-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1y7ynxvyc+aZTjwX7vtQTRg4dxH2E0dd+JhLjBQ37pPqwhh6vjSCfGdL2Y9/gXh oz4OiXvzNopoF6jgYAyEuw== 0001088866-05-000010.txt : 20050812 0001088866-05-000010.hdr.sgml : 20050812 20050812132656 ACCESSION NUMBER: 0001088866-05-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050812 DATE AS OF CHANGE: 20050812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAITHNESS COSO FUNDING CORP CENTRAL INDEX KEY: 0001088866 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 943328762 STATE OF INCORPORATION: DE FISCAL YEAR END: 0923 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-83815 FILM NUMBER: 051020396 BUSINESS ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 565 FIFTH AVENUE, 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017-2478 BUSINESS PHONE: 2129219099 MAIL ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 565 FIFTH AVENUE, 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017-2478 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSO ENERGY DEVELOPERS CENTRAL INDEX KEY: 0001088869 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 943071296 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-83815-01 FILM NUMBER: 051020399 BUSINESS ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 BUSINESS PHONE: 2129219099 MAIL ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSO FINANCE PARTNERS CENTRAL INDEX KEY: 0001088870 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 580133679 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-83815-02 FILM NUMBER: 051020398 BUSINESS ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 BUSINESS PHONE: 2129219099 MAIL ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSO POWER DEVELOPERS CENTRAL INDEX KEY: 0001088873 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 943102796 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-83815-03 FILM NUMBER: 051020397 BUSINESS ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 BUSINESS PHONE: 2129219099 MAIL ADDRESS: STREET 1: C/O CAITHNESS ENERGY LLC STREET 2: 1114 AVENUE OF THE AMERICAS 41ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10036-7790 10-Q 1 june10q2005.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 ------------- 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 charters) of incorporation) Identification No.) 565 Fifth Avenue, 29th Floor, New York, New York 10017-2478 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (212) 921-9099 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report.) 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. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 300 shares in Caithness Coso Funding Corp. as of August 12, 2005 ---------------------------------------------------------------- CAITHNESS COSO FUNDING CORP. Form 10-Q For the Quarter Ended June 30, 2005 PART I. FINANCIAL INFORMATION Page No. ITEM 1. Financial Statements Caithness Coso Funding Corp. Unaudited balance sheets at June 30, 2005 and December 31, 2004 4 Unaudited statements of operations for the three-months ended June 30, 2005, the three-months ended June 30, 2004, the six-months ended June 30, 2005 and the six-months ended June 30, 2004 5 Unaudited condensed statements of cash flows for the six-months ended June 30, 2005 and the six-months ended June 30, 2004 6 Notes to the unaudited financial statements 7 Coso Finance Partners and Subsidiary Unaudited consolidated balance sheets at June 30, 2005 and December 31, 2004 8 Unaudited consolidated statements of operations for the three-months months ended June 30, 2005, the three-months ended June 30, 2004, the six-months ended June 30, 2005 and the six-months ended June 30, 2004 9 Unaudited consolidated condensed statements of cash flows for the six-months ended June 30, 2005 and the six-months ended June 30, 2004 10 Notes to the unaudited consolidated financial statements 11 Coso Energy Developers Unaudited balance sheets at June 30, 2005 and December 31, 2004 13 Unaudited statements of operations for the three-months ended months ended June 30, 2005, the three-months ended June 30, 2004, the six-months ended June 30, 2005 and the six-months ended June 30, 2004 14 Unaudited condensed statements of cash flows for the six-months ended June 30, 2005 and the six-months ended June 30, 2004 15 Notes to the unaudited financial statements 16 Coso Power Developers and Subsidiary Unaudited consolidated balance sheets at June 30, 2005 and December 31, 2004 18 Unaudited consolidated statements of operations for the three-months months ended June 30, 2005, the three-months ended June 30, 2004, the six-months ended June 30, 2005 and the six-months ended June 30, 2004 19 Unaudited consolidated condensed statements of cash flows for the six-months ended June 30, 2005 and the six-months ended June 30, 2004 20 Notes to the unaudited consolidated financial statements 21 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 29 2 ITEM 4. Controls and Procedures 29 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 30 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 ITEM 3. Defaults upon Senior Securities 30 ITEM 4. Submission of Matters to a Vote of Security Holders 30 ITEM 5. Other Information 30 ITEM 6. Exhibits 30 3
CAITHNESS COSO FUNDING CORP. UNAUDITED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2005 2004 Assets: Current Assets: Accrued interest receivable.................................................. $ 762 $ 883 Current portion of project loan from Coso Finance Partners................... 15,524 15,100 Current portion of project loan from Coso Energy Developers.................. 9,365 8,683 Current portion of project loan from Coso Power Developers................... 11,713 11,697 ------ ------ Total current assets 37,364 36,363 Project loan from Coso Finance Partners...................................... 65,286 71,750 Project loan from Coso Energy Developers..................................... 62,062 66,217 Project loan from Coso Power Developers...................................... 44,135 48,830 ------ ------ Total assets $ 208,847 $ 223,160 ======= ======= Liabilities and Stockholders' Equity: Current Liabilities: Senior secured notes: Accrued interest payable.................................................... $ 762 $ 883 Current portion on project loans............................................ 36,602 35,480 ------ ------ Total current liabilities 37,364 36,363 9.05% notes due December 15, 2009............................................ 171,483 186,797 Stockholders' equity......................................................... - - ------- ------- Total liabilities & stockholders' equity $ 208,847 $ 223,160 ======= ======= See accompanying notes to the unaudited financial statements 4
CAITHNESS COSO FUNDING CORP. UNAUDITED STATEMENTS OF OPERATIONS (Dollars in thousands) Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Interest income..................... $ 4,962 $ 5,689 $ 9,937 $ 11,364 Interest expense.................... (4,962) (5,689) (9,937) (11,364) ----- ----- ----- ------ Net income.................... $ - $ - $ - $ - ===== ===== ===== ====== See accompanying notes to the unaudited financial statements 5
CAITHNESS COSO FUNDING CORP. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Months Six-Months Ended Ended June 30, June 30, 2005 2004 Cash flows from investing activities - repayment of project loans........ $ 14,313 $ 12,646 Cash flows from financing activities - repayment of 9.05% notes.......... (14,313) (12,646) ------ ------ Net changes in cash...................................................... $ - $ - ====== ====== Supplemental cash flow disclosure: Cash paid for interest.............................................. $ 10,058 $ 11,476 ====== ====== See accompanying notes to the unaudited condensed financial statements 6
CAITHNESS COSO FUNDING CORP. NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Dollars in thousands) (1) Organization and Operations 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 "Coso Partnerships." The Coso Partnerships are California general Partnerships. On May 28, 1999, Funding Corp. sold $413,000 of Notes. The Notes have been refinanced (See Note 3 below). Pursuant to separate credit agreements between Funding Corp. and each Coso Partnership, the net proceeds from the offering of the Notes were loaned to the Coso Partnerships. Payment of the Notes is provided for by payments made by the Coso Partnerships under their respective project loans. 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 Coso Partnerships. (2) Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules. Management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto in the audited financial statements for the year ended December 31, 2004. The preparation of unaudited financial statements in accordance with accounting principles generally accepted in the United States of America requires Funding Corp. to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, income and expenses during the reporting period. Actual results could differ from these estimates. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. (3) Subsequent Events On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and the Coso Partnerships will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. 7
COSO FINANCE PARTNERS AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2005 2004 Assets: Current Assets: Cash......................................................................... $ 265 $ 791 Restricted cash and cash equivalents......................................... 13,329 13,298 Accounts receivable, (net of allowances of $216)............................. 9,221 7,502 Prepaid expenses & other assets.............................................. 93 702 Inventory.................................................................... 5,402 5,357 Amounts due from related parties............................................. 1,759 1,583 ------ ------ Total current assets 30,069 29,233 Restricted cash and investments................................................. 15,151 14,894 Property, plant & equipment, (net of accumulated depreciation of $124,790 and $119,157, respectively)...................................... 130,833 133,624 Power purchase contract, (net of accumulated amortization of $7,268 and $6,694, respectively).......................................... 7,076 7,650 Deferred financing costs, (net of accumulated amortization of $2,703 and $2,545, respectively).......................................... 1,420 1,578 ----- ----- Total assets $ 184,549 $ 186,979 ======= ======= Liabilities and Partners' Capital: Current Liabilities: Accounts payable and accrued liabilities..................................... 2,749 4,601 Amounts due to related parties............................................... 349 606 Current portion of project loan.............................................. 15,524 15,100 ------ ------ Total current liabilities 18,622 20,307 Other liabilities............................................................... 15,937 15,648 Deferred revenue................................................................ 1,012 -- Amounts due to related parties.................................................. 2,344 2,382 Project loan.................................................................... 65,286 71,750 ------ ------ Total liabilities 103,201 110,087 Partners' capital............................................................... 81,348 76,892 ------ ------ Total liabilities & partners' capital $ 184,549 $ 186,979 ======= ======= See accompanying notes to the unaudited consolidated financial statements 8
COSO FINANCE PARTNERS AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Revenue: Energy revenues................................... $ 11,389 $ 11,046 $ 23,139 $ 22,902 Capacity revenues................................. 3,567 3,537 4,822 4,792 ------ ------ ------ ------ Total revenue.............................. 14,956 14,583 27,961 27,694 Operating expenses: Plant operating expenses.......................... 2,473 2,886 4,575 5,621 Royalty expense................................... 2,345 2,801 4,279 5,027 Depreciation and amortization..................... 3,135 2,850 6,207 5,698 ----- ----- ------ ------ Total operating expenses................... 7,953 8,537 15,061 16,346 Operating income........................... 7,003 6,046 12,900 11,348 Other (income)/expenses: Interest and other income........................ (299) (120) (458) (211) Interest expense................................. 1,937 2,188 3,880 4,372 Noncash interest expense......................... 79 79 158 158 ----- ----- ----- ----- Total other expenses....................... 1,717 2,147 3,580 4,319 ----- ----- ----- ----- Net income................................ $ 5,286 $ 3,899 $ 9,320 $ 7,029 ===== ===== ===== ===== See accompanying notes to the unaudited consolidated financial statements 9
COSO FINANCE PARTNERS AND SUBSIDIARY UNAUDITED CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Months Six-Months Ended Ended June 30, June 30, 2005 2004 Net cash provided by (used in) operating activities...... $ 13,508 $ 10,835 Net cash provided by (used in) investing activities...... (3,130) (2,757) Net cash provided by (used in) financing activities...... (10,904) (7,931) ------ ----- Net change in cash....................................... $ (526) $ 147 ====== ===== Supplemental cash flow disclosure: Cash paid for interest.......................... $ 3,930 $ 4,414 ===== ===== See accompanying notes to the unaudited consolidated and condensed financial statements 10
COSO FINANCE PARTNERS AND SUBSIDIARY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (1) Organization and Operation Coso Finance Partners (CFP), a general partnership, is engaged in the operation of a 80 MW power generation facility located at the China Lake Naval Air Weapons Station, China Lake, California. CFP sells all electricity produced to Southern California Edison (Edison) under a 24-year power purchase contract expiring in 2011. (2) Basis of Presentation The accompanying unaudited consolidated and condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules. Management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto in the audited financial statements for the year ended December 31, 2004. The preparation of unaudited financial statements in accordance with accounting principles generally accepted in the United States of America requires CFP to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from these estimates. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. CFP has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in energy revenues, expenses and net income will continue. The data for the balance sheets presented herein for June 30, 2005 and December 31, 2004 were derived from CFP's financial statements for the interim period and fiscal year then ended and includes the effect of consolidating New CLPSI Company, LLC ("CLPSI") as a result of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), (FIN 46R) Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, but does not include all disclosures required by accounting principles generally accepted in the United States of America. (3) Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under a power purchase contract. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. (4) Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. (5) Asset Retirement Obligations In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the 11 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 consolidated 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. Under the land lease, CFP is required to remove all property, plant, and equipment to restore the land to its original state. As of June 30, 2005 and December 31, 2004, the accumulated liability associated with the restoration costs were $955 and $910, respectively, and are included in other liabilities. (6) Commitments and Contingencies CFP is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water Bond), which would be used in the event of noncompliance of the remediation obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the fair value of the Water Bond that is reported as a noncurrent restricted investment is $156. 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 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 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. No appeal of this order was taken and it is now final. 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. CFP is currently evaluating potential actions to redress this issue. CFP's Agreement set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, CFP will have a line loss factor of less than 1.0, effectively decreasing revenues if Edison's challenge to the CPUC ruling stands. CFP cannot predict whether any subsequent action on this matter will be successful. (7) Subsequent Events On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and CFP, Coso Energy Developers, and Coso Power Developers, collectively, the "Coso Partnerships" will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. 12
COSO ENERGY DEVELOPERS UNAUDITED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2005 2004 Assets: Current Assets: Cash......................................................................... $ 397 $ 496 Restricted cash and cash equivalents......................................... 10,122 10,850 Accounts receivable.......................................................... 8,544 6,636 Prepaid expenses and other assets............................................ 87 930 Amounts due from related parties............................................. 496 485 ------ ------ Total current assets 19,646 19,397 Restricted investments.......................................................... 221 221 Investment in Coso Transmission Line Partners................................... 2,374 2,430 Advances to New CLPSI Company, LLC.............................................. 433 459 Property, plant and equipment, (net of accumulated depreciation of $131,156 and $127,451, respectively)...................................... 121,633 123,903 Power purchase contract, (net of accumulated amortization of $6,758 and $6,222, respectively).......................................... 14,685 15,221 Deferred financing costs, (net of accumulated amortization of $1,884 and $1,757, respectively).......................................... 1,148 1,275 ------- ------- Total assets $ 160,140 $ 162,906 ======= ======= Liabilities and Partners' Capital: Current Liabilities: Accounts payable and accrued liabilities..................................... $ 1,797 $ 1,710 Amounts due to related parties............................................... 1,485 1,648 Current portion of project loan.............................................. 9,365 8,683 ------ ------ Total current liabilities 12,647 12,041 Other liabilities.......................................................... 1,327 1,263 Amounts due to related parties............................................. 26,685 26,449 Project loan............................................................... 62,062 66,217 ------- ------- Total liabilities 102,721 105,970 Partners' capital............................................................... 57,419 56,936 ------- ------- Total liabilities & partners' capital $ 160,140 $ 162,906 ======= ======= See accompanying notes to the unaudited financial statements 13
COSO ENERGY DEVELOPERS UNAUDITED STATEMENTS OF OPERATIONS (Dollars in thousands) Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Revenue: Energy revenues................................. $ 7,360 $ 7,550 $ 14,875 $ 15,422 Capacity revenues............................... 3,448 3,484 4,674 4,711 ----- ----- ------ ------ Total revenue............................ 10,808 11,034 19,549 20,133 Operating expenses: Plant operating expenses........................ 4,295 4,785 7,658 8,222 Royalty expense................................. 662 686 844 653 Depreciation and amortization................... 2,109 2,358 4,241 4,715 ----- ----- ------ ------ Total operating expenses................. 7,066 7,829 12,743 13,590 Operating income......................... 3,742 3,205 6,806 6,543 Other (income)/expenses: Interest and other income....................... (418) (230) (697) (541) Interest expense................................ 1,677 1,903 3,353 3,801 Noncash interest expense........................ 63 63 127 127 ----- ----- ----- ----- Total other expenses..................... 1,322 1,736 2,783 3,387 ----- ----- ----- ----- Net income.............................. $ 2,420 $ 1,469 $ 4,023 $ 3,156 ===== ===== ===== ===== See accompanying notes to the unaudited financial statements 14
COSO ENERGY DEVELOPERS UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Months Six-Months Ended Ended June 30, June 30, 2005 2004 Net cash provided by (used in) operating activities....... $ 7,565 $ 6,900 Net cash provided by (used in) investing activities....... (651) (390) Net cash provided by (used in) financing activities....... (7,013) (7,096) ----- ----- Net change in cash........................................ $ (99) $ (586) ===== ===== Supplemental cash flow disclosure: Cash paid for interest........................... $ 3,389 $ 3,838 ===== ===== See accompanying notes to the unaudited condensed financial statements 15
COSO ENERGY DEVELOPERS NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Dollars in thousands) (1) Organization and Operation Coso Energy Developers (CED), a general partnership, is engaged in the operation of a 80 MW power generation facility located at the Coso Hot Springs, China Lake, California. CED sells all electricity produced to Southern California Edison (Edison) under a 30-year power purchase contract expiring in 2019. (2) Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules. Management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto in the audited financial statements for the year ended December 31, 2004. The preparation of unaudited financial statements in accordance with accounting principles generally accepted in the United States of America requires CED to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from these estimates. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. CED has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in energy revenues, expenses and net income will continue. (3) Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under a power purchase contract. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. (4) Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. (5) Asset Retirement Obligations In June 2001, FASB issued Statement of Financial Accounting Standards (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 consolidated financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 16 2003, CED adopted SFAS No. 143 and estimated the restoration costs CED expects to incur when the land lease expires. Under the land lease, CED is required to remove all property, plant, and equipment to restore the land to its original state. As of June 30, 2005 and December 31, 2004, the accumulated liability associated with the restoration costs were $1,327 and $1,263, respectively, and are included in other liabilities. (6) Commitments and Contingencies CED is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water Bond), which would be used in the event of noncompliance of the remediation obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the fair value of the Water Bond that is reported as a noncurrent restricted investment is $142. 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 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. No appeal of this order was taken and it is now final. 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. CED is currently evaluating potential actions to redress this issue. CED's Agreement set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, CED 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. (7) Subsequent Events On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and CED, Coso Finance Partners and Coso Power Developers, collectively the "Coso Partnerships" will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. 17
COSO POWER DEVELOPERS AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2005 2004 Assets: Current Assets: Cash......................................................................... $ 525 $ 507 Restricted cash and cash equivalents......................................... 10,093 8,474 Accounts receivable, (net of allowances of $82).............................. 9,374 7,693 Prepaid expenses and other assets............................................ 90 634 Amounts due from related parties............................................. 6,522 6,421 ------ ------ Total current assets 26,604 23,729 Restricted investments....................................................... 135 135 Advances to New CLPSI Company, LLC........................................... 1,911 1,923 Property, plant and equipment, (net of accumulated depreciation of $114,509 and $111,198, respectively)................................... 110,385 113,696 Power purchase contract, (net of accumulated amortization of $17,698 and $16,301, respectively)..................................... 13,040 14,437 Deferred financing costs, (net of accumulated amortization of $3,199 and $3,090, respectively)....................................... 976 1,085 ------- ------- Total assets $ 153,051 $ 155,005 ======= ======= Liabilities and Partners' Capital: Current Liabilities: Accounts payable and accrued liabilities..................................... $ 1,844 $ 2,372 Amounts due to related parties............................................... 1,432 1,313 Current portion of project loan.............................................. 11,713 11,697 ------ ------ Total current liabilities 14,989 15,382 Other liabilities............................................................ 877 835 Project loan................................................................. 44,135 48,830 ------ ------ Total liabilities 60,001 65,047 Minority interest............................................................... 2,374 2,431 Partners' capital............................................................... 90,676 87,527 ------- ------- Total liabilities & partners' capital $ 153,051 $ 155,005 ======= ======= See accompanying notes to the unaudited consolidated financial statements 18
COSO POWER DEVELOPERS AND SUBSIDARY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Revenue: Energy revenues.................................... $ 7,236 $ 7,939 $ 15,386 $ 16,361 Capacity revenues.................................. 3,506 3,504 4,738 4,738 ------ ------ ------ ------ Total revenue............................... 10,742 11,443 20,124 21,099 Operating expenses: Plant operating expenses........................... 2,680 2,445 4,914 5,248 Royalty expense.................................... 1,670 1,962 3,160 3,606 Depreciation and amortization...................... 2,564 2,556 5,127 5,118 ----- ----- ------ ------ Total operating expenses.................... 6,914 6,963 13,201 13,972 Operating income............................ 3,828 4,480 6,923 7,127 Other (income)/expenses: Interest and other income.......................... (267) (140) (429) (268) Interest expense................................... 1,349 1,595 2,703 3,189 Noncash interest expense........................... 55 55 109 109 ----- ----- ----- ----- Total other expenses........................ 1,137 1,510 2,383 3,030 ----- ----- ----- ----- Net income................................. $ 2,691 $ 2,970 $ 4,540 $ 4,097 ===== ===== ===== ===== See accompanying notes to the unaudited consolidated financial statements 19
COSO POWER DEVELOPERS AND SUBSIDIARY UNAUDITED CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Months Six-Months Ended Ended June 30, June 30, 2005 2004 Net cash provided by (used in) operating activities........ $ 8,183 $ 8,449 Net cash provided by (used in) investing activities........ (2,038) (1,727) Net cash provided by (used in) financing activities........ (6,127) (6,607) ----- ----- Net change in cash......................................... $ 18 $ 115 ===== ===== Supplemental cash flows disclosure: Cash paid for interest............................ $ 2,739 $ 3,224 ===== ===== See accompanying notes to the unaudited consolidated and condensed financial statements 20
COSO POWER DEVELOPERS AND SUBSIDIARY NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (1) Organization and Operation Coso Power Developers (CPD), a general partnership, is engaged in the operation of a 80 MW power generation facility located at the Coso Hot Springs, China Lake, California. CPD sells all electricity produced to Southern California Edison (Edison) under a 20-year power purchase contract expiring in 2010. (2) Basis of Presentation The accompanying unaudited consolidated and condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules. Management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto in the audited financial statements for the year ended December 31, 2004. The preparation of unaudited financial statements in accordance with accounting principles generally accepted in the United States of America requires CPD to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from these estimates. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. CPD has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in energy revenues, expenses and net income will continue. The data for the balance sheets presented herein for June 30, 2005 and December 31, 2004 were derived from CPD's financial statements for the interim period and fiscal year then ended and includes the effect of consolidating Coso Transmission Line Partners ("CTLP") as a result of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), (FIN 46R) Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, but does not include all disclosures required by accounting principles generally accepted in the United States of America. (3) Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under a power purchase contract. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. (4) Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. 21 (5) Asset Retirement Obligation In June 2001, FASB issued Statement of Financial Accounting Standards (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 consolidated 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. Under the land lease CPD is required to remove all property, plant, and equipment to restore the land to its original state. As of June 30, 2005 and December 31, 2004, the accumulated liability associated with the restorations costs were $876 and $835, respectively, and are included in other liabilities. (6) Commitments and Contingencies CPD is required to obtain a "Financial Guarantee Bond for Closure Costs" (Water Bond), which would be used in the event of noncompliance of the remediation obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the fair value of the Water Bond that is reported as a noncurrent restricted investment is $135. 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 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. 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. CPD is currently evaluating potential actions to redress this issue. CPD's Agreement set the loss factor at 1.0 for energy sold between May 2002 through May 2007. After April 2007, CPD will have a line loss factor of less than 1.0, effectively decreasing revenues if Edison's challenge to the CPUC ruling stands. CPD cannot predict whether any subsequent action regarding this matter will be successful. (7) Subsequent Events On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and CPD, Coso Finance Partners and Coso Energy Developers, collectively the "Coso Partnerships", will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Except for financial information contained herein, the matters discussed in this quarterly 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 and Subsidiary (the Navy I Partnership), Coso Energy Developers (the BLM Partnership), and Coso Power Developers and Subsidiary (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 and (vii) the effects of competition. General Each Coso Partnership owns an 80MW geothermal power plant, and its respective transmission lines, wells, gathering systems and other related facilities. The Coso Partnerships are located near one another near Coso Junction, California. The Navy I Partnership owns Navy I and its related facilities. The BLM Partnership owns BLM and its related facilities. The Navy II Partnership owns Navy II and its related facilities. Each Coso partnership sells 100% of the electrical energy generated at its plant to Edison under a long-term Standard Offer No.4 power purchase agreement. 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. Each Coso partnership is entitled to the following payments under its power purchase agreement: * capacity payments for being able to produce electricity at certain levels. Capacity payments are fixed throughout the life of each power purchase agreement; * capacity bonus payments if the Coso partnership is able to produce electricity above a specified level. The maximum annual capacity bonus payment available is also fixed throughout the life of each power purchase agreement; and * energy payments which are based on the amount of electricity the Coso Partnership's plant actually produces. Edison is required to make energy payments to the Coso Partnerships based on its avoided cost of energy, which is its cost to generate electricity if it were to produce electricity itself or buy it from another power producer rather than buy it from the Coso Partnerships. Edison entered into an agreement (Agreement) with the Coso Partnerships on June 19, 2001 that addressed renewable energy pricing and issues concerning California's energy crisis. The Agreement, which was amended on November 30, 23 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 in lieu of the rate calculated based on the avoided cost of energy. Subsequent to the five year period that expires in April 2007, 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. The California Public Utilities Commission (CPUC) has initiated a hearing to re-evaluate the methodology of calculating the avoided cost of energy in the future. It is not possible to predict with accuracy the likely level of future avoided cost of energy prices. Factors which may impact the future avoided cost of energy prices include, among other things, the volatility of natural gas markets and regulatory issues. 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 (PURPA). Subsequently, the California Court of Appeals issued a decision on August 20, 2002 in response to the writs affirming the January 2001 CPUC decision, except for the 0.95 "floor", which it rejected as an abuse of discretion by the CPUC. 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. Their Agreements set the line loss factor at 1.0 for all energy sold between May 2002 through April 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. The Coso Partnerships cannot predict whether any subsequent action regarding this matter will be successful. In 1994, the Coso Partnerships implemented a steam-sharing program, under the Coso Geothermal Exchange Agreement. The purpose of the steam-sharing program is to enhance the management of the Coso geothermal resource and to optimize the resource's overall benefits to the Coso Partnerships by transferring steam among the Coso Partnerships. Under the steam sharing program, the partnership receiving the steam transfer splits revenue earned from electricity generated with the partnership that transferred the steam. The Coso Partnerships are required to make royalty payments to the U.S. Navy and the Bureau of Land Management. On November 1, 2004 the Navy I and Navy II Partnerships' entered into a new agreement ("New Contract") with the United States Navy terminating the existing contract that was due to expire on December 31, 2009. Under the terms of the New Contract, the royalty paid to the U.S. Navy was restructured so that the Navy I and Navy II Partnerships pay at a rate of 15% of gross revenues received up to an annual base revenue amount. Beyond the annual base revenue amount, the U.S. Navy and the Navy I and Navy II Partnerships will split the additional revenues, on a 50/50 basis, until the U.S. Navy receives a maximum of 20% of all gross revenue. Under the terminated contract with the U. S. Navy, the Navy I Partnership was obligated to pay royalties for Units 2 and 3 at 20% of gross revenue through 2009 and the Navy II Partnership was obligated to pay royalties at 18% of gross revenue through 2004, and then increase to 20% through 2009. Additionally, the Navy I Partnership was obligated to pay a royalty for Unit I consisting of the payment of the U.S. Navy's electric bill for the China Lake Weapons Facility, subject to an indexed reimbursement from the U.S. Navy. The reimbursement was based on a pricing formula for tariff rates charged by Edison. Additionally, under the terms of the terminated agreement, the Navy was compensated annually for any savings in electrical usage at the U.S. Navy's Facility below a baseline amount ("Conserved Power"). Upon termination of the Navy Contract, the Navy was paid $1.2 million for Conserved Power from January 1, 2004 through October 31, 2004. The terminated contract also obligated the Navy I Partnership to fund an escrow account so that the Navy I Partnership would pay the U.S. Navy $25 million on December 31, 2009. Accordingly, $111,000 was deposited monthly through October 31, 2004. That provision was also terminated and a new escrow arrangement was entered into and the amount the Navy I Partnership owes the U.S. Navy is now $18 million. That payment is secured by the existing funds on deposit so that funds plus accrued interest are expected to aggregate $18.0 million by December 31, 2009. Finally, in the terminated contracts the U.S. Navy had the right to terminate the contracts at any time for their convenience. Under the New Contract that right was eliminated. 24 The BLM Partnerships geothermal lease initially had a term of ten years ending in 1998 with automatic extensions until October 31, 2035, so long as geothermal steam is commercially produced. The royalty paid to the Bureau of Land Management is 10% of the net value of steam produced based on a calculation known as the netback, which is estimated and paid monthly with an annual true-up after year-end. The Coso Partnerships also pay other royalties at various rates which in the aggregate are not material. Funding Corp. is a special purpose corporation and is equally owned by each 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 Notes. On May 28, 1999, Funding Corp. issued $110.0 million of 6.80% Notes that were due in 2001 and paid off on December 15, 2001, and $303.0 million of 9.05% Notes due in 2009. The proceeds from the Notes were loaned to the Coso Partnerships and are payable to Funding Corp. from payments of principal and interest on the Notes. Funding Corp. does not conduct any other operations apart from serving as the issuer of the Notes. On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and the Coso Partnerships will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. Capacity Utilization For purposes of consistency in financial presentation, the plant capacity factor for each of the Coso Partnerships is based on a nominal capacity amount of 80MW (240MW in the aggregate). The Coso Partnerships have a gross operating capacity that allows for the production of electricity in excess of their nominal capacity amounts. Utilization of this operating margin is based upon a number of factors and can be expected to vary throughout the year under normal operating conditions. The following data includes the operating capacity factor, capacity and electricity production (in kWh) for each Coso Partnership on a stand-alone basis:
Three-Months Ended Six-Months Ended June 30 June 30 2005 2004 2005 2004 ---- ---- ---- ---- Navy I Partnership (stand alone) Operating capacity factor 96.4% 94.0% 98.9% 98.6% Capacity (MW) (average) 77.12 75.24 79.08 78.86 kWh produced (000s) 168,440 164,321 343,530 344,471 BLM Partnership (stand alone) Operating capacity factor 82.1% 85.7% 84.5% 87.0% Capacity (MW) (average) 65.65 68.57 67.59 69.63 kWh produced (000s) 143,386 149,749 293,610 304,159 25 Navy II Partnership (stand alone) Operating capacity factor 97.7% 102.8% 102.4% 105.6% Capacity (MW) (average) 78.16 82.21 81.90 84.51 kWh produced (000s) 170,700 179,549 355,780 369,129
Total energy production for the Navy I Partnership and the BLM Partnership remained consistent for the three-months ended June 30, 2005 as compared to the same period in 2004. Total energy production for the Navy II Partnership decreased for the three-months ended June 30, 2005, as compared to the same period in 2004, primarily due to lower steam production resulting from high gas content and bridging in two production wells. Modifications are currently being made to both wells and it is anticipated they will return to service before the end of the third quarter. Total energy production for the Coso Partnerships remained consistent for the six-months ended June 30, 2005 as compared to the same period in 2004. The overall effort continues to maximize production through well maintenance and capital improvements, including improvements to existing production wells and additional steam-field piping modifications. The Coso Partnerships continue to work on enhancing 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 and permitting phase. The funds necessary to implement the capital improvement program are expected to be available from reserves established under the Notes and from excess cash flow generated after debt service. Results of Operations for the Three and Six-months ended June 30, 2005 and 2004 The following discusses the results of operations of the Coso Partnerships for the three and six-months ended June 30, 2005 and 2004 (dollar amounts in tables are in thousands, except per kWh data): Revenue
Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 $ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh - --------- - --------- - --------- - --------- Total Operating Revenues including steam transfers Navy I Partnership 14,956 8.9 14,583 8.9 27,961 8.1 27,694 8.0 BLM Partnership 10,808 7.5 11,034 7.4 19,549 6.7 20,133 6.6 Navy II Partnership 10,742 6.3 11,443 6.4 20,124 5.7 21,099 5.7
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 Navy II Partnership decreased for the three-month period ended June 30, 2005 as compared to the same period in 2004, due to the lower steam production discussed above. Plant Operating Expense
Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 $ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh - --------- - --------- - --------- - --------- Navy I Partnership 2,473 1.5 2,886 1.8 4,575 1.3 5,621 1.6 BLM Partnership 4,295 3.0 4,785 3.2 7,658 2.6 8,222 2.7 Navy II Partnership 2,680 1.6 2,445 1.4 4,914 1.4 5,248 1.4
Plant operating expense consists of labor and related expenses, supplies and maintenance, property taxes, insurance, workovers and administrative expense. Plant operating expense for the Navy I and BLM Partnerships decreased for the three and six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to decreased well workover costs which are scheduled to occur later this year. Plant operating expense for the Navy II Partnership increased for the three-month period ended June 30, 2005, as compared to the 26 same period in 2004, primarily due to the acceleration of well workover costs in the current period. Plant operating expense for the Navy II Partnership decreased for the six-month period ended June 30, 2005 as compared to the same period in 2004 primarily due to lower well workover costs in the first quarter that started to occur in the second quarter. Royalty Expense
Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 $ Cents/kWh $ Cents/kWh $ Cents/kWh $ Cents/kWh - --------- - --------- - --------- - --------- Navy I Partnership 2,345 1.4 2,801 1.7 4,279 1.2 5,027 1.5 BLM Partnership 662 0.5 686 0.5 844 0.3 653 0.2 Navy II Partnership 1,670 1.0 1,962 1.1 3,160 0.9 3,606 1.0
Royalty expense for the Navy I and Navy II Partnerships decreased for the three and six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to the change in royalty structure under the terms of the New Contract with the U.S. Navy discussed above. Royalty expense for the BLM Partnership increased for the six-months ended June 30, 2005, as compared to the same period in 2004, due to a large favorable adjustment in 2004 resulting from the annual reconciliation performed in the first quarter under the netback royalty calculation. Depreciation and Amortization Depreciation and amortization expense for the Navy I Partnership increased by $285 and $509 for the three and six-months ended June 30, 2005 respectively, as compared to the same periods in 2004, due to an increase in capitalized assets associated with a new well placed in service in December of 2004. The effect of the Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003) (FIN 46R) resulted in an increase to depreciation and amortization expense for the Navy I Partnership for the three and six-months ended June 30, 2005 and June 30, 2004, of $60 and $122, respectively, for both periods. Depreciation and amortization expense for the BLM Partnership decreased by $249 and $474 for the three and six-months ended June 30, 2005 respectively, as compared to the same periods in 2004, due to the older wells and plant overhauls being fully depreciated during 2004. Depreciation and amortization expense for the Navy II Partnership remained relatively constant for the three and six-months ended June 30, 2005 respectively, as compared to the same periods in 2004. The effect of FIN 46R resulted in an increase to depreciation and amortization expense for the Navy II Partnership for the three and six-months ended June 30, 2005 and June 30, 2004, of $60 and $121, respectively, for both periods. Interest and Other Income Interest and other income for the Navy I, BLM and Navy II Partnerships increased by $179, $188 and $127, respectively for the three-months ended June 30, 2005 and $247, $156 and $161, respectively for the six-months ended June 30, 2005, as compared to the same periods in 2004, due to higher market rates for fixed income investments during those periods in 2005. The effect of FASB FIN 46R resulted in an increase to interest and other income for the Navy I Partnership for the three and six-months ended June 30, 2005 and June 30, 2004, of $40 and $81, respectively for both periods. The effect of FIN 46R on interest and other income for the Navy II Partnership for the three and six-months ended June 30, 2005 and June 30, 2004, was an increase of $28 and $56, respectively, for both periods. 27 Interest Expense Interest expense for the Navy I, BLM and Navy II Partnerships decreased by $251, $226 and $246, respectively, for the three-months ended June 30, 2005 and decreased by $492, $448 and $486, respectively for the six-months ended June 30, 2005, as compared to the same periods in 2004, due to the reduction in the principal amount of the project loan from Funding Corp. Liquidity and Capital Resources Each of the Coso Partnerships derive substantially all of their cash flow from Edison under their power purchase agreements and from interest income earned on funds on deposit. 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 loan. 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 Securities as discussed below. The Coso Partnerships expect to be able to meet these obligations from operating cash flow. Historically, any excess cash after debt service has 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 failure to pay its future obligations may have a material adverse effect on the Coso Partnerships' ability to make debt service payments to Funding Corp. as they come due under the Securities. On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and the Coso Partnerships will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. Net cash from operating activities for the Navy I Partnership increased by $2,673 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to increased net income partially offset by increased trade payables. Net cash used in investing activities for the Navy I Partnership increased by $373 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to increased capital expenditures partially offset by a decrease in restricted cash requirements associated with the Notes. Net cash used in financing activities for the Navy I Partnership increased by $2,973 for the six-months ended June 30, 2005, as compared to the same period in 2004, due to an increase in debt payments and partner distributions. Net cash from operating activities for the BLM Partnership increased by $665 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to increased net income. Net cash used in investing activities for the BLM Partnership increased by $261 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to increased capital expenditures partially offset by a decrease in restricted cash requirements associated with the Notes. Net cash from operating activities for the Navy II Partnership remained consistent for the six-months ended June 30, 2005, as compared to the same period in 2004. Net cash used in investing activities for the Navy II Partnership increased by $311 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to an increase in capital expenditures. Net cash used in financing activities for the Navy II Partnership decreased by $480 for the six-months ended June 30, 2005, as compared to the same period in 2004, primarily due to decreased partners distributions partially offset by increased debt payments. 28 Item 3. Quantitative and Qualitative Disclosure 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: o one or more of the Coso projects could perform below expected levels of output or efficiency which would reduce revenue; o in light of the uncertainty of the Western energy markets, Edison's financial viability may be considered uncertain and accounts receivable from Edison could be reduced or eliminated; o the Coso geothermal resource could be interrupted or unavailable; o operating costs could increase; o changes in the regulatory structure which govern the current operations of the Coso Partnerships. o future competition may lead to an accelerated depletion of the resource; o energy prices paid by Edison could decrease or terminate; o delivery of electrical energy to Edison could be disrupted; o environmental problems or regulation changes could arise which could lead to fines or a shutdown of one or more plants; o plant units and equipment have broken down or failed in the past and could break down or fail in the future; o the operators of the Coso projects could suffer labor disputes; o the government could change permit or governmental approval requirements restricting operations; o third parties could fail to perform their contractual obligations to the Coso Partnerships; and o 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 4. Controls and Procedures The Registrant's Chief Executive Officer and Chief Financial Officer (the Registrant's principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2005, that the design and operation of the Registrant's "disclosure controls and procedures" (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information 29 required to be disclosed by the Registrant in the reports filed or submitted by the Registrant under the Exchange Act is accumulated, recorded, processed, summarized and reported to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required. During the quarter ended June 30, 2005, there were no changes in the Registrant's "internal controls over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Registrant's internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings General The Coso Partnerships are currently parties to various items of litigation relating to day-to-day operations, none of which, if determined adversely, would be material to the financial condition and results of operations of the Coso Partnerships, either individually or taken as a whole. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits 31.1 Section 15d-14(a) Certification of Chief Executive Officer 31.2 Section 15.d-14(a)Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer 99.1 Supplemental Consolidated and Combined Financial Information for the Coso Partnerships and Subsidiaries 30 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, James D. Bishop, Sr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Caithness Coso Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power Developers and Subsidiary (collectively, the Registrant); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 and 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 quarterly report is being prepared; 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 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 quarterly 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: August 12, 2005 Caithness Coso Funding Corp. a Delaware Corporation By: /S/ JAMES D. BISHOP, SR. ------------------------ James D. Bishop, Sr. Director, Chairman & Chief Executive Officer 31 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher T. McCallion, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Caithness Coso Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power Developers and Subsidiary (collectively, the Registrant); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 and 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 quarterly report is being prepared; 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 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 quarterly 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: August 12, 2005 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 32 Exhibit 32.1 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 Quarterly Report of Caithness Coso Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power Developers and Subsidiary (collectively, the Registrant) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, James D. Bishop, Sr., Chief Executive Officer of the Registrant, certify, to the best of my knowledge and belief, 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 Registrant. Date: August 12, 2005 Caithness Coso Funding Corp. a Delaware Corporation By: /S/ JAMES D. BISHOP, SR. ------------------------ James D. Bishop, Sr. Director, Chairman & Chief Executive Officer 33 Exhibit 32.2 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 Quarterly Report of Caithness Coso Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers, and Coso Power Developers and Subsidiary (collectively, the Registrant) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Christopher T. McCallion, Chief Financial Officer of the Registrant, certify, to the best of my knowledge and belief, 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 Registrant. Date: August 12, 2005 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 34 Exhibit 99.1 Supplemental Consolidated and Combined Financial Information for the Coso Partnerships and Subsidiaries The following information presents unaudited consolidated and combined financial statements of the Coso Partnerships and Subsidiaries. These financial statements represent a consolidation and combination of the financial statements of Caithness Coso Funding Corp., Coso Finance Partners, Coso Energy Developers, Coso Power Developers, New CLPSI Company, LLC and Coso Transmission Line Partners for the periods indicated. This supplemental financial information is not required by accounting principles generally accepted in the United States of America and has been provided to facilitate a more comprehensive understanding of the financial position, operating results and cash flows of the Coso Partnerships and Subsidiaries as a whole, which jointly and severally guarantee the repayment of the Notes. The unaudited consolidated and combined financial statements should be read in conjunction with each individual Coso Partnership's and Subsidiaries financial statements and their accompanying notes. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. 35
COSO PARTNERSHIPS UNAUDITED CONSOLIDATED AND COMBINED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2005 2004 Assets: Current Assets: Cash......................................................................... $ 1,187 $ 1,794 Restricted cash and cash equivalents......................................... 33,544 32,622 Accounts receivable, (net of allowances of $298)............................. 27,139 21,831 Prepaid expenses and other assets............................................ 270 2,266 Inventory.................................................................... 5,402 5,357 Amounts due from related parties............................................. 6,954 6,787 ------ ------ Total current assets 74,496 70,657 Restricted cash and investments.............................................. 15,507 15,250 Property, plant and equipment, (net of accumulated depreciation of $370,455 and $357,806, respectively)................................... 362,851 371,223 Power purchase contract, (net of accumulated amortization of $31,724 and $29,217, respectively)..................................... 34,801 37,308 Deferred financing costs, (net of accumulated amortization of $7,786 and $7,392, respectively)....................................... 3,544 3,938 ------- ------- Total assets $ 491,199 $ 498,376 ======= ======= Liabilities and Partners' Capital: Current Liabilities: Accounts payable and accrued liabilities..................................... $ 6,390 $ 8,684 Amounts due to related parties.............................................. 1,443 1,865 Current portion of project loans............................................. 36,602 35,480 ------ ------ Total current liabilities 44,435 46,029 Other liabilities............................................................ 18,141 17,746 Deferred revenue............................................................. 1,012 -- Amounts due to related parties............................................... 26,685 26,449 Project loans................................................................ 171,483 186,797 ------- ------- Total liabilities 261,756 277,021 Partners' capital............................................................... 229,443 221,355 ------- ------- Total liabilities & partners' capital $ 491,199 $ 498,376 ======= ======= See accompanying notes to the unaudited consolidated and combined financial statements. 36
COSO PARTNERSHIPS UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands) Three-Months Three-Months Six-Months Six-Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Revenue: Energy revenues...................................... $ 25,985 $ 26,535 $ 53,400 $ 54,685 Capacity revenues.................................... 10,521 10,525 14,234 14,241 ------ ------ ------ ------ Total revenue................................. 36,506 37,060 67,634 68,926 Operating expenses: Plant operating expenses............................. 9,380 10,032 17,010 18,943 Royalty expense...................................... 4,677 5,449 8,283 9,286 Depreciation and amortization........................ 7,808 7,764 15,575 15,531 ------ ------ ------ ------ Total operating expenses...................... 21,865 23,245 40,868 43,760 Operating income ............................. 14,641 13,815 26,766 25,166 Other (income)/expenses: Interest and other income............................ (916) (406) (1,447) (872) Interest expense..................................... 4,963 5,686 9,936 11,362 Noncash interest expense............................. 197 197 394 394 ----- ----- ----- ------ Total other expenses.......................... 4,244 5,477 8,883 10,884 ----- ----- ----- ------ Net income.................................... $ 10,397 $ 8,338 $ 17,883 $ 14,282 ====== ===== ====== ====== See accompanying notes to the unaudited consolidated and combined financial statements. 37
COSO PARTNERSHIPS UNAUDITED CONSOLIDATED COMBINED AND CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Months Six-Months Ended Ended June 30, June 30, 2005 2004 Net cash provided by (used in) operating activities...... $ 29,256 $ 26,184 Net cash provided by (used in) investing activities...... (5,819) (4,874) Net cash provided by (used in) financing activities...... (24,044) (21,634) ------ ------ Net change in cash....................................... $ (607) $ (324) ====== ====== Supplemental cash flow disclosure: Cash paid for interest.......................... $ 10,058 $ 11,476 ====== ====== See accompanying notes to the unaudited consolidated, combined and condensed financial statements. 38
COSO PARTNERSHIPS NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Dollars in thousands) (1) Basis of Presentation The accompanying unaudited consolidated and combined financial statements were derived from the stand alone unaudited financial statements of Caithness Coso Funding Corp., Coso Finance Partners and Subsidiary, Coso Energy Developers and Coso Power Developers and Subsidiary ("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 consolidated and combined financial statements should be read in conjunction with each individual Partnership's unaudited financial statements. The preparation of unaudited financial statements in accordance with accounting principles generally accepted in the United States of America requires the Coso Partnerships to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from these estimates. The financial information herein presented reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for interim periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the full year. The Coso Partnerships have experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in energy revenues, expenses and net income will continue. The data for the consolidated and combined balance sheets presented herein for June 30, 2005 and December 31, 2004 were derived from the Coso Partnership's financial statements for the interim period and fiscal year then ended and includes the effect of consolidating New CLPSI Company, LLC ("CLPSI") and Coso Transmission Line Partners ("CTLP") as a result of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), (FIN 46R) Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, but does not include all disclosures required by accounting principles generally accepted in the United States of America. (2) Accounts Receivable and Revenue Recognition Accounts receivable primarily consist of receivables from Edison for electricity delivered and sold under a power purchase contract. Operating revenues are recognized as income during the period in which electricity is delivered to Edison. (3) Reclassifications Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year. (4) Asset Retirement Obligations In June 2001, FASB issued Statement of Financial Accounting Standards (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 consolidated financial statements issued for fiscal years beginning after June 15, 2002. On January 1, 39 2003, the Coso Partnerships adopted SFAS No. 143 and estimated the restoration costs the Coso Partnerships expect to incur when the land lease expires. Under the land lease, the Coso Partnerships are required to remove all property, plant, and equipment to restore the land to its original state. As of June 30, 2005 and December 31, 2004, the accumulated liability associated with the restoration costs were $3,158 and $3,008, respectively, and are included in other liabilities. (5) Commitments and Contingencies The Coso Partnerships are required to obtain a "Financial Guarantee Bond for Closure Costs" (Water Bonds), which would be used in the event of noncompliance of the remediation obligation for waste discharge. As of June 30, 2005 and December 31, 2004, the fair value of the Water Bonds that are reported as a noncurrent restricted investments are $433. 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 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. 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. The Coso Partnerships cannot predict whether any subsequent action regarding this matter will be successful. (6) Subsequent Events On August 5, 2005, Funding Corp. issued $375 million of senior secured bonds due June 15, 2019 and $90 million of subordinated secured notes due June 15, 2014 (collectively, the "Securities"). The proceeds of the Securities were put into an escrow account for the benefit of the holders of the Notes, and on approximately September 6, 2005, the proceeds of the escrow account will be released to the holders of the Notes to repay the Notes in full. Effective August 5, 2005, under the terms of the Indenture under which the Notes are outstanding, the covenants of Funding Corp. and the Coso Partnerships will be defeased, and the related security agreements and pledge agreements of Funding Corp. and the Coso Partnerships pertaining to the Notes will be deemed to be satisfied in full and will no longer be enforceable against Funding Corp. or the Coso Partnerships. 40 SIGNATURES Pursuant to the requirements 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 Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) COSO FINANCE PARTNERS AND SUBSIDIARY a California general partnership By: New CLOC Company, LLC, its Managing General Partner Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) COSO ENERGY DEVELOPERS a California general partnership By: New CHIP Company, LLC, its Managing General Partner Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) COSO POWER DEVELOPERS AND SUBSIDIARY a California general partnership By: New CTC Company, LLC, its Managing General Partner Date: August 12, 2005 By: /S/ CHRISTOPHER T. MCCALLION ---------------------------- Christopher T. McCallion Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----