10-Q 1 cegen3rd1102.txt 3RD QUARTER 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2002 Commission File No. 333-89521 CE Generation, LLC (Exact name of registrant as specified in its charter) Delaware 47-0818523 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 302 South 36th Street, Suite 400-2 Omaha, NE 68131 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (402) 341-4500 Securities registered pursuant to Section 12(b) of the Act: N/A Securities registered pursuant to Section 12(g) of the Act: N/A Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No _____ The members' equity accounts are held 50% by MidAmerican Energy Holdings Company and 50% by El Paso Merchant Energy North America Company as of November 14, 2002. TABLE OF CONTENTS Part I Financial Information.............................................1 Item 1. Financial Statements..........................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 10 Item 4. Controls and Procedures......................................17 Part II Other Information................................................18 Item 1. Legal Proceedings............................................18 Item 2. Changes in Securities and Use of Proceeds....................18 Item 3. Defaults on Senior Securities................................18 Item 4. Submission of Matters to a Vote of Security Holders..........18 Item 5. Other Information............................................18 Item 6. Exhibits and Reports on Form 8-K.............................18 Signatures.................................................................19 INDEPENDENT ACCOUNTANTS' REPORT Board of Managers CE Generation, LLC Omaha, Nebraska We have reviewed the accompanying consolidated balance sheet of CE Generation, LLC and subsidiaries (collectively, the "Company") as of September 30, 2002, and the related consolidated statements of operations and other comprehensive income for the three-month and nine-month periods ended September 30, 2002 and 2001 and of cash flows for the nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of CE Generation, LLC and subsidiaries as of December 31, 2001, and the related consolidated statements of operations and other comprehensive income, members' equity and cash flows for the year then ended (not presented herein); and in our report dated January 17, 2002 (March 1, 2002 as to Note 9A) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Omaha, Nebraska November 8, 2002 CE GENERATION, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands)

The accompanying notes are an integral part of these financial statements. CE GENERATION, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (Amounts in Thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. CE GENERATION, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. CE GENERATION, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General In the opinion of the management of CE Generation, LLC ("CE Generation" or the "Company") the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2002 and the results of operations for the three and the nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. The unaudited consolidated financial statements shall be read in conjunction with the consolidated financial statements included in the CE Generation annual report on Form 10-K for the year ended December 31, 2001. Certain prior year amounts have been reclassified in order to conform with current year classifications. 2. Accounting Policies Effective January 1, 2001, CE Generation changed its accounting policy for major maintenance, overhaul and well workover costs. These costs, had historically been accounted for using deferral and accrual methods, and are now expensed as incurred. The Company recorded a cumulative effect of this change of approximately $15.4 million, net of tax of approximately $9.9 million, in the nine months ended September 30, 2001. CE Generation adopted Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended effective January 1, 2001. As a result of the adoption of SFAS No. 133, CE Generation recorded the fair value of the liability associated with the interest rate swap agreements at January 1, 2001, which was approximately $6.0 million, net of tax of approximately $4.0 million. These interest rate swap agreements are considered cash flow hedges and therefore the offset is recorded in accumulated other comprehensive income. The adoption did not have an impact on net income or cash flows. On January 1, 2002, CE Generation adopted SFAS No. 142, Goodwill and Other Intangible Assets, which establishes the accounting for acquired goodwill and other intangible assets, and provides that goodwill and indefinite-lived intangible assets will not be amortized, but will be tested for impairment on an annual basis. CE Generation's related amortization consists solely of goodwill amortization, which has no income tax effect. Following is a reconciliation of net income as originally reported for the three and nine month periods ended September 30, 2002 and 2001, to adjusted net income (in thousands):

The following table summarizes the acquired intangible assets as of September 30, 2002 (in thousands):

Amortization expense on acquired intangible assets was $4.6 million and $13.7 million for the three and nine month periods ended September 30, 2002, respectively. CE Generation expects amortization expense on acquired intangible assets to be $4.6 million for the remainder of fiscal 2002, $18.1 million for 2003 and $14.9 million for each of the four succeeding fiscal years. In accordance with SFAS No. 142, CE Generation has determined its reporting units and completed the transitional impairment testing of goodwill in the second quarter primarily using a discounted cash flow methodology as of January 1, 2002. No impairment was indicated as a result of the transitional impairment test. CE Generation intends to complete its annual goodwill impairment test during the fourth quarter of 2002. In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for the Company's fiscal year beginning January 1, 2003. Management has not determined the impact this standard will have on the Company's consolidated financial statements. In October 2001, FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. There was no financial statement impact as a result of CE Generation's adoption of SFAS No. 144 on January 1, 2002. 3. Commitments and Contingencies A. Southern California Edison and the California Power Exchange Southern California Edison ("Edison"), a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison had failed to pay approximately $119 million owed under the power purchase agreements with the Imperial Valley Projects (excluding the Salton Sea V and Turbo Projects) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Imperial Valley Projects (excluding the Salton Sea V and Turbo Projects) had established an allowance for doubtful accounts of approximately $21 million as of December 31, 2001. The final payment by Edison for past due balances was received March 1, 2002. Following the receipt of Edison's payment of past due balances, the Imperial Valley Projects released the remaining allowance for doubtful accounts. As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at Salton Sea Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such, cash distributions are not available to CE Generation until the Salton Sea Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V and Turbo Projects have not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.8 million. The Imperial Valley Projects have established an allowance for doubtful accounts for the full amount of this receivable. The Project entities are vigorously pursuing collection. Edison has failed to pay approximately $3.9 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 the Imperial Valley Projects (excluding the Salton Sea I, Salton Sea V and Turbo Projects) filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay these contractual obligations, the Imperial Valley Projects have established an allowance for doubtful accounts of approximately $1.3 million. The Project entities are vigorously pursuing collection of the capacity bonus payments. B. Stone and Webster The Salton Sea V and Turbo Projects were constructed by Stone & Webster, Inc. (formerly Stone & Webster Engineering Corporation), a wholly-owned subsidiary of the Shaw Group ("Stone & Webster"), pursuant to date certain, fixed-price, turnkey engineering, procure, construct and manage contracts (collectively, the "Salton Sea V and Turbo Projects EPC Contracts"). On March 7, 2002, Salton Sea Power L.L.C., Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and CE Turbo LLC, the owners of the Salton Sea V and Turbo Projects, filed a Demand for Arbitration against Stone & Webster for breach of contract and breach of warranty arising from deficiencies in Stone & Webster's design, engineering, construction and procurement of equipment for the Salton Sea V and Turbo Projects pursuant to the Salton Sea V and Turbo Projects EPC Contracts. Each of the Salton Sea V Project and Turbo Project claims are currently proceeding in separate arbitrations. The arbitration relating to the Turbo Project is currently scheduled for December 2002, with a stated claim amount of approximately $6 million of actual damages and an as yet undetermined amount of consequential damages. The arbitration relating to the Salton Sea V Project is currently scheduled to commence in April 2003, with no current stated claim amount. C. Environmental Liabilities The Company is subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, and land use aesthetics. State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of the Company's existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing the Company's cost of waste disposal and (vi) reducing the reliability of service provided by the Company and the amount of energy available from the Company's facilities. Any of such items could have a substantial impact on amounts required to be expended by the Company in the future. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other social and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating sites, other companies' clean-up experience and data released by the Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new circumstances, and are included in the accompanying balance sheets at their undiscounted amounts. As of September 30, 2002 and December 31, 2001, the environmental liabilities recorded on the balance sheet were $2.3 million and $4.2 million, respectively. 4. Related Party Transactions Pursuant to the Administrative Services Agreement, MidAmerican Energy Holdings Company ("MEHC") provides certain administrative and management services to CE Generation, and MEHC's executive, financial, legal, tax and other corporate staff departments perform certain services for CE Generation. Expenses incurred by MEHC and allocated to CE Generation were estimated based on the individual services and expense items provided. Allocated expenses totaled approximately $.8 million for the three months and $2.7 million for the nine months ended September 30, 2001, and are included in plant operations expense. On August 1, 2002, the Administrative Services Agreement between MEHC and CE Generation was amended to provide for a fixed monthly fee in lieu of certain expenses, which were being allocated. The fixed fee, which is retroactive to January 1, 2002 and ends December 2004, is $258,333 per month. On September 29, 2000, Salton Sea Power L.L.C. ("Salton Sea Power") and CE Turbo LLC ("CE Turbo") entered into an agreement to sell all available power from the Salton Sea V Project and Turbo Project to El Paso Merchant Energy Company ("EPME"). Under the terms of the agreement, EPME purchased and sold available power on behalf of Salton Sea Power and CE Turbo, into the California ISO markets. The purchase price for the available power was equivalent to the value actually received by EPME for the sale of such power, including renewable premiums. On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction Agreement to sell available power from the Salton Sea V Project and Turbo Project to EPME. Under the terms of the agreement, at the option of Salton Sea Power and CE Turbo, EPME purchased all available power from the Salton Sea V Project and Turbo Project based on day ahead price quotes received from EPME. On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into Transaction Agreements to sell available power to EPME based on percentages of the Dow Jones SP-15 Index. On June 22, 2001, the Imperial Valley Projects (excluding the Salton Sea V Project and Turbo Project) ceased selling available power to EPME and resumed power sales to Edison under the Power Purchase Agreements ("PPAs"). Effective September 16, 2002 Salton Sea Power and CE Turbo entered into Transaction Agreements to sell available power to EPME at increased percentages of the Dow Jones SP-15 Index. Pursuant to these agreements, sales to EPME from the Company totaled $2.7 million and $3.5 million for the three months ended September 30, 2002 and 2001, respectively and $6.1 million and $29.9 million for the nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002 and December 31, 2001, accounts receivable from EPME were $.7 million and $.9 million, respectively. Effective August 1, 2002, Salton Sea Power and CE Turbo amended their respective power sale agreements with CalEnergy Minerals, LLC ("Minerals") to provide for a fixed price of $31.00 per megawatt hour for all hours of August 1, 2002 through December 31, 2002. Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled $.1 million and $.1 million for the three months ended September 30, 2002 and 2001, respectively and $.2 million and $.9 million for the nine months ended September 30, 2002 and 2001, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of significant factors, which have affected CE Generation, LLC's ("CE Generation" or the "Company") financial condition and results of operations during the periods included in the accompanying statements of operations. The Company's actual results in the future could differ significantly from the historical results. Forward-Looking Statements Certain information included in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of the Company to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Reform Act, the Company has identified important factors that could cause actual results to differ materially from such expectations, including development and construction uncertainty, operating uncertainty, acquisition uncertainty, uncertainties relating to geothermal resources, uncertainties relating to economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, industry deregulation and competition. Reference is made to all of the Company's SEC filings, incorporated herein by reference, for a description of such factors. The Company assumes no responsibility to update forward-looking information contained herein. Business The consolidated financial statements reflect the consolidated financial statements of CE Generation, and its wholly-owned subsidiaries, Magma Power Company ("Magma"), FSRI Holdings, Inc. ("FSRI") and Yuma Cogeneration Associates ("Yuma"). The following table sets out information concerning CE Generation Projects: PROJECT FUEL COMMERCIAL CAPACITY LOCATION OPERATION Vulcan Geothermal 1986 34 MW California Del Ranch Geothermal 1989 38 MW California Elmore Geothermal 1989 38 MW California Leathers Geothermal 1990 38 MW California CE Turbo Geothermal 2000 10 MW California Salton Sea I Geothermal 1987 10 MW California Salton Sea II Geothermal 1990 20 MW California Salton Sea III Geothermal 1989 49.8 MW California Salton Sea IV Geothermal 1996 39.6 MW California Salton Sea V Geothermal 2000 49 MW California Power Resources Gas 1988 200 MW Texas Yuma Gas 1994 50 MW Arizona Saranac Gas 1994 240 MW New York The Vulcan Project, Del Ranch Project, Elmore Project, Leathers Project and CE Turbo Project are referred to as the Partnership Projects. The Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea IV Project and Salton Sea V Project are referred to as the Salton Sea Projects. The Partnership Projects and the Salton Sea Projects are collectively referred to as the Imperial Valley Projects. The Power Resources Project, Yuma Project and Saranac Project are collectively referred to as the Gas Projects. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements in the Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, impairment of long-lived assets and contingent liabilities. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements. Allowance for Doubtful Accounts The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, estimates of the recoverability of amounts due could be adversely affected. Impairment of Long-Lived Assets The Company's long-lived assets consist primarily of property, plant and equipment and intangible assets with useful lives, that range from 3 to 40 years, and acquired goodwill. The Company believes the useful lives of its long-lived assets are reasonable. The Company evaluates goodwill impairment on an annual basis. The Company also evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Triggering events include a significant change in the extent or manner in which long-lived assets are being used or in its physical condition, in legal factors, or in the business climate that could affect the value of the long-lived assets, including changes in regulation. The interpretation of such events requires judgment from management as to whether such an event has occurred and is required. If an event occurs that could affect the carrying value of the asset and management does not identify it as a triggering event, future results of operations could be significantly affected. Upon the occurrence of a triggering event, the carrying amount of a long-lived asset is reviewed to assess whether the recoverable amount has declined below its carrying amount. The recoverable amount is the estimated net future cash flows that the Company expects to recover from the future use of the asset, undiscounted and without interest, plus the asset's residual value on disposal. Where the recoverable amount of the long-lived asset is less than the carrying value, an impairment loss would be recognized to write down the asset to its fair value, which is based on discounted estimated cash flows from the future use of the asset. The estimated cash flows arising from future use of the asset that are used in the impairment analysis requires judgment regarding what the Company would expect to recover from future use of the asset. Any changes in the estimates of cash flows arising from future use of the asset or the residual value of the asset on disposal based on changes in the market conditions, changes in the use of the assets, management's plans, the determination of the useful life of the assets and technology change in the industry could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss, which could significantly affect the results of operations. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which dictates the accounting for acquired goodwill and other intangible assets. SFAS No. 142 requires that amortization of goodwill and indefinite-lived intangible assets be discontinued. The Company has completed the initial impairment testing of goodwill as required by SFAS No. 142 and no impairment was indicated. The Company intends to complete its annual goodwill impairment test during the fourth quarter of 2002. Contingent Liabilities The Company is subject to the possibility of various loss contingencies, including tax, legal and environmental, arising in the ordinary course of business. The Company considers the likelihood of the loss or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted. Results of Operations Sales of electricity and steam increased to $141.3 million for the three months ended September 30, 2002 from $120.1 million for the same period in 2001, a 17.5% increase. Sales of electricity and steam decreased to $381.2 million for the nine months ended September 30, 2002 from $ 392.1 million for the same period in 2001, a 4% decrease. Sales of electricity and steam for the nine months ended September 30, 2002 included the impact of a $20 million reduction in the allowance for doubtful accounts. Sales of electricity and steam for the three and nine months ended September 30, 2001 included the impact of a $7.9 million and a $90 million increase in the allowance for doubtful accounts, respectively. Excluding the impact of the adjustments related to the allowance for doubtful accounts, sales of electricity and steam increased $13.3 million for the three months ended September 30, 2002 and decreased $120.8 million for the nine months ended September 30, 2002 compared to the same periods in 2001. The three and nine month fluctuations were primarily a result of changes in energy prices under the Imperial Valley Projects' and the Yuma Project's Power Purchase Agreements ("PPAs"). As a result of the settlement agreements, Edison has elected to pay the Imperial Valley Projects (except Salton Sea Projects IV and V and the Turbo Project) a fixed energy price in lieu of Edison's Average Avoided Cost of Energy. The fixed energy price was 3.25 cents per kilowatt-hour for the period January 1, 2002 through April 30, 2002 and increased to 5.37 cents per kilowatt-hour effective May 1, 2002 through April 30, 2007. Edison's Average Avoided Cost of Energy was 3.6 cents per kilowatt-hour for the three months and 8.9 cents per kilowatt-hour for the nine months ended September 30, 2001, respectively. The following operating data represents the aggregate capacity and electricity production of the Imperial Valley Projects:

The overall capacity factor for the Imperial Valley Projects increased for the three months ended September 30, 2002 compared to the same period in 2001 due to higher availability in the third quarter 2002. The overall capacity factor decreased for the nine months ended September 30, 2002 compared to the same period in 2001 due to more extensive overhauls in 2002. The 2002 overhauls include an uncontrollable force event at the Salton Sea II Project. Salton Sea II's 10 MW turbine went out of service on March 25, 2002 and is expected to be placed back into service in December 2002. The Company expects to collect lost revenues under the Salton Sea II PPA and through insurance coverage excluding deductibles. The following operating data represents the aggregate capacity and electricity production of the Gas Projects:

The overall capacity factor of the Gas Projects reflects the effect of contractual curtailments and maintenance scheduling. The capacity factors adjusted for the contractual curtailments during the three months ended September 30, 2002 and 2001 were 98.5% and 98.9%, respectively. The capacity factors adjusted for the contractual curtailments during the nine months ended September 30, 2002 and 2001 were 99.4% and 97.3%, respectively. Interest and other income decreased to $2.3 million during the three months ended September 30, 2002 from $3.6 million for the same period in 2001. Interest and other income decreased to $7.2 million during the nine month's ended September 30, 2002 from $10.6 million for the same period in 2001. The decreases were primarily due to interest earned on past due balances from Edison in 2001. Fuel expenses increased during the three months ended September 30, 2002 to $30.4 million from $28.7 million for the same period in 2001. The increase reflects increased production at the Gas Projects in 2002, partially offset by lower gas prices at the Yuma Project. Fuel expenses decreased to $89.7 million during the nine months ended September 30, 2002 from $95.1 million for the same period in 2001. The decrease was primarily due to higher gas prices in 2001, at the Yuma Project. Plant operating expenses decreased during the three months ended September 30, 2002 to $33.1 million from $34.2 million for the same period in 2001. For the nine month period ended September 30, 2002 operating expenses increased to $101.6 million from $100.9 million for the same period in 2001. These costs include operating, maintenance, resource, general and administrative and other plant operating expenses. The expenses fluctuate primarily due to maintenance schedules. Depreciation and amortization decreased to $20.0 million during the three months ended September 30, 2002 from $21.5 million for the same period in 2001. For the nine month period ended September 30, 2002 depreciation and amortization decreased to $62.4 million from $65.0 million in 2001. The decreases were due to the discontinuation of goodwill amortization, resulting from the adoption of SFAS No. 142, which totaled $2.4 million and $7.2 million for the three and nine months ended September 30, 2001, respectively. This decrease was partially offset by capital additions and miscellaneous equipment write-offs in 2002. Interest expense decreased during the three months ended September 30, 2002 to $19.0 million from $20.4 million for the same period in 2001. For the nine months ended September 30, 2002 interest decreased to $58.1 million from $61.6 million for the same period in 2001. The decreases resulted from the paydown of debt balances. The provision for income taxes increased to $11.0 million during the three months ended September 30, 2002 from $2.5 million for the same period in 2001. For the nine month period ended September 30, 2002, the provision for income tax decreased to $19.4 from $20.0 million for the same period in 2001. The effective rate was 31.4% and 29.2% for the nine months ended September 30, 2002 and 2001, respectively. The changes from year to year in the effective tax rate are due primarily to the generation of energy tax credits and depletion deductions and the discontinuance of non-deductible goodwill amortization in 2002. Minority interest decreased to $5.3 million during the three months ended September 30, 2002 from $5.5 million for the same period in 2001. For the nine month period ended September 30, 2002, minority interest increased to $15.0 million from $11.7 million for the same period in 2001. The increase was the result of higher fixed return payments to the minority interest partners in 2002 at the Saranac project. Effective January 1, 2001, the Company changed its accounting policy for major maintenance, overhaul and well workover costs. These costs, which had historically been accounted for using deferral and accrual methods, are now expensed as incurred. The cumulative effect of the change in accounting policy represents a January 1, 2001 write off of prepaid and accrued major maintenance and well workover balances of approximately $15.4 million, net of tax of approximately $9.9 million in the three months ended March 31, 2001. Net income increased to $24.8 million during the three months ended September 30, 2002 from $10.9 million for the same period in 2001. Net income increased to $42.4 million during the nine months ended from $33.1 million for the same period in 2002. Related Party Transactions Pursuant to the Administrative Services Agreement, MidAmerican Energy Holdings Company ("MEHC") provides certain administrative and management services to CE Generation, and MEHC's executive, financial, legal, tax and other corporate staff departments perform certain services for CE Generation. Expenses incurred by MEHC and allocated to CE Generation were estimated based on the individual services and expense items provided. Allocated expenses totaled approximately $.8 million for the three months and $2.7 million for the nine months ended September 30, 2001, and are included in plant operations expense. On August 1, 2002, the Administrative Services Agreement between MEHC and CE Generation was amended to provide for a fixed monthly fee in lieu of certain expenses, which were being allocated. The fixed fee, which is retroactive to January 1, 2002 and ends December 2004, is $258,333 per month. On September 29, 2000, Salton Sea Power L.L.C. ("Salton Sea Power") and CE Turbo LLC ("CE Turbo") entered into an agreement to sell all available power from the Salton Sea V Project and Turbo Project to El Paso Merchant Energy Company ("EPME"). Under the terms of the agreement, EPME purchased and sold available power on behalf of Salton Sea Power and CE Turbo, into the California ISO markets. The purchase price for the available power was equivalent to the value actually received by EPME for the sale of such power, including renewable premiums. On January 17, 2001, Salton Sea Power and CE Turbo entered into a Transaction Agreement to sell available power from the Salton Sea V Project and Turbo Project to EPME. Under the terms of the agreement, at the option of Salton Sea Power and CE Turbo, EPME purchased all available power from the Salton Sea V Project and Turbo Project based on day ahead price quotes received from EPME. On March 27, 2001 and May 1, 2001, the Imperial Valley Projects entered into Transaction Agreements to sell available power to EPME based on percentages of the Dow Jones SP-15 Index. On June 22, 2001, the Imperial Valley Projects (excluding the Salton Sea V Project and Turbo Project) ceased selling available power to EPME and resumed power sales to Edison under the PPAs. Effective September 16, 2002 Salton Sea Power and CE Turbo entered into Transaction Agreements to sell available power to EPME at increased percentages of the Dow Jones SP-15 Index. Pursuant to these agreements, sales to EPME from the Company totaled $2.7 million and $3.5 million for the three months ended September 30, 2002 and 2001, respectively and $6.1 million and $29.9 million for the nine months ended September 30, 2002 and 2001, respectively. As of September 30, 2002 and December 31, 2001, accounts receivable from EPME were $.7 million and $.9 million, respectively. Effective August 1, 2002, Salton Sea Power and CE Turbo amended their respective power sale agreements with CalEnergy Minerals, LLC ("Minerals") to provide for a fixed price of $31.00 per megawatt hour for all hours of August 1, 2002 through December 31, 2002. Pursuant to these agreements, sales to Minerals from Salton Sea Power totaled $.1 million and $.1 million for the three months ended September 30, 2002 and 2001, respectively and $.2 million and $.9 million for the nine months ended September 30, 2002 and 2001, respectively. Liquidity and Capital Resources Each of CE Generation's direct or indirect subsidiaries is organized as a legal entity separate and apart from CE Generation and its other subsidiaries and MEHC. Pursuant to separate project financing agreements, the assets of each subsidiary (excluding the Yuma Project) are pledged or encumbered to support or otherwise provide the security for their own project or subsidiary debt. It should not be assumed that any asset of any subsidiary of CE Generation, will be available to satisfy the obligations of CE Generation or any of its other subsidiaries; provided, however, that unrestricted cash or other assets which are available for distribution may, subject to applicable law and the terms of financing arrangements for such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to CE Generation or affiliates thereof. "Subsidiary" means all of CE Generation's direct or indirect subsidiaries (1) owning direct or indirect interests in the Imperial Valley Projects (including the Salton Sea Projects and the Partnership Projects other than Magma Power Company and Salton Sea Power Company), or (2) owning direct interests in the subsidiaries that own interests in the foregoing projects, the Saranac Project and the Power Resources Project. CE Generation generated cash flows from operations of $157.7 million for the nine months ended September 30, 2002 compared with $144.9 million for the same period in 2001. The increase was primarily due to the receipt of past due balances from Southern California Edison ("Edison"). Cash flow used in investing activities was $26.6 million for the nine months ended September 30, 2002 compared with cash used of $22.4 million for the same period in 2001. Capital expenditures are the primary components of investing activities. Cash flow used in financing activities was $100.9 million for the nine months ended September 30, 2002 compared with $41.6 million for the same period in 2001. The changes in cash flows from financing activities reflect the scheduled debt repayments, a $14.4 million distribution in 2002 and a $35.0 million deposit into the debt service reserve account in 2002. Edison, a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million owed under the power purchase agreements with the Imperial Valley Projects, (excluding the Salton Sea V and Turbo Projects) for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the Imperial Valley Projects (excluding the Salton Sea V and Turbo Projects) had established an allowance for doubtful accounts of approximately $21 million as of December 31, 2001. The final payment of the past due amounts by Edison was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the Imperial Valley Projects released the remaining allowance for doubtful accounts. As a result of uncertainties related to Edison, the letter of credit that supports the debt service reserve fund at Salton Sea Funding Corporation has not been extended beyond its current July 2004 expiration date, and as such, cash distributions are not available to CE Generation until the Salton Sea Funding Corporation debt service reserve fund of approximately $67.6 million has been funded or the letter of credit has been extended beyond its July 2004 expiration date or replaced. In January 2001, the California Power Exchange ("PX") declared bankruptcy. As a result, the Salton Sea V and Turbo Projects have not received payment for power sold under the Transaction Agreements during December 2000 and January 2001 of approximately $3.8 million. The Imperial Valley Projects have established an allowance for doubtful accounts for the full amount of this receivable. Edison has failed to pay approximately $3.9 million of capacity bonus payments for the months from October 2001 through May 2002. On December 10, 2001 the Imperial Valley Projects (excluding the Salton Sea I, Salton Sea V, and Turbo Projects) filed a lawsuit against Edison in California's Imperial County Superior Court seeking a court order requiring Edison to make the required capacity bonus payments under the Power Purchase Agreements. Due to Edison's failure to pay these contractual obligations, the Imperial Valley Projects have established an allowance for doubtful accounts of approximately $1.3 million. The Project entities are vigorously pursuing collection of the capacity bonus payments. Environmental Liabilities The Company is subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, and land use aesthetics. State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of the Company's existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing the Company's cost of waste disposal and (vi) reducing the reliability of service provided by the Company and the amount of energy available from the Company's facilities. Any of such items could have a substantial impact on amounts required to be expended by the Company in the future. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other social and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating sites, other companies' clean-up experience and data released by the Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new circumstances, and are included in the accompanying balance sheets at their undiscounted amounts. As of September 30, 2002 and December 31, 2001, the environmental liabilities recorded on the balance sheet were $2.3 million and $4.2 million, respectively. Inflation Inflation has not had a significant impact on CE Generation's cost structure. Quantitative and Qualitative Disclosure About Market Risk There have been no material changes in the market risk from the information provided in Item 7A Quantitative and Qualitative Disclosures About Market Risk of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Contractual Obligations and Commercial Commitments There have been no material changes in the contractual obligations and commercial commitments from the information provided in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001 other than scheduled debt repayments. ITEM 4. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer have established "disclosure controls and procedures" (as defined in Rule 13a-14 (C) and Rule 15d - 14(C) of the Securities and exchange Act of 1934) to ensure that material information of the companies and their subsidiaries is made known to them by others within the respective companies. Under their supervision, an evaluation of the disclosure controls and procedures was performed within 90 days prior to the filing of this quarterly report. Based on that evaluation, the above-mentioned officers have concluded that, as of the date of the evaluation, the disclosure controls and procedures were operating effectively. Additionally, the above-mentioned officers find that there have been no signification changes in internal controls, or in other factors that could significantly affect internal controls, subsequent to the date of that evaluation. Part II Other Information. Item I - Legal proceedings Neither CE Generation nor its subsidiaries are parties to any material legal matters except those described in Footnote 3 of CE Generation's financial statements. Item 2 - Changes in Securities Not applicable. Item 3 - Default on Senior Securities Not applicable. Item 4 - Submission of matters to a vote of Security Holders. Not applicable. Item 5 - Other information Not applicable. Item 6 - Exhibits and reports on Form 8-K (a) Exhibits: 3.2.1 Amended and Restated Limited Liability Company Operating Agreement of CE Generation, LLC 3.2.2 First Amendment to the Amended and Restated Limited Liability Company Operating Agreement (b) Reports on Form 8-K: Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Omaha, State of Nebraska, on this 14th day of November 2002. CE Generation, LLC /s/ Joseph M. Lillo -------------------------------------- By: Joseph M. Lillo Vice President and Controller SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS I, Edward J. Heinrich, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CE Generation, LLC; 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; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of 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: November 14, 2002 /s/ Edward J. Heinrich ---------------------- Edward J. Heinrich President (chief executive officer) SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS I, Joseph M. Lillo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CE Generation, LLC; 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; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of 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: November 14, 2002 /s/ Joseph M. Lillo ------------------- Joseph M. Lillo Vice President and Controller (chief financial officer)

CE GENERATION LLC 10-Q