, respectively. Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. Deferred Financing Costs Deferred financing costs as of December 31, 2003 and 2002 consist of loan fees and other costs of financing that are amortized over the term of the related financing. Amortization expense for the years ended December 31, 2003, 2002, and 2001 included in noncash interest expense were $315, $315, and $705, respectively. Accumulated amortization at December 31, 2003 and 2002 was $2,228 and $1,913, respectively. Power Purchase Contract The PPC that is amortized on a straight-line basis over the remaining term of the PPC, which will expire in 2011. Annual amortization of the PPC is $1,147. The PPC consists of a gross carrying amount of $14,344, and accumulated amortization at December 31, 2003 and 2002 was $5,546 and $4,399, respectively. Income Taxes There is no provision for income taxes since such taxes are the responsibility of the partners. The net difference between the tax bases and the reported amounts of property, plant, and equipment, net at December 31, 2003 and 2002 was $133,507 and $133,736, respectively. Cash and Cash Equivalents For purposes of the statements of cash flows, the Partnership considers all money market instruments purchased with initial maturities of three months or less to be cash equivalents. Restricted Cash and Investments Restricted cash and investments include a capital expenditure reserve and a sinking fund related to a lump-sum royalty payment of $25,000 to be paid to the Navy in 2009 (see note 5) totaling $13,093 and $11,957 at December 31, 2003 and 2002, respectively. Currently, the monthly amount to be deposited into the sinking fund is approximately $111. At December 31, 2003 and 2002, sinking fund account includes $7,293 and $2,100 of various mortgage-backed securities with maturities in 2009 and 2007, respectively. These mortgage-backed securities are classified as held to maturity and reported at amortized cost, and mature as follows: $1,620 on October 24, 2007, $480 on November 5, 2007, and $5,193 on August 15, 2009. Restricted cash and investments also include a sinking fund for the project debt service required by the project loan (see note 6). The carrying amount of restricted cash and investments at December 31, 2003 and 2002 approximated fair value, which is based on quoted market prices as provided by the financial institution which holds the investments. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and partners' capital and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, expenses, and allocation of profits and losses during the period. Actual results could differ significantly from those estimates. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, prepaid expenses and other assets, amounts due from related parties, accounts payable and accrued liabilities, and amounts due to related parties approximated fair value as of December 31, 2003 and 2002, because of the relatively short maturities of these instruments. The project loan as of December 31, 2003 and 2002 has an estimated fair value of $105,838 and $110,955, respectively, based on the quoted market price of the senior secured notes (see note 6). The advances to New CLPSI Company, LLC (see note 3) approximate the fair value. Asset Retirement Obligations In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of a fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 2003, CFP adopted SFAS No. 143 and estimated the restoration costs CFP expects to incur when the land lease with the Navy expires will be approximately $9.1 million. Under the land lease, CFP is required to remove all property, plant, and equipment to restore the land to its original state. Adoption of SFAS No. 143 resulted in a loss from the cumulative effect of a change in accounting principle of $1,780, a net increase in property, plant, and equipment of $259, and an increase in other liabilities of $2,039. As of December 31, 2003, the accumulated liability associated with the restoration costs was $2,243 and is included in other liabilities. Accretion expense for the year ended December 31, 2003 included in other interest expense was $204. If CFP had adopted SFAS No. 143 retroactively to January 1, 2001, net income for the years ended December 31, 2002 and 2001 would have decreased by $199 and $182, respectively. New Accounting Pronouncements The FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This is an interpretation of FASB Statements No. 5, Accounting for Contingencies, No. 57, Related Party Disclosures, and No. 107, Disclosures about Fair Value of Financial Instruments, and rescission of FASB Interpretation No. 34, Disclosures of Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Interpretation is being applied prospectively to guarantees issued or modified after December 31, 2002. At December 31, 2003, the Partnership's only guarantees relate to the project loan (see note 6). This guarantee is not within the scope of the initial recognition and initial measurement provision of FIN 45. In December 2003, the FASB issued Interpretation No. 46 (Revised December 2003), (FIN 46) Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation is to be applied in the first fiscal year or interim period beginning after December 15, 2003 to enterprises that hold a variable interest in all entities that are not special purpose entities. The effect of the application of this Interpretation on CFP's financial statements is currently being evaluated and the expected impact has not yet been determined. (3) Advances to New CLPSI Company, LLC New CLPSI Company, LLC (CLPSI) is a wholly owned subsidiary of Caithness Acquisition Company, LLC (CAC). CLPSI purchases, stores, and distributes spare parts to CFP, Coso Energy Developers (CED), and Coso Power Developers (CPD) (collectively known as the Coso Partnerships). Also, certain other maintenance facilities utilized by the Coso Partnerships are owned by CLPSI. CFP's advances to CLPSI fund the purchase of spare parts inventory and other assets. CLPSI bills the Coso Partnerships for spare parts as utilized and for use of other facilities at amounts sufficient for CLPSI to recover its operating costs. (4) Property, Plant, and Equipment Property, plant, and equipment at December 31, 2003 and 2002 consist of the following: 2003 2002 ---- ---- Power plant and gathering system $ 156,608 155,714 Transmission line 5,746 5,746 Wells and resource development costs 80,262 72,982 ------- ------- 242,616 234,442 Less accumulated depreciation and amortization (107,838) (98,129) ------- ------- $ 134,778 136,313 ======= ======= The transmission line costs represent the Partnership's share of the costs of construction of transmission lines from Inyokern, California to the Edison substation at Kramer, California and from Kramer to the Edison substation at Victorville, California. (5) Royalty Expense Royalty expense for the years ended December 31, 2003, 2002, and 2001 is summarized as follows: 2003 2002 2001 ---- ---- ---- Unit 1 $ 6,047 6,281 4,889 Others 7,034 6,633 5,061 ------ ------ ----- Total $ 13,081 12,914 9,950 ====== ====== ===== CFP pays a royalty for Unit 1 through reimbursement of electricity supplied to the Navy by Edison from electricity generated at the Navy I plant. The reimbursement is based on a pricing formula that is included in the Navy contract. This formula is primarily based upon the tariff rates charged by Edison, which were increased in 2001 by the CPUC, and is subject to future revision. On July 10, 2003, the CPUC adopted a settlement between Edison and other parties to lower retail electric rates effective as of August 1, 2003. These rates are in effect for one year, after which new rates will be established in accordance with CPUC guidelines. Indices utilized in the calculation of the royalties under the CFP Unit 1 contract remained unchanged historically based on an agreement between the Navy and CFP. In October 2002 and November 2001, modifications to the calculation of the reimbursement pricing formula were made to the Navy contract resulting in a reduction of accrued royalties of $1.3 million and $6.5 million for those periods, respectively, which were agreed to by the Navy. The parties have currently agreed to a replacement index and true-up calculation in favor of CFP. For Units 2 and 3, CFP's royalty expense paid to the Navy is a fixed percentage of electricity sales at 15% of revenue received by the CFP through 2003, and will increase to 20% from 2004 through 2009. In addition, CFP is required to pay the Navy $25,000 in December 2009, the date the contract expires. The payment is secured by a sinking fund (see note 2). The balance included in other liabilities at December 31, 2003 and 2002 was approximately $13.1 million and $12.1 million, respectively. (6) Project Loan On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.), a wholly owned subsidiary of the Coso Partnerships, raised $413,000 from an offering of senior secured notes. Funding Corp. loaned approximately $151,550 to CFP from the $413,000 debt raised from the offering of senior secured notes on terms consistent with those of the senior secured notes. The loan consisted of one note of $29,000 at 6.80% which was paid off on December 15, 2001, and another of $122,550 at 9.05% which has payments due semiannually through December 15, 2009. The annual maturity of the project loan for each year ending December 31 is as follows: Amount ------ 2004 $ 10,694 2005 15,100 2006 16,160 2007 17,337 2008 18,295 Thereafter 19,961 ------ $ 97,547 ====== The loan contains certain restrictive covenants that, among other things, limit the Partnership's ability to incur additional indebtedness, release funds from reserve accounts, make distributions, create liens, and enter into any transaction of merger or consolidation. The Partnership, Funding Corp., CPD, and CED are jointly and severally liable for the repayment of the senior secured notes. The annual maturity of the senior secured notes for each year ending December 31 is as follows: Amount ------ 2004 $ 31,332 2005 35,480 2006 38,286 2007 47,419 2008 49,261 Thereafter 51,836 ------- $ 253,614 ======= (7) Related Party Transactions The amounts due from and to related parties at December 31, 2003 and 2002 consist of the following: 2003 2002 ---- ---- Amounts due from related parties: Coso Operating Company, LLC $ 116 208 Coso Power Developers 838 563 Coso Energy Developers 332 419 ----- ----- $ 1,286 1,190 ===== ===== Amounts due to related parties: Caithness Coso Funding Corp. $ 388 446 Caithness Operating Company, LLC 86 21 ----- ----- $ 474 467 ===== ===== COC is reimbursed monthly for non-third-party costs incurred on behalf of CFP. These costs comprise principally direct operating costs of the CFP geothermal facility, allocable general and administrative costs, and an operator fee. The amount due from COC relates to advances for payments of operating expenses. The amount due to COC relates to reimbursements for payment of operating expenses. CFP is charged a nonmanaging fee payable to the nonmanaging partner, ESCA, or its assignee. For the years ended December 31, 2003, 2002, and 2001, CFP paid $243, $241, and $237, respectively. The amount due to Funding Corp. is accrued interest for 15 days in December related to the project loan (see note 6). CFP is charged by CLPSI for both its inventory usage and its portion of the expenses of operating CLPSI. The charges to CFP from CLPSI in 2003, 2002, and 2001, which are included in plant operating expenses, were approximately $264, $231, and $147, respectively. During 1994, the Coso Partnerships entered into steam sharing agreements under which the partnerships may transfer steam, with the resulting incremental revenue and royalty expense shared equally by the partnerships. In the second half of 1995, interconnection facilities between the plants were completed and the transfer of steam commenced. CFP's steam sharing revenue, included in energy revenues, were $7,796, $5,801, and $7,938 for the years ended December 31, 2003, 2002, and 2001, respectively. (8) Settlement of Litigation In December 2003, CFP has settled an outstanding litigation relating to the failure and repair of its generator in 1999. The net proceeds were received in December 2003 and January 2004, which were approximately $900. (9) Commitments and Contingencies Settlement Agreement Between Edison and the California Public Utilities Commission On September 23, 2002, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) issued an opinion and order on appeal from the district court's stipulated judgment which affirmed the stipulated judgment in part and referred questions based on California state law to the California Supreme Court. The appeals court stated that if the Agreement violated California state law then the appeals court would be required to void the stipulated judgment. The California Supreme Court accepted the Ninth Circuit's request to address the issues referred to it in the September 23, 2002 ruling. On August 21, 2003 the California Supreme Court found that state laws were not violated as a result of the settlement agreements. On December 19, 2003, the Ninth Circuit fully affirmed the district court's stipulated judgment based on the reply from the California Supreme Court. It is unknown if any further appeals will be taken in this matter. Court of Appeals' Decision on Line Loss Factor Edison filed a petition for a writ of review of January 2001 CPUC decision, claiming that the "floor" line loss factor of 0.95 for renewable generators violated the Public Utility Regulatory Policies Act of 1978. Subsequently, the California Court of Appeals issued a decision on August 20, 2002 in response to the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor," which it rejected as an abuse of discretion by the CPUC. While this matter was appealed to the California Supreme Court, the petition for review was denied. The Coso Partnerships are currently evaluating potential actions to redress this issue. The Coso Partnerships' Agreements set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, the Coso Partnerships will have a line loss factor of less than 1.0, effectively decreasing revenues if Edison's challenge to the CPUC ruling stands. (10) Risks and Uncertainties CFP sells 100% of the electrical energy generated to Edison under a long-term PPC, and is significantly impacted by risks beyond the Partnership's control. Among the important factors that could cause future operating results to differ materially from those anticipated include, but are not limited to: (i) risks relating to the uncertainties in the California energy market, (ii) the financial viability of Edison, (iii) risks related to the operation of power plants, (iv) the impact of avoided cost pricing along with other pricing variables, (v) general operating risks, including resource availability and regulatory oversight, (vi) changes in government regulation, (vii) the effects of competition, (viii) the alleged manipulation of the California energy market, and (ix) acts of terrorism directed at the project or other facilities affecting the normal course of business. F-11 Independent Auditors' Report The Partners and Management Committee Coso Energy Developers: We have audited the accompanying balance sheets of Coso Energy Developers as of December 31, 2003 and 2002, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coso Energy Developers as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2 to the financial statements, effective January 1, 2003, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. February 6, 2004 New York, New York /s/ KPMG, LLP ------------- KPMG, LLP F-12 COSO ENERGY DEVELOPERS Balance Sheets December 31, 2003 and 2002 (Dollars in thousands)
Assets 2003 2002 --------------- --------------- Cash and cash equivalents $ 603 1,423 Restricted cash and investments 10,155 6,646 Accounts receivable (note 2) 6,830 6,681 Prepaid expenses and other assets 1,094 1,370 Amounts due from related parties (note 7) 442 421 Property, plant, and equipment (note 5) 130,519 135,853 Advances to New CLPSI Company, LLC (note 4) 548 674 Investment in Coso Transmission Line Partners (note 3) 2,542 2,653 Power purchase contract, net (note 2) 16,293 17,365 Deferred financing costs, net (note 2) 1,530 1,785 --------------- -------------- Total assets $ 170,556 174,871 =============== ============== Liabilities and Partners' Capital Accounts payable and accrued liabilities $ 2,114 1,644 Amounts due to related parties (note 7) 27,282 26,317 Other liabilities (note 2) 1,522 432 Project loan (note 6) 84,821 89,875 --------------- -------------- Total liabilities 115,739 118,268 Commitments and contingencies (notes 6 and 8) Partners' capital 54,817 56,603 --------------- -------------- Total liabilities and partners' capital $ 170,556 174,871 =============== ==============
See accompanying notes to financial statements. F-13
COSO ENERGY DEVELOPERS Statements of Operations Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ---------- ---------- ---------- Revenues: Energy revenues (notes 2, 7, and 8) $ 32,930 65,489 31,133 Capacity and bonus payments 13,939 15,763 12,908 ----------- ---------- ---------- Total revenues 46,869 81,252 44,041 ----------- ---------- ---------- Operating expenses: Plant operating expense 12,722 11,748 10,221 Royalty expense 2,778 2,436 5,203 Depreciation and amortization 9,320 14,342 15,972 ----------- ---------- ---------- Total operating expenses 24,820 28,526 31,396 ----------- ---------- ---------- Operating income 22,049 52,726 12,645 ----------- ---------- ---------- Other (income)/expenses: Interest and other income (1,141) (1,455) (3,766) Interest expense on project loan 8,018 8,567 8,958 Noncash interest expense 367 255 440 ----------- ---------- ---------- Total other expenses 7,244 7,367 5,632 ----------- ---------- ---------- Income before cumulative effect of change in accounting principle 14,805 45,359 7,013 Cumulative effect of change in accounting principle (note 2) 924 -- -- ----------- ---------- ---------- Net income $ 13,881 45,359 7,013 =========== ========== ==========
See accompanying notes to financial statements. F-14
COSO ENERGY DEVELOPERS Statements of Partners' Capital Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) Caithness Coso New Holdings, CHIP LLC Company, LLC Total ------------ ------------ ------------ Balance at December 31, 2000 $ 42,978 26,267 69,245 Distributions to partners (12,218) (11,278) (23,496) Net income 3,647 3,366 7,013 ------------ ------------ ------------- Balance at December 31, 2001 34,407 18,355 52,762 Distributions to partners (21,589) (19,929) (41,518) Net income 23,587 21,772 45,359 ------------ ------------ ------------- Balance at December 31, 2002 36,405 20,198 56,603 Distributions to partners (8,147) (7,520) (15,667) Net income 7,218 6,663 13,881 ------------ ------------ ------------- Balance at December 31, 2003 $ 35,476 19,341 54,817 ============ ============ =============
See accompanying notes to financial statements. F-15
COSO ENERGY DEVELOPERS Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 13,881 45,359 7,013 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,320 14,342 15,972 Non cash interest expense 367 255 440 Cumulative effect of change in accounting principle 924 -- -- Changes in operating assets and liabilities: Accounts receivable, prepaid expenses, and other assets 127 (4,263) (2,735) Advances to New CLPSI Company, LLC 126 115 262 Accounts payable and accrued liabilities 470 (6,055) 860 Amounts due from related parties (21) (20) (36) Other (144) 432 -- Amounts due to related parties 965 (950) 2,946 ----------- ----------- ------------ Net cash provided by operating activities 26,015 49,215 24,722 ----------- ----------- ------------ Cash flows from investing activities: Capital expenditures (2,716) (706) (9,698) Investment in Coso Transmission Line Partners 111 85 133 (Increase) decrease in restricted cash (3,509) 722 7,134 ----------- ----------- ------------ Net cash (used in) provided by investing activities (6,114) 101 (2,431) ----------- ----------- ------------ Cash flows from financing activities: Distributions to partners (15,667) (41,518) (23,496) Repayment of project financing loans (5,054) (6,375) (4,657) ----------- ----------- ------------ Net cash used in financing activities (20,721) (47,893) (28,153) ----------- ----------- ------------ Net change in cash and cash equivalents (820) 1,423 (5,862) Cash and cash equivalents at beginning of year 1,423 -- 5,862 ----------- ----------- ------------ Cash and cash equivalents at end of year $ 603 1,423 -- =========== =========== ============ Supplemental cash flow disclosure:, Cash paid for interest $ 8,042 8,595 8,964
See accompanying notes to financial statements. F-16 COSO ENERGY DEVELOPERS Notes to Financial Statements December 31, 2003, 2002, and 2001 (Dollars in thousands) (1) Organization, Operation, and Business of the Partnership Coso Energy Developers (CED or the Partnership) was founded on March 31, 1988, in connection with financing the construction of a geothermal power plant on land leased from the U.S. Bureau of Land Management (BLM) at Coso Hot Springs, China Lake, California. CED is a general partnership owned by Caithness Coso Holdings, LLC (CCH), a California limited liability company, and New CHIP Company, LLC (New CHIP), a Delaware limited liability company, which are affiliates of CED. The CED power plants are located on land owned by the BLM. There are turbine generators located at both the East and West power locks. CED pays royalties to BLM of 10% of the net value of the steam produced. The primary BLM geothermal lease had an initial term of ten years ending in 1998 and thereafter is subject to automatic extension until October 31, 2035, so long as geothermal steam is commercially produced. In addition, the lease may be extended to 2075 at the option of the BLM. Coso Land Company (CLC), the original leaseholder, retained a 5% overriding royalty interest based on the value of the steam produced. CLC was a joint venture between Caithness Acquisition Company, LLC (CAC) and an affiliate to CCH. The Partnership sells all electricity produced to Southern California Edison (Edison) under a 30-year power purchase contract (the PPC) expiring in 2019. Under the terms of the PPC, Edison makes payments to CED as follows: * Contractual payments for energy delivered escalated at an average rate of approximately 7.6% for the first ten years after the date of firm operation (scheduled energy price period). After the scheduled energy price period, the energy payment adjusted to the actual avoided energy cost experienced by Edison. In March 1999, the Partnership completed the ten-year fixed price payment period and Edison ceased paying the scheduled energy rates. Edison entered into an agreement (the Agreement) with the Partnership on June 19, 2001 that addressed renewable energy pricing and issues concerning California's energy crisis. The Agreement, which was amended on November 30, 2001, established May 1, 2002 as the date when the Partnership will begin receiving a fixed energy rate of 5.37 cents per kilowatt (kWh) for five (5) years. From January 1, 2002 through April 30, 2002, CED elected to receive from Edison a fixed energy rate of 3.25 cents per kWh. The average rate of energy paid to the Partnership for the years ended December 31, 2003, 2002, and 2001 was 5.37, 4.66, and 7.46 cents per kWh, respectively. Starting May 1, 2002, CED received 5.37 cents per kWh, pursuant to the Agreement discussed above. Subsequent to the five-year period, Edison will be required to make energy payments to the Partnership based on its avoided cost of energy until the PPC expires. Beyond the five-year period, the Partnership cannot predict the likely level of avoided cost of energy prices under the PPC and, accordingly, the revenues generated by the Partnership could fluctuate significantly; * Capacity payments which remain fixed over the life of the PPC to the extent that actual energy delivered exceeds minimum levels of the plant capacity defined in the PPC; and * Bonus payments to the extent that actual energy delivery exceeds 85% of the plant capacity stated in the PPC. In 2003, 2002, and 2001, the bonus payments aggregated $2,126, $2,126, and $2,126, respectively. Coso Operating Company LLC (COC), an affiliated Delaware limited liability company, provides for the operation and maintenance of the geothermal power facilities and administrative services through December 31, 2009 pursuant to certain operation and maintenance agreements with New CHIP, the managing general partner. The partnership agreement provides for distributable cash flow to be allocated 48% to New CHIP and 52% to CCH. For purposes of allocating net income to partners' capital accounts, profits and losses are allocated based on the aforementioned cash flow percentages. For income tax purposes, certain deductions and credits are subject to special allocations as defined in the partnership agreement. (2) Summary of Significant Accounting Policies Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under the PPC. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. Revenue was recognized based on the payment rates scheduled in CED's PPC with Edison through March 1999. From March 1999 through December 31, 2001, and subsequent to the five-year period stated in the Agreement, except for the period January 1, 2002 through April 30, 2002, as discussed in note 1, revenue is recognized based on Edison's avoided energy cost, until the Partnership's PPC expires. Periodic increases in natural gas prices and imbalances between supply and demand, among other factors, have at times led to significant increases in wholesale electricity prices in California. During those periods, Edison had fixed tariffs with its retail customers that were significantly below the wholesale prices it paid in California. That resulted in significant under-recoveries by Edison of its electricity purchase costs. On January 16, 2001, Edison announced that it was temporarily suspending payments for energy provided, including the energy provided by the Partnership, pending a permanent solution to its liquidity crisis. Subsequently, pursuant to a California Public Utilities Commission (CPUC) order, Edison resumed making payments to the Partnership beginning with power generated on March 27, 2001. Edison also made a payment equal to 10% of the unpaid balance for power generated from November 1, 2000 to March 26, 2001 and paid interest on the outstanding amount at 7% per annum. That payment was made pursuant to the Agreement between Edison and the Partnership described in note 1. The Agreement, as amended, which received CPUC approval in January 2002, established the fixed energy rates discussed above and set payment terms for past due amounts owed to the Partnership by Edison. Due to the uncertainty surrounding Edison's ability to make payment on past due amounts, collection was not reasonably assured and the Partnership did not recognize revenue of $37,068 from Edison for energy delivered during the period November 1, 2000 through March 26, 2001. On March 1, 2002, Edison reached certain financing milestones and paid the Partnership $37,068 for electricity generated during the period November 1, 2000 through March 26, 2001. The Partnership recognized revenue for such electricity deliveries in March 2002. Fixed Assets and Depreciation The costs of major additions and betterments are capitalized, while replacements, maintenance, and repairs, which do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation of the power plant and transmission line is computed on a straight-line basis over their estimated useful lives of 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Impairment of Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Partnership adopted SFAS No.144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Partnership's financial statements. Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows that is expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Wells and Resource Development Costs Wells and resource development costs include costs incurred in connection with the exploration and development of geothermal resources. All such costs, which include dry hole costs, the cost of drilling and equipping production wells, and administrative and interest costs directly attributable to the project are capitalized and amortized over their estimated useful lives when production commences. The estimated useful lives of production wells are 10 years each; exploration costs and development costs, other than production wells, are amortized over 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Deferred Plant Overhaul Costs and Well Rework Costs Plant overhaul costs are deferred and amortized over the estimated period between overhauls as these costs extend the life of the respective assets. These deferred costs of $420 and $641 at December 31, 2003 and 2002, respectively, are included in property, plant, and equipment. Currently, plant overhauls are amortized over three years from the point of completion. Production and injection rework costs included in plant operating expenses are expensed as incurred during the year. For the years ended December 31, 2003, 2002, and 2001, such costs were $1,493, $0, and $160, respectively. Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. Deferred Financing Costs Deferred financing costs as of December 31, 2003 and 2002 consist of loan fees and other costs of financing that are amortized over the term of the related financing. Amortization expense for the years ended December 31, 2003, 2002, and 2001 included in non cash interest expense were $255, $255, and $440, respectively. Accumulated amortization at December 31, 2003 and 2002 was $1,502 and $1,247, respectively. Power Purchase Contract Intangible asset as of December 31, 2003 and 2002 consists of the PPC that is amortized on a straight-line basis over the remaining term of the PPC, which will expire in 2019. Annual amortization of the PPC is $1,072. The PPC consists of a gross carrying amount of $21,443, and accumulated amortization at December 31, 2003 and 2002 was $5,150 and $4,078, respectively. Income Taxes There is no provision for income taxes since such taxes are the responsibility of the partners. The net difference between the tax bases and the reported amounts of property, plant, and equipment, net at December 31, 2003 and 2002 was $123,010 and $129,298, respectively. Cash and Cash Equivalents For purposes of the statements of cash flows, CED considers all money market instruments purchased with an initial maturity of three months or less to be cash equivalents. Restricted Cash and Investments As of December 31, 2003 and 2002, all of the Partnership's investments were classified as held to maturity and reported at amortized cost. Included in restricted cash and investments are capital expenditure reserves and sinking fund requirements for the project debt service required by the project loan (see note 6). The carrying amount of restricted cash and investments at December 31, 2003 and 2002 approximated fair value, which is based on quoted market prices as provided by the financial institution which holds the investments. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and partners' capital and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and the allocation of profits and losses during the period. Actual results could differ significantly from those estimates. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, prepaid expenses and other assets, amounts due from related parties, accounts payable and accrued liabilities, and amounts due to related parties approximated fair value as of December 31, 2003 and 2002, because of the relatively short maturity of these instruments. The project loan as of December 31, 2003 and 2002 has an estimated fair value of $92,031 and $89,875, respectively, based on the quoted market price of the senior secured notes (see note 6). The investment in Coso Transmission Line Partners (see note 3) and advances to New CLPSI Company, LLC (see note 4) approximate the fair value. Asset Retirement Obligations In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of a fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 2003, CED adopted SFAS No. 143 and estimated the restoration costs CED expects to incur when the land lease with the Navy expires and will be approximately $8.9 million. Under the land lease, CED is required to remove all property, plant, and equipment to restore the land to its original state. Adoption of SFAS No. 143 resulted in a loss from the cumulative effect of a change in accounting principle of $924, a net increase in property, plant, and equipment of $198, and an increase in other liabilities of $1,122. As of December 31, 2003, the accumulated liability associated with the restoration costs was $1,234 and is included in other liabilities. Accretion expense for the year ended December 31, 2003 included in noncash interest expense was $112. If CED had adopted SFAS No. 143 retroactively to January 1, 2001, net income for the years ended December 31, 2002 and 2001 would have decreased by $110 and $100, respectively. New Accounting Pronouncements The FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This is an interpretation of FASB SFAS No. 5, Accounting for Contingencies, SFAS No. 57, Related Party Disclosures, and SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and rescission of FASB Interpretation No. 34, Disclosures of Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Interpretation is being applied prospectively to guarantees issued or modified after December 31, 2002. At December 31, 2003, the Partnership's only guarantees relate to the project loan (see note 6). This guarantee is not within the scope of the initial recognition and initial measurement provision of FIN 45. In December 2003, the FASB issued Interpretation No. 46 (Revised December 2003), (FIN 46) Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation is to be applied in the first fiscal year or interim period beginning after December 15, 2003 to enterprises that hold a variable interest in all entities that are not special purpose entities. The effect of the application of this Interpretation on CED's financial statements is currently being evaluated and the expected impact has not yet been determined. (3) Investment in Coso Transmission Line Partners Coso Transmission Line Partners (CTLP) is a partnership owned 46.67% by CED and 53.33% by Coso Power Developers (CPD) which owns the transmission line and facilities connecting the power plants owned by CED and CPD to the transmission line owned by Edison, at Inyokern, California, located 28 miles south of the plants. CTLP charges CED and CPD for the use of the transmission line at amounts sufficient for CTLP to recover its operating costs. These charges are recorded by CED as operating expenses and reflected as an increase in CED's payable to CTLP (see note 7). (4) Advances to New CLPSI Company, LLC New CLPSI Company, LLC (CLPSI) is a wholly owned subsidiary of CAC. CLPSI purchases, stores, and distributes spare parts to CED, CPD, and Coso Finance Partners (CFP) (collectively known as the Coso Partnerships). Also, certain other maintenance facilities utilized by the Coso Partnerships are owned by CLPSI. CED's advances to CLPSI fund the purchase of spare parts inventory and other assets. CLPSI bills the Coso Partnerships for spare parts as utilized and for use of the other facilities at amounts sufficient for CLPSI to recover its operating costs. (5) Property, Plant, and Equipment Property, plant, and equipment at December 31, 2003 and 2002 consist of the following: 2003 2002 -------- -------- Power plant and gathering system $ 148,198 147,896 Transmission line 9,120 9,120 Wells and resources development costs 93,612 90,896 ------- ------- 250,930 247,912 Less accumulated depreciation and amortization (120,411) (112,059) ------- ------- $ 130,519 135,853 ======= ======= The transmission line costs represent the Partnership's share of the costs of construction of transmission lines from Inyokern, California to the Edison substation at Kramer, California and from Kramer to the Edison substation at Victorville, California. (6) Project Loan On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.), a wholly owned subsidiary of the Coso Partnerships raised $413,000 from an offering of senior secured notes. Funding Corp. loaned approximately $108,000 to CED from the $413,000 debt raised from the offering of senior secured notes on terms consistent with those of the senior secured notes. The loan consisted of one note of $11,650 at 6.80%, which was paid off on December 15, 2001 and another of $96,250 at 9.05%, which has payments due semi-annually through December 15, 2009. The annual maturity of the project loan for each year ending December 31 is as follows: Amount ------ 2004 $ 9,920 2005 8,683 2006 10,388 2007 17,552 2008 18,574 Thereafter 19,704 ------ $ 84,821 ====== The loan contains certain restrictive covenants that, among other things, limit the Partnership's ability to incur additional indebtedness, release funds from reserve accounts, make distributions, create liens, and enter into any transaction of merger or consolidation. The Partnership, Funding Corp., CPD, and CFP are jointly and severally liable for the repayment of the senior secured notes. The annual maturity of the senior secured notes for each year ending December 31 is as follows: Amount ------ 2004 $ 31,332 2005 35,480 2006 38,286 2007 47,419 2008 49,261 Thereafter 51,836 ------- $ 253,614 ======= (7) Related Party Transactions The amounts due from and to related parties at December 31, 2003 and 2002 consist of the following: 2003 2002 ---- ---- Amounts due from related parties: Coso Land Company: Principal $ 141 141 Accrued interest 301 280 ------ ------ $ 442 421 ====== ====== Amounts due to related parties: Coso Power Developers $ 380 15 Coso Finance Partners 332 563 Coso Land Company 25,809 24,995 Caithness Coso Funding Corp. 337 361 Coso Operating Company, LLC 350 337 Caithness Operating Company, Inc. 74 46 ------ ------ $ 27,282 26,317 ====== ====== COC is reimbursed monthly for nonthird-party costs incurred on behalf of CED. These costs are comprised principally of direct operating costs of the CED geothermal facility, allocable general and administrative costs, and an operator fee. The amount due to COC relates to reimbursements for payments of operating expenses. CED is charged a nonmanaging fee payable to the nonmanaging partner, CCH, or its assignee. For the years ended December 31, 2003, 2002, and 2001, CED paid $243, $241, and $237, respectively. As indicated in note 1, CLC is entitled to a royalty of 5% of the value of steam used by CED to produce the electricity sold to Edison. The royalty due CLC for the years ended December 31, 2003, 2002, and 2001 was $814, $781, and $1,684, respectively. Payment of royalties due to CLC is subordinated to payment of the project loan (see note 6). CED is charged for its use of the transmission line owned by CTLP. The amount of such net charges, which are included in plant operating expenses, were $111, $113, and $114 for the years ended December 31, 2003, 2002, and 2001, respectively. CED is charged by CLPSI for both its inventory usage and its portion of the expenses of operating CLPSI. The 2003, 2002, and 2001 costs charged to CED from CLPSI, which are included in plant operating expenses, were approximately $318, $350, and $324, respectively. The amount due to Funding Corp. represents accrued interest for 15 days in December related to the project loan (see note 6). On December 16, 1992, CED retired CLC's promissory note due to CalEnergy Company, Inc., resulting in the loan from CED to CLC of $141. Interest was accrued on this loan for the years ended December 31, 2003, 2002, and 2001 at 5%, 5%, and 10%, respectively. Interest on the note was $21, $20, and $36 in 2003, 2002, and 2001, respectively. During 1994, the Coso Partnerships entered into steam sharing agreements under which the partnerships may transfer steam, with the resulting incremental revenue and royalty expense shared equally by the partnerships. In the second half of 1995, interconnection facilities between the plants were completed and the transfer of steam commenced. CED's steam sharing resulted in an expense, included in energy revenues, were $908, $546, and $1,085, for the years ended December 31, 2003, 2002, and 2001, respectively. (8) Commitments and Contingencies Settlement Agreement between Edison and the California Public Utilities Commission On September 23, 2002, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) issued an opinion and order on appeal from the district court's stipulated judgment which affirmed the stipulated judgment in part and referred questions based on California state law to the California Supreme Court. The Ninth Circuit stated that if the Settlement Agreement violated California state law then the appeals court would be required to void the stipulated judgment. The California Supreme Court accepted the Ninth Circuit's request to address the issues referred to it in the September 23, 2002 ruling. On August 21, 2003, the California Supreme Court found that state laws were not violated as a result of the settlement Agreements. On December 19, 2003, the Ninth Circuit fully affirmed the district court's stipulated judgment based on the reply from the California Supreme Court. It is unknown if any further appeals will be taken in this matter. Court of Appeals Decision on Line Loss Factor Edison filed a petition for a writ of review of a January 2001 CPUC decision, claiming that the "floor" line loss factor of 0.95 for renewable generators violated the Public Utility Regulatory Policies Act of 1978. Subsequently, the California Court of Appeals issued a decision on August 20, 2002 in response to the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor," which it rejected as an abuse of discretion by the CPUC. While this matter was appealed to the California Supreme Court, the petition for review was denied. The Coso Partnerships are currently evaluating potential actions to redress this issue. The Coso Partnerships' Agreements set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, the Coso Partnerships will have a line loss factor of less than 1.0, effectively decreasing revenues if Edison's challenge to the CPUC ruling stands. CED cannot predict whether any subsequent action regarding this matter will be successful. (9) Risks and Uncertainties CED sells 100% of the electrical energy generated to Edison under a long-term PPC, and is significantly impacted by risks beyond the Partnership's control. Among the important factors that could cause future operating results to differ materially from those anticipated include, but are not limited to: (i) risks relating to the uncertainties in the California energy market, (ii) the financial viability of Edison, (iii) risks related to the operation of power plants, (iv) the impact of avoided cost pricing along with other pricing variables, (v) general operating risks, including resource availability and regulatory oversight, (vi) changes in government regulations, (vii) the effects of competition, (viii) the alleged manipulation of the California energy market, and (ix) acts of terrorism directed at the project or other facilities affecting the normal course of business. F-17 Independent Auditors' Report The Partners and Management Committee Coso Power Developers: We have audited the accompanying balance sheets of Coso Power Developers as of December 31, 2003 and 2002, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coso Power Developers as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2 to the financial statements, effective January 1, 2003, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. February 6, 2004 New York, New York /s/ KPMG, LLP ------------- KPMG, LLP F-18 COSO POWER DEVELOPERS Balance Sheets December 31, 2003 and 2002 (Dollars in thousands)
Assets 2003 2002 -------------- -------------- Cash and cash equivalents $ 78 824 Restricted cash and investments 8,281 10,855 Accounts receivable, net (note 2) 7,985 7,234 Prepaid expenses and other assets 830 1,111 Amounts due from related parties (note 7) 6,412 5,902 Property, plant, and equipment, net (note 5) 114,839 116,192 Advances to New CLPSI Company, LLC (note 4) 1,914 1,911 Investment in Coso Transmission Line Partners (note 3) 3,128 3,260 Power purchase contract, net (note 2) 17,232 20,026 Deferred financing costs, net (note 2) 1,302 1,519 -------------- -------------- Total assets $ 162,001 168,834 =============== ============== Liabilities and Partners' Capital Accounts payable and accrued liabilities $ 1,891 1,948 Amounts due to related parties (note 7) 1,191 758 Other liabilities (note 2) 2,589 366 Project loans (note 6) 71,246 80,401 --------------- -------------- Total liabilities 76,917 83,473 Commitments and contingencies (notes 6 and 8) Partners' capital 85,084 85,361 --------------- -------------- Total liabilities and partners' capital $ 162,001 168,834 =============== ==============
See accompanying notes to financial statements. F-19
COSO POWER DEVELOPERS Statements of Operations Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ------------------ ------------------ ------------------ Revenues: Energy revenues (notes 2, 7, and 8) $ 32,131 63,756 23,411 Capacity and bonus payments 14,018 15,836 12,978 ------------------ ------------------ ------------------ Total revenues 46,149 79,592 36,389 ------------------ ------------------ ------------------ Operating expenses: Plant operating expense 9,777 10,304 9,679 Royalty expense 7,520 6,961 9,377 Depreciation and amortization 10,113 12,163 15,352 ------------------ ------------------ ------------------ Total operating expenses 27,410 29,428 34,408 ------------------ ------------------ ------------------ Operating income 18,739 50,164 1,981 ------------------ ------------------ ------------------ Other (income)/expenses: Interest and other income (426) (894) (2,883) Interest expense on project loan 7,070 7,538 8,128 Noncash interest expense 430 217 1,119 ------------------ ------------------ ------------------ Total other expenses 7,074 6,861 6,364 ------------------ ------------------ ------------------ Income (loss) before cumulative effect of change in accounting principle 11,665 43,303 (4,383) Cumulative effect of change in accounting principle (note 2) 1,777 -- -- ------------------ ------------------ ------------------ Net income (loss) $ 9,888 43,303 (4,383) ================== ================== ==================
See accompanying notes to financial statements. F-20
COSO POWER DEVELOPERS Statements of Partners' Capital Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) Caithness Navy II New Group, CTC LLC Company, LLC Total ------------------- ------------------ ------------------- Balance at December 31, 2000 $ 44,941.5 42,481.5 87,423.0 Distributions to partners (10,410.0) (10,410.0) (20,820.0) Net income (2,191.5) (2,191.5) (4,383.0) ------------------- ------------------ ------------------- Balance at December 31, 2001 32,340.0 29,880.0 62,220.0 Distributions to partners (10,081.0) (10,081.0) (20,162.0) Net loss 21,651.5 21,651.5 43,303.0 ------------------- ------------------ ------------------- Balance at December 31, 2002 43,910.5 41,450.5 85,361.0 Distributions to partners (5,082.5) (5,082.5) (10,165.0) Net income 4,944.0 4,944.0 9,888.0 ------------------- ------------------ ------------------- Balance at December 31, 2003 $ 43,772.0 41,312.0 85,084.0 =================== ================== ===================
See accompanying notes to financial statements. F-21
COSO POWER DEVELOPERS Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 (Dollars in thousands) 2003 2002 2001 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ 9,888 43,303 (4,383) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 10,113 12,163 15,352 Noncash interest expense 430 217 1,119 Provision for doubtful accounts 82 -- -- Cumulative effect of change in accounting principle 1,777 -- -- Changes in operating assets and liabilities: Accounts receivable, prepaid expenses, and other assets (552) (4,475) (2,992) Advances to New CLPSI Company, LLC (3) 2 50 Accounts payable and accrued liabilities (57) (13,912) 3,582 Amounts due from related parties (510) 237 (186) Other (122) 366 -- Amounts due to related parties 433 (7,020) 5,962 ---------------- ---------------- ---------------- Net cash provided by operating activities 21,479 30,881 18,504 ---------------- ---------------- ---------------- Cash flows from investing activities: Capital expenditures (5,611) (896) (276) Investment in Coso Transmission Line Partners 132 138 130 Decrease (increase) in restricted cash 2,574 (5,338) 4,697 ---------------- ---------------- ---------------- Net cash (used in) provided by investing activities (2,905) (6,096) 4,551 ---------------- ---------------- ---------------- Cash flows from financing activities: Distributions to partners (10,165) (20,162) (20,820) Repayment of project financing loan (9,155) (3,799) (9,976) ---------------- ---------------- ---------------- Net cash used in financing activities (19,320) (23,961) (30,796) ---------------- ---------------- ---------------- Net change in cash and cash equivalents (746) 824 (7,741) Cash and cash equivalents at beginning of year 824 -- 7,741 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 78 824 -- ================ ================ ================ Supplemental cash flow disclosure: Cash paid for interest $ 7,110 7,551 8,154
See accompanying notes to financial statements. F-22 COSO POWER DEVELOPERS Notes to Financial Statements December 31, 2003, 2002, and 2001 (Dollars in thousands) (1) Organization, Operation, and Business of the Partnership Coso Power Developers (CPD or the Partnership) was formed on July 31, 1989 in connection with financing the construction of a geothermal power plant on land at the China Lake Naval Air Weapons Station at Coso Hot Springs, China Lake, California. CPD is a general partnership between Caithness Navy II Group LLC (Navy II), and New CTC Company, LLC (New CTC), which are affiliated Delaware limited liability companies. The power plant is located on land owned by the U.S. Navy, and CPD pays a royalty to the U.S. Navy which was initially 4% of revenues, increased to 10% of revenues at December 31, 1998, and is currently 18% of revenues (as of December 24, 1999). The royalty will increase to 20% of revenues after December 15, 2004. The U.S. Navy contract will expire in 2010. The Partnership sells all electricity produced to Southern California Edison (Edison) under a 20-year power purchase contract (the PPC) expiring in 2010. Under the terms of the PPC, Edison makes payments to CPD as follows: * Contractual payments for energy delivered escalated at an average rate of approximately 7.6% for the first ten years after the date of firm operation (scheduled energy price period). The scheduled energy price period extended until January 2000. After the scheduled energy price period, the energy payment adjusted to the actual avoided energy cost experienced by Edison. Edison entered into an agreement (the Agreement) with the Partnership on June 19, 2001 that addressed renewable energy pricing and issues concerning California's energy crisis. The Agreement, which was amended on November 30, 2001, established May 1, 2002 as the date from which the Partnership receives a fixed energy rate of 5.37 cents per kilowatt (kWh) for five (5) years. From January 1, 2002 through April 30, 2002, CPD elected to receive from Edison a fixed energy rate of 3.25 cents per kWh. The average rate of energy paid to the Partnership for the years ended December 31, 2003, 2002, and 2001, was 5.37, 4.66, and 7.46 cents per kWh, respectively. Starting May 1, 2002, CPD received 5.37 cents per kWh, pursuant to the Agreement discussed above. Subsequent to the five-year period, Edison will be required to make energy payments to the Partnership based on its avoided cost of energy until the PPC expires. Beyond the five-year period, the Partnership cannot predict the likely level of avoided cost of energy prices under the PPC and, accordingly, the revenues generated by the Partnership could fluctuate significantly; * Capacity payments which remain fixed over the life of the PPC to the extent that actual energy delivered exceeds minimum levels of the plant capacity defined in the PPC; and * Bonus payments to the extent that actual energy delivered exceeds 85% of the plant capacity stated in the PPC. In 2003, 2002, and 2001, the bonus payments aggregated $2,138, $2,138, and $2,138, respectively. Coso Operating Company LLC (COC), an affiliated Delaware limited liability company, provides for the operation and maintenance of the geothermal power facilities and administrative services through December 31, 2009 pursuant to certain operation and maintenance agreements with New CTC, the managing general partner. The partnership agreement provides for distributable cash flow to be allocated 50% each to New CTC and Navy II. For purposes of allocating net income to partners' capital accounts and for income tax purposes, profits and losses are allocated based on the aforementioned cash flow percentages. For income tax purposes, certain deductions and credits are subject to special allocations as defined in the partnership agreements. (2) Summary of Significant Accounting Policies Accounts Receivable and Revenue Recognition Accounts receivable primarily consists of receivables from Edison for electricity delivered and sold under the PPC. As of December 31, 2003, the Partnership established an allowance for doubtful accounts of $82, based on a dispute with Edison regarding a payment for capacity. In October and November, Edison limited generation to complete their transmission system maintenance resulting in lower capacity payments. CPD is disputing Edison's claim that the reduction in generation was the result of scheduled maintenance which would have been completed in a more expeditious fashion. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. Revenue was recognized based on the payment rates scheduled in CPD's PPC with Edison, through January 2000. From January 2000 through December 31, 2001, and subsequent to the five-year period stated in the Agreement except for the period January 1, 2002 through April 30, 2002, as discussed in note 1, revenue is recognized based on Edison's avoided energy cost, until the Partnership's PPC expires. Periodic increases in natural gas prices and imbalances between supply and demand, among other factors, have at times led to significant increases in wholesale electricity prices in California. During those periods, Edison had fixed tariffs with its retail customers that were significantly below the wholesale prices it paid in California. That resulted in significant under-recoveries by Edison of its electricity purchase costs. On January 16, 2001, Edison announced that it was temporarily suspending payments for energy provided, including the energy provided by the Partnership, pending a permanent solution to its liquidity crisis. Subsequently, pursuant to a California Public Utilities Commission (CPUC) order, Edison resumed making payments to the Partnership beginning with power generated on March 27, 2001. Edison also made a payment equal to 10% of the unpaid balance for power generated from November 1, 2000 to March 26, 2001 and paid interest on the outstanding amount at 7% per annum. That payment was made pursuant to the Agreement between Edison and the Partnership described in note 1. The Agreement, as amended, which received CPUC approval in January 2002, established the fixed energy rates discussed above and set payment terms for past due amounts owed to the Partnership by Edison. Due to the uncertainty surrounding Edison's ability to make payment on past due amounts, collection was not reasonably assured and the Partnership did not recognize revenue of $38,045 from Edison for energy delivered during the period November 1, 2000 through March 26, 2001. On March 1, 2002, Edison reached certain financing milestones and paid the Partnership $38,045 for electricity generated during the period November 1, 2000 through March 26, 2001. The Partnership recognized revenues for such electricity deliveries in March 2002. Fixed Assets and Depreciation The costs of major additions and betterments are capitalized, while replacements, maintenance, and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Depreciation of the power plant and transmission line is computed on a straight-line basis over their estimated useful life of 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Impairment of Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Partnership adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Partnership's financial statements. Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Wells and Resource Development Costs Wells and resource development costs include costs incurred in connection with the exploration and development of geothermal resources. All such costs, which include dry hole costs, the costs of drilling and equipping production wells, and administrative and interest costs directly attributable to the project, are capitalized and amortized over their estimated useful lives when production commences. The estimated useful lives of production wells are ten years each; exploration costs and development costs, other than production wells, are amortized over 30 years and, for significant additions, the remainder of the 30-year life from the plant's commencement of operations. Deferred Plant Overhaul Costs and Well Rework Costs Plant overhaul costs are deferred and amortized over the estimated period between overhauls, as these costs extend the useful lives of the respective assets. These deferred costs of $246 and $102 at December 31, 2003 and 2002, respectively, are included in property, plant, and equipment. Currently, plant overhauls are amortized over three years from the point of completion. Production and injection rework costs included in plant operating expenses are expensed as incurred. For the years ended December 31, 2003, 2002, and 2001, such costs were $0, $328, and $533, respectively. Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. Deferred Financing Costs Deferred financing costs as of December 31, 2003 and 2002 consist of loan fees and other costs of financing that are amortized over the term of the related financing. Amortization expense for the years ended December 31, 2003, 2002 and 2001 included in noncash interest expense were $217, $217 and $1,119. Accumulated amortization at December 31, 2003 and 2002 was $2,873 and $2,656, respectively. Power Purchase Contract The PPC, which is amortized on a straight-line basis over the remaining term of the PPC, which will expire in 2010. Annual amortization of the PPC is $2,794. The PPC consists of a gross carrying amount of $30,738 and accumulated amortization at December 31, 2003 and 2002 was $13,506 and $10,712, respectively. Income Taxes There is no provision for income taxes since such taxes are the responsibility of the partners. The net difference between the tax basis and the reported amounts of property, plant, and equipment, net at December 31, 2003 and 2002 was $109,655 and $112,584, respectively. Cash and Cash Equivalents For purposes of the statements of cash flows, CPD considers all money market instruments purchased with initial maturities of three months or less to be cash equivalents. Restricted Cash and Investments As of December 31, 2003 and 2002, all of the Partnership's investments were classified as held to maturity and reported at amortized cost. Included in restricted cash and investments are capital expenditure reserves and sinking fund requirements for the project debt service required by the project loans (see note 6). The carrying amount of restricted cash and investments at December 31, 2003 and 2002 approximated fair value, which is based on quoted market prices as provided by the financial institution which holds the investments. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, partners' capital, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and the allocation of profits and losses during the reportable period. Actual results could differ significantly from those estimates. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, prepaid expenses and other assets, amounts due from related parties, accounts payable and accrued liabilities, and amounts due to related parties approximated fair value as of December 31, 2003 and 2002, because of the relatively short maturity of these instruments. The project loans as of December 31, 2003 and 2002 have an estimated fair value of $77,302 and $80,401, respectively, based on the quoted market price of the senior secured notes (see note 6). The investments in Coso Transmission Line Partners (see note 3) and advances to New CLPSI Company, LLC (see note 4) approximate fair value. Asset Retirement Obligation In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and amends FASB No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of a fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 2003, CPD adopted SFAS No. 143 and estimated the restoration costs CPD expects to incur when the land lease with the Navy expires and will be approximately $8.4 million. Under the land lease CPD is required to remove all property, plant and equipment to restore the land to its original state. Adoption of SFAS No. 143 resulted in a loss from the cumulative effect of a change in accounting principle of $1,777, a net increase in property, plant, and equipment of $354, and an increase in other liabilities of $2,131. As of December 31, 2003, the accumulated liability associated with the restorations costs was $2,345 and is included in other liabilities. Accretion expense for the year ended December 31, 2003 included in noncash interest expense was $213. If CPD had adopted SFAS No. 143 retroactively to January 1, 2001, net income for the years ended December 31, 2002 and 2001 would have decreased by $215 and $197, respectively. New Accounting Pronouncements The FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This is an interpretation of FASB Statements No. 5, Accounting for Contingencies, No. 57, Related Party Disclosures, and No. 107, Disclosures about Fair Value of Financial Instruments and rescission of FASB Interpretation No. 34, Disclosures of Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Statement is being applied prospectively, to guarantees issued or modified after December 31, 2002. At December 31, 2003, the Partnership's only guarantees relate to the project loans (see note 6). This guarantee is not within the scope of the initial recognition and initial measurement provision of FIN 45. In December 2003, the FASB issued Interpretation No. 46 (Revised December 2003), (FIN 46) Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation is to be applied in the first fiscal year or interim period beginning after December 15, 2003 to enterprises that hold a variable interest in all entities that are not special purpose entities. The effect of the application of this Interpretation on CPD's financial statements is currently being evaluated and the expected impact has not yet been determined. (3) Investment in Coso Transmission Line Partners Coso Transmission Line Partners (CTLP) is a partnership owned 53.33% by CPD and 46.67% by Coso Energy Developers (CED) which owns the transmission line and facilities connecting the power plants owned by CPD and CED to the transmission line owned by Edison, at Inyokern, California, located 28 miles south of the plants. CTLP charges CPD and CED for the use of the transmission line at amounts sufficient for CTLP to recover its operating costs. These charges are recorded by CPD as operating expenses and reflected as an increase in CPD's payable to CTLP (see note 7). (4) Advances to New CLPSI Company, LLC New CLPSI Company, LLC (CLPSI) is a wholly owned subsidiary of Caithness Acquisition Company, LLC (CAC). CLPSI purchases, stores, and distributes spare parts to CPD, CED, and Coso Finance Partners (CFP) (collectively known as the Coso Partnerships). Also, certain other maintenance facilities utilized by the Coso Partnerships are owned by CLPSI. CPD's advances to CLPSI fund the purchase of spare parts inventory and other assets. CLPSI bills the Coso Partnerships for spare parts as utilized and for use of the other facilities at amounts sufficient for CLPSI to recover its operating costs. (5) Property, Plant, and Equipment Property, plant, and equipment at December 31, 2003 and 2002 consist of the following: 2003 2002 ------- ------- Power, plant, and gathering system $ 149,775 143,542 Transmission line 7,245 7,245 Wells and resources development costs 59,762 59,761 ------- ------- 216,782 210,548 Less accumulated depreciation and amortization (101,943) (94,356) ------- ------- $ 114,839 116,192 ======= ======= The transmission line costs represent the Partnership's share of the costs of construction of transmission lines from Inyokern, California to the Edison substation at Kramer, California, and from Kramer to the Edison substation at Victorville, California. (6) Project Loan On May 28, 1999, Caithness Coso Funding Corp. (Funding Corp.) raised $413,000 from an offering of senior secured notes. Funding Corp. loaned approximately $154,000 to CPD from the $413,000 debt raised from the offering of senior secured notes on terms consistent with those of the senior secured notes. The loan consisted of one note of $69,350 at 6.80% which was paid off on December 15, 2001 and another note of $84,200 at 9.05%, which has payments due semi-annually through December 15, 2009. The annual maturity of the project loan for each year ending December 31 is as follows: Year ending December 31: Amount ------------------------ ------ 2004 $ 10,718 2005 11,697 2006 11,738 2007 12,530 2008 12,392 Thereafter 12,171 ------ $ 71,246 ====== The loan contains certain restrictive covenants that, among other things, limit the Partnership's ability to incur additional indebtedness, release funds from reserve amounts, make distributions, create loans, and enter into any transaction of merger or consolidation. The Partnership, Funding Corp., CED, and CFP are jointly and severally liable for the repayment of the senior secured notes. The annual maturity of the senior secured notes for each year ending December 31 is as follows: Year ending December 31: Amount ------------------------ ------ 2004 $ 31,332 2005 35,480 2006 38,286 2007 47,419 2008 49,261 Thereafter 51,836 ------- $ 253,614 ======= (7) Related Party Transactions The amounts due from and to related parties at December 31, 2003 and 2002 consist of the following: 2003 2002 -------- -------- Amounts due from related parties: Coso Energy Developers $ 380 15 Coso Operating Company, LLC 1,122 1,211 China Lake Joint Venture: Principal 1,562 1,562 Accrued interest 3,348 3,114 ----- ----- $ 6,412 5,902 ===== ===== Amounts due to related parties: Coso Finance Partners $ 838 419 Caithness Coso Funding Corp. 283 323 Caithness Operating Company, LLC 70 16 ----- ----- $ 1,191 758 ===== ===== COC is reimbursed monthly for nonthird-party costs incurred on behalf of CPD. These costs are comprised principally of direct operating costs of the CPD geothermal facility, allocable general and administrative costs, and an operator fee. The amount due from COC relates to advances for payments of operating expenses. CPD is charged a nonmanaging fee payable to the nonmanaging partner, Navy II, its assignee. For the years ended December 31, 2003, 2002, and 2001, CPD paid $243, $241, and $237, respectively. CPD is charged for its use of the transmission line owned by CTLP. For the years ended December 31, 2003, 2002, and 2001, the amount of such net charges was $132, $155, and $129, respectively. CPD is charged by CLPSI for both its inventory usage and its portion of the expenses of operating CLPSI. The charges to CPD from CLPSI in 2003, 2002, and 2001, which are included in plant operating expenses, were approximately $189, $237, and $148, respectively. On December 16, 1992, CPD retired China Lake Joint Venture's (CLJV) promissory note due CalEnergy, resulting in the loan from CPD to CLJV of $1,562 at December 31, 1992. CLJV is an affiliated venture. Interest has been accrued on this loan for the years ended December 31, 2003, 2002, and 2001 at 5%, 5%, and 10%, respectively. Interest on the loan was $234, $229, and $405, in 2003, 2002, and 2001, respectively. The amount due to Funding Corp. represents accrued interest for 15 days in December, related to the project loan (see note 6). During 1994, the Coso Partnerships entered into steam sharing agreements under which the partnerships may transfer steam, with the resulting incremental revenue and royalty expense shared equally by the partnerships. In the second half of 1995, interconnection facilities between the plants were completed and the transfer of steam commenced. CPD's steam sharing resulted in an expense, included in energy revenue were $6,888, $5,255, and $9,634 for the years ended December 31, 2003, 2002, and 2001, respectively. (8) Commitments and Contingencies Settlement Agreement between Edison and the California Public Utilities Commission On September 23, 2002, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) issued an opinion and order on appeal from the district court's stipulated judgment which affirmed the stipulated judgment in part and referred questions based on California state law to the California Supreme Court. The Ninth Circuit stated that if the Agreement violated California state law then the appeals court would be required to void the stipulated judgment. The California Supreme Court accepted the Ninth Circuit's request to address the issues referred to it in the September 23, 2002 ruling. On August 21, 2003, the California Supreme Court found that state laws were not violated as of result of the settlement agreements. On December 19, 2003, the Ninth Circuit fully affirmed the district court's stipulated judgment based on the reply from the California Supreme Court. It is unknown if any further appeals will be taken in this matter. Court of Appeals Decision on Line Loss Factor Edison filed a petition for a writ of review of a January 2001 CPUC decision, claiming that the "floor" line loss factor of 0.95 for renewable generators violated the Public Utility Regulator Policies Act of 1978. Subsequently, the California Court of Appeals issued a decision on August 20, 2002 in response to the writ affirming the January 2001 CPUC decision, except for the 0.95 "floor," which it rejected as an abuse of discretion by the CPUC. While this matter was appealed to the California Supreme Court, the petition for review was denied. The Coso Partnerships are currently evaluating potential actions to redress this issue. The Coso Partnerships' Agreements set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, the Coso Partnerships will have a line loss factor of less than 1.0, effectively decreasing revenues if Edison's challenge to the CPUC ruling stands. (9) Risks and Uncertainties CPD sells 100% of the electrical energy generated to Edison under a long-term PPC, and is significantly impacted by risks beyond the Partnership's control. Among the important factors that could cause future operating results to differ materially from those anticipated include, but are not limited to: (i) risks relating to the uncertainties in the California energy market, (ii) the financial viability of Edison, (iii) risks related to the operation of power plants, (iv) the impact of avoided cost pricing along with other pricing variables, (v) general operating risks, including resource availability and regulatory oversight, (vi) changes in government regulation, (vii) the effects of competition, (viii) the alleged manipulation of the California energy market, and (ix) acts of terrorism directed at the project or other facilities affecting the normal course of business. F-23
Quarterly Data (Unaudited) March 31(a)(b) June 30(a)(c) September 30(a) December 31(a) -------------- ------------- --------------- -------------- Caithness Coso Funding Corp: 2003 Total revenues $ 6,294 6,323 6,144 6,067 Operating income -- -- -- -- Net income $ -- -- -- -- 2002 Total revenues $ 6,854 6,856 6,659 6,562 Operating income -- -- -- -- Net income $ -- -- -- -- 2001 Total revenues $ 8,601 5,997 7,105 7,117 Operating income -- -- -- -- Net income $ -- -- -- -- Coso Finance Partners: 2003 Total revenues $ 12,553 15,323 19,833 12,083 Operating income (loss) 5,043 6,351 9,840 4,883 Net income (loss) $ 760 3,836 7,400 3,708 2002 Total revenues $ 45,498 14,328 19,761 12,478 Operating income 38,443 6,107 8,139 6,000 Net income (loss) $ 36,063 4,300 5,528 3,221 2001 Total revenues $ 6,188 24,835 16,833 8,472 Operating income (1,843) 16,498 5,126 7,365 Net income (loss) $ (4,957) 13,397 2,100 4,169 Coso Energy Developers: 2003 Total revenues $ 9,334 11,610 16,222 9,703 Operating income (loss) 4,231 5,576 9,091 3,151 Net income (loss) $ 1,514 3,721 7,265 1,381 2002 Total revenues $ 43,480 11,190 16,591 9,991 Operating income 36,805 3,705 7,878 4,338 Net income (loss) $ 35,203 1,725 5,961 2,470 2001 Total revenues $ 1,445 23,529 15,095 7,738 Operating income (7,730) 15,595 7,735 811 Net income (loss) $ (10,066) 13,264 5,431 (1,616) Coso Power Developers: 2003 Total revenues $ 8,512 10,825 16,513 10,299 Operating income (loss) 1,917 4,137 8,930 3,755 Net income (loss) $ (1,634) 2,330 7,174 2,018 2002 Total revenues $ 44,422 9,771 15,838 9,561 Operating income 37,565 1,730 8,484 2,385 Net income (loss) $ 36,085 (60) 6,796 482 2001 Total revenues $ (2,196) 20,133 13,934 7,401 Operating income (11,636) 11,246 5,388 (134) Net income $ (13,903) 8,991 3,193 (2,664)
(a) In the opinion of the Caithness Coso Funding Corp. and the Partnerships, all adjustments, which consist of normal recurring accruals to present a fair statement of the amounts shown for such periods, have been made. (b) The provision for doubtful accounts previously recorded for the quarter ended March 31, 2001 for Coso Finance Partners, Coso Energy Developers, and Coso Power Developers of $25,817, $25,950 and $26,998, respectively, has been reclassified as a reduction of revenue to conform with the 2001 financial statements presentation. (c) The income from the reduction in the provision for doubtful accounts previously recorded for the quarter ended June 30, 2001 for Coso Finance Partners, Coso Energy Developers, and Coso Power Developers of $4,204 $4,120 and $4,265, respectively, has been reclassified to revenue to conform with the 2001 financial statements presentation. Supplemental Condensed Combined Financial Information for Coso Partnerships The following information presents unaudited condensed combined financial statements of the Coso Partnerships. These financial statements represent a compilation of the financial statements of Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers and Coso Power Developers for the periods indicated. This supplemental financial information is not required by GAAP and has been provided to facilitate a more comprehensive understanding of the financial position, operating results and cash flows of the Coso partnerships as a whole, which jointly and severally guarantee the repayment of Caithness Coso Funding Corp's senior notes. The unaudited condensed combined financial statements should be read in conjunction with each individual partnerships financial statements and their accompanying notes. F-24
COSO PARTNERSHIPS UNAUDITED CONDENSED COMBINED BALANCE SHEETS (Dollars in thousands) December 31, December 31, 2003 2002 Assets: Cash and cash equivalents........................ $ 2,110 6,462 Restricted cash and investments.................. 43,093 46,193 Accounts receivable, net......................... 21,740 21,346 Prepaid expenses and other assets................ 2,796 3,549 Amounts due from related parties................. 6,590 6,516 Property, plant and equipment, net............... 380,136 388,358 Power purchase agreement, net.................... 42,323 47,336 Investments and Advances......................... 12,294 12,508 Deferred financing costs, net.................... 4,725 5,512 ------- ------- Total assets........................... $ 515,807 $ 537,780 ======= ======= Liabilities and Partners' Capital: Accounts payable and accrued liabilities........ $ 8,505 $ 10,486 Amounts due to related parties.................. 27,397 25,415 Other liabilities............................... 19,714 13,276 Project loans................................... 253,614 281,231 ------- ------- Total liabilities...................... 309,230 330,408 Partners' capital................................ 206,577 207,372 ------- ------- Total liabilities and partners' capital $ 515,807 $ 537,780 ======= ======= See accompanying notes to the unaudited condensed combined financial statements.
F-25
COSO PARTNERSHIPS UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands) Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, December 31, December 31, 2003 2002 2001 ------------ ------------ ------------ Revenue: Energy revenues............................ $ 110,587 $ 205,151 $ 94,734 Capacity and bonus revenues................ 42,223 47,758 39,096 ------- ------- ------- Total revenue......................... 152,810 252,909 133,830 ------- ------- ------- Operating expenses: Plant operating expenses................... 32,450 31,884 28,910 Royalty expense............................ 23,379 22,311 24,530 Depreciation and amortization.............. 30,076 37,135 41,546 ------ ------ ------ Total operating expenses.............. 85,905 91,330 94,986 ------ ------- ------ Operating income...................... 66,905 161,579 38,844 ------ ------- ------ Other expenses: Interest and other income.................. (3,191) (3,923) (9,577) Interest expense on project loan........... 24,826 26,941 28,818 Non cash interest expense.................. 1,316 787 2,264 ------ ------ ------ Total other expenses.................. 22,951 23,805 21,505 ------ ------ ------ Income before cumulative effect of change in accounting principle............... 43,954 137,774 17,339 Cumulative effect of change in accounting principle............................. 4,481 -- -- ------- ------- ------ Net income............................ $ 39,473 $ 137,774 $ 17,339 ====== ======= ====== See accompanying notes to the unaudited condensed combined financial statements.
F-26
COSO PARTNERSHIPS UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS (Dollars in thousands) Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, December 31, December 31, 2003 2002 2001 Net cash provided by (used in) operating activities... $ 76,220 $ 144,495 $ 60,338 Net cash provided by (used in) investing activities... (12,687) (18,719) 3,355 Net cash provided by (used in) financing activities... (67,885) (119,578) (80,538) --------- --------- -------- Net change in cash and cash equivalents............... $ (4,352) $ 6,198 $ (16,845) ========= ========= ======== Supplemental cash flow disclosure: Cash paid for interest.................... $ 24,950 $ 27,026 $ 28,881 See accompanying notes to the unaudited condensed combined financial statements.
F-27 COSO PARTNERSHIPS NOTES TO THE UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS (1) Basis of Presentation The accompanying unaudited condensed combined financial statements were derived from the stand alone unaudited condensed financial statements of Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers and Coso Power Developers (the "Coso Partnerships"). All intercompany accounts and transactions were eliminated. This financial information has been provided to facilitate a more comprehensive understanding of the financial position, operating results and cash flows of the Coso Partnerships as a whole. The unaudited condensed combined financial statements should be read in conjunction with each individual Partnership's unaudited condensed financial statements. (2) Accounts Receivable and Revenue Recognition The Coso Partnerships sell all electricity produced to Southern California Edison (Edison) under long-term power purchase contracts. Due to the uncertainty surrounding Edison's ability to make payment on past due amounts, collection was not reasonably assured and the Coso Partnerships had not recognized revenue from Edison for energy delivered during the period November 1, 2000 through March 26, 2001. On March 1, 2002, the Coso Partnerships recognized revenue for energy delivered from November 1, 2000 through March 26, 2001 of $112.4 million, when Edison reached certain financing milestones and paid the Coso Partnerships for revenue generated but not recognized for the period November 1, 2000 through March 26, 2001. (3) Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. F-28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Part III Item 10. Directors and Executive Officers of the Registrant. The following table sets forth the persons who served as our directors and executive officers as of December 31, 2003:
Name Age Position(s) ---- --- ----------- James D. Bishop, Sr. 70 Director, Chairman and Chief Executive Officer Leslie J. Gelber 47 Director, President and Chief Operating Officer James D. Bishop, Jr. 43 Director, Vice Chairman Christopher T. McCallion 42 Director, Executive Vice President and Chief Financial Officer Kenneth P. Hoffman 51 Senior Vice President Larry K. Carpenter 54 Executive Vice President 18 Mark A. Ferrucci 51 Director David V. Casale 40 Vice President and Controller John A. McNamara 44 Vice President Finance Barbara Bishop Gollan 45 Vice President
James D. Bishop, Sr., Chairman, Chief Executive Officer and a Director of Funding Corp. and of Caithness Energy, has served as a Director of Caithness Equities Corporation (formerly known as Caithness Corporation) since its inception in 1975. Mr. Bishop served as Caithness Equities Corporation's President from its inception until December 1986 and has served as Chairman of Caithness Equities Corporation since January 1987. Mr. Bishop also serves as a director for various other entities which engage in independent power production and natural resource exploration and development. Mr. Bishop holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Arts degree from Yale University. Mr. Bishop is the father of James D. Bishop, Jr. and Barbara Bishop Gollan. Leslie J. Gelber, President, Chief Operating Officer and a Director of Funding Corp. and of Caithness Energy, has served as President and Chief Operating Officer of Caithness Equities Corporation since January 1999. Prior to joining Caithness Equities Corporation, Mr. Gelber served as President of Cogen Technologies, Inc., which is also engaged in the field of independent power production, from August 1998 until December 1998. From July 1993 to July 1998, Mr. Gelber served as President of ESI Energy, Inc., the non-regulated independent power company owned by FPL Group, Inc. Mr. Gelber holds a Master of Business Administration degree from the University of Miami and holds a Bachelor of Arts degree in Economics from Alfred University. James D. Bishop, Jr., Vice Chairman and a Director of Funding Corp. and of Caithness Energy, joined Caithness Equities Corporation in 1988 and served as President and Chief Operating Officer of Caithness Equities Corporation from November 1995 until December 1998. Mr. Bishop also serves on all the boards of directors and management committees of the entities and joint ventures affiliated with Caithness Equities Corporation. Mr. Bishop holds a Master of Business Administration degree from the Kellogg Graduate School of Management at Northwestern University and holds a Bachelor of Science degree from Trinity College. Mr. Bishop is the son of James D. Bishop, Sr. and the brother of Barbara Bishop Gollan. Christopher T. McCallion, Executive Vice President, Chief Financial Officer and a Director of Funding Corp. and of Caithness Energy, served as Vice President and Controller of Caithness Equities Corporation from July 1991 to November 1995, and has served as Executive Vice President and Chief Financial Officer of Caithness Equities Corporation since November 1995. Mr. McCallion holds a Bachelor of Science degree from Seton Hall University. Kenneth P. Hoffman a Senior Vice President of Funding Corp and of Caithness Energy, joined Caithness Equities Corporation in March of 2000. Prior to joining Caithness, Mr. Hoffman was a Vice President of FPL Energy, Inc. From 1989 until 1993 he was the Vice President of Business Management of ESI Energy, Inc. Before 1989, Mr. Hoffman was employed by Florida Power & Light Company. Mr. Hoffman holds a Master of Business Administration degree from Florida International University and a Bachelor of Science degree from Rochester Institute of Technology. Larry K. Carpenter, Executive Vice President of Funding Corp. and of Caithness Energy, has served as an Executive Vice President of Caithness Equities Corporation since January 1999. Prior to joining Caithness Equities Corporation, Mr. Carpenter served as Vice President of Development at ESI Energy, Inc., the non-regulated independent power company owned by FPL Group Inc., from 1985 to December 1998. Mr. Carpenter holds a Bachelor of Science degree in Electrical Engineering from the University of Florida. 19 Mark A. Ferrucci, a Director of Funding Corp., has served as the independent director of Funding Corp. since May 1999. From 1977 until 2002, Mr. Ferrucci was an employee of CT Corporation System, where he served as CT Corporation System's Assistant Secretary and as Assistant Vice President from 1992 to 2002. At present, Mr. Ferrucci operates as a sole proprietor that provides corporate staffing services to businesses and law firms. David V. Casale, a Vice President and the Controller of Funding Corp. and of Caithness Energy joined Caithness Equities Corporation in December 1991 and has served as a Vice President and as its Controller since November 1995. Mr. Casale also serves on the boards of directors of joint ventures affiliated with Caithness Equities Corporation. Mr. Casale holds a Bachelor of Arts degree from Adelphi University. John A. McNamara, Vice President Finance of Funding Corp. and of Caithness Energy, joined Caithness Equities Corporation in September of 1990 and has served as Vice President since 1999. Prior to joining Caithness, Mr. McNamara was a broker with Bradley & Company, an account executive with First Georgetown Securities, Inc. and a staff member of the United States Senate Committee on Small Business. He received a Masters of Business Administration degree from Georgetown University and a Bachelor of Arts degree from Denison University. Barbara Bishop Gollan, a Vice President of Funding Corp. and of Caithness Energy, joined Caithness Equities Corporation as Vice President in October 1990. Ms. Gollan has authored and co-authored a number of technical papers on geothermal systems, which were presented to the Geothermal Resources Council, the Geologic Society of America and the Stanford Geothermal Workshop. Ms. Gollan holds a Master of Science degree in Geology and Geochemistry from Stanford University and holds a Bachelor of Arts degree from Amherst College. Ms. Gollan is the daughter of Mr. James D. Bishop, Sr. and the sister of James D. Bishop, Jr. The Board of Directors appointed Mr. Ferrucci as an independent director. The unanimous affirmative vote of our Board of Directors (including Mr. Ferrucci) is required before certain actions can be taken, including, but not limited to, (1) engaging in any business or activity other than issuing the senior secured notes and making the related loans to the Coso partnerships, (2) incurring any debt, or assuming or guaranteeing any debt of any other entity, (3) dissolving or liquidating, (4) consolidating, merging or selling all or substantially all of our assets or (5) instituting any bankruptcy or insolvency proceedings. Item 11. Executive Compensation. None of the directors or executive officers of Funding Corp. receives any compensation for his or her services, except Mr. Ferruci, who receives $8,400 in compensation annually for services provided. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of December 31, 2003 certain information regarding the beneficial ownership of Coso Funding Corp.'s voting securities and the beneficial ownership of the voting securities of each of the Coso partnerships by: (1) Each person who is known by us and the Coso partnerships to beneficially own 5% or more of Coso Funding Corp.'s voting securities or 5% or more of the voting securities of any Coso partnership, (2) Each of Coso Funding Corp.'s directors and executive officers who also act in similar capacities on behalf of the managing partner of each Coso partnership and each of the delegates to the management committee of each Coso partnership, and 20 (3) All of Coso Funding Corp.'s directors and executive officers who also act in similar capacities for the managing partnership of each Coso partnership and all of the delegates to the management committee of each Coso partnership as a group. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Except as otherwise noted, each person named below has an address in care of our principal executive offices.
Beneficial Ownership of Coso Funding Corp. and the Coso Partnerships Percent Indirect Percent Indirect Percent Indirect Percent Indirect Beneficial Beneficial Beneficial Beneficial Name and Address of Ownership in Ownership in Ownership in Ownership in Beneficial Owner Coso Funding the Navy I the BLM the Navy II ---------------- Corp. Partnership Partnership Partnership ----- ----------- ----------- ----------- James D. Bishop, Sr. (1)(2).............. -- -- -- -- Leslie J. Gelber (1)(3).................. -- -- -- -- James D. Bishop, Jr. (1)(4).............. 17.3% 16.9% 19.3% 15.7% Christopher T. McCallion (1)(3).......... -- -- -- -- Kenneth P. Hoffman (1)(3)................ -- -- -- -- Larry K. Carpenter (1)(3)................ -- -- -- -- Mark A. Ferrucci......................... -- -- -- -- David V. Casale (1)(3)................... -- -- -- -- John A. McNamara (1)(3).................. -- -- -- -- Barbara Bishop Gollan (1)(3)(5).......... -- -- -- -- Dominion Energy, Inc. (6)................ * -- 7.8% 2.8% 901 East Byrd Street Richmond, VA 23219 Mojave Energy Company (7)................ 6.1% 5.5% 7.7% 5.2% c/o Davenport Resources, Inc. 200 Railroad Avenue, 3rd floor Greenwich, CT 06830 ArcLight Clean Power Investors, LLC 13.9% 13.6% 14.7% 13.3% (8)...................................... 200 Clarendon Street Boston, MA 02117 All directors, executive officers and management committee delegates as a group............................... 21.4% 17.4% 30.2% 16.6%
* Less than 5.0%. 21 (1) The address of such person is c/o Caithness Corporation, 565 Fifth Avenue, 29th Floor, New York, New York 10017-2478. (2) James D. Bishop, Sr. is the beneficiary of The James D. Bishop Trust--2002 ("Bishop, Sr. 2Trust"), which owns shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., and Mojave Power II, Inc., and membership units in Caithness 1997, LLC, the voting rights of which have been transferred to The Caithness Entities Voting Trust, the trustee of which is James D. Bishop, Jr. Caithness Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., Mojave Power II Inc., and Caithness 1997, LLC own, indirectly through various entities, general partnership interests in the Navy I partnership, the BLM partnership and the Navy II partnership, which collectively own all of the shares of common stock of Funding Corp. The Bishop, Sr. Trust is irrevocable. James D. Bishop, Sr., therefore, does not have voting or investment power over these shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., Mojave Power II, Inc. and these membership interests in Caithness 1997, LLC. (3) Indirect owner of economic interests in the Coso partnerships through Caithness Equities Corporation's (f/k/a Caithness Corporation) employee incentive plans, which economic interests are not listed on this table. (4) James D. Bishop, Jr. is: (i) the beneficiary of The James D. Bishop, Jr. Irrevocable Trust--1996 (the "Bishop, Jr. Trust"), which owns shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation), and membership units in Caithness 1997, LLC, the voting rights of which have been transferred to the Caithness Entities Voting Trust, the trustee of which is James D. Bishop, Jr.; (ii) the owner of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation) and Mojave Power, Inc., and membership units in Caithness 1997, LLC; and (iii) the trustee of The Caithness Entities Voting Trust which possesses sole voting control over the shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation), Mojave Power, Inc., Mojave Power II, Inc., and the membership interests in Caithness 1997, LLC held by the Bishop, Sr. Trust, The Barbara Bishop Gollan Irrevocable Trust--1996 (the "Gollan Trust"), The Elizabeth Bishop DeLuca Irrevocable Trust--1996 and The Linda Bishop Fotiu Irrevocable Trust--1996. The interests listed in (i) and (ii) above entitle James D. Bishop, Jr. to the following indirect beneficial ownership interests: Funding Corp. 1.6%; Navy I partnership 1.6%; BLM partnership 1.5%; and Navy II partnership 1.6%. James D. Bishop, Jr. disclaims beneficial ownership of the interests listed in (iii) above. (5) Barbara Bishop Gollan is the beneficiary of the Gollan Trust, which owns shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation), and membership units in Caithness 1997, LLC, the voting rights of which have been transferred to The Caithness Entities Voting Trust, the trustee of which is James D. Bishop, Jr. The Gollan Trust is irrevocable. Barbara Bishop Gollan, therefore, does not have voting or investment power over these shares of common stock of Caithness Equities Corporation (f/k/a Caithness Corporation). (6) Dominion Energy, Inc. owns: (i) a limited liability company membership interest in Caithness BLM Group, LP, a Delaware limited partnership, which owns a limited liability company membership interest in Caithness Coso Holdings, LLC, which owns a general partnership interest in the BLM partnership; and (ii) a limited liability company membership interest in Navy II Group which owns a general partnership interest in the Navy II partnership. (7) Mojave Energy Company owns limited liability company membership interests in Caithness Power, LLC, which owns, indirectly through various entities, general partnership interests in each of the Coso partnerships. (8) ArcLight Clean Power Investors, LLC owns limited liability company membership interests in Caithness Investors, LLC, which owns, indirectly through various entities, general partnership interests in each of the Coso partnerships. Item 13. Certain Relationships and Related Transactions. 22 The Coso Partnerships Each of the Coso partnerships has two general partners, a managing partner and a non-managing partner. Under the amended and restated partnership agreement, the managing partner of each Coso partnership is generally responsible for the management and control of the day-to-day business and affairs. The managing partner of the Navy I partnership is New CLOC Company, LLC, a Delaware limited liability company, the managing partner of the BLM partnership is New CHIP Company, LLC, a Delaware limited liability company and the managing partner of the Navy II partnership is New CTC Company, LLC, a Delaware limited liability company. The non-managing partner of the Navy I partnership is ESCA, LLC, a Delaware limited liability company, the non-managing partner of the BLM partnership is Caithness Coso Holdings, LLC, a Delaware limited liability company, and the non-managing partner of the Navy II partnership is Caithness Navy II Group, LLC, a Delaware limited liability company. Each managing partner is a limited liability company managed by a manager who is appointed by Caithness Acquisition Company, LLC (CAC), the sole member of each managing partner. The manager is responsible for the ordinary course management and operations by its Coso partnership. CAC has appointed itself as the manager of each managing partner. CAC has also appointed Mr. Ferrucci as the independent manager of each managing partner. (In addition, each of the managing members of the non-managing partners has appointed Mr. Ferrucci as the independent manager of that non-managing partner.) The approval of the independent manager is required before the managing partner (or the non-managing partner, as the case may be) may take certain actions that do not involve the ordinary course management and operations by the Coso partnerships of the Coso projects, including, among others, (1) commencing any bankruptcy or insolvency proceeding involving the managing partner, (2) incurring any debt in the name of the managing partner for which it would be liable, (3) dissolving, liquidating, consolidating or merging, or selling all or substantially all of the assets of, its respective Coso partnership, or (4) engaging in any business or activity other than acting as the managing partner of its respective Coso partnership. Each managing partner also has its officers, who are also officers of Funding Corp. , who act on behalf of the managing partners of the Coso partnerships. CAC, a limited liability company, is the manager and sole member of each of the managing partners. Caithness Energy, LLC (Caithness Energy) as the manager and sole owner of CAC, has delegated its role as manager of CAC to the CAC board of directors, including the power to manage the managing partners of the Coso partnerships. Each managing partner's officers are also the officers of CAC. None of the persons acting on behalf of the Coso partnerships receives any compensation from the Coso partnerships for his or her services, except that nominal compensation is paid in consideration for Mr. Ferrucci's services. Caithness Energy is governed by a board of directors and not by its members. The directors of Funding Corp., other than Mr. Ferrucci, also currently serve as members of the board of directors of Caithness Energy. Under the limited liability company agreement of Caithness Energy, Caithness Corporation is entitled to appoint a number of members to the Board of Directors of Caithness Energy who hold, in the aggregate, a majority of the votes of all members of such board of directors. Caithness Corporation's present appointees are Messrs. Bishop, Sr., and Bishop, Jr. In addition, Messrs. Gelber, Carpenter and McCallion serve as voting members of the board of directors of Caithness Energy pursuant to their individual executive compensation agreements with Caithness Energy. These five individuals, together with Mr. Ferrucci, serve as the CAC board of directors. Management Committees Under the amended and restated partnership agreement of each Coso partnership, the managing partner is subject to the directives of a management committee which oversees the business operations of the Coso partnership. The managing partner of a Coso partnership may not take certain specific actions without the consent of the management committee of that Coso partnership. However, the management committee may not direct the managing partner of the Coso partnership to take any action over which the independent manager has exclusive authority without the requisite approval of the independent manager. The management committee of each Coso partnership consists of four delegates, two of which are appointed by the managing partner and two of which are appointed by the non-managing partner. Each partner may substitute or change its delegates. 23 Under the amended and restated partnership agreements of the Coso partnerships, each partner may appoint one delegate with multiple votes. The names of the delegates appointed by affiliates of Caithness Energy to the management committees of the Coso partnerships are set forth below. As of December 31, 2003, the following persons were the members of the management committee of each Coso partnership, as applicable. Each person has two votes on each management committee on which he serves:
Name Age Partnership(s) ---- --- -------------- James D. Bishop, Jr. 43 Navy I partnership, BLM partnership, Navy II partnership Christopher T. McCallion 42 Navy I partnership, BLM partnership, Navy II partnership
Certain information regarding Messrs. Bishop and McCallion is provided above. Management Committee Fees The members of the management committees are not entitled to any direct compensation from Funding Corp. or the Coso partnerships. However, each Coso partnership previously paid its two general partners' annual management committee fees for their participation on the management committee of that Coso partnership. The following table sets forth, for the years ended December 31, 2003, 2002, 2001, and 2000, the total amount of management committee fees paid or payable by each of the Coso partnerships to its partners:
Year Ended December 31 ---------------------- 2003 2002 2001 2000 ---- ---- ---- ---- Navy I Partnership ESCA........................ $ 243,000 $ 241,000 $ 237,000 $ 234,000 ======= ======= ======= ======= BLM Partnership CCH......................... $ 243,000 $ 241,000 $ 237,000 $ 234,000 ======= ======= ======= ======= Navy II Partnership Navy II Group............... $ 243,000 $ 241,000 $ 237,000 $ 234,000 ======= ======= ======= =======
The Coso partnerships no longer pay management committee fees to their managing partners. Funding Corp. As of December 31, 2003, the authorized capital stock of Funding Corp. consisted of 1,000 shares of common stock, par value 1 cent per share, of which 300 shares were outstanding. The outstanding common stock is owned equally by the Coso partnerships. 24 Coso Partnerships The directors and executive officers also act in similar capacities on behalf of the managing partner of each Coso partnership and, except for Mr. Ferrucci, on behalf of CAC and Caithness Energy. Several of these directors and executive officers beneficially own the securities of Caithness Corporation, who beneficially owns the majority of membership interests of Caithness Energy. Part IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K. (a) Documents filed as part of this report: Financial Statements and Schedules (b) Current reports on Form 8-K: None. (c) Exhibits: The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report. INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 3.1 Certificate of Incorporation of Caithness Coso Funding Corp.* 3.2 Bylaws of Caithness Coso Funding Corp.* 3.3 Third Amended and Restated Partnership Agreement of Coso Finance Partners, dated as of May 28, 1999.* 3.4 Third Amended and Restated Partnership Agreement of Coso Energy Developers, dated as of May 28, 1999.* 3.5 Third Amended and Restated Partnership Agreement of Coso Power Developers, dated as of May 28, 1999.* 3.6 Amendment Agreement, dated as of May 28, 1999, by and among Coso Finance Partners, Caithness Acquisition Company, LLC, New CLOC Company, LLC, ESCA, LLC and Coso Operating Company LLC.* 3.7 Amendment Agreement, dated as of May 28, 1999, by and among Coso Energy Developers, Caithness Acquisition Company, LLC, New CHIP Company, LLC, Caithness Coso Holdings, LLC and Coso Operating Company LLC.* 3.8 Amendment Agreement, dated as of May 28, 1999, by and among Coso Power Developers, Caithness Acquisition Company, LLC, New CTC Company, LLC, Caithness Navy II Group, LLC and Coso Operating Company LLC.* 25 4.1 Indenture, dated as of May 28, 1999, among Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and U.S. Bank Trust National Association as trustee and as collateral agent.* 4.3 Notation of Guarantee, dated as of May 28, 1999, of Coso Finance Partners.* 4.4 Notation of Guarantee, dated as of May 28, 1999, of Coso Energy Developers.* 4.5 Notation of Guarantee, dated as of May 28, 1999, of Coso Power Developers.* 4.6 Registration Rights Agreement, dated as of May 28, 1999, by and among Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and Donaldson, Lufkin & Jenrette Securities Corporation.* 10.1 Deposit and Disbursement Agreement, dated as of May 28, 1999, among Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and U.S. Bank Trust National Association, as collateral agent, as trustee, and as depositary.* 10.2 Credit Agreement, dated as of May 28, 1999, between Caithness Coso Funding Corp. and Coso Finance Partners.* 10.3 Promissory Note due 2001 of Coso Finance Partners in favor of Caithness Coso Funding Corp.* 10.4 Promissory Note due 2009 of Coso Finance Partners in favor of Caithness Coso Funding Corp.* 10.5 Credit Agreement, dated as of May 28, 1999, between Caithness Coso Funding Corp. and Coso Energy Developers.* 10.6 Promissory Note due 2001 of Coso Energy Developers in favor of Caithness Coso Funding Corp.* 10.7 Promissory Note due 2009 of Coso Energy Developers in favor of Caithness Coso Funding Corp.* 10.8 Credit Agreement, dated as of May 28, 1999, between Caithness Coso Funding Corp. and Coso Power Developers.* 10.9 Promissory Note due 2001 of Coso Power Developers in favor of Caithness Coso Funding Corp.* 10.10 Promissory Note due 2009 of Coso Power Developers in favor of Caithness Coso Funding Corp.* 10.11 Purchase Agreement, dated as of May 21, 1999, by and among Caithness Coso Funding Corp., as Issuer, Coso Finance Partners, Coso Energy Developers and Coso Power Developers, as guarantors, and Donaldson, Lufkin & Jenrette Securities Corporation, as initial purchaser.* 10.12 Security Agreement, dated as of May 28, 1999, executed by and among Caithness Coso Funding Corp. in favor of U.S. Bank Trust National Association, as collateral agent.* 10.13 Security Agreement, dated as of May 28, 1999, executed by and among Coso Finance Partners in Favor of U.S. Bank Trust National Association, as collateral agent.* 10.14 Security Agreement, dated as of May 28, 1999, executed by Coso Energy Developers in favor of U.S. Bank Trust National Association, as collateral agent.* 10.15 Security Agreement, dated as of May 28, 1999, executed by Coso Power Developers in favor of U.S. Bank Trust National Association, as collateral agent.* 10.18 Security Agreement (Navy I project permits), dated as of May 28, 1999, executed by Coso Operating Company LLC in favor of U.S. Bank Trust National Association, as collateral agent.* 26 10.19 Security Agreement (BLM project permits), dated as of May 28, 1999, executed by Coso Operating Company LLC in favor of U.S. Bank Trust National Association, as collateral agent.* 10.20 Security Agreement (Navy II project permits), dated as of May 28, 1999, executed by Coso Operating Company LLC in favor of U.S. Bank Trust National Association, as collateral agent.* 10.24 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by Coso Finance Partners in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.25 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by Coso Energy Developers in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.26 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by Coso Power Developers in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.27 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by Coso Transmission Line Partners in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.28 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by China Lake Joint Venture in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.29 Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement, dated as of May 28, 1999, executed by Coso Land Company in favor of U.S. Bank Trust National Association, as trustee, and as beneficiary.* 10.30 Stock Pledge Agreement, dated as of May 28, 1999, by Coso Finance Partners, Coso Energy Developers and Coso Power Developers in favor of U.S. Bank Trust National Association, as Collateral agent.* 10.31 Partnership Interest Pledge Agreement (Navy I), dated as of May 28, 1999, by ESCA, LLC and New CLOC Company, LLC, in favor of U.S. Bank Trust National Association, as collateral agent.* 10.32 Partnership Interest Pledge Agreement (BLM), dated as of May 28, 1999, by Caithness Coso Holdings, LLC and New CHIP Company, LLC, in favor of U.S. Bank Trust National Association, as Collateral agent.* 10.33 Partnership Interest Pledge Agreement (Navy II), dated as of May 28, 1999, by Caithness Navy II Group, LLC and New CTC Company, LLC, in favor of U.S. Bank Trust National Association, as collateral agent.* 10.34 Partnership Interest Pledge Agreement (CTLP), dated as of May 28, 1999, by Coso Energy Developers and Coso Power Developers, in favor of U.S. Bank Trust National Association, as Collateral agent.* 10.35 Partnership Interest Pledge Agreement (CLJV), dated as of May 28, 1999, by Caithness Acquisition Company, LLC and Caithness Geothermal 1980 Ltd., LP, in favor of U.S. Bank Trust National Association, as collateral agent.* 27 10.36 Partnership Interest Pledge Agreement (CLC), dated as of May 28, 1999, by Caithness Acquisition Company, LLC and Caithness Geothermal 1980 Ltd., LP, in favor of U.S. Bank Trust National Association, as collateral agent.* 10.37 Promissory Notes Security Agreement, dated as of May 28, 1999, by Caithness Coso Funding Corp., in favor of U.S. Bank Trust National Association, as collateral agent.* 10.38 Original Service Contract N62474-79-C-5382, dated December 6, 1979, between U.S. Naval Weapons Center and California Energy Company, Inc., Contractor (the "Navy Contract "), including all Amendments thereto.* 10.39 Escrow Agreement, dated December 16, 1992, as amended, by and among 10.40 Offer to Lease and Lease for Geothermal Resources, Serial No. 11402, dated April 29, 1985 but Effective May 1, 1985, from the United States of America, acting through the Bureau of Land Management, to California Energy Company, Inc.; as assigned by Assignment Affecting Record Title to Geothermal Resources Lease, dated June 24, 1985, but effective July 1, 1985 from California Energy Company, Inc. to Coso Land Company; as assigned by Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources, dated April 20, 1988, but effective May 1, 1988 from Coso Land Company to Coso Geothermal Company; as assigned by Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources dated April 20, 1988 but effective May 1, 1988 from Coso Geothermal Company to Coso Energy Developers.* 10.41 Geothermal Resources Lease, Serial No. CA-11383, by and between the United States of America, acting through the Bureau of Land Management, and the LADWP, effective as of January 1, 1988; as assigned by Lease Assignment Agreement by and between LADWP and Coso Land Company, dated September 10, 1997; as assigned by Assignment of Record Title Interest in Lease for Oil and Gas or Geothermal Resources, by and between the United States of America, acting through the Bureau of Land Management, and Coso Land Company, effective January 1, 1998; and as extended by Extension of primary term of CACA-11383 to September 23, 2004.* 10.42 Geothermal Resources Lease, Serial No. CA-11384, by and between the United States of America, acting through the Bureau of Land Management, and the LADWP, effective as of February 1, 1982; as assigned by Lease Assignment Agreement by and between LADWP and Coso Land Company, dated September 10, 1997; as assigned by Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources (CACA-11384), by and between the United States of America, acting through the Bureau of Land Management, and Coso Land Company, effective as of January 1, 1998; and as extended by extension of primary term of CACA-11385 to December 24, 2002.* 10.43 Geothermal Resources Lease, Serial No. CA-11385, by and between the United States of America, acting through the Bureau of Land Management, and the LADWP, effective as of February 1, 1982; as assigned by Lease Assignment Agreement by and between LADWP and Coso Land Company, dated September 10, 1997; as assigned by Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources (CACA-11385) by and between the United States of America, acting Through the Bureau of Land Management, and Coso Land Company, effective as of January 1, 1998; and as extended by extension of primary term of CACA-11385 to December 24, 2002.* 10.44 License for Electric Power Plant Site Utilizing Geothermal Resources between the United States of America, Licensor, through the Bureau of Land Management, and Coso Energy Developers, Licensee, Serial No. CACA 22512, dated March 8, 1989 (expires 3/8/19).* 28 10.45 License for Electric Power Plant Site Utilizing Geothermal Resources between the United States of America, acting through the Bureau of Land Management, and Coso Energy Developers, Licensee, Serial No. 25690, dated 12/29/1989 (expires 12/28/19).* 10.46 Right of Way CA-18885 by and between the United States of America, acting through the Bureau of Land Management, and California Energy Company, Inc., dated May 7, 1986 (telephone cable)(expires 5/7/16).* 10.47 Right of Way CA-13510 by and between the United States of America, acting through the Bureau of Land Management, and California Energy Company, Inc., dated April 12, 1984 (Coso office site)(expires 4/12/14).* 10.48 Agreement of Transfer and Assignment (Navy I Transmission Line), dated July 14, 1987, among China Lake Joint Venture and Coso Finance Partners.* 10.49 Agreement of Transfer and Assignment (Navy II Transmission Line), dated July 31, 1989, among Coso Power Developers and Coso Transmission Line Partners.* 10.50 Agreement of Transfer and Assignment (BLM Transmission Line), dated July 31, 1989, among Coso Energy Developers and Coso Transmission Line Partners.* 10.51 Agreement Regarding Overriding Royalty (CLC Royalty), dated May 5, 1988, between Coso Energy Developers and Coso Land Company.* 10.52 Coso Geothermal Exchange Agreement, dated January 11, 1994, by and among Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and California Energy Company, Inc.* 10.53 Amendment to Coso Geothermal Exchange Agreement, dated April 12, 1995, by and among Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and California Energy Company, Inc.* 10.55 Operation and Maintenance Agreement (Navy I Project), dated May 28, 1999, by and among FPL Energy Operating Services, Inc. and Coso Operating Company, LLC and New CLOC Company, LLC.* 10.56 Operation and Maintenance Agreement (BLM Project), dated May 28, 1999, by and among FPL Energy Operating Services, Inc. and Coso Operating Company, LLC and New CHIP Company, LLC.* 10.57 Operation and Maintenance Agreement (Navy II Project), dated May 28, 1999, by and among FPL Energy Operating Services, Inc. and Coso Operating Company, LLC and New CTC Company, LLC.* 10.58 Field Operation and Maintenance Agreement (Navy I), dated February 25, 1999, between Coso Operating Company, LLC and New CLOC Company, LLC.* 10.59 Field Operations and Maintenance Agreement (Navy II), dated February 25, 1999, between Coso Operating Company, LLC and New CTC Company, LLC.* 10.60 Field Operations and Maintenance Agreement (BLM), dated February 25, 1999, between Coso Operating Company, LLC and New CHIP Company, LLC.* 10.61 Purchase Agreement, dated as of January 16, 1999, by and among Caithness Energy, L.L.C., Caithness Acquisition Company, LLC, and California Energy Company, Inc.* 29 10.62 Agreement Concerning Consideration, dated as of February 25, 1999, by and among Caithness Energy, L.L.C., Caithness Acquisition Company, L.L.C., New CLOC Company, LLC, New CHIP Company, LLC, New CTC Company, LLC, and CalEnergy Company, Inc.* 10.63 Future Revenue Agreement, dated February 25, 1999, by and between Caithness Energy, L.L.C., Caithness Acquisition Company, LLC, New CTC Company, LLC, New CLOC Company, LLC, NewCHIP Company, LLC, Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and California Energy Company, Inc.* 10.64 Acknowledgment and Agreement--Release, dated January 16, 1999, executed by Caithness Resources, Inc., Caithness Corporation, Caithness Power, L.L.C., James Bishop Sr., and Caithness CEA Geothermal, LP (appended to Exhibit 10.61).* 10.65 Acknowledgment and Agreement--Indemnity, dated May 28, 1999, executed by Coso Finance Partners, New CLOC Company, LLC, ESCA, LLC, Coso Energy Developers, New CHIP Company, LLC, Caithness Coso Holdings, LLC, Coso Power Developers, New CTC Company, LLC, and Caithness Navy II Group, LLC.* 10.66 Acknowledgment and Agreement--Release, dated May 28, 1999, executed by Coso Finance Partners, New CLOC Company, LLC, ESCA, LLC, Coso Energy Developers, New CHIP Company, LLC, Caithness Coso Holdings, LLC, Coso Power Developers, New CTC Company, LLC, and Caithness Navy II Group, LLC.* 10.67 Acknowledgment and Agreement--Indemnity, dated January 16, 1999, executed by Caithness Resources, Inc., Caithness Corporation, Caithness Power, L.L.C., China Lake Operating Company, Coso Technology Corporation and Coso Hotsprings Intermountain Power (appended to Exhibit 10.61).* 10.68 Power Purchase Agreement (modified Standard Offer No.4) (Navy I), dated as of June 4, 1984, as Amended, by and between Southern California Edison Company and Coso Finance Partners (as assignee of China Lake Joint Venture).* 10.69 Power Purchase Agreement (modified Standard Offer No.4) (BLM), dated as of February 1, 1985, by and between Southern California Edison Company and Coso Energy Developers (as assignee of China Lake Joint Venture).* 10.70 Power Purchase Agreement (modified Standard Offer No.4) (Navy II), dated as of February 1, 1985, by and between Southern California Edison Company and Coso Power Developers (as assignee of China Lake Joint Venture).* 10.72 Interconnection and Integration Facilities Agreement (BLM project), dated December 15, 1988, Between Southern California Edison Company and Coso Energy Developers (as assignee of China Lake Joint Venture).* 10.73 Interconnection and Integration Facilities Agreement (Navy II project), dated December 15, 1988, Between Southern California Edison Company and Coso Power Developers (as assignee of China Lake Joint Venture).* 10.77 Operating Fee Subordination Agreement (Navy I), dated as of May 28, 1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust National Association, as collateral agent.* 10.78 Operating Fee Subordination Agreement (BLM), dated as of May 28, 1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust National Association, as collateral agent.* 10.79 Operating Fee Subordination Agreement (Navy II), dated as of May 28, 1999, by and among Coso Operating Company, LLC, and U.S. Bank Trust National Association, as collateral agent.* 30 10.80 Management Fee Subordination Agreement (Navy I), dated as of May 28, 1999, by and among ESCA, LLC, New CLOC Company, LLC, Coso Finance Partners, and U.S. Bank Trust National Association, as collateral agent.* 10.81 Management Fee Subordination Agreement (BLM), dated as of May 28, 1999, by and among Caithness Coso Holdings, LLC, New CHIP Company, LLC, Coso Energy Developers, and U.S. Bank Trust National Association, as collateral agent.* 10.82 Management Fee Subordination Agreement (Navy II), dated as of May 28, 1999, by and among Caithness Navy II Group, LLC, New CTC Company, LLC, Coso Power Developers, and U.S. Bank Trust National Association, as collateral agent.* 10.83 Cotenancy Agreement, dated as of May 28, 1999, by and among Coso Finance Partners, Coso Energy Developers, and Coso Power Developers.* 10.84 Acquisition Agreement, dated as of May 28, 1999, among Coso Land Company, Coso Finance Partners, Coso Energy Developers, Coso Power Developers, and Coso Operating Company, LLC.* 10.85 Assignment and Assumption Agreement, dated as of May 28, 1999, by and among MidAmerican Energy Holdings Company as successor-in-interest to Cal Energy Company, Inc., Coso Energy Developers, Coso Power Developers and Coso Finance Partners.* 21.1 Subsidiaries of Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers, and Coso Power Developers.* 23.3 Consent of Sandwell Engineering Inc.* 23.4 Consent of Henwood Energy Services, Inc.* 23.5 Consent of GeothermEx, Inc.* 23.6 Consent of Riordan & McKinzie, A Professional Law Corporation (included in Exhibit 5.1).* 23.7 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 5.2).* 24.1 Powers of Attorney (included on pages II-9, II-11, II-13 and II-15).* 25.1 Form T-1 Statement of Eligibility and Qualification of U.S. Bank Trust National Association as Trustee.* 27.1 Financial Data Schedule--Form SX--Caithness Coso Funding Corp. 27.2 Financial Data Schedule--Form SX--Coso Finance Partners. 27.3 Financial Data Schedule--Form SX--Coso Energy Developers. 27.4 Financial Data Schedule--Form SX--Coso Power Developers. 99.1 Certification of Chief Executive Officer. 99.2 Certification of Chief Financial Officer. 99.3 Sale Agreement by and between Caithness Acquisition Company, LLC, and ESI Geothermal, Inc. dated as of October 6, 1999.** 99.4 Assignment, Assumption and Novation Agreement (Coso Finance Partners) by and between FPL Energy Operating Services, Inc. and Coso Operating Company, LLC dated October 18, 1999.** 31 99.5 Assignment, Assumption and Novation Agreement (Coso Energy Developers) by and between FPL Energy Operating Services, Inc. and Coso Operating Company, LLC dated October 18, 1999.** 99.6 Assignment, Assumption and Novation Agreement (Coso Power Developers) by and between FPL Energy Operating Services, Inc. and Coso Operating Company, LLC dated October 18, 1999.** * Incorporated herein by reference from the Registration Statement on Form S-4, Registration No. 333-83815 filed with the Securities and Exchange Commission (the SEC) by Coso Funding Corp. on October 7, 1999, as amended. ** Incorporated herein by reference from the Form 8-K on report dated October 18, 1999 for Coso Funding Corp., filed with the SEC. 32 EXHIBIT 27.1 Form S-X Commercial and Industrial Companies Financial Data Schedule Worksheet for: CAITHNESS COSO FUNDING CORP. ---------------------------- Review the following list of tags for Article 5 and fill in the correct data in the column(s) provided. Generally, only one column of information will be required, however, two columns are provided if required in the Financial Data Schedule. Unless otherwise noted, all tags are required. A response is required for each item within the schedule. Use the value "0" (zero) if information is immaterial, inapplicable or unknown. Decimals may not be used to state financial data except as indicated. Values not provided will be entered as "0" (zero). Missing dates will be entered as "TO COME". Please be sure to verify all information in the EDGARized exhibit. To include a footnote, place a number in parentheses next to the value and provide the text of each corresponding footnote at the end of the worksheet form. Do you wish to include a LEGEND? This schedule contains summary financial Yes X No information extracted from *_____________ --- --- and is equalified in its entirety by reference to such financial statements. *Identify the financial statement(s) to be referenced in the legend: RESTATED Are your financials being "restated" (NO VALUE REQUIRED) from a previously file period? Yes X No --- --- CIK Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT CIK: NAME Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT NAME: MULTIPLIER Do the financials require a multiplier X 1,000 1,000,000,000 --- ---- other than 1 (one)? X Yes No 1,000,000 1,000,000,000,000 --- --- --- ---- CURRENCY CURRENCY OF FINANCIAL DATA: Is the currency used other than US Dollars? Use in conjunction with EXCHANGE RATE tag. Yes X No --- --- PERIOD TYPE - MOS - MOS -- ---- -- ---- X YEAR X YEAR --- --- (for annual report filings) OTHER OTHER ---- ---- FISCAL YEAR END (example: DEC-31-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD START (example: JAN-01-1997) Jan - 01 - 2002 JAN - 01 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD END (example: SEP-30-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy EXCHANGE RATE EXCHANGE RATE: EXCHANGE RATE: Is the exchange rate other than 1 (one)? Value may contain up to 5 decimal places) Use in conjunction with CURRENCY tag. Yes X No --- ---
PERIOD TYPE Year PERIOD TYPE Year ---- ---- CASH 0 0 SECURITIES 0 0 RECEIVABLES 282,361 254,622 ALLOWANCES 0 0 INVENTORY 0 0 CURRENT ASSETDS 1,130 1,008 PP&E 0 0 DEPRECIATION 0 0 TOTAL ASSETS 282,361 254,622 CURRENT LIABILITIES 1,130 1,008 BONDS 281,231 253,614 PREFERRED MANDATORY 0 0 PREFERRED 0 0 COMMON 0 0 OTHER SE 0 0 TOTAL LIABILITY AND EQUITY 282,361 254,622 SALES 0 0 TOTAL REVENUES 26,931 24,828 CGS 0 0 TOTAL COSTS 0 0 OTHER EXPENSES 0 0 LOSS PROVISION 0 0 INTEREST EXPENSES 26,931 24,828 INCOME PRETAX 0 0 INCOME TAX 0 0 INCOME CONTINUING 0 0 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 0 NET INCOME 0 0 EPS BASIC 0 0 (Value may contain up to 3 decimal places) EPS DILUTED 0 0 (Value may contain up to 3 decimal places) Footnote Text: (Note: Each footnote cannot exceed 256 characters, including spaces)
EXHIBIT 27.2 Form S-X Commercial and Industrial Companies Financial Data Schedule Worksheet for: COSO FINANCE PARTNERS --------------------- Review the following list of tags for Article 5 and fill in the correct data in the column(s) provided. Generally, only one column of information will be required, however, two columns are provided if required in the Financial Data Schedule. Unless otherwise noted, all tags are required. A response is required for each item within the schedule. Use the value "0" (zero) if information is immaterial, inapplicable or unknown. Decimals may not be used to state financial data except as indicated. Values not provided will be entered as "0" (zero). Missing dates will be entered as "TO COME". Please be sure to verify all information in the EDGARized exhibit. To include a footnote, place a number in parentheses next to the value and provide the text of each corresponding footnote at the end of the worksheet form. Do you wish to include a LEGEND? This schedule contains summary financial Yes X No information extracted from *_____________ --- --- and is equalified in its entirety by reference to such financial statements. *Identify the financial statement(s) to be referenced in the legend: RESTATED Are your financials being "restated" (NO VALUE REQUIRED) from a previously file period? Yes X No --- --- CIK Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT CIK: NAME Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT NAME: MULTIPLIER Do the financials require a multiplier X 1,000 1,000,000,000 --- ---- other than 1 (one)? X Yes No 1,000,000 1,000,000,000,000 --- --- --- ---- CURRENCY CURRENCY OF FINANCIAL DATA: Is the currency used other than US Dollars? Use in conjunction with EXCHANGE RATE tag. Yes X No --- --- PERIOD TYPE - MOS - MOS -- ---- -- ---- X YEAR X YEAR --- --- (for annual report filings) OTHER OTHER ---- ---- FISCAL YEAR END (example: DEC-31-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD START (example: JAN-01-1997) Jan - 01 - 2002 JAN - 01 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD END (example: SEP-30-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy EXCHANGE RATE EXCHANGE RATE: EXCHANGE RATE: Is the exchange rate other than 1 (one)? Value may contain up to 5 decimal places) Use in conjunction with CURRENCY tag. Yes X No --- ---
PERIOD TYPE Year PERIOD TYPE Year ---- ---- CASH 4,215 1,429 SECURITIES 28,692 24,657 RECEIVABLES 8,621 8,427 ALLOWANCES 0 216 INVENTORY 0 0 CURRENT ASSETS 13,904 10,512 PP&E 234,442 242,616 DEPRECIATION 98,129 107,838 TOTAL ASSETS 195,072 184,800 CURRENT LIABILITIES 6,231 4,974 BONDS 110,955 97,547 PREFERRED MANDATORY 0 0 PREFERRED 0 0 COMMON 0 0 OTHER SE 0 0 TOTAL LIABILITY AND EQUITY 195,072 184,800 SALES 92,065 59,792 TOTAL REVENUES 93,639 61,416 CGS 0 0 TOTAL COSTS 0 0 OTHER EXPENSES 33,376 33,675 LOSS PROVISION 0 0 INTEREST EXPENSES 11,151 10,257 INCOME PRETAX 0 0 INCOME TAX 0 0 INCOME CONTINUING 0 0 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 1,780 NET INCOME 49,112 15,704 EPS BASIC 0 0 (Value may contain up to 3 decimal places) EPS DILUTED 0 0 (Value may contain up to 3 decimal places) Footnote Text: (Note: Each footnote cannot exceed 256 characters, including spaces)
EXHIBIT 27.3 Form S-X Commercial and Industrial Companies Financial Data Schedule Worksheet for: COSO ENERGY DEVELOPERS ---------------------- Review the following list of tags for Article 5 and fill in the correct data in the column(s) provided. Generally, only one column of information will be required, however, two columns are provided if required in the Financial Data Schedule. Unless otherwise noted, all tags are required. A response is required for each item within the schedule. Use the value "0" (zero) if information is immaterial, inapplicable or unknown. Decimals may not be used to state financial data except as indicated. Values not provided will be entered as "0" (zero). Missing dates will be entered as "TO COME". Please be sure to verify all information in the EDGARized exhibit. To include a footnote, place a number in parentheses next to the value and provide the text of each corresponding footnote at the end of the worksheet form. Do you wish to include a LEGEND? This schedule contains summary financial Yes X No information extracted from *_____________ --- --- and is equalified in its entirety by reference to such financial statements. *Identify the financial statement(s) to be referenced in the legend: RESTATED Are your financials being "restated" (NO VALUE REQUIRED) from a previously file period? Yes X No --- --- CIK Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT CIK: NAME Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT NAME: MULTIPLIER Do the financials require a multiplier X 1,000 1,000,000,000 --- ---- other than 1 (one)? X Yes No 1,000,000 1,000,000,000,000 --- --- --- ---- CURRENCY CURRENCY OF FINANCIAL DATA: Is the currency used other than US Dollars? Use in conjunction with EXCHANGE RATE tag. Yes X No --- --- PERIOD TYPE - MOS - MOS -- ---- -- ---- X YEAR X YEAR --- --- (for annual report filings) OTHER OTHER ---- ---- FISCAL YEAR END (example: DEC-31-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD START (example: JAN-01-1997) Jan - 01 - 2002 JAN - 01 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD END (example: SEP-30-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy EXCHANGE RATE EXCHANGE RATE: EXCHANGE RATE: Is the exchange rate other than 1 (one)? Value may contain up to 5 decimal places) Use in conjunction with CURRENCY tag. Yes X No --- ---
PERIOD TYPE Year PERIOD TYPE Year ---- ---- CASH 1,423 603 SECURITIES 6,646 10,155 RECEIVABLES 7,102 7,272 ALLOWANCES 0 0 INVENTORY 0 0 CURRENT ASSETS 9,895 8,969 PP&E 247,912 250,930 DEPRECIATION 112,059 120,411 TOTAL ASSETS 174,871 170,556 CURRENT LIABILITIES 27,961 29,396 BONDS 89,875 84,821 PREFERRED MANDATORY 0 0 PREFERRED 0 0 COMMON 0 0 OTHER SE 0 0 TOTAL LIABILITY AND EQUITY 174,871 170,556 SALES 81,252 46,869 TOTAL REVENUES 82,707 48,010 CGS 0 0 TOTAL COSTS 0 0 OTHER EXPENSES 28,526 24,820 LOSS PROVISION 0 0 INTEREST EXPENSES 8,822 8,385 INCOME PRETAX 0 0 INCOME TAX 0 0 INCOME CONTINUING 0 0 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 924 NET INCOME 43,359 13,881 EPS BASIC 0 0 (Value may contain up to 3 decimal places) EPS DILUTED 0 0 (Value may contain up to 3 decimal places) Footnote Text: (Note: Each footnote cannot exceed 256 characters, including spaces)
EXHIBIT 27.4 Form S-X Commercial and Industrial Companies Financial Data Schedule Worksheet for: COSO POWER DEVELOPERS --------------------- Review the following list of tags for Article 5 and fill in the correct data in the column(s) provided. Generally, only one column of information will be required, however, two columns are provided if required in the Financial Data Schedule. Unless otherwise noted, all tags are required. A response is required for each item within the schedule. Use the value "0" (zero) if information is immaterial, inapplicable or unknown. Decimals may not be used to state financial data except as indicated. Values not provided will be entered as "0" (zero). Missing dates will be entered as "TO COME". Please be sure to verify all information in the EDGARized exhibit. To include a footnote, place a number in parentheses next to the value and provide the text of each corresponding footnote at the end of the worksheet form. Do you wish to include a LEGEND? This schedule contains summary financial Yes X No information extracted from *_____________ --- --- and is equalified in its entirety by reference to such financial statements. *Identify the financial statement(s) to be referenced in the legend: RESTATED Are your financials being "restated" (NO VALUE REQUIRED) from a previously file period? Yes X No --- --- CIK Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT CIK: NAME Use this section only for coregistrant Does this data apply to a coregistrant filings. Yes X No --- --- COREGISTRANT NAME: MULTIPLIER Do the financials require a multiplier X 1,000 1,000,000,000 --- ---- other than 1 (one)? X Yes No 1,000,000 1,000,000,000,000 --- --- --- ---- CURRENCY CURRENCY OF FINANCIAL DATA: Is the currency used other than US Dollars? Use in conjunction with EXCHANGE RATE tag. Yes X No --- --- PERIOD TYPE - MOS - MOS -- ---- -- ---- X YEAR X YEAR --- --- (for annual report filings) OTHER OTHER ---- ---- FISCAL YEAR END (example: DEC-31-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD START (example: JAN-01-1997) Jan - 01 - 2002 JAN - 01 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy PERIOD END (example: SEP-30-1997) Dec - 31 - 2002 DEC - 31 - 2003 --------------- --------------- mmm - dd - yyyy mmm - dd - yyyy EXCHANGE RATE EXCHANGE RATE: EXCHANGE RATE: Is the exchange rate other than 1 (one)? Value may contain up to 5 decimal places) Use in conjunction with CURRENCY tag. Yes X No --- ---
PERIOD TYPE Year PERIOD TYPE Year ---- ---- CASH 824 78 SECURITIES 10,855 8,281 RECEIVABLES 13,136 14,479 ALLOWANCES 0 82 INVENTORY 0 0 CURRENT ASSETS 15,071 15,305 PP&E 210,548 216,782 DEPRECIATION 94,356 101,943 TOTAL ASSETS 168,834 162,001 CURRENT LIABILITIES 2,706 3,082 BONDS 80,401 71,246 PREFERRED MANDATORY 0 0 PREFERRED 0 0 COMMON 0 0 OTHER SE 0 0 TOTAL LIABILITY AND EQUITY 168,834 162,001 SALES 79,592 46,149 TOTAL REVENUES 80,486 46,575 CGS 0 0 TOTAL COSTS 0 0 OTHER EXPENSES 29,428 27,410 LOSS PROVISION 0 0 INTEREST EXPENSES 7,755 7,500 INCOME PRETAX 0 0 INCOME TAX 0 0 INCOME CONTINUING 0 0 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 1,777 NET INCOME 43,303 9,888 EPS BASIC 0 0 (Value may contain up to 3 decimal places) EPS DILUTED 0 0 (Value may contain up to 3 decimal places) Footnote Text: (Note: Each footnote cannot exceed 256 characters, including spaces)
Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Caithness Coso Funding Corp. (the Company) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James D. Bishop, Sr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: March 25, 2004 Caithness Coso Funding Corp. a Delaware Corporation By: /S/ JAMES D. BISHOP, SR. ------------------------ James D. Bishop, Sr. Director, Chairman & Chief Executive Officer CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, James D. Bishop, Sr., certify that: 1. I have reviewed this annual report on Form 10-K of Caithness Coso Funding Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2004 Caithness Coso Funding Corp. a Delaware Corporation By: /S/ JAMES D. BISHOP, SR. ------------------------ James D. Bishop, Sr. Director, Chairman & Chief Executive Officer Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Caithness Coso Funding Corp. (the Company) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher T. McCallion, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: March 25, 2004 Caithness Coso Funding Corp. a Delware Corporation By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial & Accounting Officer) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Christopher T. McCallion, certify that: 1. I have reviewed this annual report on Form 10-K of Caithness Coso Funding Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2004 Caithness Coso Funding Corp. a Delaware Corporation By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer Principal Financial & Accounting Officer SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAITHNESS COSO FUNDING CORP., a Delaware corporation By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 25, 2004 COSO FINANCE PARTNERS a California general partnership By: New CLOC Company, LLC, its Managing General Partner By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 25, 2004 COSO ENERGY DEVELOPERS a California general partnership By: New CHIP Company, LLC, its Managing General Partner By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 25, 2004 COSO POWER DEVELOPERS a California general partnership By: New CTC Company, LLC, its Managing General Partner By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 25, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /S/ JAMES D. BISHOP, SR. ------------------------ James D. Bishop, Sr. Director, Chairman and Chief Executive Officer (Principal Executive Officer Date: March 25, 2004 By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Director, Executive Vice President & Chief Financial Officer (Principal Accounting Officer) Date: March 25, 2004 By: /S/ LESLIE J. GELBER -------------------- Leslie J. Gelber Director, President and Chief Operating Officer Date: March 25, 2004 By: /S/ JAMES D. BISHOP, JR. ------------------------ James D. Bishop, Jr. Director, Vice Chairman Date: March 25, 2004 By: /S/ MARK A. FERRUCCI -------------------- Mark A. Ferrucci Director Date: March 25, 2004