Business Context and Reporting Period
This Form 6-K, filed by TransAlta Corporation on November 17, 2003, discloses the audited consolidated financial statements of its subsidiary, CE Generation, LLC, for the fiscal year ended December 31, 2002. CE Generation operates independent power generation facilities, primarily geothermal projects in California (Imperial Valley) and natural gas-fired cogeneration facilities in New York, Texas, and Arizona. The filing also notes a significant subsequent event: on January 29, 2003, TransAlta USA Inc. acquired a 50% interest in CE Generation from El Paso Merchant Energy North America Company.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric | Amount (in thousands) |
|---|---|
| Total Revenue | $510,082 |
| Net Income | $58,314 |
| Operating Cash Flow | $197,547 |
| Total Assets | $1,865,036 |
| Total Liabilities | $1,322,762 |
| Members' Equity | $489,895 |
| Long-Term Debt (Non-Current) | $964,597 |
| Cash and Cash Equivalents | $43,706 |
Note: Long-term debt excludes the current portion of long-term debt ($86,656) and project loans ($122,573) classified as current liabilities in the source text, though project loans are often long-term in nature. The table reflects the specific line items presented in the balance sheet.
Material Changes and Operational Highlights
- Accounting Policy Change: In 2002, the Company adopted SFAS No. 142, ceasing the amortization of goodwill and indefinite-lived intangible assets, replacing it with an annual impairment test. No impairment was indicated.
- Customer Concentration: Revenue is highly concentrated. Approximately 37% of electricity/steam revenue came from Imperial Valley Projects (95% sold to Southern California Edison), and another 37% from the Saranac Project (98% sold to NYSEG).
- Contract Expirations: The Power Resources Project power purchase agreement (PPA) with TXU expired in September 2003. The Company obtained exempt wholesale generator status to potentially continue operations.
- Dispute Resolution: A significant dispute with Southern California Edison regarding unpaid balances from 2000-2001 was settled, with final payment received in March 2002. However, a dispute remains regarding approximately $3.9 million in capacity bonus payments.
Outlook, Risks, and Contingencies
- Liquidity Constraints: Cash distributions to CE Generation from the Salton Sea Funding Corporation are restricted until a debt service reserve fund of approximately $67.6 million is fully funded or the supporting letter of credit is renewed. As of Dec 31, 2002, the fund held $46.3 million.
- Customer Credit Risk: The Company maintains an allowance for doubtful accounts of approximately $2.7 million related to Edison's failure to pay capacity bonuses and $3.8 million related to the bankruptcy of the California Power Exchange (PX).
- Regulatory Risk: Facilities rely on PURPA qualifying status. Proposed federal legislation could repeal or restructure PURPA, though existing contracts are expected to remain intact.
- Environmental Obligations: The Company recorded $5.3 million in environmental liabilities for remediation efforts. Future compliance costs could increase significantly.
- Subsequent Event: Following the January 2003 acquisition by TransAlta, power sales agreements were amended to sell available power to TransAlta based on market indices.
Investor Verification Checklist
- Debt Service Coverage: Verify the status of the $67.6 million debt service reserve fund for Salton Sea Funding Corporation and whether the letter of credit has been renewed to unlock cash distributions.
- Edison Dispute Status: Confirm the current status of the lawsuit regarding the $3.9 million in unpaid capacity bonus payments from Southern California Edison.
- Power Resources Project: Assess the operational and financial performance of the Power Resources Project post-September 2003, following the expiration of its primary PPA with TXU.
- Interest Rate Swaps: Review the fair value of interest rate swap agreements (noted at $21 million fair value) and their impact on future interest expense.
- Environmental Liabilities: Monitor updates on the $5.3 million recorded environmental liability and potential for increased remediation costs due to regulatory changes.