Calpine Power Income Fund Announces Solid Financial Results for 2004 and Cash Distributions for February, March and April 2005.CALGARY, Alberta -- Calpine Power Income Fund (TSX:CF.UN) today announced its results for the year ended December 31, 2004. Based upon current forecast, cash distributions for the months of February, March and April 2005 are estimated at $0.0818 per trust unit.
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Ex-Distribution Distribution Distribution
Record Date Date Date per Unit
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February 28, 2005 February 24, 2005 March 18, 2005 $0.0818
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March 31, 2005 March 29, 2005 April 20, 2005 $0.0818
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April 29, 2005 April 27, 2005 May 20, 2005 $0.0818
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The above reflects distributions expected to be paid, however,
distributions are subject to change based upon actual conditions.
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"I am pleased to report that in 2004, the Calpine Power Income Fund has once again delivered strong results, resulting in the Fund meeting all expected distributions to its unitholders" said Toby Austin, President and Chief Executive Officer of Calpine Canada Power Ltd., manager of the Calpine Power Income Fund. "All of our plants performed extremely well throughout the year, resulting in strong financial performance for our Fund. We added another plant to our fleet with the acquisition of the 120 MW King City Facility in May 2004 and increased capacity at our Island Cogen plant by almost 10%, resulting in increased sales of power to BC Hydro and improved efficiency in operations. Regarding other acquisitions, we were not able to reach agreement with Calpine to purchase an interest in the Deer Park facility and have terminated negotiations. However, looking forward, we are confident that we will continue to deliver stable and sustainable cash distributions to our unitholders, while implementing our strategy to expand our asset base and reduce overall risk in our Fund by acquiring facilities from Calpine or third parties." MANAGEMENT'S DISCUSSION AND ANALYSIS The Calpine Power Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of Alberta. The Fund indirectly owns interests in power generating facilities in British Columbia, Alberta and California and has an economic interest in a power plant in Ontario and holds a promissory note issued by Calpine Canada Power Ltd. ("the Manager"). The power generation facilities owned by the Fund and Calpine Power, L.P. (the "Partnership') are all modern and environmentally preferred, natural gas fired plants, with long-term energy sales agreements. The Fund and the Partnership are managed and administered by the Manager. The Fund's objectives are to provide, on a per Trust Unit basis, a stable and sustainable flow of Distributable Cash of the Fund. To achieve these objectives, the Manager seeks to maximize the efficiency and profitability of the facilities and acquire or develop future facilities in accordance with established acquisition and investment guidelines. The Manager believes that Calpine Corporation's ("Calpine") extensive experience in all aspects of the development, acquisition and operation of power generation facilities will enable it to successfully implement the Fund's objectives. The following discussion and analysis as provided by Management should be read in conjunction with the accompanying audited consolidated financial statements and the notes thereto of the Fund and the Partnership for the year ended December 31, 2004 and 2003, which have been prepared in accordance with Canadian generally accepted accounting principles, and is based on information to February 3, 2005. All dollar amounts are shown in Canadian dollars unless otherwise specified. Additional information concerning the Fund is available at www.calpinepif.com or on SEDAR at www.sedar.com. 2004 HIGHLIGHTS - The Fund's power generation facilities continued to produce strong and reliable operating results in 2004 as demonstrated below.
Availability Generation (MWh)
--------------------------------------
2004 2003 2004 2003
--------------------------------------
Calgary Energy Centre(1) 92% 94% 858,662 747,604
Island Cogeneration Facility 84% 82% 1,628,402 1,470,891
Whitby Cogeneration Facility 96% 93% 368,172 344,648
King City Facility(2) 98% - 596,254 -
(1) 2003 availability and generation factors are from commercial
operations date, March 31, 2003
(2) Acquired May 19, 2004 - availability and generation factors are
from date of acquisition only.
Other Achievements - Successfully completed a major capital upgrade at the Island Facility in the second quarter resulting in increased output of 25 MW. - Acquired a 120 MW natural gas-fired, combined cycle cogeneration facility located in King City, California. The facility is leased to a wholly-owned subsidiary of Calpine until 2028. In addition, the Fund loaned $48.0 million ($53.4 million face value) to the Manager (the "Manager Loan"), a wholly-owned subsidiary of Calpine, at a fixed rate of 13% per annum which loan will mature in 2010 (collectively referred to as the "King City Transaction"). - Generated Distributable Cash of $56.3 million, $0.9703 per weighted average Trust Unit, for distribution to the Fund's Unitholders. - Increased monthly Unitholders' distributions twice in the year - in January 2004 increased to $0.079 per Trust Unit, a 1% increase over 2003, and increased a further 2.5% to $0.081 per Trust Unit in June following the completion of the King City Transaction. - Established a levelization reserve for monthly cash received on the King City Transaction in excess of declared distributions to Unitholders to be used to fund future distributions. Total reserve at December 31, 2004 was $9.6 million. - The Fund closed 2004 with a strong cash position of $13.7 million, including restricted cash, and positive working capital of $13.0 million. At December 31, 2004, the Fund had 61,742,288 Trust Units outstanding, of which 4,605 are held by a wholly-owned subsidiary of Calpine. The Trust Units trade on the Toronto Stock Exchange. SIGNIFICANT TRANSACTIONS On May 19, 2004 the Fund acquired a 120 MW natural gas-fired, combined cycle cogeneration plant located in King City, California (the "King City Facility"). The King City Facility is leased to a wholly-owned subsidiary of Calpine until 2028. In addition, the Fund through it's wholly-owned subsidiary, Calpine Commercial Trust ("CCT"), loaned $48.0 million ($53.4 million face value) to the Manager. The Fund acquired the King City Facility from an unrelated third party, BAF Energy, a California Limited Partnership. The King City Transaction resulted in the Fund acquiring two payment streams. The first payment stream is a 24-year lease (the "Lease") of the King City Facility to Calpine King City Cogen, LLC ("Calpine King City"), a wholly-owned subsidiary of Calpine. Calpine King City leased the King City Facility from the previous owner and will continue to lease the King City Facility from a wholly-owned subsidiary of the Fund on revised terms. The lease terms are such that the actual plant acquisition is shown as a net investment in the lease given that the Fund's economic recovery of the investment is substantially achieved from the lease with Calpine King City. The King City Facility has a long-term power purchase agreement with an investment grade utility. The second payment stream is from the interest and principal receipts on the loan to the Manager. The loan is repayable over a six year term with interest at a rate of 13% per annum. The loan assists to provide the Fund with sufficient cash to allow the Fund to maintain levelized distributions over the lease term so as to assist in providing stable and sustainable distributions to Unitholders. The loan is a full recourse obligation of the Manager and is secured by a pledge of the Manager's limited partnership interest in the Partnership, including the Manager's right to receive distributions under its ownership of Class B Subordinated Units of the Partnership. In addition, Calpine King City provided the Fund with a limited recourse guarantee of the Manager's obligations under the loan and granted the Fund a security interest in a bank account established by Calpine King City in connection with the project financing of the King City Facility. The Fund financed the King City Transaction using a combination of $99.8 million raised pursuant to a public offering of Trust Units and a non-recourse loan facility totaling US$82 million provided by a third party (the "King City Loan").
RESULTS OF OPERATIONS
Calpine Power Income Fund
Selected Annual Information Year ended Year ended Inception to
(in 000's) December 31, December 31, December 31,
2004 2003 2002
(restated) (restated)
(1)(2)(3) (1)
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Total Revenue $ 68,723 $ 41,390 $ 9,482
Net Earnings 46,864 38,527 8,949
Net Earnings Per Trust Unit 0.8074 0.7409 0.1721
Weighted Average Number
of Trust Units Outstanding 58,042,861 52,001,351 52,001,352
Total Assets 691,264 492,819 501,931
Total Long-term Liabilities 88,877 - -
Distributions Declared
Per Trust Unit 0.9703 0.9620 0.3365
(1) 2003 and 2002 have been restated for the retroactive application
of the new CICA accounting standard, "Asset Retirement
Obligations".
(2) A special distribution of $0.02 per Trust Unit was declared in
September 2003, in respect of 2002.
(3) A special distribution of $0.0165 per Trust Unit was declared in
January 2003.
The Fund reported net earnings of $46.9 million or $0.8074 per Trust Unit for the year ended December 31, 2004 compared to net earnings of $38.5 million or $0.7409 per Trust Unit for the year ended December 31, 2003. Net earnings for the year ended December 31, 2004 have increased 22% from the same period last year in part from the strong contribution of the Partnership - up 11% from 2003 - and in part by income generated from the King City Facility, acquired in the second quarter. Through the lease of the King City Facility and associated land to Calpine King City, the Fund recorded finance and rental income of $16.6 million for the year ended December 31, 2004. The Fund recognizes finance income over the lease term that provides a constant rate of return on the net investment in the lease. The King City Facility is leased to Calpine King City under a long term lease arrangement which expires on December 31, 2028, subject to a one time extension for a period not to exceed a further 16 years at the option of Calpine King City. Lease and land rental payments are payable, annually, in arrears on December 31. Lease payments are due in both US and Canadian dollars - the US dollar portion being sufficient to service principal and interest payable to the third party lender. The King City Facility generated 596,254 MWh for the period since acquisition in May 2004 and operated at 98% availability for the same period. The King City Facility operated as expected in 2004 and delivered cash from operations sufficient to service the Lease. Cash in excess of required principal and interest payments on the King City Loan was paid to the Fund as planned on December 31, 2004. Interest and other income of $6.5 million in 2004 includes $5.6 million of interest earned on the loan to the Manager made in conjunction with the acquisition of the King City Facility. Other income includes $0.4 million related to fees charged to the Partnership for administrative services provided by the Fund.
Selected Annual Information Year ended Year ended Inception to
(in 000's) December 31, December 31, December 31,
2004 2003 2002
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Initial lease costs $ 4,191 $ - $ -
Management and administrative
expenses 3,494 2,458 533
Interest on long-term debt 8,236 - -
Interest 761 134 -
Amortization 1,209 271 -
Future Income Taxes 3,809 - -
The costs associated with amending the lease of the King City Facility were expensed in 2004, with the equivalent amount included in finance income. Management and administrative expenses were $3.5 million for the year ended December 31, 2004, including $163 thousand for fees payable to the Manager to manage and administer the Fund, up from $2.5 million in 2003. Management and administrative fees primarily include salary, overhead and public reporting expenses. In addition, current year management and administrative expense includes $1.2 million in expenses related to the review of the Deer Park acquisition. The Fund was not able to reach an agreement with Calpine to purchase an interest in the Deer Park facility, and have terminated negotiations. The Fund is entitled to a special distribution on its Class A Priority Units from the Partnership equal to certain of the Fund's general and administrative expenses. Total special distributions received for the year ended December 31, 2004 were $4.9 million, which related in part to 2004 general and administrative expenses and in part to 2003 expenses unpaid at the end of 2003. Interest on long term debt was $8.2 million for the year ended December 31, 2004 and relates to interest accrued on the third-party loan made in conjunction with the acquisition of the King City Facility. This third-party loan, payable annually in US dollars, matures in 2019 and bears interest at a fixed interest rate of 12.8% per annum. The US dollar lease receipts are expected to substantially offset all foreign exchange risk associated with satisfying future obligations under this US dollar loan. Interest expense of $0.8 million relates to interest on the portion of the CCT Credit Facility (the "Credit Facility") drawn in the year, which was loaned to the Partnership to partially finance the Island Facility upgrade, and the quarterly standby fee. No amounts were drawn in 2003. The average cost of borrowing in the year was 4.34%. Amortization expenses attributable to the Credit Facility and the King City Loan were $1.2 million for the year ended December 31, 2004. In 2003, amortization of the Credit Facility was $271 thousand. No comparative amounts exist for amortization of the King City Loan in 2003 as the obligation did not exist at that time. As a result of the acquisition of the King City Facility, a US subsidiary of the Fund provided for future income taxes on its income from the King City Facility. Income tax expense was $3.8 million for the year ended December 31, 2004, which represents an effective tax rate of 40.75%. No cash taxes are expected to be paid this year due to US tax depreciation on the King City Facility in excess of income from operations.
Calpine Power, L.P.
Selected Annual Information Year ended Year ended Inception to
(in 000's) December 31, December 31, December 31,
2004 2003 2002
(restated) (restated)
(1) (1)
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Total Revenue $ 105,346 $ 91,348 $ 20,022
Net Earnings 64,012 58,742 13,532
Net Earnings Per
Class A Priority Unit 0.8795 0.7956 0.1821
Net Earnings Per
Class B Subordinated Unit 0.8201 0.7795 0.1821
Total Assets 660,229 665,407 734,518
Total Long-term Liabilities 2,369 2,183 949
Distributions Declared
Per Class A Priority Unit 1.0350 1.0226 0.3457
Per Class B Subordinated Unit 0.9715 0.9935 0.3585
(1) 2003 and 2002 have been restated for the retroactive application
of the new CICA accounting standard, "Asset Retirement
Obligations".
Revenues for 2004 were up $14.0 million from 2003 levels. $16.0 million of this increase was from the additional operating months of the Calgary Energy Centre with the Island Facility contributing an addition $3.6 million from increased electricity and steam sales despite the shutdown in the second quarter of 2004. These increases were offset by declines in other income sources at the Island Facility including a reduction of the Alstom Construction contract settlement income of $1.9 million as well as a reduction in liquidated damage revenue of $3.4 million both resulting from improved availability in 2004 versus 2003. Net earnings for the year were $64.0 million, up $5.3 million from 2003. The 9% increase in net earnings is due in part to benefits associated with the Island Facility upgrade, reduced operating and maintenance expenses and the inclusion of a full year of operations for the Calgary Energy Centre versus only nine months for the year ended December 2003. Interest earned through a participating loan (the "Whitby Loan") to a Calpine subsidiary and other cash balances was $3.8 million for the year ended December 31, 2004 compared to $4.5 million for 2003. The reduction year over year is primarily due to increased bank interest in 2003 on the Calgary Energy Centre reserve for construction costs which was fully paid out in the first quarter of 2004. Interest income on the Whitby Loan is substantially the same as for 2003. Foreign exchange losses (2004 - $16 thousand, 2003 - $186 thousand) consist primarily of gains and losses on US dollar denominated cash and US dollar transactions. The Partnership has a long-term service agreement ("LTSA LTSA - Labeled Transition System Analyzer LTSA - Land Transport Safety Authority (New Zealand) LTSA - Learning Technology Systems Architecture LTSA - Linearly Tapered Slot Antenna LTSA - Long Term Service Agreement LTSA - Long-Term Space Astrophysics LTSA - Low Temperature Starting Aid (Advanced Engine Technology Ltd.)") for the maintenance of the Calgary Energy Centre, payable in US dollars. A portion of available cash is maintained in US dollars to mitigate foreign exchange risk associated with satisfying future payment obligations under the LTSA. The Partnership reported consolidated cash flow from operating activities of $88.2 million for the year ended December 31, 2004, compared to $65.8 million for the year ended December 31, 2003. Cash flow from operating activities increased due to the increased earnings in 2004 over 2003 levels and from a reduction in Island Facility accounts receivable from 2003, which included two months revenue outstanding at December 31, 2003. Island Cogeneration Facility The Island Facility is a 240 MW combined cycle cogeneration plant located at Duncan Bay, near Campbell River, on Vancouver Island, British Columbia. The Island Facility operated at 84% availability and generated 1,628,402 MWh for the year ended December 31, 2004 compared to 82% availability and 1,470,891 MWh for 2003. The Island Facility was shut down for major maintenance and capital upgrades from mid-April to mid-June in 2004. Similarly in 2003, the Island Facility was shutdown for an extended maintenance period in the first quarter. The 2004 upgrades consisted of compressor blade modifications, an air intake upgrade with improved air filtration, and installation of a glycol freeze protection system. The upgrades improved output of the Island Facility by approximately 25 MW which was delivered to BC Hydro under the existing terms of the Electricity Purchase Agreement ("EPA"). The total cost of the upgrades was $16.0 million, substantially as budgeted. $12.0 million of the upgrade expenditures were financed through a loan from the Fund. The remaining amount will be financed in the first quarter of 2005. The increased cash flow generated from the capital upgrade will be used to service the loan from the Fund and is expected to be fully repaid sometime after 2007. The Island Facility electricity generation revenue was $29.6 million for the year ended December 31, 2004 and $27.0 million for the year ended December 31, 2003. Revenue also includes amounts from steam generation which is sold to Norske Skog Canada Limited ("Norske Skog"), a global supplier of newsprint and magazine printing papers. For the year ended December 31, 2004, the Island Facility produced 1,635,422 GJ (2003 - 1,673,885 GJ) of steam resulting in revenue of $11.6 million (2003 - $10.5 million). While steam produced was slightly down from prior years, the increase in natural gas prices in the year improved the steam price by 13%, increasing the overall steam revenue by 10%. Revenue in 2004 further includes $1.6 million of liquidated damages in respect of actual plant availability versus guaranteed availability under the Island Facility Construction Contract. Liquidated damages are payable under this contract depending on actual annual performance of the plant determined as at April 12 each year, which provision is in effect for the first six years of plant operation. The amounts earned in 2004, the third contract year, were largely a result of reduced availability in the second quarter. Liquidated damages of $5.0 million were recorded in the first quarter of 2003 in respect of contract year one. No amounts were received for the contract year two. Operating and maintenance expense attributable to the Island Facility was $9.6 million and depreciation expense was $11.8 million for the year ended December 31, 2004 compared to $9.6 million for operating and maintenance expense and $11.4 million for depreciation expense in 2003. In 2004, wages, property tax, insurance and repairs comprise 73% of total operating and maintenance expense with major maintenance expense accounting for a further 21% compared to 69% and 29% respectively in 2003. Certain operating and maintenance expenses are paid by the Manager and reimbursed by the Partnership, in accordance with applicable agreements. At December 31, 2004, there was $0.2 million (2003 - $0.2 million) due to the Manager from the Partnership in respect of such agreements. Pursuant to a settlement agreement reached in 2002 (the "Settlement Agreement") with Alstom Canada Inc. ("Alstom") related to performance guarantees set out under the Island Facility Construction Contract, Alstom agreed to buy down amounts totaling $50.0 million to the Partnership over a ten year period because certain performance targets for the Island Facility were not met. This amount will be settled whereby the Partnership will record revenue as an offset to amounts otherwise payable for capital and operating expenses. Settlement revenue of $4.3 million (2003 - $6.2 million) has been recognized within electricity and thermal revenue for the year ended December 31, 2004. At December 31, 2004, the remaining amount due from Alstom was $34.1 million (2003 - $38.4 million) which will be earned over the remaining settlement period. Performance of this obligation is secured by a letter of credit issued by a Canadian financial institution. Calgary Energy Centre The Calgary Energy Centre is a natural gas-fired combined cycle plant located in Calgary, Alberta which commenced operations on March 31, 2003. The Calgary Energy Centre has a capacity of 300 MW, consisting of 250 MW of base capacity plus 50 MW of peaking capacity. The Calgary Energy Centre generated 858,662 MWh for the year ended December 31, 2004, and operated at 92% availability for the period. The plant became commercially operational in March 2003 and generated 747,604 MWh to the end of the year operating at 94% availability. Annual availability for 2004 was slightly lower than expected due to a forced outage in August 2004 caused by a combustion turbine hardware failure. The lost revenue during this outage was offset in part by a recovery pursuant to an availability guarantee set out in the Calgary LTSA with Siemens Westinghouse ("Siemens"). Electricity generation revenues at the Calgary Energy Centre were $54.4 million for the year ended December 31, 2004. Revenues for the year ended December 31, 2003 were $38.1 million for the period from March 31, 2003 when the Calgary Energy Centre commenced operations. Revenue is earned through both a fixed and variable charge payable by Calpine Energy Services Canada Partnership ("CESCP"), a wholly-owned partnership of Calpine, where the fixed charge component represents approximately 99% of total revenue. In 2004, tolling revenues were above what the plant would have received as net revenue had it been exposed to market pricing. Annual operating and maintenance and depreciation expense attributable to the Calgary Energy Centre was $10.0 million and $8.8 million respectively for 2004, compared to $5.0 million and $6.1 million respectively, for 2003. In 2004, wages, insurance, property tax and consumables accounted for 57% of total expenses. Major maintenance accounted for a further 14% of expenditures. In 2003, wages, insurance, property tax and consumables accounted for 59% of total expenses. Major maintenance accounted for a further 3% of expenditures. Certain operating and maintenance expenses are paid by the Manager and reimbursed by the Partnership, in accordance with applicable agreements. At December 31, 2004 there was $0.3 million (2003 - $0.4 million) due to the Manager from the Partnership in respect of such agreements. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2004, the Fund had unrestricted cash and cash equivalents of $8.1 million, up from $37 thousand in 2003. The Fund generated cash from operating activities of $61.9 million. Changes in non-cash working capital items decreased cash by $1.9 million primarily as a result of a decrease in accounts payable at December 31, 2004. Cash from financing activities for the year totaled $158.7 million, including $99.8 million in net proceeds from the issuance of Trust Units, and $111.1 million from the issuance of long-term debt, both associated with the King City Transaction in May 2004, less $55.4 million paid to Unitholders in the year. The Fund's offering consisted of 9,740,937 Trust Units at a price of $10.25 per unit. The Fund used $206.6 million of cash to acquire the King City Facility and to loan funds to both the Manager ($48.0 million) and the Partnership ($12.0 million). The Partnership had cash and cash equivalents of $13.7 million at December 31, 2004, up $0.7 million from 2003. The Partnership generated cash from operations of $88.2 million compared to $65.8 million in 2003. Changes in non-cash working capital items increased cash flow by $3.4 million, primarily due to a decrease in the accounts receivable balance at the end of 2004 compared to 2003. Cash from financing activities included $12.0 million received to finance the capital expenditures associated with the Island Facility upgrade, less $77.5 million paid as distributions to the partners of the Partnership. The Partnership received an additional $4.0 million in January 2005 as the final installment of the upgrade loan. The Partnership used $18.9 million for capital expenditures throughout the year - $16.0 million related to the Island Facility upgrade, $2.4 million related to major maintenance expenses at the Island Facility and Calgary Energy Centre and $0.5 million related to smaller enhancements in the year. 2010 Contractual Obligations and (in 000's) 2005 2006 2007 2008 2009 Beyond Total --------------------------------------------------------------------- In Canadian $ Asset retirement liability Calpine Power, L.P. $ - $ - $ - $ - $ - $36,612 $36,612 Island Cogeneration Facility land lease 30 30 30 30 30 840 990 --------------------------------------------------------------------- In US $ Asset retirement liability King City Facility $ - $ - $ - $ - $ - $ 7,610 $ 7,610 Calgary Energy Centre - LTSA 3,181 7,813 861 2,307 5,125 9,394 28,681 Long-term debt 9,989 8,143 7,123 5,535 1,857 47,054 79,701 --------------------------------------------------------------------- Both the Fund and Partnership will be required to remove generation facilities at the end of their useful lives and restore the plant sites to their original condition. This future asset retirement obligation, estimated to be $36.6 million is expected to be incurred between 2037 and 2038 for the Partnership and US$7.6 million (relating to the King City Facility), expected to be incurred in 2028 at the earliest, for the Fund. The Calgary Energy Centre and the Island Facility are each required to make payments for annual plant maintenance in accordance with applicable LTSA's. Amounts paid in accordance with these agreements for the year ended December 31, 2004 were $574 thousand (2003 - $737 thousand) for the Calgary Energy Centre and $796 thousand (2003 - $803 thousand) for the Island Facility. Future commitments relating to the LTSA's have a significant variable portion that cannot be reasonably estimated. Currently the variable portion of the Island LTSA is offset with the Settlement Agreement with Alstom. As a result, the Island Facility will not be required to make significant cash payments relating to equivalent operating hour ("EOH EOH - Emergency Operation Headquarters (also seen as EOHQ) EOH - End of Healing EOH - End Of Overhaul EOH - Engine Operating Hours EOH - Engine Overhaul EOH - Engineered Overhaul (US Navy) EOH - Equipment On Hand EOH - Equipment Operator Hauling EOH - Executive Office Headquarters EOH - Eye of the Hurricane (music album) EOH - Medellin, Colombia - Enrique Olaya Herrara (Airport Code)") charges under the Island LTSA for approximately five to seven years. Calgary's LTSA payments are due in US dollars and are payable at certain EOH hurdles. As of December 31, 2004, an unsegregated cash reserve of $10.9 million (2003 - $9.3 million) has been accumulated in the Partnership to partially fund future maintenance costs. The next major maintenance for the Island Facility is expected to occur in three years. The Calgary Energy Centre is expected to have its first major maintenance in two years. In October 2003, the Fund, through CCT, obtained a $120 million extendible revolving term credit facility. The credit facility has a three year term, comprised of a two year revolving period followed by a one year term period. The credit facility is split into two tranches. One tranche of $90 million is available only to finance acquisitions and the second tranche of $30 million is available for acquisitions as well as for general corporate purposes. Costs of $3.3 million related to establishing the credit facility are being amortized over a three year term commencing October 2003. During the year, the Fund drew $8.0 million on the credit facility which was loaned to the Partnership to finance the capital upgrades. At the end of the year, the Fund had an additional undrawn credit amount of $22.0 million available. In addition to this available working capital fund, the Fund has the full $90.0 million acquisition facility available. As part of the acquisition of the King City Facility, trust accounts with a third-party depositary were established to ensure revenues earned by Calpine King City, after payment of operating, fuel and major maintenance expenses, are applied to satisfy loan obligations on the King City Loan and to satisfy lease payment obligations, in priority to any distributions being made to Calpine King City. On December 31, 2004, the Fund received $5.5 million from Calpine King City, net of payment of interest and principal on the King City Loan. This cash was retained by the Fund to be used to fund future cash distributions as contemplated at the time of the acquisition. Concurrent with the closing of the acquisition of the King City Facility in May 2004, the Fund used a portion of the proceeds of the public offering to loan the Manager $48.0 million, which is evidenced by a secured promissory note with a stated face value of approximately $53.4 million. This loan will mature in 2010 and bears interest at a rate of 13% per annum, with principal and interest payments payable monthly. The Fund received $12.3 million in principal and interest payments in 2004 and is scheduled to receive $16.0 million in 2005. A cash reserve of $111.0 million was established in the Partnership in 2002 to cover the construction costs to complete the Calgary Energy Centre. During the first quarter of 2004, after completion of all outstanding construction issues, the remaining construction reserve balance of $1.7 million was paid to the Manager as a special distribution in accordance with applicable agreements. The Fund has not entered into any off-balance sheet arrangements. DISTRIBUTABLE CASH AND DISTRIBUTIONS Distributable Cash is not a measure under Canadian generally accepted accounting principles and there is no standardized measure of Distributable Cash. Distributable Cash, as presented, may not be comparable to similar measures presented by other companies. Distributable cash has been presented to assist readers in determining possible future cash distributions. Distributable cash cannot be assured and may vary. The amount of Distributable Cash of the Fund to be distributed monthly to Unitholders is, as defined in the Fund Trust Indenture, based generally on the amount by which the Fund's cash on hand exceeds: (i) administration expenses of the Fund; (ii) amounts required for the business and operations including fees payable to the Manager under the Administration and Management Agreements; and (iii) any cash reserve which the Board of Directors of the Manager in its discretion determines is necessary to satisfy the Fund's current and anticipated obligations.
Calpine Power Income Fund Year ended Year ended
December 31, 2004 December 31, 2003
(restated)(1)(2)
---------------------------------------------------------------------
FUNDS FROM OPERATIONS
BEFORE WORKING CAPITAL $ 63,770 $ 51,213
Add (Deduct):
Working capital reserve (2,982) 2,085
Levelization reserve (9,643) -
Financing costs (71) (3,273)
Payment of principal on
long term debt (2,770) -
Principal repayment on
loan Calpine Canada Power Ltd. 8,014 -
-------------------------------------
DISTRIBUTABLE CASH $ 56,318 $ 50,025
-------------------------------------
-------------------------------------
Weighted average number of
Trust Units outstanding 58,042,861 52,001,351
-------------------------------------
-------------------------------------
Distributable Cash per
Trust Unit $ 0.9703 $ 0.9620
-------------------------------------
-------------------------------------
(1) A special distribution of $0.02 per Trust Unit was declared in
September 2003.
(2) 2003 has been restated for the retroactive application of the new
CICA accounting standard, "Asset Retirement Obligations".
Distributable Cash generated by the Fund totaled $56.3 million or $0.9703 per Trust Unit for the year ended December 31, 2004 compared to $50.0 million or $0.9620 per unit in 2003. As a result of the successful close of the King City Transaction in May 2004, the monthly target distribution increased to $0.081 per Trust Unit, from $0.079 per Trust Unit, commencing June 2004. The Fund pays monthly cash distributions to Unitholders on or about the 20th day of each month following the record date, which is the last business day of the preceding month. The Fund, through its indirect 70% ownership of the Partnership, received $0.079 of Distributable Cash per Class A Priority Unit per month (in addition to certain management and administrative expenses incurred directly by the Fund) for the year ended December 31, 2004. In addition, the Fund received cash from both the King City Facility and the Manager Loan. Following the King City Transaction, the Fund established a Distribution Levelization Reserve ("the Levelized Reserve"), the purpose of which is to levelize, over the long-term, the distributions paid by the Fund to Unitholders in respect of this acquisition, so as to enable the Fund to provide a level cash stream to the Unitholders. Total undistributed cash at December 31, 2004 was $9.6 million. The CCT Trustees intend to annually increase or decrease this reserve with long-term consideration given to the expected cash from both the King City Facility and Manager Loan and future distribution requirements to Unitholders. Cash generated by the King City Transaction and other Fund investments is expected to exceed cash distributions anticipated to be paid on the Trust Units until 2014 and, as a result, the Levelized Reserve is expected to increase. Levelized Reserve --------------------------------------------------------------------- Balance at May 19, 2004 $ - Contributions 9,605 Income reinvested 38 --------------------------------------------------------------------- Balance at December 31, 2004 $ 9,643 --------------------------------------------------------------------- Upon CCT Trustee approval, the Fund used a portion of the cash held in the Levelized Reserve to purchase investments and a loan to the Partnership to partially fund the Island Facility upgrade. As at December 31, 2004, the value of the investments and the loan are as follows: Book Value --------------------------------------------------------------------- Guaranteed investment certificates $ 500 Loan to Calpine Power L.P. 4,000 Cash 5,143 --------------------------------------------------------------------- Balance at December 31, 2004 $ 9,643 --------------------------------------------------------------------- The Fund declared a cash distribution of $5.0 million or $0.081 per Trust Unit for the period from December 1 to December 31, 2004. The cash distribution was paid on January 20, 2005 to Unitholders of record on December 31, 2004. The Fund also declared a cash distribution of $5.1 million or $0.0818 per Trust Unit for January 2005. This cash distribution will be paid on February 18, 2005 to Unitholders of record on January 31, 2005.
Calpine Power, L.P. Year ended Year ended
December 31, 2004 December 31, 2003
(restated)(1)
---------------------------------------------------------------------
FUNDS FROM OPERATIONS
BEFORE WORKING CAPITAL $ 84,802 $ 76,689
Add (Deduct):
Receipts with respect to
Calgary Energy Centre
Tolling Agreement - 9,548
Capital expenditures (22,145) (3,191)
Maintenance reserve decrease (increase) (1,636) (2,985)
Loan payable 11,993 -
Working capital 2,456 (4,742)
-------------------------------------
DISTRIBUTABLE CASH $ 75,470 $ 75,319
-------------------------------------
-------------------------------------
Allocation of Distributable
Cash Class A Priority Units $ 53,819 $ 53,178
Class B Subordinated Units 21,651 22,141
-------------------------------------
$ 75,470 $ 75,319
-------------------------------------
-------------------------------------
Per Unit allocation of
Distributable Cash Class A
Priority Units $ 1.0350 $ 1.0226
-------------------------------------
-------------------------------------
Class B Subordinated Units $ 0.9715 $ 0.9935
-------------------------------------
-------------------------------------
(1) 2003 has been restated for the retroactive application of the new
CICA accounting standard, "Asset Retirement Obligations".
The amount of Distributable Cash, as defined in the Calpine Power, L.P. Partnership Agreement, is to be distributed monthly and is based generally on the amount by which the Partnership's cash on hand exceeds: (i) management and administration expenses of the Partnership; (ii) amounts required for the business and operations of the Partnership and its Facilities (including expenses payable to the Manager under the O&M Agreements); and (iii) any cash reserve which the Board of Directors of the Manager in its discretion has determined is necessary to satisfy the Partnership's current and anticipated obligations, including an annual reserve for the average estimated major maintenance expenditures. The Partnership distributes Distributable Cash of the Partnership in respect of each month to the partners of record on the last day of each month based on the priority rights of the partnership units. Payments are made on or about the 20th day after each record date. The Partnership makes monthly cash distributions to both the Class A Priority Unitholders and Class B Subordinated Unitholders. The Fund, as the holder of Class A Priority Units in the Partnership, must be paid before the Manager receives distributions on its Class B Subordinated Units. In addition, the Partnership makes a special distribution to the Class A Priority Unitholders equivalent to the amount of certain general and administrative expense of the Fund. The Class B Subordinated Units represent a 30% economic interest in the Island Facility, the Calgary Energy Centre and the Whitby Loan and their entitlement to distributions is subordinated to that of Class A Priority Unitholders until 2022. The target distribution per Class A Priority Unit and Class B Subordinated Unit increases annually by 1%. The Partnership has established a maintenance reserve, the purpose of which is to partially fund future maintenance costs. The annual increase/decrease in the maintenance reserve is deducted from/added to cash available for distribution. During the year ended December 31, 2004, $6.5 million (2003 - $3.0 million) was contributed to the reserve and $4.9 million (2003 - $0.7 million) was withdrawn to fund maintenance costs. The funds in the reserve are invested in guaranteed investment certificates. Interest income of $0.1 million (2003 - $0.2 million) was earned on the maintenance reserve during 2004. --------------------------------------------------------------------- Balance at December 31, 2002 $ 7,016 Contributions 2,985 Withdrawals (738) Income reinvested 224 Foreign exchange loss on US dollars (199) --------------------------------------------------------------------- Balance at December 31, 2003 9,288 Contributions 6,476 Withdrawals (4,862) Income reinvested 126 Foreign exchange loss on US dollars (104) --------------------------------------------------------------------- Balance at December 31, 2004 $ 10,924 --------------------------------------------------------------------- Under the Calgary Energy Centre Tolling Agreement, as pre-payment for the provision of future tolling services of the Calgary Energy Centre, CESCP had been required to pay to the Calgary Energy Centre a monthly amount equivalent to the fixed charge component of the monthly tolling fee until commercial operations date of the Calgary Energy Centre. Payments of $9.5 million were received for the year ended December 31, 2003. The Calgary Energy Centre Tolling Agreement, which is now in effect, is a 20-year contract, under which CESCP is required to deliver all fuel required to operate the Calgary Energy Centre and is, in turn, obligated to pay for all electricity generated or deemed to have been made available. The Partnership declared a cash distribution of $5.7 million for the period from December 1 to December 31, 2004. The cash distribution was paid on January 20, 2005 to the Class A Priority and Class B Subordinated Unitholders of record on December 31, 2004. During the year, distributions to the Class B Subordinated Unitholders were delayed as a result of lower revenues resulting from the Island Facility upgrade. With the Island Facility back in operation in the third quarter, the arrears distribution on the Class B Subordinated Units was declared and paid. The Partnership also declared a cash distribution of $5.9 million for January 2005. This cash distribution will be paid on February 18, 2005 to Unitholders of record on January 31, 2005. RESTRICTED CASH RESERVES Calpine Power Income Fund As part of the King City Transaction, the Fund deposited $4.6 million US dollars of the funds received from the offering into a segregated account. This cash amount and related interest earned will be used to partially satisfy its obligations on the King City Loan. It is expected that $3.9 million US dollars of this reserve will be used in 2005 with the balance to be used in 2006. Calpine Power, L.P. At the end of 2004, no amounts of cash in the Partnership was restricted, compared to $2.2 million at December 31, 2003. The remaining restricted cash was paid out to the Manager in 2004 after the resolution of all construction related issues pertaining to the Calgary Energy Centre. In total, $19.9 million of the original $111.0 million construction reserve was paid out to the Manager as a special distribution with the remaining amount used to complete the construction of the Calgary Energy Centre. The construction reserve account was established in a segregated account of the Partnership in August 2002 to meet the remaining construction costs of the Calgary Energy Centre. During the third quarter of 2003, $18.2 million of the construction reserve balance was returned to the Manager as a special distribution, in accordance with applicable agreements. During the first quarter of 2004, the remaining construction reserve balance of $1.7 million was returned to the Manager and the construction account was closed. TAX TREATMENT OF DISTRIBUTIONS For Canadian tax purposes, the taxable amounts of distributions to the Fund's Unitholders is estimated to be approximately 20% for 2004. The remaining amount of the distributions reduce the adjusted cost base of the Trust Units, thereby providing a significant tax deferral for the Unitholders. The tax deferral arises primarily due to the ability of the Partnership to shelter its taxable income with capital cost allowance claims on the Facilities. As a result, in 2004, approximately 80% of the distributions to Unitholders were a return of capital rather than an allocation of income. In 2003, the taxable amount was 1.59%. The Manager anticipates that a higher proportion of cash distributions made by the Fund in the future will be included in the income of the Unitholders for income tax purposes. Further Fund acquisitions could serve to extend or reduce the tax-deferred horizon. The Fund recommends that Unitholders consult their tax advisors regarding the tax implications of their investment in Trust Units. CRITICAL ACCOUNTING ESTIMATES As discussed in Note 2 of the financial statements for both the Fund and the Partnership, the preparation of financial statements in conformity with Canadian generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. For the Fund, amounts recorded for finance income, depreciation and the provision for asset retirement obligations are based on estimates. With respect to the Partnership, amounts recorded for depreciation and the provision for asset retirement obligations are based on estimates. By their nature, these estimates are subject to measurement uncertainty and changes in these estimates may impact the consolidated financial statements of future periods. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the Canadian Institute of Chartered Accountants ("CICA") issued the new standard 3110 "Asset Retirement Obligations". This standard requires recognition of a liability for the future retirement obligations associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future cost of the liability. This fair value is capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the date of expected settlement of the retirement obligations. The new standard is effective for all fiscal years beginning on or after January 1, 2004. The Partnership has adopted this standard as of January 1, 2004. The effect of this change in accounting policy was recorded retroactively with the restatement of prior periods. The impact of the adoption of the new standard is disclosed in Note 3 of the Fund's and the Partnership's consolidated financial statements. In June 2003, the CICA issued new Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, effective for fiscal years and periods starting on or after November 1, 2004. AcG-15 presents indications on the application of consolidation principles to certain entities that are subject to control on a basis other than the ownership of voting interests. Management does not expect that the adoption of this standard will have an impact on the Fund's financial statements. FORECASTS Forecasts of the Fund and the Partnership for the twelve months ending March 31, 2005 were prepared and included in the prospectus issued in respect of the public offering of Trust Units in connection with the acquisition of the King City Facility. The actual financial results of the Fund and the Partnership for the year ended December 31, 2004 and from the closing of the transaction on May 19, 2004 through December 31, 2004 compare favorably to these forecasts, with the exception of future income taxes which exceed the forecasted amount by approximately $2.3 million. The additional future income tax expense is caused by unrealized foreign exchange gains on the net investment in lease, recorded in a US subsidiary of the Fund, which were not forecasted. These foreign exchange gains were eliminated upon translation of the US subsidiaries financial statements to Canadian dollars. OUTLOOK The Fund's main goal is to provide stable and sustainable cash distributions to its Unitholders. Management expects this will be done by its ongoing commitment to operational excellence at its facilities, by enhancing operations to increase cash from operations and by reducing the overall risk profile of our assets by making accretive acquisitions of high quality assets. The nature of the Fund's contracts insulate the Fund from commodity price risk while allowing the Fund to focus on reducing operating and maintenance expenses, the benefits of which we expect will increase net earnings and cash flow. Capital expenditures for 2005 are expected to be $0.6 million, which will be financed from cash flow from operations. The major maintenance reserve is expected to increase by $2.1 million in 2005. The Fund anticipates the Island Facility will continue to make a strong contribution to our overall earnings due to increased output and improved efficiency resulting from the 2004 upgrade. The other plants should continue their strong operational history and deliver expected contributions on earnings. The Fund benefits from the Calgary Energy Centre Tolling Agreement and therefore does not have power or gas price market exposure in Alberta, where electricity prices continue to be quite low. Management expects to make cash distributions to our Unitholders of at least $0.98 per Trust Unit, slightly up from last year, and anticipate to end the year with a strengthened balance sheet and cash reserves. The announced increase in 2005 distributions of 1% brings the growth in distributions to 4.2% since the Fund was established in 2002. The Fund and Partnership continue to demonstrate the ability to maintain a strong balance sheet while at the same time pursuing growth opportunities for the Unitholders. BUSINESS RISKS The Fund and the Partnership are exposed to a variety of business risks. However, many of the risks to the Unitholders of the Fund are mitigated due to the priority on distributions that the Fund receives from the Partnership as well as the security available on the Calpine King City lease arrangement. Risks that materialize and result in reduced Distributable Cash of the Partnership will first reduce Partnership distributions to holders of the Class B Subordinated Units. Distributions received by the Fund will not be impacted unless the cash flow shortfall exceeds all forecasted distributions otherwise payable to holders of the Class B Subordinated Units. As well, distributions payable on the Class A Priority Units held by the Fund are cumulative until December 31, 2022, such that the Class A Priority Unit distributions must be paid before any distributions can be made to Calpine's Class B Subordinated Units. The Fund and the Partnership have not to date entered into any derivative instruments to mitigate identified business risks. Operations Risk The major operations risks are facility performance and equipment failure risk. The revenues generated by the Facilities are largely dependent on the availability of the Facilities to generate electrical energy, and primarily determine the Distributable Cash to the Fund's Unitholders. Such risks have been reduced by operating high-quality assets with well-designed maintenance programs that ensure such assets have high availability and operate at peak efficiency. Contract Performance The amount of Distributable Cash of the Fund available for distribution to Unitholders is highly dependent upon parties to certain agreements fulfilling their contractual obligations to the Fund or its affiliates. An inability or failure by any such party to meet its contractual commitments may adversely affect cash distributions by the Fund. Calpine has guaranteed certain contracts held by the Fund including the Calgary Energy Centre Tolling Agreement with CESCP. If for any reason CESCP or Calpine is unable or unwillingly to fulfill these contractual obligations, Distributable Cash of the Fund could decline. Commodity Price Risk Through the use of long-term contracts, the Fund has mitigated short-term exposure to various commodity price risks. Under tolling arrangements established with customers, revenues are earned through monthly payments received from the customer in exchange for providing the full operating capacity of the plant. The customer is further responsible for providing all gas required to generate that electricity. This type of arrangement effectively eliminates commodity price risk and establishes a stable cash flow for the Fund. Loan Default Risk The Partnership has made a loan to Calpine Canada Whitby Holdings Company ("CCWH"), which holds a 50% partnership interest in the Whitby Cogeneration Facility. The Partnership is exposed to default risk on this loan as any defaults on the loan may have an adverse effect on the Partnership's distributable cash and, in turn, on the Distributable Cash of the Fund. Default risk has been minimized by including in the loan documentation restrictions on, but not limited to, how CCWH carries on business, borrows or otherwise incurs indebtedness, enters into business transactions and declares or pays dividends or other distributions to its shareholders. Regulatory Risk The profitability of the Facilities will in part be dependent upon the continuation of a favorable regulatory climate with respect to the continuing operations and the future growth and development of the independent power industry. Should the regulatory regime in an applicable jurisdiction be modified in a manner which adversely affects the Facilities, Distributable Cash of the Fund may be adversely affected. The Facilities encompass operations which are subject to operational, environmental and safety permits, standards and regulations imposed by regulatory bodies. Although the Manager believes that the operations of the Facilities are in compliance in all material respects with such permits, standards and regulations, or are in receipt of the necessary relaxation certificates, failure to operate the Facilities in strict compliance with applicable permits, standards and regulations may require temporary or permanent cessation of operations of the Facilities and may expose owners or operators to claims and clean-up costs. Any new law or regulation could require significant additional expenditures to achieve or maintain compliance. Insurance Coverage The Manager maintains insurance coverage for each of the Facilities that it believes is sufficient to address material insurable risks and provides coverage that is similar to what would be maintained by a prudent owner/operator of similar facilities. Whitby Cogeneration Limited Partnership carries insurance for the Whitby Cogeneration Facility that the Manager believes to be adequate. However, there can be no assurance that such insurance will continue to be offered on an economically feasible basis, nor that all events that could give rise to a loss or liability are insurable, nor that the amounts of insurance will at all times be sufficient to cover each and every loss or claim that may occur involving the assets or operations of the Partnership. Impact of Subordination on the Manager Loan It is expected that the Manager will be able to fund its obligations to the Fund under the Manager Loan only through distributions paid to the Manager on its Class B Subordinated Units of the Partnership. The Partnership pays distributions on the Class B Subordinated Units only after satisfying its distribution obligations to the Fund, as the sole owner of the Class A Priority Units. As a result, there can be no guarantee that the Partnership will distribute sufficient funds to the Manager, as the owner of the Class B Subordinated Units, to allow the Manager to meet its payment obligations under the Manager Loan. Labour Relations While labour relations at the Facilities have been stable to date and there have not been any disruptions in operations as a result of labour disputes with employees, the maintenance of a productive and efficient labour environment cannot be assured. In the event of a labour disruption such as a strike or lock out at the Island Facility, where the employees are unionized, the ability of the Island Facility to generate income, and consequently the ability of the Fund to generate distributable cash of the Fund, may be impaired. Loss of QF Status The maintenance of Qualifying Facility ("QF") status at the King City Facility is dependent upon the King City steam host taking a sufficient amount of thermal energy from the King City Facility under the King City Steam Sale Agreement ("King City SSA"). If the King City SSA were terminated or the King City steam host failed to take a sufficient amount of thermal energy to ensure the King City Facility retained its QF status, the Fund would seek to replace the King City steam host as the thermal energy customer for the King City Facility or find another use for the thermal energy produced by the King City Facility to allow the King City Facility to retain its QF status. No assurance can be given that securing another steam host or alternative steam use would be possible and feasible. The loss of QF status by King City Facility is a lease event of default as well as a loan event of default, for which there is no grace period. Such loss of status would entitle the third party lender to exercise remedies under the various financing documents. Although the King City steam host currently takes sufficient thermal energy from the King City Facility to ensure the facility retains its QF status, the steam host is seeking an alternate use for the thermal energy. The King City steam host is currently installing a distilled water generating facility which, when operable, will take a sufficient amount of thermal energy to ensure the King City Facility retains its QF status. Application has been made to FERC to recertify the facility for this alternate thermal energy use. Although Calpine King City expects to cause the contemplated alternative facilities to be constructed and to obtain the necessary recertification, no assurance can be given that the recertification will be obtained. Credit Risk The Fund is exposed to credit related losses in the event of non-performance by counterparties. The Partnership deals with certain counterparties that are not investment grade, including Calpine and its affiliates, but does not anticipate non-performance by the counterparties. The Calgary Energy Centre tolling revenues are above what the plant would expect to receive as net revenue if it were exposed to current market pricing. Provided CESCP continues to satisfy its obligations under the tolling agreement, this negative market exposure should have no impact on the Fund. The Fund monitors credit risk on an ongoing basis. Foreign Exchange Risk Within the Fund, the US dollar lease receipts from Calpine King City are expected to offset substantially all foreign exchange risk associated with satisfying future obligations under the US dollar third party loan. The Partnership is exposed to foreign exchange risk on US dollar denominated cash that it holds. The Partnership maintains a portion of the maintenance reserve in US currency in an effort to mitigate foreign exchange risk associated with satisfying future obligations, which are settled in US currency under the long-term service agreement for the Calgary Energy Centre.
SUMMARY OF QUARTERLY RESULTS
Calpine Power Income Fund
(unaudited) 2004
(in 000's) Total Q4 Q3 Q2(1) Q1
--------------------------------------------------
Revenue
Equity earnings
from Calpine
Power, L.P. $ 45,734 $ 13,292 $ 13,802 $ 5,378 $ 13,262
Finance income.(2) 16,496 4,843 5,076 6,577 -
Interest and
other income 6,493 2,457 2,429 1,607 -
--------------------------------------------------
68,723 20,592 21,307 13,562 13,262
--------------------------------------------------
Expenses
Initial lease
cost 4,191 - - 4,191 -
Management and
administrative 3,494 1,879 800 357 458
Interest on
long-term debt 8,236 3,132 3,433 1,671 _
Interest 761 237 218 170 136
Amortization 1,209 311 311 311 276
Accretion 75 27 28 20 -
Future income
taxes 3,809 1,666 1,743 400 -
Foreign exchange
loss 84 20 53 11 -
---------------------------------------------------
21,859 7,272 6,586 7,131 870
--------------------------------------------------
Net earnings $ 46,864 $ 13,320 $ 14,721 $ 6,431 $ 12,392
--------------------------------------------------
--------------------------------------------------
Net earnings
per Trust Unit $ 0.8074 $ 0.2157 $ 0.2384 $ 0.1138 $ 0.2383
--------------------------------------------------
--------------------------------------------------
(1) Operations for the three months ended June 30, 2004 include
revenues and expenses as a result of the King City transaction,
which closed in May 2004.
(2) Finance income is earned from the lease of the King City
Facility to Calpine King City.
2003
(unaudited) (restated) (3)
(in 000's) Total Q4 Q3 Q2 Q1
---------------------------------------------------------------------
Revenue
Equity earnings
from Calpine
Power, L.P. $ 41,369 $ 12,563 $ 11,312 $ 13,196 $ 4,299
Finance income (2) - - - - -
Interest and
other income 21 15 6 - -
--------------------------------------------------
41,390 12,578 11,318 13,196 4,299
--------------------------------------------------
Expenses
Initial lease
cost - - - - -
Management and
administrative 2,458 529 1,153 338 438
Interest on
long-term debt - - - - -
Interest 134 134 - - -
Amortization 271 271 - - -
Accretion - - - - -
Future income
taxes - - - - -
Foreign exchange
loss - - - - -
--------------------------------------------------
2,863 934 1,153 338 438
--------------------------------------------------
Net earnings $ 38,527 $ 11,644 $ 10,165 $ 12,858 $ 3,861
--------------------------------------------------
--------------------------------------------------
Net earnings
per Trust Unit $ 0.7409 $ 0.2239 $ 0.1995 $ 0.2472 $ 0.0742
--------------------------------------------------
--------------------------------------------------
(2) Finance income is earned from the lease of the King City Facility
to Calpine King City.
(3) 2003 has been restated for the retroactive application of the new
CICA accounting standard, "Asset Retirement Obligations".
Total revenue for the fourth quarter is up 64% over the same period last year as a result of improved earnings at the Partnership, finance income derived from the lease of the King City Facility to Calpine King City and the interest earned on the Manager Loan. Similarly, lease and interest income for the second and third quarters were up over prior years due to these additional sources of income. Management and administrative expenses in the fourth quarter were up $1.1 million from the third quarter 2004 and up $1.4 million from the fourth quarter in 2003 primarily from the expenses associated with reviewing the Deer Park Facility acquisition. The Fund was not able to reach an agreement with Calpine to purchase an interest in the Deer Park facility, and have terminated negotiations. Interest expense is comprised of interest on the King City Loan, which was used to purchase the King City Facility in May 2004, and interest and standby fees related to the $120 million credit facility obtained by the Fund in October 2003. Interest on the current balance of the facility averaged 4.34% for the year ended December 31, 2004. Amortization expense relates to the amortization of deferred financing costs associated with the credit facility and, commencing in the second quarter of 2004, also includes the amortization of deferred financing costs associated with the King City Loan. Initial lease costs and finance income in the same amount have been recognized in the second quarter of 2004. Future income tax expense is entirely related to the earnings of King City LP ("KCLP"), a wholly-owned subsidiary of the Fund, acquired in May 2004, which will be taxable in the United States. It is expected that cash taxes will not be payable until sometime after 2010, assuming no change in current US tax legislation.
Calpine Power, L.P
(unaudited) 2004
(in 000's) Total Q4 Q3 Q2(1) Q1
---------------------------------------------------------------------
Revenue
Electricity
and thermal $ 101,541 $ 28,467 $ 27,827 $ 18,490 $ 26,757
Interest - Whitby 3,393 846 855 846 846
Interest - Other 412 143 129 72 68
--------------------------------------------------
105,346 29,456 28,811 19,408 27,671
--------------------------------------------------
Expenses
Operating and
maintenance 19,603 4,836 3,573 6,417 4,777
Depreciation 20,588 5,104 5,504 4,777 5,203
Accretion 186 46 47 47 46
General and
administrative 699 604 82 10 3
Interest 242 107 88 47 -
Foreign Exchange 16 157 194 (209) (126)
--------------------------------------------------
41,334 10,854 9,488 11,089 9,903
--------------------------------------------------
Net earnings $ 64,012 $ 18,602 $ 19,323 $ 8,319 $ 17,768
--------------------------------------------------
--------------------------------------------------
Net earnings
per Unit
Class A
Priority Unit $ 0.8795 $ 0.2556 $ 0.2654 $ 0.1102 $ 0.2550
Class B
Subordinated
Unit $ 0.8201 $ 0.2383 $ 0.2477 $ 0.1160 $ 0.2022
2003
(unaudited) (restated) (1)
(in 000's) Total Q4 Q3 Q2(1) Q1
--------------------------------------------------
Revenue
Electricity
and thermal $ 86,855 $ 26,564 $ 23,828 $ 27,078 $ 9,385
Interest - Whitby 3,357 855 859 843 800
Interest - Other 1,136 81 288 411 356
--------------------------------------------------
91,348 27,500 24,975 28,332 10,541
--------------------------------------------------
Expenses
Operating and
maintenance 14,507 4,597 3,587 3,881 2,442
Depreciation 17,613 5,017 5,144 5,546 1,906
Accretion 150 43 43 43 20
General and
administrative 152 78 48 18 8
Interest - - - - -
Foreign Exchange 184 184 - - -
--------------------------------------------------
32,606 9,919 8,822 9,488 4,376
--------------------------------------------------
Net earnings $ 58,742 $ 17,581 $ 16,153 $ 18,844 $ 6,165
--------------------------------------------------
--------------------------------------------------
Net earnings
per Unit
Class A
Priority Unit $ 0.7956 $ 0.2415 $ 0.2174 $ 0.2477 $ 0.0830
Class B
Subordinated
Unit $ 0.7795 $ 0.2254 $ 0.2174 $ 0.2477 $ 0.0830
(1) 2003 and 2002 have been restated for the retroactive application
of the new CICA accounting standard, "Asset Retirement
Obligations".
Revenues for the three months ended December 31, 2004 were up 7% over the same period last year due to improved revenues from the Island Facility resulting from the capital upgrades, and due to the recognition of $1.6 million of liquidating damages from Alstom regarding availability guarantees. Revenues for the three months ended September 30, 2004 were up 15% over the same period last year as a result of the upgrades at the Island Facility and increased steam demand from Norske Skog. Operating and maintenance expense for the three months ended December 31, 2004 was higher than the same period last year due to overhead recoveries charged by the Manager totaling $0.7 million. Further, there was an unplanned shutdown at the Calgary Energy Centre for steam turbine maintenance during the three months ended December 31, 2003. Costs associated with this maintenance lessened the year over year variance. Operating and maintenance expense for the three months ended June 30, 2004 was higher than the same period last year due to additional expenses as a result of planned maintenance at both the Calgary Energy Centre and Island Facility in the quarter. FORWARD-LOOKING INFORMATION Certain information in this Management's Discussion and Analysis is forward-looking and subject to risks and uncertainties. The results or events predicted in this information may differ from actual results or events. Factors which could cause actual results or events to differ materially from current expectations include, among other things, the ability of the Fund and the Partnership to successfully implement the Fund's strategic initiatives and whether such strategic initiatives will yield the expected benefits, the availability and price of energy commodities, regulatory decisions, competitive factors in the power industry, and the prevailing economic conditions in North America. The Fund and the Partnership each disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Calpine Power Income Fund is an unincorporated open-ended trust that invests in electrical power assets. The Fund indirectly owns interests in power generating facilities in British Columbia, Alberta and California. In addition, the Fund owns a participating loan interest in a power plant in Ontario and has made a loan to Calpine Canada Power Ltd. The Fund is managed by Calpine Canada Power Ltd., which is headquartered in Calgary, Alberta. The Calpine Power Income Fund trust units are listed on the Toronto Stock Exchange under the symbol CF.UN. For further information on the Fund, please visit our website at www.calpinepif.com or contact:
CALPINE POWER INCOME FUND
CONSOLIDATED BALANCE SHEETS
(thousands)
As at
As at December 31,
December 31, 2003
2004 (restated
- Note 3)
---------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 8,138 $ 37
Restricted cash, current portion (Note 8) 4,490 -
Distributions receivable 3,890 4,763
Accounts receivable 566 71
Loan to Calpine Canada Power Ltd., current
portion (Note 5) 9,083 -
Net investment in lease, current portion
(Note 6) 1,583 -
Loan to Calpine Power, L.P. (Note 7) 11,993 -
Prepaid expenses 257 212
--------------------------
40,000 5,083
Investment in Calpine Power, L.P.
(Notes 3 and 10) 476,649 484,734
Net investment in lease, less current
portion (Note 6) 135,521 -
Loan to Calpine Canada Power Ltd., less
current portion (Note 5) 32,188 -
Restricted Cash, less current portion
(Note 8) 1,114 -
Land 1,870 -
Deferred financing costs (Notes 8 and 9) 3,922 3,002
--------------------------
$ 691,264 $ 492,819
--------------------------
--------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities
Distributions payable $ 5,001 $ 4,082
Accounts payable and accrued liabilities 1,959 3,736
Long-term debt, current portion (Note 8) 12,035 -
Borrowing under Credit Facility (Note 9) 8,000 -
--------------------------
26,995 7,818
Future income tax (Note 11) 3,589 -
Asset retirement liability (Note 12) 1,298 -
Long-term debt, less current portion
(Note 8) 83,990 -
--------------------------
115,872 7,818
Unitholders' equity (Notes 3 and 13) 575,392 485,001
--------------------------
$ 691,264 $ 492,819
--------------------------
--------------------------
See accompanying notes to the consolidated financial statements
Approved by the Trustees of Calpine Commercial Trust on behalf of
Calpine Power Income Fund
-------------------- -------------------
CCT Trustee CCT Trustee
CALPINE POWER INCOME FUND
CONSOLIDATED STATEMENTS OF EARNINGS AND UNITHOLDERS' EQUITY
(thousands, except for Trust Units and per Trust Unit amounts)
Year ended
Year ended December 31,
December 31, 2003
2004 (restated
- Note 3)
---------------------------------------------------------------------
REVENUES
Equity earnings from Calpine Power, L.P.
(Note 3) $ 45,734 $ 41,369
Finance income 16,496 -
Interest and other income 6,493 21
--------------------------
68,723 41,390
--------------------------
EXPENSES
Interest on long-term debt 8,236 -
Initial lease costs 4,191 -
Management and administrative 3,494 2,458
Amortization 1,209 271
Interest 761 134
Foreign exchange loss 84 -
Accretion 75 -
--------------------------
18,050 2,863
--------------------------
EARNINGS BEFORE FUTURE INCOME TAXES 50,673 38,527
--------------------------
Future income taxes 3,809 -
--------------------------
NET EARNINGS 46,864 38,527
UNITHOLDERS' EQUITY,
BEGINNING OF YEAR, as previously stated 485,167 496,523
Adjustment for adoption of new accounting
policy (Note 3) (166) (24)
--------------------------
As restated 485,001 496,499
Trust Units issued (Note 4 and 13) 99,845 -
Distributions (56,318) (50,025)
--------------------------
UNITHOLDERS' EQUITY, END OF YEAR $ 575,392 $ 485,001
--------------------------
--------------------------
Weighted average number of Trust Units
outstanding 58,042,861 52,001,351
--------------------------
--------------------------
Net earnings per Trust Unit (Note 13) $ 0.8074 $ 0.7409
--------------------------
--------------------------
See accompanying notes to the consolidated financial statements
CALPINE POWER INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Year ended
Year ended December 31,
December 31, 2003
2004 (restated
- Note 3)
---------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 46,864 $ 38,527
Adjustments for non-cash items:
Equity earnings from Calpine Power, L.P.
(Note 3) (45,734) (41,369)
Finance income (12,305) -
Amortization 1,209 271
Amortization of discount on loan to
Calpine Canada Power Ltd. (1,316) -
Accretion 75 -
Foreign exchange loss 84 -
Future income tax 3,809 -
Lease receipts 16,392 -
Distributions received from Calpine
Power, L.P. 54,692 53,784
--------------------------
Cash from operations before working
capital 63,770 51,213
Change in non-cash working capital
(Note 14) (1,885) 2,970
--------------------------
Net cash provided by operating activities 61,885 54,183
--------------------------
INVESTING ACTIVITIES
Acquisition of King City Facility Lease
and Land (154,658) -
Loan to Calpine Canada Power Ltd. (47,968) -
Receipt of principal on loan to Calpine
Canada Power Ltd. 8,014 -
Loan to Calpine Power, L.P. (11,993) -
--------------------------
Net cash used in investing activities (206,605) -
--------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 111,111 -
Payment of principal on long-term debt (2,770) -
Financing costs (2,131) (3,273)
Borrowing under credit facility 8,000 -
Trust Units issued 99,845 -
Distributions paid (55,399) (50,883)
--------------------------
Net cash provided by (used in) financing
activities 158,656 (54,156)
--------------------------
Foreign exchange loss on cash held in a
foreign currency (231) -
--------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 13,705 27
Cash and cash equivalents, beginning of year 37 10
--------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,742 $ 37
--------------------------
--------------------------
Represented by:
Cash and cash equivalents $ 8,138 $ 37
Restricted cash, current portion 4,490 -
Restricted cash, less current portion 1,114 -
--------------------------
$ 13,742 $ 37
--------------------------
--------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Taxes paid $ - $ -
Interest received $ 4,369 $ 21
Interest paid $ 8,997 $ 134
See accompanying notes to the consolidated financial statements
CALPINE POWER INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 2004 and 2003
(Tabular amounts are in thousands except for Trust
Units and per Trust Unit amounts)
1. BUSINESS AND STRUCTURE OF THE FUND Calpine Power Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of the Province of Alberta pursuant to the Fund Trust Indenture dated July 16, 2002, as amended, supplemented or restated from time-to-time. The Fund was created to acquire or develop facilities in accordance with established acquisition and investment guidelines. The Fund owns 100% of Calpine Commercial Trust ("CCT"), a wholly-owned unincorporated open-ended trust, established under the laws of the Province of Alberta to hold directly the Fund's interest in Class A Priority Units of Calpine Power, L.P., a limited partnership acquired on August 29, 2002, which owns 100% of the Island Cogeneration Facility and the Calgary Energy Centre and a term loan with Calpine Canada Whitby Holdings Company, which owns a 50% interest in the Whitby Cogeneration Facility (collectively referred to as the Partnership). 1021446 Alberta Ltd., a wholly-owned subsidiary of CCT, acts as general partner of the Partnership, the rights and duties of which have been delegated broadly to Calpine Canada Power Ltd. (the "Manager"). In 2004 the Fund indirectly acquired through CCT, King City LP ("KCLP") which leases to Calpine King City Cogen LLC ("Calpine King City") a combined cycle cogeneration facility under a long-term lease arrangement. The Fund also provides, through its wholly-owned subsidiary CPIF CPIF - California Poultry Industry Federation CPIF - Contract Cost-Plus-Incentive-Fee CPIF - Cost Plus Incentive-Fee (Contract) Holdings Ltd., administrative services to the Manager. The Manager, an indirect wholly-owned subsidiary of Calpine Corporation ("Calpine"), is responsible for overseeing the management and administration of the Fund. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Fund have been prepared by the Manager in accordance with Canadian generally accepted accounting principles and include the following: a) Basis of Consolidation The consolidated financial statements include the accounts of the Fund, CPIF Holdings Ltd., CCT, 1021446 Alberta Ltd., CCT Holdings (US) Ltd. 1, King City Ltd. LLC, and KCLP. All intercompany transactions are eliminated. b) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from these estimates. c) Cash and Cash Equivalents The Fund's short-term investments that mature on a daily basis are considered to be cash equivalents and are recorded at cost, which approximates market value. Included in cash and cash equivalents is restricted cash to be used towards debt payments in 2005 and beyond. d) Restricted Cash The Fund is required to maintain cash balances that are restricted by provisions of its debt agreement. These amounts are held by depository banks in order to comply with contractual provisions requiring reserves for payments such as for debt service. Funds that will be used to satisfy obligations due during the next twelve months are classified as current restricted cash, with the remainder classified as non-current restricted cash. Restricted cash is invested in accounts earning market rates; therefore the carrying value approximates fair value. e) Investment in Calpine Power, L.P. The Fund's 70% partnership investment in the Partnership is accounted for using the equity basis of accounting whereby the investment cost is increased or decreased for net earnings or loss and reduced by cash distributions paid to the Fund. The Fund evaluates the carrying value of its investment based on the projection of undiscounted pre-interest expense and pre-tax expense cash flows annually or whenever events change. In the event a decrease in the value of the investment is other than a temporary decline, the investment is written down to their estimated fair values. f) Financial Instruments The carrying value of the Fund's financial instruments including current assets, loan to the Manager, current liabilities and long-term debt approximate fair value, except as otherwise disclosed. g) Revenue Recognition Revenues are derived from equity earnings as earned by the Partnership, finance income from the King City Lease and interest on the loan to the Manager. Finance income is recognized over the lease term in a manner that will provide a constant rate of return on the net investment in the lease. Interest revenue is recorded as earned. h) Asset Retirement Obligation The Fund recognizes a liability for the future retirement obligations associated with the King City Facility. These obligations are initially measured at fair value, which is the discounted future cost of the liability. The liability accretes until the date of expected settlement of the retirement obligations. i) Income Taxes Under the terms of the Income Tax Act (Canada), each of the Fund and CCT, as trusts, will not be subject to income taxes to the extent that its taxable income and taxable capital gains are paid or payable to its unitholders. Accordingly, no provision for current or future income taxes for the Fund or CCT is made. In addition, as each of the Fund and CCT is required to distribute to its unitholders all or virtually all of its taxable income and taxable capital gains that would otherwise be taxable to it, and each of the Fund and CCT intends to continue not to be subject to income taxes, each of the Fund and CCT is not subject to the recommendations of The Canadian Institute of Chartered Accountants Handbook Section 3465. The Fund's other wholly-owned incorporated subsidiaries are subject to corporate income taxes as computed under the applicable tax regimes and follow the liability method of accounting for income taxes. Future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings during the period that such a change is substantively enacted. j) Net Earnings per Trust Unit Net earnings per Trust Unit are calculated by dividing net earnings by the weighted average number of Trust Units outstanding. There are no other dilutive elements. k) Foreign Currency Translation The Fund's foreign subsidiaries are considered to be functionally integrated with the Canadian operations. All monetary assets and liabilities denominated in US currency are translated into Canadian currency at period-end exchange rates, whereas non-monetary assets and liabilities are translated at historical rates in effect at the transaction date. Revenues and expenses of these foreign operations are translated at the average rate of exchange in effect during the applicable period. Any foreign currency gains or losses resulting from such translation are reflected in the consolidated statement of earnings l) Measurement Uncertainty The preparation of the financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. 3. CHANGE IN ACCOUNTING POLICY Effective January 1, 2004, the Partnership adopted the Canadian Institute of Chartered Accountants ("CICA") new standard 3110 "Asset Retirement Obligations". This standard requires recognition of liabilities for the future retirement obligations associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future cost of the liability. This fair value is capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the date of expected settlement of the retirement obligations. This change in accounting policy impacts the Fund through its equity ownership in the Partnership. The Partnership will be required to remove generation facilities at the end of their useful lives and restore the plant sites to their original condition. The effect of this change was recorded retroactively with restatement of prior periods. The effect of the adoption on prior periods is presented below:
As at
Consolidated Balance Sheet December 31, 2003
---------------------------------------------------------------------
Increase (decrease)
Investment in Calpine Power, L.P. $ (166)
Unitholders' Equity (166)
---------------------------------------------------------------------
Year Ended
Consolidated Statement of Earnings December 31, 2003
---------------------------------------------------------------------
Increase (decrease)
Equity earnings from Calpine Power, L.P. $ (142)
Net earnings (142)
Net earnings per Trust Unit (Note 13) (0.0027)
---------------------------------------------------------------------
4. ACQUISITION OF KING CITY FACILITY On May 19, 2004 the Fund closed a transaction to acquire a 120 megawatt natural gas-fired, combined cycle cogeneration facility (the "King City Facility") located in King City, California, which is leased to Calpine King City. In addition, the Fund through its wholly-owned subsidiary, CCT, loaned $48.0 million ($53.4 million face value) to the Manager of the Fund. The Fund acquired the King City Facility from an unrelated third party, BAF Energy a California Limited Partnership. The acquisition by the Fund of the King City Facility and the loan to the Manager (collectively, the "Transaction") resulted in the Fund acquiring two different payment streams. The first payment stream is a 24-year lease (the "Lease") of the King City Facility to Calpine King City, a wholly-owned subsidiary of Calpine. The King City Facility has a long-term Power Purchase Agreement supported by the underlying credit of an investment grade utility. The second payment stream arises from the interest and principal stream from the loan issued to the Manager. The loan is repayable over a nine year term with interest at a rate of 13% per annum. The Fund financed the transaction using a combination of a public offering of approximately $99.8 million of Trust Units of the Fund (the "Offering") and a non-recourse loan facility totaling US$82 million provided by a third party lender. The allocation of the purchase price between assets and liabilities acquired is as follows:
Consideration:
Issuance of 9,740,937 Trust Units at
$10.25 per Trust Unit $ 99,845
Non-recourse long-term debt (US$82,000) 111,111
---------------------------------------------------------------------
$ 210,956
-----------------
-----------------
Net Assets Acquired:
Land $ 1,870
Net investment in lease 154,169
Asset retirement obligation (1,381)
-----------------
154,658
Promissory note (Face Value $53,428) 47,968
Deferred financing costs on non-recourse long-term debt 2,060
Establishment of segregated account (US$ 4,628) 6,270
---------------------------------------------------------------------
$ 210,956
-----------------
-----------------
5. LOAN TO CALPINE CANADA POWER LTD. As part of the Transaction, the Fund made a loan to the Manager with $48.0 million of the funds received from the Offering (Note 4) as evidenced by a promissory note and certain security. This loan has a face value of $53.4 million, will mature in 2010 and bears interest at a fixed rate of 13% per annum with interest and principal payable monthly under the schedule provided in the loan agreement. The discount on the face value is amortized to interest income over the term of the note. The amount of the loan maturing within the next 12 months has been classified as current. The loan is a full recourse obligation of the Manager and is secured by a pledge of the Manager's limited partnership interest in the Partnership, including the Manager's right to receive distributions under the Class B Subordinated Units of Calpine Power L.P. In addition, Calpine King City has provided the Fund with a limited recourse guarantee of the Manager's obligations under the loan and granted the Fund a security interest in the Lessee's annual cash from operations. As at December 31, 2004 the fair market value of the loan was determined to be approximately $45.8 million.
Schedule of principal receipts
and discount amortization Principal Discount Total
---------------------------------------------------------------------
2005 $ 10,686 $ (1,603) $ 9,083
2006 10,686 (1,180) 9,506
2007 10,686 (757) 9,929
2008 8,014 (383) 7,631
2009 2,672 (163) 2,509
2010 2,671 (58) 2,613
---------------------------------------------------------------------
As at December 31, 2004 $ 45,415 $ (4,144) $ 41,271
-------------------------------
-------------------------------
6. NET INVESTMENT IN LEASE The Fund acquired the King City Facility, pursuant to an Acquisition Agreement with BAF Energy, including costs associated with the acquisition and amending the terms of the lease (Note 4). The lease terms are such that the actual plant acquisition is shown as a net investment in the lease given that the Fund's economic recovery of the investment is substantially achieved from the lease with Calpine King City. The Fund will recognize finance income over the lease term that will provide a constant rate of return on the net investment in the lease. Lease payments are denominated in both US and Canadian currency and will be receivable annually on December 31. The US dollar lease receipts are expected to offset substantially all foreign exchange risk associated with satisfying future obligations under the US dollar third party loan. The amount of the net investment in the lease maturing within the next 12 months has been classified as current. Net Investment in Lease includes the following as at December 31, 2004:
Total minimum lease payments receivable $ 319,807
Unguaranteed residual value 177,954
Unearned finance income (360,657)
-------------
137,104
Net investment in lease, current portion (1,583)
-------------
Net investment in lease, less current portion $ 135,521
-------------
-------------
Future minimum lease payments receivable under the lease are as follows:
2005 $ 20,042
2006 19,755
2007 20,055
2008 19,977
2009 21,220
2010 and beyond 218,758
-------------
$ 319,807
-------------
-------------
7. LOAN TO CALPINE POWER, L.P. During the year ended December 31, 2004, the Fund loaned $12.0 million to the Partnership to finance the capital upgrades at the Island Cogeneration Facility. Interest is charged at a rate of 10 basis points over the rate charged under the credit facility. Although the loan is a demand loan, it is not expected to be fully repaid until sometime after 2007. As at December 31, 2004, the fair market value of the loan was determined to be approximately $12.2 million. 8. LONG-TERM DEBT In connection with the acquisition of the King City Facility, the Fund entered into a loan for an amount equal to US$82 million from a third party lender (Note 4). This loan will mature in 2019 and bear interest at a fixed interest rate of 12.8% per annum. The amount of the loan maturing within the next 12 months has been classified as current. The loan is a full recourse obligation of KCLP, a wholly-owned subsidiary of the Fund, but non-recourse to the Fund. Payments of principal and interest are payable annually on December 31. The loan is secured by a first preferred security interest in all assets owned by KCLP without limitation. As at December 31, 2004 the fair market value of the loan was determined to be approximately US$78.8 million. Deferred financing costs of US$1.5 million were incurred with respect to arranging the loan and are being amortized over the 15 year term of the loan. The Fund established a segregated cash account of US$4.6 million (CDN $5.6 million) with proceeds received from the Offering. This cash amount, together with interest earned thereon, will be used to partially satisfy its obligations to the third party lender for principal and interest payments under the terms of the debt, beginning on December 31, 2005.
Future principal payments US $ CDN $
----------------------------------------------------------------------
2005 $ 9,989 $ 12,035
2006 8,143 9,811
2007 7,123 8,582
2008 5,535 6,669
2009 1,857 2,237
2010 and beyond 47,054 56,691
-----------------------------
$ 79,701 $ 96,025
-----------------------------
-----------------------------
9. CREDIT FACILITY AND DEFERRED FINANCING COSTS In October 2003, the Fund, through CCT, obtained a $120 million extendible term credit facility. The term credit facility has a three year term, comprised of a two year revolving period followed by a one year term period and is split into two tranches. One tranche of $90 million is available only to finance acquisitions and the second tranche of $30 million is available for acquisitions as well as for general corporate purposes. Deferred financing costs incurred totaled $3.3 million and are being amortized over the three year term of the credit facility that commenced October 2003. The facility can be drawn upon in Canadian or US dollars and has varying interest rates based on prevailing market-based interest rates, and the ratio of consolidated debt to adjusted consolidated earnings. Standby fees range from 45 basis points to 75 basis points, depending on the ratio of consolidated debt to adjusted consolidated earnings and are charged on the undrawn balance of the facility. During the year ended December 31, 2004, $8.0 million had been drawn down on the facility. Interest on the current balance of the facility averaged 4.34% for the year ended December 31, 2004. Due to the short-term nature and floating interest rate on the credit facility borrowing, carrying value approximates fair value. Security for the facility consists of a floating charge and a security interest over CCT's and the Partnership's current and after acquired real and personal property, and is subject to certain financial covenants measured quarterly. If not renewed, any outstanding balance on the credit facility must be settled by October 2006. 10. INVESTMENT IN CALPINE POWER, L.P. On August 29, 2002, the Fund purchased 52,001,351 Class A Priority Units of the Partnership representing a 70% partnership interest. As at December 31, 2004 and 2003, the equity investment in Calpine Power, L.P. was comprised as follows:
---------------------------------------------------------------------
Investment in Calpine Power, L.P. at
December 31, 2002, restated $ 496,543
Equity Earnings from Calpine Power, L.P., restated 41,369
Distributions received and receivable
from Calpine Power, L.P. (53,178)
---------------------------------------------------------------------
As at December 31, 2003, restated 484,734
Equity Earnings from Calpine Power, L.P. 45,734
Distributions received and receivable
from Calpine Power, L.P. (53,819)
---------------------------------------------------------------------
As at December 31, 2004 $ 476,649
--------------
--------------
11. INCOME AND OTHER TAXES As the Fund operates in Canada and the United States, its income is subject to various rates of taxation. The provision for income taxes differs from the amount that would have resulted from applying the Canadian statutory income tax rates to income (loss) before income taxes as follows:
2004
Income before income taxes
Canada $ 46,314
United States 4,359
---------------------------------------------------------------------
$ 50,673
-----------
-----------
Federal and provincial statutory rates 33.87%
---------------------------------------------------------------------
Tax at statutory rates 17,163
Income not subject to tax (13,891)
Difference between Canadian rate and
rates applicable to subsidiaries in other countries 661
Other (124)
-----------
Income tax expense $ 3,809
-----------
-----------
Details of income tax expense are as follows:
Canada
Current $ -
Future 20
United States - Federal
Current -
Future 3,133
United States - State
Current -
Future 656
-----------
Income tax expense $ 3,809
-----------
-----------
The components of future income assets and liabilities are as
follows:
2004 2003
Future tax liabilities
Capital assets book value in excess of
undepreciated cost of capital $ 2,902 $ -
Finance incomes 1,540 -
Other - -
------------------------
Total future tax liabilities 4,442 -
Future tax assets
Loss carryforwards 841 -
Other 12 -
------------------------
Net future tax liability $ 3,589 $ -
------------------------
------------------------
12. ASSET RETIREMENT OBLIGATION The Fund has recognized a liability for the future retirement obligations associated with the King City Facility (Note 4). This obligation was measured at fair value, which is the discounted future cost of the liability. This fair value was capitalized as part of the net investment in lease. The liability accretes until the date of expected settlement of the retirement obligation. The Fund estimates the undiscounted amount of cash required to settle the asset retirement obligation will be approximately US$7.6 million, which will be incurred in 2028. A discount rate of 8 1/2% and assumed inflation of 2 1/4% were used to calculate the carrying value of the asset retirement obligation. As at December 31, 2004, the Asset Retirement Liability is comprised of the following: --------------------------------------------------------------------- As at May 19, 2004 $ 1,381 Accretion expense 75 Foreign exchange (158) --------------------------------------------------------------------- As at December 31, 2004 $ 1,298 --------------------------------------------------------------------- 13. UNITHOLDERS' EQUITY The Fund Trust Indenture provides that an unlimited number of Trust Units may be authorized and issued. Each Trust Unit is transferable, carries the right to one vote and represents an equal undivided beneficial interest in any distributions from the Fund and in the net assets of the Fund in the event of termination or winding-up of the Fund. All Trust Units are of the same class with equal rights and privileges. The Trust Units are redeemable at the holder's option at an amount equal to the lesser of: (a) 90% of the weighted average price per Trust Unit during the period of the last 10 days during which the Trust Units were traded on the Toronto Stock Exchange; and (b) the closing market price at the date of redemption as defined in the Trust Indenture. Redemptions are subject to a maximum of $250,000 in cash redemptions in any particular month. Redemptions in excess of this amount will be paid by way of a distribution of notes issued by CCT to the Fund. There have been no redemptions to date. On February 13, 2003, the Fund and Calpine Canada Energy Holdings Ltd. ("CEHL CEHL - Continental Elite Hockey League") a wholly-owned subsidiary of Calpine, completed a Secondary Offering of 17,034,234 Warranted Units of the Fund for gross proceeds of $153.3 million to CEHL. Each Warranted Unit consisted of one Trust Unit and one-half of one Trust Unit purchase warrant ("Warrant") with an ascribed value of $9.00 per Trust Unit and $0.20 per Warrant. Each Warrant entitled the holder to purchase one Trust Unit at a price of $9.00 at any time prior to December 31, 2003, after which time the Warrant would be null and void. On closing of the Secondary Offering, CEHL sold 17,034,234 Trust Units to the public as part of the Warranted Unit, and sold 8,517,118 Trust Units to the Fund. The Fund issued an interest bearing promissory note (the "Fund Promissory Note") to CEHL in consideration for the Trust Units purchased by the Fund. The Fund cancelled the Trust Units it purchased and intended to issue up to 8,517,117 Trust Units to satisfy its obligations in respect of Warrants and apply the exercise proceeds to repay any outstanding amount under the Fund Promissory Note prior to December 31, 2003. If any Warrants were not exercised prior to December 31, 2003, they would be null and void and the Fund would extinguish any outstanding amount of the Fund Promissory Note by issuing additional Trust Units to CEHL. Total Warrants exercised were 8,508,517 for the year ended December 31, 2003. A total of 8,600 Warrants expired on December 31, 2003 resulting in the issuance of 8,600 Trust Units to CEHL to fully satisfy the remaining outstanding balance of the Fund Promissory Note. As at December 31, 2004, CEHL's ownership is 4,605 Trust Units. On May 19, 2004, the Fund completed an offering of 9,740,937 Trust Units for total proceeds of $99.8 million to acquire the King City Facility (Note 3).
Number of Units Amount
---------------------------------------------------------------------
UNITHOLDERS' EQUITY
As at December 31, 2002, restated 52,001,352 $ 496,499
Net earnings, restated 38,527
Distributions declared (50,025)
Trust Units purchased and cancelled (8,517,118) (78,357)
Trust Units issued on exercise and
expiry of Warrants 8,517,117 78,357
----------------------------
As at December 31, 2003, restated 52,001,351 $ 485,001
----------------------------
Issued for King City Transaction (Note 3) 9,740,937 99,845
Net earnings 46,864
Distributions declared (56,318)
----------------------------
As at December 31, 2004 61,742,288 $ 575,392
----------------------------
----------------------------
WARRANTS
Issued on Trust Units purchased
and cancelled 8,517,117 1,703
Exercise of Warrants (8,508,517) (1,701)
Expires (8,600) (2)
----------------------------
As at December 31, 2003 - $ -
----------------------------
----------------------------
PROMISSORY NOTE
Issued on Trust Units purchased
and cancelled $ 78,357
Repayment on issue of Warrants (1,703)
Repayment on exercise and expiry
of Warrants (76,654)
----------------------------
As at December 31, 2003 - $ -
----------------------------
----------------------------
Net earnings per Trust Unit for the year ended December 31, 2004 have been calculated based on a weighted average of 58,042,861 Trust Units (52,001,351 weighted average Trust Units for the year ended December 31, 2003). There are no other dilutive securities.
14. WORKING CAPITAL
Year ended Year ended
December 31, December 31,
Change in non-cash working capital 2004 2003
---------------------------------------------------------------------
Operating Activities
Accounts receivable $ (63) $ (71)
Prepaid expenses (45) (212)
Accounts payable (1,777) 3,253
----------------------------
$ (1,885) $ 2,970
----------------------------
----------------------------
15. RELATED PARTY TRANSACTIONS The Manager is a wholly-owned subsidiary of CEHL, which in turn is an indirect wholly-owned subsidiary of Calpine. The Manager holds Class B Subordinated Units representing a 30% interest in the Partnership. The Fund and the Manager have entered into a 20-year Administration Agreement expiring in 2022 and CCT and the Manager have entered into a 20-year Management Agreement expiring 2022. Pursuant to these agreements, the Manager administers the Fund and manages CCT. In consideration for services provided under the Administration Agreement with the Fund, the Manager receives a monthly fee which is adjusted annually based upon the increase in the Canadian Consumer's Price Index. In consideration for services provided under the Management Agreement with CCT, the Manager will receive: (i) a monthly base fee subject to annual adjustment based on the increase in the Canadian Consumer's Price Index and (ii) an incentive fee payable annually and equal to 20% of the amount by which the excess distributable cash of the Partnership exceeds a specified threshold amount. During the year ended December 31, 2004, a total of $163 thousand (year ended December 31, 2003 - $773 thousand) was paid or payable to the Manager for administrative and incentive fees under the administration and management agreements. As at December 31, 2004 and December 31, 2003 the Fund had the following balances receivable from (payable to) related parties in the normal course of business:
As at As at
December 31, December 31,
2004 2003
---------------------------------------------------------------------
Distributions receivable from
the Partnership $ 3,890 $ 4,763
Loan and interest receivable from
the Partnership 12,235 -
Accounts receivable from the Partnership 64 -
Accounts payable to the Partnership (28) (2,767)
Accounts payable to the Manager (684) (724)
Accounts payable to Calpine (55) -
---------------------------------------------------------------------
The Fund advanced $12.0 million to the Partnership to pay for capital upgrades at the Island Cogeneration Facility. For the year ended December 31, 2004, $242 thousand (year ended December 31, 2003 - nil) of interest income on this amount was recognized by the Fund based on a rate 10 basis points over the rate incurred on the Fund's credit facility that averaged 4.34% for the year ended December 31, 2004. In addition, the Fund entered into several related party transactions as part of the King City Transaction (Note 4). This acquisition included an independent appraisal of the transaction and was approved by the independent Trustees of CCT and the Unitholders of the Fund and accordingly the transactions were recorded at the applicable exchange amounts. As at December 31, 2004, the Fund had the following balances receivable from related parties resulting from this transaction:
As at As at
December 31, December 31,
2004 2003
---------------------------------------------------------------------
Loan to Manager 41,271 -
Ground Lease due from Calpine 95 -
Net Investment in Lease due from Calpine 137,104 -
---------------------------------------------------------------------
For the year ended December 31, 2004, the Fund recognized finance and rental income of $12.3 million (year ended December 31, 2003 - nil) from the Facility and Ground Lease with Calpine King City. Interest earned with respect to the loan receivable from the Manager amounted to $5.6 million for the year ended December 31, 2004 (year ended December 31, 2003 - nil). 16. ECONOMIC DEPENDENCE AND OTHER BUSINESS RISKS For purposes of declaring distributions, the Fund is primarily dependent on cash distributions received from the Partnership, the King City Facility and the Manager Loan. For the year ended December 31, 2004, the Partnership's primary sources of cash were derived from the sale of electricity by the Island Cogeneration Facility to BC Hydro pursuant to the electricity purchase agreement and from the Calgary Energy Centre pursuant to the tolling agreement between Calpine Energy Services Canada Partnership and the Calgary Energy Centre. The Fund benefits from this tolling agreement, which is currently above the market for merchant power pricing in Alberta. Contract Performance The amount of Distributable Cash of the Fund available for distribution to Unitholders is highly dependent upon parties to certain agreements fulfilling their contractual obligations to the Fund or its affiliates. An inability or failure by any such party to meet its contractual commitments may adversely affect cash distributions by the Fund. Calpine has guaranteed certain contracts held by the Fund including the Calgary Energy Centre Tolling Agreement with CESCP. If for any reason CESCP or Calpine is unable or unwillingly to fulfill these contractual obligations, Distributable Cash of the Fund could decline. Credit Risk The Fund is exposed to credit-related losses in the event of non-performance by counterparties. The Fund deals with certain counterparties that are not investment grade, including Calpine, but does not anticipate non-performance by the counterparties. The Calgary Energy Centre tolling revenues are above what the plant would expect to receive as net revenue if it were exposed to current market pricing. Provided CESCP continues to satisfy its obligations under the tolling agreement, this negative market exposure should have no impact on the Fund. The Fund monitors credit risk on an ongoing basis. Impact of Subordination on the Manager Loan It is expected that the Manager will be able to fund its obligations to the Fund under the Manager Loan only through distributions paid to the Manager on its Class B Subordinated Units of the Partnership. The Partnership pays distributions on the Class B Subordinated Units only after satisfying its distribution obligations to the Fund, as the sole owner of the Class A Priority Units. As a result, there can be no guarantee that the Partnership will distribute sufficient funds to the Manager, as the owner of the Class B Subordinated Units, to allow the Manager to meet its payment obligations under the Manager Loan. Foreign Exchange Risk Within the Fund, the US dollar lease receipts from Calpine King City are expected to substantially offset all foreign exchange risk associated with satisfying future obligations under the US dollar third party loan. Loss of QF Status The maintenance of Qualifying Facility ("QF") status at the King City Facility is dependent upon the King City steam host taking a sufficient amount of thermal energy from the King City Facility under the King City Steam Sale Agreement ("King City SSA"). If the King City SSA were terminated or the King City steam host failed to take sufficient amount of thermal energy to ensure the King City Facility retained its QF status, the Fund would seek to replace King City steam host as the thermal energy customer for the King City Facility to retain its QF status. No assurance can, however, be given that securing another steam host or alternative steam use would be possible and feasible. The loss of QF status by King City Facility is a lease event of default as well as a loan event of default, for which there is no grace period. Such loss of status would entitle the third party lender to exercise remedies under the various financing documents. Although the King City steam host currently takes sufficient thermal energy from the King City Facility to ensure the facility retains its QF status, the steam host is seeking an alternate use for the thermal energy. The King City steam host is currently installing a distilled water generating facility which when operable will take a sufficient amount of thermal energy to ensure the King City Facility retains its QF status. Application has been made to FERC to recertify the facility for this alternate thermal energy use. Although Calpine King City expects to cause the contemplated alternative facilities to be constructed and to obtain the necessary recertification, no assurance can be given that the recertification will be obtained. 17. COMMITMENTS AND CONTINGENCIES As part of normal operations, the Fund and its wholly-owned subsidiaries and partnerships enter a variety of commitments under normal business terms. Payments due by period Contractual 2010 and Obligations Total 2005 2006 2007 2008 2009 Beyond --------------------------------------------------------------------- Asset retirement liability King City Facility (US$) $ 7,610 $ - $ - $ - $ - $ - $ 7,610 Principal payments on the King City Loan (US$) 79,701 9,989 8,143 7,123 5,535 1,857 47,054 --------------------------------------------------------------------- 18. SUBSEQUENT EVENTS On November 22, 2004, the Fund announced cash distributions for January 2005 had been set at $0.0818 per Trust Unit. The cash distribution for this period will be paid on February 18, 2005 to Unitholders of record on January 31, 2005. During January 2005, the Fund used excess cash to loan $4.0 million to the Partnership to complete the financing of the capital upgrade at the Island Facility and $1.0 million to reduce the principal on the credit facility.
CALPINE POWER, L.P.
CONSOLIDATED BALANCE SHEETS
(thousands)
As at As at
December 31, December 31,
2004 2003
(restated -
Note 3)
---------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 13,715 $ 12,978
Restricted cash (Note 4) - 2,190
Accounts receivable 10,819 16,573
Interest receivable - Whitby Loan (Note 5) 2,248 855
Prepaid expenses 2,014 2,935
-------------------------
28,796 35,531
Loan to Calpine Canada Whitby Holdings
Company (Note 5) 37,404 37,404
Capital assets (Notes 3 and 6) 594,029 592,472
-------------------------
$ 660,229 $ 665,407
-------------------------
-------------------------
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Distributions payable $ 5,651 $ 7,665
Accounts payable and accrued
liabilities - trade 8,577 10,684
- accrued capital 44 367
Interest payable 242 -
Loan payable (Note 7) 11,993 -
-------------------------
26,507 18,716
Asset retirement liability 2,369 2,183
-------------------------
28,876 20,899
Partners' equity (Notes 3 and 9) 631,353 644,508
-------------------------
$ 660,229 $ 665,407
-------------------------
-------------------------
See accompanying notes to the consolidated financial statements
Approved by Calpine Canada Power Ltd.
_________________________ ______________________
Director Director
CALPINE POWER, L.P.
CONSOLIDATED STATEMENTS OF EARNINGS AND PARTNERS' EQUITY
(thousands, except for per Unit amounts)
Year ended Year ended
December 31, December 31,
2004 2003
(restated -
Note 3)
---------------------------------------------------------------------
REVENUES
Electricity and thermal $ 101,541 $ 86,855
Interest - Whitby 3,393 3,357
- other 412 1,136
-------------------------
105,346 91,348
-------------------------
EXPENSES
Operating and maintenance 19,603 14,507
Depreciation (Note 3) 20,588 17,613
Accretion (Note 3) 186 150
Interest 242 -
General and administrative 699 152
Foreign exchange loss (gain) 16 184
-------------------------
41,334 32,606
-------------------------
NET EARNINGS 64,012 58,742
PARTNERS' EQUITY, BEGINNING OF YEAR, as
previously stated 644,742 679,308
Adjustment for adoption of new
accounting policy (Note 3) (234) (35)
-------------------------
As restated 644,508 679,273
Special distributions (1,697) (18,188)
Distributions (75,470) (75,319)
-------------------------
PARTNERS' EQUITY, END OF YEAR $ 631,353 $ 644,508
-------------------------
-------------------------
Net earnings per Unit (Note 9):
Class A Priority Unit $ 0.8795 $ 0.7956
-------------------------
-------------------------
Class B Subordinated Unit $ 0.8201 $ 0.7795
-------------------------
-------------------------
See accompanying notes to the consolidated financial statements
CALPINE POWER, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Year ended Year ended
December 31, December 31,
2004 2003
(restated -
Note 3)
---------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 64,012 $ 58,742
Adjustments for non-cash items:
Depreciation (Note 3) 20,588 17,613
Accretion (Note 3) 186 150
Foreign exchange 16 184
-------------------------
Cash from operations before working capital 84,802 76,689
Change in non-cash working capital (Note 8) 3,417 (10,841)
-------------------------
Net cash provided by operating activities 88,219 65,848
-------------------------
INVESTING ACTIVITIES
Capital expenditures (22,145) (24,663)
Receipts under Calgary Energy Tolling
Agreement - 9,548
Change in non-cash working capital (Note 8) (323) (22,870)
-------------------------
Net cash used in investing activities (22,468) (37,985)
-------------------------
FINANCING ACTIVITIES
Loan payable 11,993 -
Special distributions on the Class B
Subordinated Units (Note 4) (1,697) (18,188)
Distributions (77,484) (75,631)
Security deposit returned - (17,269)
Change in non-cash working capital - 117
-------------------------
Net cash used in financing activities (67,188) (110,971)
-------------------------
Foreign exchange gain on cash held in
foreign currency (16) (184)
-------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,453) (83,292)
Cash and cash equivalents,
beginning of year 15,168 98,460
-------------------------
Cash and cash equivalents, end of year $ 13,715 $ 15,168
-------------------------
-------------------------
Represented by:
Cash and cash equivalents $ 13,715 $ 12,978
Restricted cash (Note 4) - 2,190
-------------------------
$ 13,715 $ 15,168
-------------------------
-------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Interest received $ 2,412 $ 2,024
Interest paid $ - $ -
See accompanying notes to the consolidated financial statements
CALPINE POWER, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004 and 2003
(Tabular amounts are in thousands except for per Unit amounts)
1. BUSINESS AND STRUCTURE OF THE PARTNERSHIP Calpine Power, L.P. (the "Partnership") is a limited partnership created under the laws of the Province of Alberta pursuant to the limited partnership agreement between 1021446 Alberta Ltd., as general partner, and Calpine Canada Power Ltd. (the "Manager") and Calpine Commercial Trust ("CCT") as limited partners of the Partnership (the "CLP Partnership Agreement"). The rights and duties of the general partner have been broadly delegated to the Manager. Under the terms of the operating and maintenance agreement between Calpine Island Cogeneration Limited Partnership ("ICLP ICLP - International Conference on Logic Programming"), Calpine Island Cogeneration Project Inc. ("ICPI ICPI - Incremental Contractor Preliminary Inspection ICPI - Institut de Chimie et Physique Industrielles (French) ICPI - Insurance Crime Prevention Institute ICPI - Interlocking Concrete Pavement Institute ICPI - International Conference on Parallel Interconnects ICPI - Intracerebral Pathogenicity Index") and the Manager (the "Island O&M Agreement") and the operating and maintenance agreement between Calgary Energy Centre ULC ("CECGP'), Calgary Energy Centre Limited Partnership ("CECLP") and the Manager (the "Calgary Energy O&M Agreement") (collectively, the "O&M Agreements"), the Manager operates and maintains the Island Cogeneration Facility and the Calgary Energy Centre for the reimbursement of its costs. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Partnership have been prepared by the Manager in accordance with Canadian generally accepted accounting principles and include the following: a) Basis of Consolidation The consolidated financial statements include the accounts of the Partnership, ICLP, ICPI, CECGP and CECLP. All inter-company transactions are eliminated. b) Use of Estimates The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires the Manager to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. c) Cash and Cash Equivalents The Partnership's short-term investments that mature on a daily basis are considered to be cash equivalents and are recorded at cost, which approximates market value. d) Financial Instruments The carrying value of the Partnership's financial instruments including current assets, loans receivable, and current liabilities approximate fair value, except as otherwise disclosed. e) Prepaid Expenses Prepaid expenses include insurance, property taxes and long-term service agreement ("LTSA") payments. At the time of the major overhaul, prepaid LTSA payments are either expensed or capitalized, depending on the nature of the work performed. f) Capital Assets The Facilities are accounted for at cost. The cost of a power generation plant and equipment, less estimated salvage value, is depreciated on a straight-line basis over its estimated service life of thirty-five years. The cost of major overhauls is capitalized and depreciated on a straight-line basis over the estimated service lives, which is usually one to six years. The Partnership evaluates the impairment of capital assets based on the projection of discounted pre-interest expense and pre-tax expense cash flows whenever events and changes in circumstance indicate the carrying amount of such assets may not be recoverable. In the event that the fair value of the capital assets decrease below the net book value, the capital assets are written down to their estimated fair value. g) Income Taxes The Partnership's wholly-owned subsidiaries, CECGP and ICPI are subject to corporate income taxes as computed under the Income Tax Act (Canada) and the liability method of accounting under CICA section 3465. Under the liability method of accounting, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the difference are expected to reverse. Future income tax expense for 2004 was $5 thousand and has been included in general and administrative expense. Under the Income Tax Act (Canada), a partnership does not pay tax. Rather, the income taxes in respect of the partnership are the responsibility of the individual partners as opposed to the partnership and therefore have not been recorded in the consolidated financial statements. h) Revenue Recognition Electricity revenue derived from sales pursuant to the Electricity Purchase Agreement (the "Island EPA") dated September 29, 1998, between ICLP and British Columbia Hydro and Power Authority ("BC Hydro") and the Tolling Agreement, dated effective as of August 29, 2002, between Calpine Energy Services Canada Partnership ("CESCP") and CECLP (the "Calgary Energy Tolling Agreement") is recorded at the time electrical energy is delivered at the rates set out in the Island EPA and, with respect to the Calgary Energy Tolling Agreement, revenue is recorded monthly based on the monthly charge set forth in the Calgary Energy Tolling Agreement. Electricity revenue is also recognized pursuant to the Alstom Settlement Agreement, where the Partnership records revenue based on equivalent operating hours of the plant. Thermal revenue derived from sales pursuant to the Energy Services Agreement, dated September 29, 1998, between, ICLP, Norske Skog Canada Limited and Norske Skog Canada Pulp Operations Limited (the "Island ESA") is recorded at the time steam is delivered (or deliverable) at the rates set out in the Island ESA. Interest revenue is recorded as earned. i) Asset Retirement Obligation The Partnership recognizes a liability for the future retirement obligations associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future cost of the liability. This fair value is capitalized as part of the cost of the related asset and amortized over its useful life. This liability accretes until the date of expected settlement of the retirement obligation. j) Net Earnings per Unit Net earnings per unit are calculated by dividing net earnings respectively, by the weighted average number of units outstanding. There are no other dilutive elements. k) Foreign Currency All monetary assets and liabilities denominated in foreign currency are translated into Canadian currency at period-end exchange rates, whereas non-monetary assets and liabilities are translated at the historical rates in effect at the transaction date. Any foreign currency gains or losses resulting from such translation is reflected in the consolidated statements of earnings. l) Measurement Uncertainty The preparation of the financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. 3. CHANGE IN ACCOUNTING POLICY Effective January 1, 2004, the Partnership adopted the Canadian Institute of Chartered Accountants ("CICA") new standard 3110 "Asset Retirement Obligations". This standard requires recognition of a liability for the future retirement obligations associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future cost of the liability. This fair value is capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the date of expected settlement of the retirement obligations. The Partnership will be required to remove generation facilities at the end of their useful lives and restore the plant sites to their original condition. The effect of this change in accounting policy was recorded retroactively with the restatement of prior periods. The effect of the adoption on prior periods is presented below:
As at
Consolidated Balance Sheet: December 31, 2003
---------------------------------------------------------------------
Capital Assets Increase (decrease)
Cost $ 2,008
Accumulated depreciation 59
Asset retirement liability 2,183
Partners' equity (234)
---------------------------------------------------------------------
Year ended
Consolidated Statement of Earnings: December 31, 2003
---------------------------------------------------------------------
Increase (decrease)
Depreciation expense $ 49
Accretion expense 150
Net earnings (199)
Net earnings per Unit (Note 9):
Class A Priority Unit (0.0027)
Class B Subordinated Unit (0.0026)
---------------------------------------------------------------------
As at December 31, 2004 the Asset Retirement Liability is comprised
of the following:
As at December 31, 2003 $ 2,183
Accretion expense 186
---------------------------------------------------------------------
As at December 31, 2004 $ 2,369
---------------------------------------------------------------------
The Partnership estimates the undiscounted amount of cash required to settle the asset retirement obligation is approximately $36.6 million, which will be incurred between 2037 and 2038 for the two power plants. A discount rate of 8 1/2% and assumed inflation of 2 1/4% was used to calculate the carrying value of the asset retirement obligation. 4. RESTRICTED CASH AND MAINTENANCE RESERVE A cash reserve of $111.0 million was established in 2002 in a segregated account at the time of acquisition of the Facilities Interests to meet the remaining construction requirements of the Calgary Energy Centre. During the third quarter of 2003, $18.2 million of the construction reserve balance was returned to the Manager as a special distribution, in accordance with the applicable agreements. During the first quarter of 2004 after paying all remaining construction expense, the remaining construction reserve balance of $1.7 million was returned to the Manager and the construction account was closed. At December 31, 2004, a maintenance reserve of $10.9 million (December 31, 2003 - $9.3 million) has been accumulated within cash and cash equivalents to partially fund future maintenance costs. 5. WHITBY LOAN Cash received during the year ended December 31, 2004 in the amount of $2.0 million associated with the Whitby Loan has been applied to the accrued interest receivable balance consistent with the terms of the loan agreement. As at December 31, 2004, the fair market value of the Whitby Loan was determined to be approximately $40.3 million (December 31, 2003 - $39.6 million). 6. CAPITAL ASSETS
---------------------------------------------------------------------
Cost Accumulated Net Book
Depreciation Value
---------------------------------------------------------------------
As at December 31, 2004
Land $ 334 $ - $ 334
Power generation plants and
equipment 634,656 40,961 593,695
------------------------------------
$ 634,990 $ 40,961 $ 594,029
------------------------------------
------------------------------------
As at December 31, 2003
Land $ 334 $ - $ 334
Power generation plants and
equipment 612,511 20,373 592,138
------------------------------------
$ 612,845 $ 20,373 $ 592,472
------------------------------------
------------------------------------
Included within power generation plants and equipment is $2.6 million (2003 - $2.6 million) of spare parts and other inventory not yet put into service, and as such, has not been depreciated. 7. LOAN PAYABLE During the year ended December 31, 2004, $12.0 million was advanced to the Partnership by the Fund to finance the capital upgrade at the Island Cogeneration Facility. Interest is charged at a rate of 10 basis points over the rate per the Fund's credit facility which averaged 4.34% for the year ended December 31, 2004. Although the loan is a demand loan, it is not expected to be fully repaid until sometime after 2007. As at December 31, 2004, the fair market value of the loan was determined to be approximately $12.2 million. 8. WORKING CAPITAL
Year ended Year ended
December 31, December 31,
Change in non-cash working capital 2004 2003
---------------------------------------------------------------------
Operating activities:
Accounts receivable $ 5,754 $ (11,823)
Interest receivable (1,393) (1,357)
Prepaid expenses 921 (2,422)
Accounts Payable and accrued Liabilities (2,107) 4,761
Interest payable 242 -
------------------------------------
$ 3,417 $ (10,841)
------------------------------------
------------------------------------
Investing activities:
Accounts payable - accrued capital $ (323) $ (22,870)
------------------------------------
------------------------------------
Financing activities:
Deposits payable $ - $ 117
------------------------------------
------------------------------------
9. PARTNERS' EQUITY The Partnership is authorized to issue an unlimited number of Class A Priority Units and an unlimited number of Class B Subordinated Units. For the year ended December 31, 2004, the holder of Class A Priority Units, CCT, received the first $0.079 of Distributable Cash per Class A Priority Unit per month (in addition to certain management and administrative expenses incurred directly by the Fund) on a cumulative basis in priority to any payments on the Class B Subordinated Units. For the year ended December 31, 2004, the holder of Class B Subordinated Units, the Manager, was entitled to receive up to $0.079 of Distributable Cash per Class B Subordinated Unit per month which amounts cumulate for a fiscal year (and if unpaid at the end of a fiscal year, this entitlement terminates for such fiscal year) following the priority payment of Distributable Cash to the holder of Class A Priority Units. Each year until 2022, the Distributable Cash entitlements increase at an annual rate of 1%. Holders of Class A Priority Units and Class B Subordinated Units are entitled to share equally, on a class basis, any Distributable Cash in excess of their prior entitlements in any calendar year.
Class A Units Class B Units Total
---------------------------------------------------------------------
As at December 31, 2002,
restated $ 496,543 $ 182,730 $ 679,273
Net earnings, restated 41,369 17,373 58,742
Distributions declared (53,178) (22,141) (75,319)
Special distribution
- Construction reserve - (18,188) (18,188)
------------------------------------------
As at December 31, 2003,
restated $ 484,734 $ 159,774 $ 644,508
Net earnings 45,734 18,278 64,012
Distributions declared (53,819) (21,651) (75,470)
Special distribution
- Construction reserve - (1,697) (1,697)
------------------------------------------
As at December 31, 2004 $ 476,649 $ 154,704 $ 631,353
------------------------------------------
------------------------------------------
Net earnings per Class A Priority Unit and Class B Subordinated Unit for the year ended December 31, 2004 have been calculated based on a weighted average of 52,001,352 Class A Priority Units (December 31, 2003 - 52,001,352) and 22,286,294 Class B Subordinated Units (December 31, 2003 - 22,286,294). 10. RELATED PARTY TRANSACTIONS The Manager is an indirect wholly-owned subsidiary of Calpine Corporation ("Calpine"). The Manager holds Class B Subordinated Units representing a 30% interest in the Partnership. Calpine Canada Whitby Holdings Company ("CCWH") is an indirect wholly-owned subsidiary of Calpine. The Partnership, through a term loan to CCWH of $37.4 million that matures on August 29, 2017, is entitled to interest income at an annual interest rate of 9.07%. CCWH shall be obligated to repay principal at such time as it receives distributions from Whitby Cogeneration Limited Partnership (or its general partner, 1066917 Ontario Inc.) in an amount equal to the amount of such distributions less the amount of any interest payments then due or coming due within the next 60 day period and less any reserve necessary to pay taxes expected to be payable on such distributions. Interest earned with respect to this loan amounted to $3.4 million for the year ended December 31, 2004 (2003 - $3.4 million). CECLP and CESCP entered into a tolling agreement whereby the Calgary Energy Centre earns revenue through monthly payments, composed of both a fixed and variable portion, received from CESCP in exchange for providing the full operating capacity of the plant. For the year ended December 31, 2004, the Partnership recognized revenues of $54.4 million (year ended December 31, 2003 - $38.1 million) from CESCP related to this agreement. Under the terms of the operating and maintenance agreement between ICPI, ICLP and the Manager, and the operating and maintenance agreement between CECGP, CECLP and the Manager, the Manager operates and maintains the Island Cogeneration Facility and the Calgary Energy Centre for the reimbursement of its costs. Under the Partnership Agreement, the Manager is responsible for providing and performing management and administrative and other services for the Partnership on a cost reimbursement basis. As at December 31, 2004 and December 31, 2003, the Partnership had the following balances receivable from (payable to) related parties in the normal course of business:
As at As at
December 31, December 31,
2004 2003
---------------------------------------------------------------------
Accounts receivable from Calpine $ 3,664 $ 5,152
Accounts receivable from the Fund 28 2,767
Loan and interest receivable from Calpine
Canada Whitby Holdings Company 39,652 38,259
Distributions payable to Calpine Commercial
Trust (3,890) (4,763)
Distributions payable to the Manager (1,761) (2,902)
Accounts payable to Calpine (1,613) (468)
Accounts payable to the Fund (64) -
Capital reimbursement due to the Manager - (367)
Loan and interest payable to the Fund (12,235) -
---------------------------------------------------------------------
11. ALSTOM SETTLEMENT AGREEMENT On July 9, 2002, Alstom Canada Inc. ("Alstom") pursuant to its obligation under a turnkey design, engineering, procurement and construction contract, agreed to pay buy down amounts totaling $50.0 million to the Partnership over a 10 year period because certain performance targets for the Island Cogeneration Facility were not met. The settlement is fully supported by a banker's demand bond. This amount will be settled whereby the Partnership will record revenue as an offset to amounts otherwise payable for capital and operating expenses. Settlement revenue of $4.3 million (2003 - $6.2 million), has been recognized within electricity and thermal revenue in the consolidated financial statements of the Partnership for the year ended December 31, 2004. At December 31, 2004, the remaining amount due from Alstom was $34.1 million (2003 - $38.4 million) which will be earned over the remaining settlement period. The amount recognized is dependent on the actual operating hours of the Plant, as such. It will vary annually depending on Plant performance. Under the Island Cogeneration Facility Construction Contract with Alstom, there also exists certain performance guarantees regarding plant availability during the first six years of operation. As a result of an extended maintenance period and plant shutdown in 2003, the actual plant availability for the first year of operations was below the guaranteed availability. As a result of this guarantee, the Partnership received liquidating damages of $5.0 million that was included as a component of electricity and thermal revenue in 2003. No amounts were received for the second contract year with respect to the guarantees, since Alstom met all required availability guarantees. In respect of the third contract year, $1.6 million has been recognized and included as electricity and thermal revenue for the year ended December 31, 2004. 12. COMMITMENTS AND CONTINGENCIES Payments due by period Contractual 2010 and Obligations Total 2005 2006 2007 2008 2009 Beyond --------------------------------------------------------------------- Calgary Energy Centre - LTSA (US$) $ 28,681 $ 3,181 $ 7,813 $ 861 $ 2,307 $ 5,125 $ 9,394 Island Cogeneration Facility - Land Lease (CDN$) 990 30 30 30 30 30 840 Asset retirement liability Calpine Power, L.P (CDN$) 36,612 - - - - - 36,612 --------------------------------------------------------------------- As part of normal operations, the Partnership and its wholly-owned subsidiaries and partnerships enter a variety of commitments under normal business terms with unrelated third parties. Island Electricity Purchase Agreement: The sale of electricity from the Island Cogeneration Facility to BC Hydro is governed by the Island EPA dated September 29, 1998 between ICLP and BC Hydro, as amended. The initial term of the Island EPA expires on April 12, 2022. The Island EPA functions as a tolling arrangement, under which BC Hydro delivers all fuel required to operate the Facility and is, in turn, obligated to pay for all electricity generated or deemed to have been made available by the Island Cogeneration Facility at the delivery point, subject to a maximum of 285 MW. Energy Services Agreement with Norske Skog: Under the Island ESA dated September 29, 1998, between ICLP and Norske Skog, ICLP is obligated to provide steam from the Island Cogeneration Facility to Norske Skog for use in the Elk Falls Mill. Norske Skog is obligated to request, accept and pay for a minimum annual amount of steam and ICLP is obligated to deliver the requested steam, subject to annual and hourly maximum amounts. The initial term of the Island ESA expires on April 12, 2022, and is renewable by Norske Skog for up to an additional ten years if one or more third parties agree to purchase all the electricity the Island Cogeneration Facility can produce through the renewal period and the Island site lease and the mill services agreement (the "Island MSA") are renewed. Mill Services Agreement with Norske Skog: Norske Skog provides ICLP with certain services pursuant to the Island MSA dated September 29, 1998. The initial term of the Island MSA expires on April 12, 2022, and is renewable by ICLP for up to an additional ten years if certain conditions are met. The Island MSA terminates automatically if the Island ESA is terminated prior to April 12, 2022, and may be terminated by ICLP if the Island EPA is terminated. Island Maintenance Agreement: Under a maintenance agreement ("Island Maintenance Agreement") dated November 24, 1997, between ICPI and Alstom, Alstom supplies various parts and services in connection with maintenance of certain equipment located at the Island Cogeneration Facility. ICPI pays a monthly fee to Alstom under this agreement of which there is a fixed and variable component. The Island Maintenance Agreement terminates upon completion of a specified inspection which is scheduled to occur after approximately 12 years of operations. Calgary Energy Centre Maintenance Agreement: Under a maintenance agreement ("Calgary Energy Centre Maintenance Agreement") dated March 31, 2003, between CECGP and Siemens Westinghouse ("Siemens"), Siemens supplies various parts and services in connection with maintenance of certain equipment located at the Calgary Energy Centre. CECGP pays a monthly fee to Siemens under this agreement The Calgary Energy Centre Maintenance Agreement terminates in 2016 or upon the second major inspection of the Combustion Turbine, whichever comes first. 13. ECONOMIC DEPENDENCE AND OTHER BUSINESS RISKS Electricity sales pursuant to the Island EPA with BC Hydro accounted for 28% of total revenue for the year ended December 31, 2004 (2003 - 30%). Approximately 36% of the period end accounts receivable balance was due from BC Hydro relating to electricity sales (2003 - 42%). Electricity sales pursuant to the Calgary Energy Tolling Agreement with CESCP accounted for 52% of total revenue for the year ended December 31, 2004 (2003 - 42%). Approximately 34% of the period end accounts receivable balance was due from CESCP relating to electricity sales (2003- 27%). Contract Performance The amount of Distributable Cash of the Partnership available for distribution to the Partners is highly dependent upon parties to certain agreements fulfilling their contractual obligations. An inability or failure by any such party to meet its contractual commitments may adversely affect cash distributions by the Partnership. Calpine has guaranteed certain contracts held by the Partnership including the Calgary Energy Centre Tolling Agreement with CESCP. If for any reason CESCP or Calpine is unable or unwillingly to fulfill these contractual obligations, Distributable Cash of the Partnership could decline. Commodity Price Risk Through the use of long-term contracts, the Partnership has mitigated exposure to various commodity price risks. Under tolling arrangements established with customers, revenues are earned through monthly payments received from the customer in exchange for providing the full operating capacity of the plant. The customer is further responsible for providing all gas required to generate that power. Currently, the tolling agreement between the Calgary Energy Centre and CESCP is above the market for merchant power pricing in Alberta. This type of arrangement effectively eliminates commodity price risk and establishes a stable cash flow for the Partnership. Interest Rate and Loan Default Risk The Partnership has a loan to CCWH, which holds a 50% partnership interest in the Whitby Cogeneration Facility. The fair value of the loan will change dependent on the fluctuation of market interest rates. Due to the fixed nature of the loan arrangement, fluctuations in cash flow are eliminated. The Partnership is exposed to default risk on this loan as any defaults on the loan may have an adverse effect on distributable cash of the Partnership. Credit Risk The Partnership is exposed to credit-related losses in the event of non-performance by counterparties. The Partnership deals with certain counterparties that are not investment grade, including Calpine, but does not anticipate non-performance by the counterparties. The Calgary Energy Centre tolling revenues are above what the plant would expect to receive as net revenue if it were exposed to current market pricing. Provided CESCP continues to satisfy its obligations under the tolling agreement, this negative market exposure should have no impact on the Partnership. The Partnership monitors credit risk on an ongoing basis. Foreign Exchange Risk The Partnership is exposed to foreign exchange risk on US dollar denominated cash that it holds. The Partnership maintains a portion of the maintenance reserve in US currency in an effort to mitigate foreign exchange risk associated with satisfying future obligations which are settled in US currency under the LTSA for the Calgary Energy Centre. 14. COMPARATIVE FIGURES Certain of the comparative figures have been adjusted to be consistent with the current year's presentation. Calpine Power Income Fund (TSX:CF.UN) |
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