10-Q 1 h88763e10-q.txt CEDAR BRAKES I, L.L.C. - 6/30/01 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2001 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 333-50828 CEDAR BRAKES I, L.L.C. (Exact Name of Registrant as Specified in its Charter) DELAWARE 76-0613738 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) EL PASO BUILDING 1001 LOUISIANA STREET HOUSTON, TEXAS 77002 (Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 420-2600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Member interests, par value $100 per share. Shares outstanding on August 13, 2001: 10 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CEDAR BRAKES I, L.L.C. STATEMENTS OF INCOME (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 1 3 CEDAR BRAKES I, L.L.C. BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 2 4 CEDAR BRAKES I, L.L.C. STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 3 5 CEDAR BRAKES I, L.L.C. NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We are a single member Delaware limited liability company organized in March 2000, pursuant to the terms of a limited liability company agreement. We are owned indirectly by Chaparral Investors, L.L.C., who is owned by the Limestone Electron Trust and a subsidiary of El Paso Corporation. We began operations on September 27, 2000, when we acquired a long-term power purchase agreement to sell electric energy and provide electric capacity to Public Service Electric & Gas Company. Our December 31, 2000, audited financial statements, as presented in our registration statement on Form S-4, include a summary of our significant accounting policies and other disclosures. You should read those financial statements in conjunction with this Quarterly Report on Form 10-Q. The financial statements at June 30, 2001, and for the quarter and six months ended June 30, 2001, are unaudited. The balance sheet at December 31, 2000, is derived from our audited financial statements. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all disclosures required by accounting principles generally accepted in the United States. In our opinion, we have made all adjustments, all of which are of a normal, recurring nature, to fairly present our interim period results. Information for interim periods may not necessarily indicate the results of operations for the entire year due to the seasonal nature of our business. Our accounting policies are consistent with those discussed in our Form S-4, except as discussed below. Intangible Assets and Derivative Instruments As of December 31, 2000, our intangible assets represented the unamortized acquisition cost of a power purchase agreement with Public Service Electric. Upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001, we adjusted this power purchase agreement to its fair value since it met the definition of a derivative. The difference between the fair value and the unamortized cost on January 1, 2001, was recorded as a cumulative effect of an accounting change in our income statement. We record all derivative instruments on our balance sheet at their fair value. Our derivative instruments consist of our power purchase agreement and power services agreement. Changes in the fair value of these agreements are reported in current period earnings. We estimate the fair value of these agreements based upon the expected cash receipts and payments derived from these agreements compared to our estimate of future power prices. Our estimates of the timing of cash receipts and payments are based on the estimated timing of power delivered under our power purchase and power services agreements. These estimates also consider the minimum and maximum delivery requirements under those agreements. Estimates of the future prices of power are based upon the forward pricing curve of the appropriate power delivery and receipt points, and this curve is derived from actual prices observed in the market, price quotes from brokers and extrapolating models. See Note 4 for additional information on the power purchase and power services agreements. 2. LIMITED LIABILITY COMPANY As a limited liability company, our members are not personally obligated for our debt, obligations, or other liabilities simply because they are our members. 4 6 3. ACCOUNTING FOR DERIVATIVE ACTIVITIES On January 1, 2001, we adopted SFAS No. 133, and recorded a cumulative effect of accounting change of approximately $89.4 million. The fair value of the power agreements reflected on our balance sheet is as follows:

4. POWER AGREEMENTS Power Purchase Agreement We have a power purchase agreement with Public Service Electric that extends through August 2013. Under this agreement, we are required to sell and deliver energy to Public Service Electric at fixed prices and at specified delivery points. The prices under the agreement are specified on an annual basis, and escalate each year over the contract term. For 2001, the price is $72.17 per megawatt hour, increasing annually to $92.43 per megawatt hour in 2013. The amount of energy delivered under this agreement is subject to an annual minimum and maximum requirement. We must deliver a minimum of 394,000 megawatt hours annually, with 40,000 megawatt hours required in each of the months of June through September. The remainder of the minimum requirements must be met during the other months in the year. During any one year, total deliveries cannot exceed the specified maximum amounts, which range from 788,954 megawatt hours to 855,779 megawatt hours over the life of the contract. If we fail to deliver all or part of the scheduled energy or fail to schedule sufficient deliveries to meet the minimum energy delivery requirements for reasons within our control, Public Service Electric's payment to us will be reduced by a credit. Generally the credit would equal the excess price paid, if any, for energy purchased by Public Service Electric over the prices stated in our power purchase agreement. In addition to energy deliveries, we are required to provide 123 megawatts per day of capacity to Public Service Electric. If we fail to provide all or part of this capacity for reasons within our control, we are required to pay Public Service Electric an amount equal to its cost to acquire this capacity from third parties. Power Services Agreement In order to meet our energy delivery commitments under the power purchase agreement, we entered into a power services agreement with El Paso Merchant Energy, L.P., an affiliate of El Paso. The power services agreement has the same term as the power purchase agreement. Under this agreement, we purchase energy at a fixed price and at quantities sufficient to meet our obligations to Public Service Electric under the power purchase agreement. The fixed prices under the power services agreement escalate each year, and range from $29.71 per megawatt hour in 2001 to $33.75 per megawatt hour in 2013. If El Paso Merchant Energy fails to deliver all or part of the scheduled energy to us for any reason within their control, our payment to them will be reduced by a credit calculated in the same manner as the credit to Public Service Electric described in the power purchase agreement. The power services agreement also provides that El Paso Merchant Energy deliver sufficient amounts of capacity to meet our capacity requirements under the power purchase agreement. If El Paso Merchant Energy fails to provide all or part of the capacity, for any reason within their control, our payment to them will be reduced by a credit calculated in the same manner as our payment to Public Service Electric if we fail to provide capacity under the power purchase agreement. Because our power purchase and power services agreements are similar in terms of quantities of energy bought and sold, and since prices under these agreements are fixed, the execution of these agreements results 5 7 in our ability to earn a fixed margin. Assuming that minimum energy delivery requirements are met and all capacity requirements are made available, this margin will range from $42.46 to $59.99 per megawatt hour sold over the life of the agreements. 5. RELATED PARTY TRANSACTIONS Administrative Services Agreement We have an administrative services agreement with El Paso Merchant Energy to provide project management, finance and accounting services to us for a fee of $100,000 per year through 2013. In addition to the base fee, we are obligated to reimburse El Paso Merchant Energy for direct expenses other than project management, finance and accounting services that may be incurred on our behalf. Fees and expenses under this agreement are due and payable only to the extent that we have sufficient cash after paying obligations under our bond indenture. Affiliated Accounts Payable Affiliated accounts payable primarily represents the liability for energy purchased by us from El Paso Merchant Energy as well as administrative services fees due to El Paso Merchant Energy. See Note 4 for additional discussion on commitments with related parties. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS As of June 30, 2001 and December 31, 2000, the carrying amounts of our financial instruments including cash, cash equivalents, and trade receivables and payables are representative of fair value because of their short-term maturity. The fair value of our long-term debt was $329.6 million as of June 30, 2001, and $310.6 million as of December 31, 2000. The fair value of our long-term debt has been estimated based on quoted market prices for the same or similar issues. Our power purchase and power services agreements meet the definition of derivatives under the provisions of SFAS No. 133, and are recorded at their fair value. The fair value of these agreements at June 30, 2001, was estimated based on the forward pricing curve of the appropriate delivery or receipt point for power bought and sold under these agreements. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in Item 2 updates, and you should read it in conjunction with information disclosed in our registration statement on Form S-4 (Registration No. 333-50828) dated May 2, 2001, in addition to the financial statements and notes presented in Item 1 of this Quarterly Report on Form 10-Q. GENERAL Our company has no employees, and we rely upon El Paso Merchant Energy to perform our responsibilities under our material agreements. Our material assets are comprised of the power purchase agreement, receivables that are generated by, or accrue under that agreement, the proceeds of such receivables, our interest in amounts held in accounts described in this report and our material agreements. We have no material obligations other than those under our bonds, our bond indenture, and our power services and administrative services agreements. RESULTS OF OPERATIONS We were formed in March 2000, but did not begin operations until September 27, 2000, when we acquired the power purchase agreement from Newark Bay Cogeneration Partnership L.P. As a result, our discussion of financial condition and results of operations only encompasses those periods in which we had operations. For the quarter ended June 30, 2001, our net income was $2.5 million. During the quarter, we generated revenues of $15.6 million from sales of electricity and capacity to Public Service Electric. Operating expenses totaled $6.8 million, including $6.4 million in expenses related to power purchased from El Paso Merchant Energy and $0.4 million of non-cash losses as a result of changes in the fair values of our power purchase and power services agreements, both of which are reflected in our June 30, 2001 financial statements at their fair value. Our operating expenses also include fees to El Paso Merchant Energy under our administrative services agreement. The annual fee to El Paso Merchant Energy under this agreement is $0.1 million. These fees accrue annually, but are only payable to the extent that there are amounts on deposit in the collections account after payment of all current and past due amounts having a payment priority ranking above these fees. Interest and debt expense for the quarter ended June 30, 2001, was $6.5 million. For the six months ended June 30, 2001, we had net income of $84.6 million, including income of $89.4 million as a result of our adoption of SFAS No. 133 on January 1, 2001. Prior to this item, our net loss was $4.8 million. During the first six months of 2001, we generated revenues of $30.4 million from sales of electricity and capacity to Public Service Electric. Operating expenses totaled $22.4 million, including $12.6 million in expenses related to power purchased from El Paso Merchant Energy and $9.8 million of non-cash losses as a result of changes in the fair value of our power purchase and power services agreements. Our operating expenses also include fees accrued under our administrative services agreement with El Paso Merchant Energy. Interest and debt expense for the six months ended June 30, 2001, was $13.3 million. LIQUIDITY AND CAPITAL RESOURCES We have no capital requirements, either short or long term since our primary purpose is to administer the terms of our power purchase and power services agreements. We believe that cash flows from our operations will be sufficient to satisfy our cash and liquidity requirements, including payments of interest and principal on our bonds and the payment of our operating expenses. Annual energy deliveries under our power purchase agreement with Public Service Electric may be scheduled and delivered at any time during the calendar year subject to the minimum requirements and maximum limits called for under the agreement. Since annual delivery requirements will be within these minimum and maximum delivery amounts, our revenues and net cash flows, determined on an annual basis, should remain relatively stable. However, our monthly and quarterly revenues and net cash flows will vary significantly, particularly during peak summer months (June through September) due to the cyclical nature of our operations. Payments on power sold to Public Service Electric are due in the month following delivery. 7 9 Interest payments on our bonds are made semi-annually, each February 15 and August 15 of each year, and principal payments are made annually on February 15 of each year. In order to offset any timing differences between our cash flows from energy bought and sold and our interest and principal payments, we funded a liquidity account in an amount equal to the amount of our next interest payment. The purpose of the liquidity account is to provide the trustee additional cash, if needed, to fund interest payments. During the period from the inception of operations in September 2000 to the end of June 2001, we generated funds of approximately $28.2 million available for debt service from the sale of power. Interest for this period was approximately $20.3 million, providing an interest coverage ratio of 1.39. Including the proportionate principal payment for the same period of approximately $3.2 million, the debt service coverage ratio was 1.20. MANAGEMENT Pursuant to our limited liability company agreement, management powers of our company are managed by a committee comprised of five managers. Three of these managers are appointed by Mesquite Investors, L.L.C., a subsidiary of Chaparral Investors, L.L.C., our parent company, and two managers are independent. Our day-to-day operations are managed by officers and employees of El Paso Merchant Energy under our administrative services agreement with them. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions or bases to be reasonable and to be made in good faith, assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis. We cannot assure you, however, that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," "estimate," "anticipate" and similar expressions will generally identify forward-looking statements. 8 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk is exposure to changing interest rates. The table below shows cash flows and weighted average interest rates of our interest bearing securities, by expected maturity date. The fair value of fixed rate long-term debt was estimated based on quoted market prices for the same or similar issues.

Our power purchase agreement and power services agreement meet the definition of derivatives under the provisions of SFAS No. 133, and are carried at their fair value. The fair value of these agreements at June 30, 2001, was estimated based on the forward pricing curve of the appropriate delivery or receipt point for power we buy and sell.

9 11 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K a. Exhibits None. Undertaking We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of our long-term debt not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10 percent of our total consolidated assets. b. Reports on Form 8-K None. 10 12 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. CEDAR BRAKES I, L.L.C. Date: August 14, 2001 /s/ JOHN L. HARRISON ----------------------------------------- John L. Harrison Vice President, Senior Managing Director (Principal Financial Officer) Date: August 14, 2001 /s/ CECILIA T. HEILMANN ----------------------------------------- Cecilia T. Heilmann Vice President, Managing Director and Controller (Principal Accounting Officer)

CEDAR BRAKES I LLC 10-Q