**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-K**
 
 Annual
Report Pursuant to Section 13 or 15(d) of
 the
Securities Exchange Act of 1934
 
 For the
fiscal year ended December 31, 2004
 
 Commission
File No. 333-89521
 
 **CE
GENERATION, LLC**
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
    
    47-0818523(State
      or other jurisdiction of
    
    (I.R.S.
      Employerincorporation
      or organization)
    
    Identification
      No.)302
      South 36thStreet, Suite 400Omaha,
      Nebraska
    
    68131(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 (402)
      341-4500(Registrant’s
      telephone number, including area code)
 
 Securities
registered pursuant to Section 12(b) of the Act: N/A
 Securities
registered pursuant to Section 12(g) of the Act: N/A
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes x  No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
each of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Act).
 Yes o  No x
 
 The
members’ equity accounts are held 50% by MidAmerican Energy Holdings Company and
50% by TransAlta USA Inc. as of February 25, 2005.
 
 
   **TABLE
OF CONTENTS**
 
 **PART
      I**Item 1.
    Business
    4Item 2.
    Properties
    10Item 3.
    Legal Proceedings
    10Item 4.
    Submission of Matters to a Vote of Security
      Holders
    11**PART
      II**Item 5.
    Market for Registrant’s Common Equity and Related
      Stockholder Matters
    12Item 6.
    Selected Financial Data
    12Item 7.
    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
    13Item 7A.
    Quantitative and Qualitative Disclosures About Market
      Risk
    21Item 8.
    Financial Statements and Supplementary
      Data
    22Item 9.
    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
    40Item 9A.
    Controls and Procedures
    40Item 9B.
    Other Information
    41**PART
      III**Item 10.
    Directors and Executive Officers of the
      Registrant
    42Item 11.
    Executive Compensation
    43Item 12.
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
    43Item 13.
    Certain Relationships and Related
      Transactions
    43Item 14.
    Principal Accountant Fees and
    Services
    44**PART
      IV**Item 15.
    Exhibits and Financial Statement
      Schedules
    45Signatures
    
    47Exhibit Index
    
    48
 
  2
  
 **Disclosure
Regarding Forward-Looking Statements**
 
 This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may," "could," "project," "believe," "anticipate," "expect,"
"estimate," "continue," "potential," "plan," "forecast," and similar terms.
These statements represent CE Generation, LLC’s intentions, plans, expectations
and beliefs and are subject to risks, uncertainties and other factors. Many of
these factors are outside CE Generation, LLC’s control and could cause actual
results to differ materially from such forward-looking statements. These factors
include, among others:
 
 ·
    general
      economic and business conditions in the jurisdictions in which CE
      Generation, LLC’s facilities are located;
 ·
    the
      financial condition and creditworthiness of our significant customers and
      suppliers;
 ·
    governmental,
      statutory, regulatory or administrative initiatives or ratemaking actions
      affecting CE Generation, LLC or the power generation
      industries;
 ·
    weather
      effects on sales and revenue;
 ·
    general
      industry trends;
 ·
    increased
      competition in the power generation
industry;
 ·
    fuel
      and power prices and availability;
 ·
    changes
      in business strategy, development plans or customer or vendor
      relationships;
 ·
    availability
      of qualified personnel;
 ·
    unscheduled
      outages or repairs;
 ·
    financial
      or regulatory accounting principles or policies imposed by the Public
      Company Accounting Oversight Board, the Financial Accounting Standards
      Board ("FASB"), the Securities and Exchange Commission ("SEC") and similar
      entities with regulatory oversight;
 ·
    other
      risks or unforeseen events, including wars, the effects of terrorism,
      embargos and other catastrophic events; and
 ·
    other
      business or investment considerations that may be disclosed from time to
      time in SEC filings or in other publicly disseminated written
      documents.
 
 CE
Generation, LLC undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors should not be construed as
exclusive.
 
  3
  **PART
I**
 
 **Item
1.**  **Business.**
 
 **General**
 
 CE
Generation, LLC ("CE Generation" or the "Company"), is a Delaware limited
liability company created by MidAmerican Energy Holdings Company ("MEHC") on
February 8, 1999, for the sole purpose of issuing securities and holding
the equity investments in certain subsidiaries. On March 3, 1999, MEHC sold
50% of its ownership interest in CE Generation to El Paso CE Generation Holding
Company ("El Paso").
 
 On
January 29, 2003, El Paso sold all its interest in CE Generation to
TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.
 
 The
Company’s limited liability company operating agreement provides that MEHC and
TransAlta each are entitled to appoint 50% of the directors and are entitled to
50% of the distributions made by the Company.
 
 CE
Generation owns all of the common stock interests in Magma Power Company
("Magma"), FSRI Holdings, Inc. ("FSRI") and California Energy Development
Corporation and their subsidiaries. Through its subsidiaries, CE Generation is
primarily engaged in the development, ownership and operation of environmentally
responsible independent power production facilities in the United States
utilizing geothermal and natural gas resources.
 
 The
principal executive office of CE Generation is located at 302 South
36 th Street,
Suite 400, Omaha, Nebraska 68131 and its telephone number is (402)
341-4500.
 
 In this
Annual Report, references to kW means kilowatts, MW means megawatts, kWh means
kilowatt hours, and MWh means megawatt hours.
  4
 **The
Projects**
 
 CE
Generation has an aggregate net ownership interest of 769 MW of electrical
generating capacity in domestic power plants, which have an aggregate net
capacity of 829 MW. Set forth
below is a table describing certain characteristics of CE Generation’s projects
as of December 31, 2004:
 
 **Facility**
    
    
    
    
    
    **Power
      Purchase****Net
      Capacity**
    
    **Net
      MW**
    
    
    
    **Agreement**
    
    **Power****Operating Project**
    
    **(MW)****(1)**
    
    **Owned
      (1)**
    
    **Location**
    
    **Expiration**
    
    **Purchaser****(2)**Salton
      Sea Projects:Salton
      Sea I
    
    10
    
    10
    
    California
    
    2017
    
    EdisonSalton
      Sea II
    
    20
    
    20
    
    California
    
    2020
    
    EdisonSalton
      Sea III
    
    50
    
    50
    
    California
    
    2019
    
    EdisonSalton
      Sea IV
    
    40
    
    40
    
    California
    
    2026
    
    EdisonSalton
      Sea V
    
    49
    
    49
    
    California
    
    Varies
    
    Various
      (3)Total
      Salton Sea Projects
    
    169
    
    169Partnership
      Projects:Vulcan
    
    34
    
    34
    
    California
    
    2016
    
    EdisonElmore
    
    38
    
    38
    
    California
    
    2018
    
    EdisonLeathers
    
    38
    
    38
    
    California
    
    2019
    
    EdisonDel
      Ranch
    
    38
    
    38
    
    California
    
    2019
    
    EdisonCE
      Turbo
    
    10
    
    10
    
    California
    
    Varies
    
    Various
      (3)Total
      Partnership Projects
    
    158
    
    158Total
      geothermal facilities
    
    327
    
    327**Gas
      Facilities:**Saranac
    
    240
    
    180
    
    New
      York
    
    2009
    
    NYSE&GPower
      Resources
    
    212
    
    212
    
    Texas
    
    2005
    
    ONEOKYuma
    
    50
    
    50
    
    Arizona
    
    2024
    
    SDG&ETotal
      gas facilities
    
    502
    
    442**Total
      operating projects**
    
    829
    
    769
 
 (1)
    Represents
      nominal net generating capability (contract capacity for most). Actual MW
      may vary depending on operating and reservoir conditions and plant design.
      Facility Net Capacity (in MW) represents facility gross capacity less
      parasitic load. Parasitic load is electrical output used by the facility
      and not made available for sale. Net MW Owned indicates current legal
      ownership.
 
 (2)
    Southern
      California Edison Company ("Edison"); New York State Electric & Gas
      Corporation ("NYSE&G"); ONEOK Energy, Marketing and Trading Company,
      L.P. ("ONEOK"); and San Diego Gas & Electric Company
      ("SDG&E").
 
 (3)
    Salton
      Sea Power LLC ("Salton Sea Power") which owns the Salton Sea V Project,
      and CE Turbo LLC ("CE Turbo"), which owns the CE Turbo Project, began
      selling available power to TransAlta on February 12, 2003 based on
      percentages of the Dow Jones SP-15 Index (the “TransAlta Transaction
      Agreement”). The TransAlta Transaction Agreement shall continue until the
      earlier of: (a) 30 days following a written notice of termination; or (b)
      any other termination date mutually agreed to by the parties. No such
      notice of termination has been given by either
party.
 
 Additionally,
the Salton Sea V and CE Turbo Projects have 33-year contracts, which commenced
in July 2000, to sell electricity to CalEnergy Minerals LLC (“CalEnergy
Minerals”) and the Salton Sea V Project has a 10-year contract, which commenced
in May 2003, to sell up to 20 MW to the City of Riverside, California
(“Riverside”).
 
 Effective
July 1, 2004, Salton Sea Power and CE Turbo began selling the environmental
attributes associated with up to 931,800 MWh to TransAlta Marketing (US) Inc.
(“TransAlta Marketing”) through December 31, 2008.
 
 5
 **Geothermal
Facilities**
 
 CE
Generation affiliates currently own and operate ten geothermal plants in the
Imperial Valley in California known as the Salton Sea I Project, Salton Sea II
Project, Salton Sea III Project, Salton Sea IV Project and Salton Sea V Project
(collectively, the "Salton Sea Projects"), the Vulcan Project, Elmore Project,
Leathers Project, Del Ranch Project and CE Turbo Project (collectively the
"Partnership Projects" and, together with the Salton Sea Projects the “Imperial
Valley Projects”).
 
 Each of
the Imperial Valley Projects, excluding the Salton Sea V and CE Turbo Projects,
sells electricity to Edison pursuant to either a separate Standard Offer No. 4
Agreement ("SO4 Agreement") or a negotiated power purchase agreement. Each power
purchase agreement is independent of the others, and the performance
requirements specified within one such agreement apply only to the project which
is subject to the agreement. The power purchase agreements provide for capacity
payments, capacity bonus payments and energy payments. Edison makes fixed annual
capacity payments and capacity bonus payments to the applicable projects to the
extent that capacity factors exceed certain benchmarks. The price for capacity
is fixed for the life of the SO4 Agreements and is significantly higher in the
months of June through September.
 
 Energy
payments under the Imperial Valley Projects’ SO4 Agreements, excluding the
Salton Sea IV Project, were at a rate based on the cost that Edison avoids by
purchasing energy from the project instead of obtaining the energy from other
sources ("Edison’s Avoided Cost of Energy"). In June and November 2001, the
Imperial Valley Projects which receive Edison’s Avoided Cost of Energy, entered
into agreements that provide for amended energy payments under the SO4
Agreements. The amendments provide for fixed energy payments per kWh in lieu of
Edison’s Avoided Cost of Energy. For a five-year period, commencing May 1,
2002, the fixed energy payment is 5.37 cents per kWh. Following the five-year
period, the energy payments revert back to Edison’s Avoided Cost of Energy.
 
 For the
years ended December 31, 2004, 2003 and 2002, Edison’s Avoided Cost of
Energy was 5.9 cents per kWh, 5.4 cents per kWh and 3.5 cents per kWh,
respectively. Estimates of Edison’s Avoided Cost of Energy in the future vary
substantially from year-to-year based primarily on the estimated future cost of
natural gas.
 
 The
Salton Sea I Project has contracted to sell electricity to Edison pursuant to a
30-year negotiated power purchase agreement, which commenced on July 1,
1987 (the "Salton Sea I PPA"). The contract capacity and contract nameplate are
each 10 MW. The capacity payment is based on the firm capacity price, which
adjusts quarterly based on specified indices for the term of the Salton Sea I
PPA and is currently $174.53 per kW-year. The capacity payment was approximately
$1.5 million, $1.5 million and $1.1 million in 2004, 2003 and 2002,
respectively. The energy payment is calculated using a Base Price (defined as
the initial value of the energy payment (4.7 cents per kWh for the second
quarter of 1992)), which is subject to quarterly adjustments based on specified
indices. The time period weighted average energy payment for Salton Sea I
Project was 6.3 cents per kWh during 2004.
 
 The
Salton Sea II Project has contracted to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on April 5, 1990. The
contract capacity and contract nameplate are 15 MW (16.5 MW during on-peak
periods) and 20 MW, respectively. The price for contract capacity and contract
capacity bonus payments is fixed for the life of the modified SO4 Agreement.
Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments
are approximately $3.3 million. Edison was entitled to receive, at no cost, 5%
of all energy delivered in excess of 80% of contract capacity through
March 31, 2004.
 
 The
Salton Sea III Project has contracted to sell electricity to Edison pursuant to
a 30-year modified SO4 Agreement (the "Salton Sea III PPA") that commenced on
February 13, 1989. The contract capacity and contract nameplate are 47.5 MW
and 49.8 MW, respectively. The price for contract capacity payments and capacity
bonus payments is fixed at $175 per kW per year. Pursuant to the SO4 Agreement,
the maximum annual capacity and bonus payments are approximately $9.7 million.
 
 The
Salton Sea IV Project has contracted to sell electricity to Edison pursuant to a
modified SO4 Agreement (the "Salton Sea IV PPA") which provides for contract
capacity payments on 40 MW of capacity at two different rates based on the
respective contract capacities deemed attributable to the original Salton Sea I
PPA option (20 MW) and to the original Salton Sea IV SO4 Agreement (14 MW). The
capacity payment price for the 20 MW portion adjusts quarterly based upon
specified indices and the capacity payment price for the 14 MW portion is a
fixed levelized rate. The capacity and bonus payments in 2004, 2003 and 2002
were approximately $5.5 million, $3.9 million and $5.5 million, respectively.
For deliveries up to 39.6 MW, the energy payment is at a base price, adjusted
quarterly based on specified indices, for 55.6% of the total energy delivered by
the Salton Sea IV Project and is based on an energy payment schedule for 44.4%
of the total energy delivered by the Salton Sea IV Project. For deliveries over
39.6 MW, the energy payment is at Edison’s Avoided Cost of Energy. The contract
has a 30-year term, but Edison is not required to purchase the 20 MW of capacity
and energy originally attributable to the Salton Sea I PPA option after
September 30, 2017, the original termination date of the Salton Sea I
PPA.
 
 6
 O n
May 20, 2003, Salton Sea Power entered into a Power Sales Agreement with
Riverside. Under the terms of the agreement, Salton Sea Power sells up to 20 MW
of energy generated from the Salton Sea V Project to Riverside at 6.1 cents per
kWh. Sales under the agreement commenced June 1, 2003 and will terminate
May 31, 2013. The
Salton Sea V Project previously sold a portion of its net output to CalEnergy
Minerals for the Zinc Recovery Project’s full electrical energy requirements.
The agreement provided for energy payments based on the market rates available
to the Salton Sea V Project, adjusted for wheeling costs. On September 10,
2004, CalEnergy Minerals ceased operations of the Zinc Recovery Project.
Accordingly, except for sales during the dismantling and decommissioning phases
of the Zinc Recovery Project, no further sales to CalEnergy Minerals are
expected. The
Salton Sea V Project sells its remaining output to TransAlta under the TransAlta
Transaction Agreement.
 
 Commencing
March 27, 2001, Salton Sea Power and CE Turbo entered into a series of
transaction agreements to sell available power from the Salton Sea V Project and
CE Turbo Project to El Paso Merchant Energy Company (“EPME”) based on
percentages of the Dow Jones SP-15 Index. On February 11, 2003, Salton Sea Power
and CE Turbo ceased selling available power to EPME. Pursuant to the TransAlta
Transaction Agreement, Salton Sea Power and CE Turbo began selling available
power from the Salton Sea V Project and CE Turbo Project to TransAlta on
February 12, 2003 based on percentages of the Dow Jones SP-15 Index. The
TransAlta Transaction Agreement shall continue until the earlier of: (a) 30 days
following a written notice of termination; or (b) any other termination date
mutually agreed to by the parties. No such notice of termination has been given
by either party.
 
 On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by one MWh of generation, a "Green Tag") associated
with up to 931,800 MWh of available generation at the Salton Sea V and CE Turbo
Projects through December 31, 2008 to TransAlta Marketing at a market price
per Green Tag. Sales under this agreement commenced in July 2004.
 
 The
Vulcan Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on February 10, 1986. The Vulcan Project has a
contract capacity and contract nameplate of 29.5 MW and 34 MW, respectively.
Pursuant to the SO4 Agreement, the maximum annual capacity and bonus payments
are approximately $5.5 million.
 
 The
Elmore Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 1, 1989. The contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4
Agreement, the maximum annual capacity and bonus payments are approximately $7.9
million.
 
 The
Leathers Project has contracted to sell electricity to Edison pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract
capacity and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to
the SO4 Agreement, the maximum annual capacity and bonus payments are
approximately $7.5 million.
 
 The Del
Ranch Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 2, 1989. The contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4
Agreement, the maximum annual capacity and bonus payments are approximately $7.9
million.
 
 The CE
Turbo Project sells its available power under the TransAlta Transaction
Agreement.
 
 The
Imperial Valley Projects, other than the Salton Sea I Project, receive
transmission service from the Imperial Irrigation District ("IID") to deliver
electricity to Edison near Mirage, California. These projects pay a rate based
on the IID’s cost of service, which was $1.66 per month per kW of service
provided for 2004 and is recalculated annually. The transmission service and
interconnection agreements expire in 2015 for the Partnership Projects, 2019 for
the Salton Sea III Project, 2020 for the Salton Sea II Project and 2026 for the
Salton Sea IV Project. The Salton Sea V and CE Turbo Projects have entered into
agreements with similar terms with the IID, which expire in 2030. The Salton Sea
I Project delivers energy to Edison at the project site and has no transmission
service agreement with the IID.
 
 7
 **Gas
Facilities**
 
 CE
Generation affiliates currently operate three gas fired facilities (the "Gas
Projects") located in New York, Texas and Arizona. The Gas Projects consist of
the "Saranac Project", the "Power Resources Project", and the "Yuma Project",
respectively.
 
 The
Saranac Project is a 240 net MW natural gas-fired cogeneration facility located
in Plattsburgh, New York. The Saranac Project provides electricity to NYSE&G
under an existing 15-year power purchase agreement (the "Saranac PPA"), which
expires in June 2009. The Saranac Project provides steam to Georgia-Pacific
Corporation and Pactiv Corporation under 15-year steam purchase agreements (the
"Saranac Steam Purchase Agreements"), which expire in June 2009. The Saranac
Project has a 15-year natural gas supply contract (the "Saranac Gas Supply
Agreement"), which expires in June 2009, with Coral Energy to supply 100% of the
Saranac Project’s fuel requirements. Coral Energy is responsible for production
and delivery of natural gas to the U.S.-Canadian border; the gas is then
transported by the North Country Gas Pipeline Corporation ("NCGP") the remaining
22 miles to the plant. NCGP is a wholly-owned subsidiary of Saranac Power
Partners, L.P. (the "Saranac Partnership") and the Saranac Partnership also owns
the Saranac Project. NCGP also transports gas for NYSE&G and Georgia-Pacific
Corporation. Each of the Saranac PPA, the Saranac Steam Purchase Agreements and
the Saranac Gas Supply Agreement contains rates that are fixed for the
respective contract terms. The Saranac PPA rates escalate at a higher percentage
than the Saranac Gas Supply Agreement rates. The Saranac Partnership is
indirectly owned by subsidiaries of CE Generation, ArcLight Capital Holdings and
General Electric Capital Corporation.
 
 The Power
Resources Project, a 212 net MW natural gas-fired cogeneration project owned by
Power Resources, Ltd. ("Power Resources"), an indirect wholly-owned subsidiary
of CE Generation, sold electricity to TXU Power Generation Company, LP ("TXU")
as a qualifying facility ("QF") within the meaning of the Public Utility
Regulatory Policies Act of 1978, pursuant to a 15-year negotiated power purchase
agreement (the "Power Resources PPA"), which provided for capacity and energy
payments. The contractual capacity payments in 2003 and 2002 were $3.7 million
and $3.6 million per month, respectively. The average energy payments in 2003
and 2002 were 3.6 and 3.5 cents per kWh, respectively. The Power Resources PPA
expired September 30, 2003. The Power Resources Project sold steam to ALON
USA, LP ("ALON") under a 15-year agreement that also expired September 30,
2003.
 
 On
August 5, 2003, Power Resources entered into a Tolling Agreement with
ONEOK. The agreement commenced October 1, 2003 and expires
December 31, 2005. Under the terms of the agreement, Power Resources, as an
exempt wholesale generator ("EWG"), sells its electricity and capacity to ONEOK
for $1.75 per kW-month plus a variable operating and maintenance fee of $0.50
per MWh. In addition, ONEOK pays annual turbine start-up costs in an amount
equal to the greater of (i) $3,643 per turbine start-up, (ii) $939,986 and (iii)
$140 per hour of operation during the contract year.
 
 The Yuma
Project is a 50 net MW natural gas-fired cogeneration project in Yuma, Arizona
providing 50 MW of electricity to SDG&E under an existing 30-year power
purchase contract (the "Yuma PPA") which expires in 2023. The energy is sold at
SDG&E’s Avoided Cost of Energy and the capacity is sold to SDG&E at a
fixed price for the life of the Yuma PPA. For the years ended December 31,
2004, 2003 and 2002, SDG&E's Average Avoided Cost of Energy was 6.6 cents
per kWh, 6.0 cents per kWh and 4.1 cents per kWh, respectively. The maximum
annual capacity payments are approximately $8.4 million. The power is wheeled to
SDG&E over transmission lines constructed and owned by Arizona Public
Service Company. The project entity, Yuma Cogeneration Associates ("YCA"), has
executed steam sales contracts with Queen Carpet, Inc. to act as its thermal
host. Since the industrial entity has the right under its agreement to terminate
the agreement upon one year’s notice if a change in its technology eliminates
its need for steam, and in any case to terminate the agreement at any time upon
three years notice, there can be no assurance that the Yuma Project will
maintain its status as a QF. However, if the industrial entity terminates the
agreement, YCA anticipates that it will be able to locate an alternative thermal
host in order to maintain its status as a QF. A natural gas supply and
transportation agreement has been executed with Southwest Gas Corporation,
terminable under certain circumstances by YCA and Southwest Gas
Corporation.
 
 **Insurance**
 
 The
Company currently possesses property, business interruption, catastrophic and
general liability insurance. There can be no assurance that such comprehensive
insurance coverage will be available in the future at commercially reasonable
costs or terms or that the amounts for which the Company has been or will be
insured will cover all potential losses.
 
 Because
areas of geothermal activity such as the area in which the Imperial Valley
Projects are located are subject to frequent low-level seismic disturbances, and
serious seismic disturbances are possible, the power generating plants and other
facilities at these projects are designed and built to withstand relatively
significant levels of seismic disturbance. However, there is no assurance that
seismic disturbances of a nature and magnitude so as to cause material damage to
the projects or gathering systems or a material change in the nature of the
geothermal resource will not occur, that insurance with respect to seismic
disturbances will be maintained by or on behalf of all of the projects, that
insurance proceeds will be adequate to cover all potential losses sustained, or
that insurance will continue to be available in the future in amounts adequate
to insure against such seismic disturbances.
 
 8
 **Regulatory
and Environmental Matters**
 
 The
Company is subject to a number of environmental laws and regulations affecting
many aspects of their present and future operations, including the disposal of
various forms of materials resulting from geothermal reservoir production and
the drilling and operation of new wells. Such laws and regulations generally
require the Company to obtain and comply with a wide variety of licenses,
permits and other approvals. In addition, regulatory compliance for the
construction of new facilities is a costly and time-consuming process, and
intricate and rapidly changing environmental regulations may require major
expenditures for permitting and create the risk of expensive delays or material
impairment of project value if projects cannot function as planned due to
changing regulatory requirements or local opposition. The Company also remains
subject to a varied and complex body of environmental and energy regulations
that both public officials and private individuals may seek to enforce. There
can be no assurance that existing regulations will not be revised or that new
regulations will not be adopted or become applicable to the Company which could
have an adverse impact on its operations. In particular, the independent power
market in the United States is dependent on the existing energy regulatory
structure, including the Public Utility Regulatory Policies Act of 1978 and its
implementation by utility commissions in the various states. The structure of
such federal and state energy regulations has in the past, and may in the
future, be the subject of various challenges and restructuring proposals by
utilities and other industry participants. The implementation of regulatory
changes in response to such challenges or restructuring proposals, or otherwise
imposing more comprehensive or stringent requirements on the Company, which
would result in increased compliance costs could have a material adverse effect
on the Company’s results of operations .
 
 On
December 4, 2003, the Environmental Protection Agency (“EPA”) announced the
development of its Interstate Air Quality Rule, now known as the Clean Air
Interstate Rule. The rule was developed in an effort to reduce ozone and fine
particulate matter in the Eastern United States by requiring reductions of
sulfur dioxide and nitrogen oxides emissions from the power sector in 29 states,
including New York where the Company’s Saranac facility is located, and the
District of Columbia. The Clean Air Interstate Rule could, in whole or in part,
be superseded or made more stringent by one of a number of multi-pollutant
emission reduction proposals currently under consideration at the federal level
as well as possible new federal regulation of carbon dioxide and other gases
that may affect global climate change.
 
 **Employees**
 
 Employees
necessary for the operation of the CE Generation projects are provided by
CalEnergy Operating Corporation ("CEOC") and Falcon Power Operating Company
("FPOC"), indirect subsidiaries of CE Generation, under operation and
maintenance agreements. As of December 31, 2004, CEOC and FPOC employed 214
and 58 people full-time, respectively.
 
 9
 **Item
2.**  **Properties.**
  The
Company’s most significant physical properties are its current interest in
operating power facilities and its related real property interests. The gas
fired generating facilities are located on land leased or owned by the
respective project companies. The Company maintains an inventory of
approximately 23,000 acres of geothermal property leases in the Salton Sea area
to support the Imperial Valley Projects. The Company, as lessee, pays certain
royalties and other fees to the property owners and other royalty interest
holders from the revenue generated by the Imperial Valley Projects. The Company
also has interests in other geothermal property leases which are unrelated to
its current operating power facilities. Certain of the producing acreage owned
by Magma is leased to Mammoth-Pacific Geothermal, LP as owner and operator of a
10 net MW contract nameplate geothermal power plant and a 15 net MW contract
nameplate geothermal power plant at Mammoth Lakes, California, and Magma, as
lessor, receives royalties from the revenues earned by such power plants.
 
 Lessors
and royalty holders are generally paid a monthly or annual rental payment during
the term of the lease or mineral interest, unless and until the acreage goes
into production, in which case the rental typically stops and the (generally
higher) royalty payments begin. Leases of federal property are transacted with
the United States Department of Interior, Bureau of Land Management, pursuant to
standard geothermal leases under the Geothermal Steam Act of 1970, as amended,
and the regulations promulgated thereunder (the "Regulations"), and are for a
primary term of 10 years, extendible for an additional 5 years if drilling is
commenced within the primary term and is diligently pursued for two successive 5
year periods upon certain conditions set forth in the Regulations. A secondary
term of up to 40 years is available so long as geothermal resources from the
property are being produced or used in commercial quantities. Leases of state
lands may vary in form. Leases of private lands vary considerably, since their
terms and provisions are the product of negotiations with the
landowners.
 
 **Item
3.**  **Legal Proceedings.**
 
 Edison
and the California Power Exchange
 
 On
July 10, 2003, the Salton Sea IV Project’s 40 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea IV Project’s turbine returned to service, on
September 17, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea IV PPA totaling $2.5 million. Salton Sea Power Generation, L.P.
("SSPG"), with Fish Lake Power Company ("Fish Lake"), owner of the Salton Sea IV
Project, served notices of error on Edison for such unpaid amounts. As a result,
the Company had established an allowance for doubtful accounts of $1.7 million
for capacity payments as of December 31, 2003. In December 2004, as a
result of a settlement agreement dated December 7, 2004 resolving the
dispute, which settlement is contingent upon approval by the California Public
Utility Commission, the allowance for doubtful accounts was released and the
associated receivable was written off.
 
 On
October 9, 2003, the Salton Sea III Project’s 50 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended and the Salton Sea III Project’s turbine returned to service, on
December 12, 2003. Edison failed to recognize the uncontrollable force
event and as such has not paid amounts otherwise due and owing under the Salton
Sea III PPA totaling $0.8 million. SSPG, owner of the Salton Sea III Project,
served notice of error on Edison for such unpaid amounts. As a result, the
Company had established an allowance for doubtful accounts for the full amount
of this receivable. Pursuant to a letter agreement dated December 2, 2004,
Edison made a
settlement payment of $0.6 million  on
December 13, 2004. Consequently,
in December 2004, the allowance for doubtful accounts was released and the
remaining receivable of $0.2 million was written off.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo had not received payment for power sold to EPME
under certain transaction agreements during December 2000 and January 2001 of
$3.8 million (the "PX Receivable"). Salton Sea Power and CE Turbo had
established an allowance for doubtful accounts for this balance as of
December 31, 2003. On September 29, 2004, Salton Sea Power and CE
Turbo entered into separate Transfer of Claims Agreements with TransAlta and
MEHC (the "Transfer of Claims Agreements"), pursuant to which Salton Sea Power
and CE Turbo received an aggregate of $3.7 million in exchange for transferring
the rights to receive payment on the PX Receivable to TransAlta and MEHC. As a
result of the transaction, Salton Sea Power and CE Turbo wrote-off the PX
Receivable and the related allowance for doubtful accounts and recorded a $3.8
million current liability to reflect the collection risk retained under the
Transfer of Claims Agreements. Pursuant to the Transfer of Claims Agreements, to
the extent that the PX Receivable becomes uncollectible, Salton Sea Power and CE
Turbo can be required to pay the PX Receivable, plus interest, to MEHC and
TransAlta.
 
 10
 **Item
4.** **Submission of Matters to a Vote of Security
Holders.**
 
 Not
Applicable.
  11
  **PART
II**
 
 **Item
5.** **Market for Registrant’s Common Equity and Related Stockholder
Matters.**
 
 Not
applicable.
 
 **Item
6.** **Selected Financial Data.**
 
 The
selected financial data presented below are derived from CE Generation’s audited
consolidated financial statements. The consolidated financial statements reflect
the consolidated financial statements of Magma and subsidiaries, FSRI and
subsidiaries and YCA, each a wholly-owned subsidiary of CE Generation.
 
 **Year
      Ended December 31,****2004****(1)**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**(Amounts
      in thousands)**Statement
      of Operations Data:**Total
      revenue(2)
    
    $
    444,228
    
    $
    487,422
    
    $
    510,082
    
    $
    565,838
    
    $
    510,796Income
      before minority interest and cumulative effect of change in accounting
      principle
    
    
    18,951
    
    
    58,188
    
    
    79,071
    
    
    89,812
    
    
    73,535Cumulative
      effect of change in accounting principle, net of tax(3)
    
    
    -
    
    
    (2,467
    )
    
    -
    
    
    (15,386
    )
    
    -Net
      income (loss)
    
    $
    (3,084
    )
    $
    34,874
    
    $
    58,314
    
    $
    58,808
    
    $
    73,535**Balance
      Sheet Data:**Total
      assets
    
    $
    1,447,388
    
    $
    1,708,742
    
    $
    1,865,036
    
    $
    1,932,119
    
    $
    1,984,445Debt
      including current portion:Project
      loans
    
    
    100,473
    
    
    122,573
    
    
    163,142
    
    
    199,006
    
    
    230,221Salton
      Sea notes and bonds
    
    
    298,377
    
    
    463,592
    
    
    491,678
    
    
    520,250
    
    
    543,908Senior
      Secured bonds
    
    
    323,800
    
    
    338,400
    
    
    356,400
    
    
    377,000
    
    
    389,600Members’
      equity
    
    $
    377,341
    
    $
    418,885
    
    $
    489,895
    
    $
    467,377
    
    $
    438,915
 
 (1)
    The
      2004 net loss includes the partial impairment of Power Resources
      long-lived assets, which resulted in a non-cash after-tax charge of $33.5
      million in the fourth quarter of 2004. See Note 2 in "Item 8. Financial
      Statements and Supplementary Data - Notes to Consolidated Financial
      Statements" of this Form 10-K for additional
  information.(2)
    The
      reduction in revenue since 2002 is primarily due to the expiration of the
      Power Resources PPA on September 30, 2003.(3)
    The
      cumulative effect of change in accounting principle in 2003 reflects the
      January 1, 2003 adoption of Statement of Financial Accounting Standards
      ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
      143"). The cumulative effect of change in accounting principle in 2001
      reflects the January 1, 2001 write-off of prepaid and accrued balances
      associated with a change in policy for accounting for major maintenance,
      overhauls and well workovers. See Note 2 in "Item 8. Financial Statements
      and Supplementary Data - Notes to Consolidated Financial Statements" of
      this Form 10-K for additional information.
  12
 **Item
7.** **Management's Discussion and Analysis of Financial Condition
and Results of Operations.**
 
 *The
following discussion and analysis should be read in conjunction with the
selected financial data and the consolidated financial statements included in
Items 6 and 8 herein.*
 
 **Executive
Summary**
 
 The
following significant events and changes, as discussed in more detail herein,
highlight the factors that affect the comparability of our financial results for
each of the years ended December 31, 2004, 2003 and 2002:
 
 ·
    The
      expiration of the long-term power purchase agreement between Power
      Resources and TXU in September 2003. A portion of this lost revenue was
      replaced with the October 2003 tolling agreement between Power Resources
      and ONEOK.
 ·
    The
      partial impairment of Power Resources’ long-lived assets resulting in a
      non-cash after-tax charge of $33.5 million in December
    2004.
 ·
    The
      redemption by Salton Sea Funding Corporation ("Funding Corporation") of
      $136.4 million of its 7.475% Senior Secured Series F Bonds ("Series F
      Bonds") on March 1, 2004 and the related collection of the $136.4
      million under Funding Corporation’s demand on MEHC.
 ·
    The
      settlement agreement in regards to the Salton Sea V Project reached in
      April 2003 with Stone & Webster Inc. ("Stone & Webster"), which
      resulted in the receipt of $12.1 million from Stone & Webster. The
      settlement was recorded as a $4.5 million reduction of incremental capital
      expenditures and a $7.6 million reduction of incremental operation
      expenditures.
 ·
    The
      Salton Sea III and Salton Sea IV Projects’ uncontrollable force events in
      2003.
 ·
    The
      collection of the majority of the amounts in dispute with Edison in
      2002.
 ·
    The
      Company made progress on several income tax examination matters during
      2002, which resulted in lower income tax expense of $15.1 million in
      2002.
 
 The
capacity factor for a particular project is determined by dividing the total
quantity of electricity sold by the product of the project's capacity and the
total hours in the year. At December 31, 2004, the capacity factors for the
Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea
IV Project, and Salton Sea V Project plants are based on capacity amounts of
approximately 10, 20, 50, 40, and 49 net MW, respectively. At December 31,
2004, the capacity factors for the Vulcan Project, Elmore Project, Leathers
Project, Del Ranch Project, and CE Turbo Project plants are based on capacity
amounts of approximately 34, 38, 38, 38 and 10 net MW, respectively. At
December 31, 2004, the capacity factors for the Saranac Project, Power
Resources Project and Yuma Project plants are based on capacity amounts of
approximately 240, 212 and 50 MW, respectively. Each plant possesses an
operating margin, which allows for production in excess of the amount listed
above. Utilization of this operating margin is based upon a variety of factors
and can be expected to vary throughout the year under normal operating
conditions. The amount of revenues received by these projects is affected by the
extent to which they are able to operate and generate electricity. Accordingly,
the capacity and capacity factor figures provide information on operating
performance that has affected the revenues received by these
projects.
 
 The
following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
 
 **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Overall
      capacity factor
    
    91.6%
    
    84.6%
    
    89.6%MWh
      produced
    
    2,625,100
    
    2,417,700
    
    2,561,800Capacity
      (net MW)(weighted average)
    
    326.4
    
    326.4
    
    326.4
 
 The
changes in the overall capacity factor and MWh production are primarily due to
the uncontrollable force events at the Salton Sea III and IV Projects and other
extended scheduled maintenance outages in 2003. The Salton Sea IV Project’s 40
MW turbine went out of service beginning on July 10, 2003 and returned to
service on September 17, 2003. The Salton Sea III Project’s 50 MW turbine
went out of service beginning October 9, 2003 and returned to service on
December 12, 2003.
  13
 The
following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
 
 **Year
      Ended December 31****2004**
    
    **2003**
    
    **2002**Overall
      capacity factor
    
    62.9%
    
    77.9%
    
    92.4%MWh
      produced
    
    2,775,600
    
    3,364,479
    
    3,963,818Capacity
      (net MW)(weighted average)
    
    502.0
    
    493.0
    
    490.0
 
 The
decrease in the overall capacity factor and production and capacity factors in
2003 and 2004 is primarily the result of the expiration of Power Resources’
contract with TXU in September 2003. The increase in capacity is due to Power
Resources operations as an EWG under the ONEOK tolling agreement due to the
absence of the need to deliver steam to a third party.
 
 **Results
of Operations for the Years Ended December 31, 2004 and
2003**
 
 Operating
revenue decreased $43.5 million, or 9%, to $439.9 million for the year ended
December 31, 2004 from $483.4 million for the same period in 2003. The
decrease in 2004 reflects $72.3 million in lower revenue as a result of the
expiration of the TXU contract at the Power Resources Project in September 2003
and $3.7 million in lower revenue due to reduced production at the Saranac
Project. The decrease was partially offset by $32.5 million of increased revenue
due to increased production at the Imperial Valley Projects in 2004 as a result
of the Salton Sea III and IV Projects uncontrollable force events in 2003,
favorable market energy rates at the Imperial Valley and Yuma Projects in 2004
and higher contract rates at the Saranac Project in 2004.
 
 Interest
and other income increased $0.4 million to $4.4 million for the year ended
December 31, 2004 from $4.0 million for the same period in 2003 primarily
due to sales of scrap equipment at the Imperial Valley Projects in 2004.
 
 Fuel
expenses decreased $26.2 million, or 22%, to $92.1 million for the year ended
December 31, 2004 from $118.3 million for the same period in 2003. The
decrease reflects $28.7 million in lower fuel costs in 2004 due to the
expiration of the TXU contract at the Power Resources Project in September 2003
and a $3.9 million decrease due to reduced production at the Saranac Project,
partially offset by increased fuel prices at the Yuma and Saranac Projects in
2004.
 
 Plant
operating expenses, which include operating, maintenance, resource and other
plant operating expenses, increased $4.1 million, or 3%, to $133.9 million for
the year ended December 31, 2004 from $129.8 million for the same period in
2003. The increase was primarily due to the $7.6 million settlement of a
warranty claim with Stone & Webster received in 2003, partially offset by
increased well workover and overhaul costs of $2.9 million at the Imperial
Valley Projects in 2004.
 
 Depreciation
and amortization decreased $3.5 million to $84.2 million for the year ended
December 31, 2004 from $87.7 million for the same period in 2003. The
decrease was due to the full amortization of the long-term power purchase
agreement between Power Resources and TXU in 2003.
 
 Interest
expense decreased $7.9 million to $61.5 million for the year ended
December 31, 2004 from $69.4 million for the same period in 2003. The
decrease is due to lower outstanding debt balances.
 
 The $61.2
million asset impairment in 2004 reflects the partial impairment of Power
Resources’ long-lived assets, which resulted in a $54.5 million write-down of
Power Resources’ plant and write-offs of $6.7 million related to abandoned
equipment at the Imperial Valley Projects. The $3.9
million asset impairment in 2003 represents write-offs of abandoned equipment at
the Imperial Valley Projects.
 
 The
benefit for income taxes was $11.6 million for the year ended December 31,
2004 compared to a provision for income taxes of $15.7 million for the same
period in 2003. The effective tax rate was (156.8)% and 21.3% in 2004 and 2003,
respectively. Changes in the effective rate primarily reflect lower pre-tax
income in 2004 and the corresponding effect of minority interest, depletion and
energy tax credits as a percentage of pre-tax income.
 
 The
cumulative effect of a change in accounting principle in 2003 reflects the
Company’s adoption of SFAS 143 as of January 1, 2003. The cumulative effect
of initially applying this statement was recognized as a cumulative effect of a
change in accounting principle of $2.5 million, net of tax of $1.6 million, as
of January 1, 2003.
 
 14
 **R** **esults
of Operations for the Years Ended December 31, 2003 and
2002**
 
 Operating
revenue decreased $17.3 million, or 4%, to $483.4 million for the year ended
December 31, 2003 from $500.7 million for the same period in 2002. The
decrease reflects $44.9 million in lower revenue in 2003 from decreased
production at both the Imperial Valley Projects and the Gas Projects, as a
result of contract curtailments, scheduled maintenance, uncontrollable force
events, the expiration of the TXU contract at Power Resources and the $21.0
million favorable adjustment to the Edison provision at the Imperial Valley
Projects in the first quarter of 2002 partially offset by increases of $30.1
million due to higher energy rates at the Imperial Valley Projects and $18.4
million due to increased energy rates at the Gas Projects in 2003.
 
 Interest
and other income decreased $5.4 million to $4.0 million for the year ended
December 31, 2003 from $9.4 million for the same period in 2002 primarily
due to the interest earned in 2002 on past due Edison amounts and Salton Sea II
Project business interruption revenue.
 
 Fuel
expenses decreased $3.4 million, or 3%, to $118.3 million for the year ended
December 31, 2003 from $121.7 million for the same period in 2002. The
decrease reflects $11.4 million in lower fuel costs in 2003 from decreased
production at the Gas Projects, as a result of contract curtailments, scheduled
maintenance and the expiration of the TXU contract at Power Resources partially
offset by an $8.0 million increase due to higher fuel prices at the Gas Projects
in 2003.
 
 Plant
operating expenses, which include operating, maintenance, resource and other
plant operating expenses, decreased $4.3 million, or 3%, to $129.8 million for
the year ended December 31, 2003 from $134.1 million for the same period in
2002. The decrease was primarily due to the $7.6 million settlement of a
warranty claim with Stone & Webster, partially offset by increased major
maintenance outages at the Gas Projects in 2003.
 
 General
and administrative expenses decreased $2.5 million to $4.4 million for the year
ended December 31, 2003 from $6.9 million for the same period in 2002.
These costs include administrative services including executive, financial,
legal, tax and other corporate functions. The decrease in 2003 was due to a
reduction in legal costs related to disputes with Edison.
 
 Depreciation
and amortization increased $5.6 million to $87.7 million for the year ended
December 31, 2003 from $82.1 million for the same period in 2002. The
increase was primarily due to a change in salvage values used at the Salton Sea
Projects.
 
 Interest
expense decreased $7.3 million to $69.4 million for the year ended
December 31, 2003 from $76.7 million for the same period in 2002. The
decrease is due to lower outstanding debt balances.
 
 The $3.9
million asset impairment in 2003 represents a write-off of abandoned equipment
at the Imperial Valley Projects.
 
 The
provision for income taxes increased $6.1 million to $15.7 million for the year
ended December 31, 2003 from $9.6 million for the same period in 2002. The
effective tax rate was 21.3% and 10.8% in 2003 and 2002, respectively. During
2002, the Company made considerable progress on several significant income tax
examination matters for prior tax years, including percentage of depletion,
which resulted in a decrease in income tax expense of $15.1 million in
2002.
 
 The
cumulative effect of a change in accounting principle in 2003 reflects the
Company’s adoption of SFAS 143 as of January 1, 2003. The cumulative effect
of initially applying this statement was recognized as a cumulative effect of a
change in accounting principle of $2.5 million, net of tax of $1.6 million, as
of January 1, 2003. If CE Generation had adopted the policy as of
January 1, 2002, income before cumulative effect of change in accounting
principle would have been $0.5 million lower for the year ended
December 31, 2002 on a proforma basis.
 
  15
 **Related
Party Transactions**
 
 Pursuant
to an Administrative Services Agreement between MEHC and CE Generation (the
"Administrative Services Agreement"), MEHC provides certain administrative and
management services to CE Generation, and MEHC’s executive, financial, legal,
tax and other corporate staff departments perform certain services for CE
Generation. On August 1, 2002, the Administrative Services Agreement
between MEHC and CE Generation was amended to provide for a fixed monthly fee in
lieu of certain expenses which were being allocated. The fixed fee, which was
retroactive to January 1, 2002 and ended December 31, 2004, was $3.1
million annually. On October 22, 2004, the Administrative Services
Agreement was amended to extend the fixed fee at $3.0 million per year beginning
January 1, 2005 through December 31, 2007.
 
 The
Company participates in multi-employer pension plans sponsored by MEHC. The
Company’s contribution to the various plans was approximately $2.1 million, $2.3
million and $1.8 million in 2004, 2003 and 2002, respectively.
 
 Commencing
March 27, 2001, Salton Sea Power and CE Turbo entered into a series of
transaction agreements to sell available power from the Salton Sea V Project and
CE Turbo Project to EPME based on percentages of the Dow Jones SP-15 Index. On
February 11, 2003 Salton Sea Power and CE Turbo ceased selling available power
to EPME. Pursuant to these transaction agreements sales to EPME totaled
$1.2 million and $8.9 million in 2003 and 2002, respectively. As of
December 31, 2004 and 2003, there were no accounts receivable balances from
EPME.
 
 Pursuant
to the TransAlta Transaction Agreement, Salton Sea Power and CE Turbo began
selling available power from the Salton Sea V Project and CE Turbo Project to
TransAlta on February 12, 2003 based on percentages of the Dow Jones SP-15
Index. The TransAlta Transaction Agreement shall continue until the earlier of:
(a) 30 days following a written notice of termination; or (b) any other
termination date mutually agreed to by the parties. No such notice of
termination has been given by either party. Pursuant to this agreement, sales to
TransAlta totaled $10.5 million and $9.9 million in 2004 and 2003, respectively.
As of December 31, 2004 and 2003, accounts receivable balances from
TransAlta were $1.3 million and $1.6 million, respectively.
 
 On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the Green Tags associated with up to
931,800 MWh of available generation of the Salton Sea V Project and CE Turbo
Project through December 31, 2008 to TransAlta Marketing at a market price
per Green Tag. Pursuant to this agreement, sales to TransAlta Marketing
commenced in July 2004 and totaled $0.5 million in 2004. As of
December 31, 2004, there were no accounts receivable balances from
TransAlta Marketing.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo had not received payment for the PX Receivable.
Salton Sea Power and CE Turbo had established an allowance for doubtful accounts
for this balance as of December 31, 2003. On September 29, 2004,
Salton Sea Power and CE Turbo entered into Transfer of Claims Agreements,
pursuant to which the Salton Sea Power and CE Turbo received an aggregate of
$3.7 million in exchange for transferring the rights to receive payment on the
PX Receivable to TransAlta and MEHC. As a result of the transaction, Salton Sea
Power and CE Turbo wrote-off the PX Receivable and the related allowance for
doubtful accounts and recorded a $3.8 million current liability to reflect the
collection risk retained under the Transfer of Claims Agreements. Pursuant to
the Transfer of Claims Agreements, to the extent that the PX Receivable becomes
uncollectible, Salton Sea Power and CE Turbo can be required to pay the PX
Receivable, plus interest, to MEHC and TransAlta.
 
 Pursuant
to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton
Sea Power and CE Turbo provided CalEnergy Minerals with the Zinc Recovery
Project’s electrical energy requirements at the market rates available to them,
less wheeling costs. Pursuant to these agreements, sales to CalEnergy Minerals
from Salton Sea Power totaled $1.3 million, $0.9 million and $0.4 million for
the years ended December 31, 2004, 2003 and 2002, respectively, and there
were no sales to CalEnergy Minerals from CE Turbo for the years ended
December 31, 2004, 2003 or 2002. On September 10, 2004, CalEnergy
Minerals ceased operations of the Zinc Recovery Project. Accordingly, except for
sales during the dismantling and decommissioning phases of the Zinc Recovery
Project, no further sales to CalEnergy Minerals are expected. There were no
material accounts receivable balances at December 31, 2004 or 2003 from
CalEnergy Minerals.
 
 On
December 31, 2004, in connection with the dismantling and decommissioning
of the Zinc Recovery Project, CalEnergy Minerals sold certain equipment to the
Imperial Valley Projects. The equipment was sold at a fair market value of
approximately $0.4 million, which amount was paid in January 2005.
 
 16
 **Liquidity
and Capital Resources**
 
 Each of
CE Generation’s direct or indirect subsidiaries is organized as a legal entity
separate and apart from CE Generation and its other subsidiaries. Pursuant to
separate project financing agreements applicable to the Imperial Valley Projects
and the Saranac Project, the assets of each subsidiary with a direct or indirect
ownership interest in the Imperial Valley Projects and the Saranac Project are
pledged or encumbered to support or otherwise provide the security for their own
project or subsidiary debt. It should not be assumed that any asset of any
subsidiary of CE Generation will be available to satisfy the obligations of CE
Generation or any of its other subsidiaries; provided, however, that
unrestricted cash or other assets which are available for distribution may,
subject to applicable law and the terms of financing arrangements for such
parties, be advanced, loaned, paid as dividends or otherwise distributed or
contributed to CE Generation or affiliates thereof. For the purposes of the
immediately preceding two sentences, the term "subsidiary" means all of CE
Generation’s direct or indirect subsidiaries: (1) owning direct or indirect
interests in the Imperial Valley Projects other than Magma and Salton Sea Power;
or (2) owning direct interests in the subsidiary that owns interests in the
Saranac Project.
 
 CE
Generation generated cash flows from operations of $128.2 million for the year
ended December 31, 2004 compared with $146.6 million for the same period in
2003. The decrease was due primarily to the expiration of the Power Resources
PPA on September 30, 2003.
 
 The
Imperial Valley Projects' only source of electricity revenue is payments
received pursuant to long-term power sales agreements with Edison, other than
Salton Sea V and CE Turbo Project revenues. Because of the Imperial Valley
Projects' dependence on Edison, if Edison fails to fulfill its obligations to
the projects, it could significantly impair the ability of the Imperial Valley
Projects to fund operating and maintenance expenses, payments of interest and
principal on the Securities, projected capital expenditures and debt service
reserve fund requirements.
 
 The Power
Resources Project, sold electricity to TXU as a QF, pursuant to the Power
Resources PPA, which provided for capacity and energy payments. Capacity and
energy payments, in 2003 were $3.7 million per month and 3.6 cents per kWh,
respectively. The Power Resources PPA expired September 30, 2003. The Power
Resources Project sold steam to ALON under a 15-year agreement that also expired
September 30, 2003.
 
 On
August 5, 2003, Power Resources entered into a Tolling Agreement with
ONEOK. The agreement commenced October 1, 2003 and expires
December 31, 2005. Under the terms of the agreement, Power Resources, as an
EWG, sells its electricity and capacity to ONEOK for $1.75 per kW-month plus a
variable operating and maintenance fee of $0.50 per MWh. In addition, ONEOK pays
annual turbine start-up costs in an amount equal to the greater of (i) $3,643
per turbine start-up, (ii) $939,986 and (iii) $140 per hour of operation during
the year.
 
 The
Company has efforts underway to evaluate and execute long-term business
alternatives for the Power Resources Project. However, given the
December 31, 2005 expiration of the Tolling Agreement with ONEOK and the
surplus of generation capacity and depressed energy prices in the Electric
Reliability Council of Texas markets,
the Company has been evaluating Power Resources’ long-lived assets to assess
whether the carrying value of the assets is recoverable.
 
 During
the fouth quarter of 2004, management determined that a portion of the carrying
value of the Power Resources long-lived assets is no longer recoverable. As a
result, the Company recognized a non-cash impairment charge of $33.5 million,
net of tax of $21.0 million, in accordance with SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets," to write down the long-lived assets to
their fair value. The fair value was determined based on discounted estimated
cash flows from the future use of the long-lived assets. The impairment charge
will not result in any current or future cash expenditures.
 
 Additionally,
the Company wrote down $6.7 million and $3.9 million of abandoned equipment at
the Imperial Valley Projects in 2004 and 2003, respectively.
 
 Cash flow
from investing activities was $114.1 million for the year ended
December 31, 2004 compared with cash used of $13.2 million for the same
period in 2003. The change is primarily due to the concurrent payment under the
MEHC guarantee related to the redemption of a portion of the Series F Bonds, as
described below. Capital expenditures and major maintenance cash reserves are a
primary component of investing activities and were lower in 2003 due to the
portion of the Stone & Webster settlement received in 2003 recorded as a
reduction of incremental capital expenditures. Capital expenditures for 2005 are
expected to be approximately $33.8 million. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews. The Company expects to meet these capital expenditures with cash
flows from operations.
 
 17
 The
Salton Sea V Project was constructed by Stone & Webster, pursuant to the
Salton Sea V Project EPC Contract. On March 7, 2002, Salton Sea Power, the
owner of the Salton Sea V Project, filed a Demand for Arbitration against Stone
& Webster for breach of contract and breach of warranty arising from
deficiencies in Stone & Webster’s design, engineering, construction and
procurement of equipment for the Salton Sea V Project pursuant to the Salton Sea
V Project EPC Contract. On April 25, 2003, Salton Sea Power entered into a
settlement agreement with Stone & Webster. The settlement agreement resulted
in a total payment of $12.1 million from Stone & Webster in the second
quarter of 2003 and the arbitration was dismissed. The settlement was recorded
as a $4.5 million reduction of incremental capital expenditures and a $7.6
million reduction of incremental operating expenses related to legal, other
expenses and equipment write-offs.
 
 Cash flow
used in financing activities was $243.7 million for the year ended
December 31, 2004 compared with $143.2 million for the same period in 2003.
The changes in cash flows from financing activities reflect the scheduled debt
repayments, the redemption of $136.4 million of Funding Corporation’s Series F
Bonds, lower distributions in 2004 and a $52.9 million reduction to the debt
service reserve account of Funding Corporation in 2003.
 
 On
March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of $136.4 million of its Series F Bonds, pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC, and MEHC performed under that demand, for the full amount
remaining on MEHC's guarantee of the Series F Bonds in order to fund the
redemption. Given the payment under MEHC's guarantee, MEHC no longer has any
liability with respect to its guarantee.
 
 In May
2003, the previous $65.4 million debt service reserve letter of credit issued by
a financial institution for the account of Funding Corporation was replaced by a
letter of credit issued in the current amount of $25.3 million by a financial
institution for the account of TransAlta and a letter of credit issued in the
current amount of $26.7 million by a financial institution for the account of
MEHC, which expire on January 1, 2006 and June 6, 2005,
respectively.
 
 **Environmental
Liabilities**
 
 The
Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics. State and
federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company’s existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company’s cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company’s facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediation of sites, other companies’ clean-up experience and
data released by the EPA or other organizations. These estimated liabilities are
subject to revision in future periods based on actual costs or new
circumstances, and are included in the accompanying consolidated balance sheets
at their undiscounted amounts. As of December 31, 2004 and 2003, the
environmental liabilities recorded as current liabilities were $2.7 million and
$4.6 million, respectively.
 
 On
December 4, 2003, the EPA announced that development of its Interstate Air
Quality Rule, now known as the Clean Air Interstate Rule. The rule was developed
in an effort to reduce ozone and fine particulate matter in the Eastern United
States by requiring reductions of SO2 and NOx emissions from the power sector in
29 states, including New York where the Company’s Saranac facility is located.
The Clean Air Interstate Rule could, in whole or in part, be superceded or made
more stringent by one of a number of multi-pollutant emission reduction
proposals currently under consideration at the federal level as well as possible
new federal regulation of carbon dioxide and other gases that may affect global
climate change.
 
 18
 **Inflation**
 
 Inflation
has not had a significant impact on CE Generation’s cost structure.
 
 **Contractual
Obligations and Commercial Commitments**
 
 The
Company has contractual obligations and commercial commitments that may affect
its financial condition. Contractual obligations to make future payments
primarily arise from long-term debt and fuel purchase agreements. In addition,
possible future payments arise from lines of credit and standby letters of
credit.
 
 The
following tables identify material obligations and commitments as of
December 31, 2004 (in thousands):
 
 **Payments
      Due by Period****<
      1**
    
    **2-3**
    
    **4-5**
    
    **>5****Total**
    
    **Year**
    
    **Years**
    
    **Years**
    
    **Years**Contractual
      cash obligations:Long-term
      debt
    
    $
    722,650
    
    $
    69,612
    
    $
    153,690
    
    $
    115,874
    
    $
    383,474Interest
      expense
    
    
    354,322
    
    
    53,389
    
    
    90,210
    
    
    67,775
    
    
    142,948Other
      long-term obligations(1)
    
    
    328,816
    
    
    68,544
    
    
    145,423
    
    
    114,849
    
    
    -Total
      contractual cash obligations
    
    $
    1,405,788
    
    $
    191,545
    
    $
    389,323
    
    $
    298,498
    
    $
    526,422
 
 (1)
    Other
      long-term
      obligations represent natural gas purchase agreements for the Saranac
      Project as of December 31, 2004.
 
 General
Electric Capital Corporation ("GECC"), an indirect owner of the Saranac
Partnership, has issued an irrevocable letter of credit for the account of the
Saranac Partnership to its gas supplier in the current amount of approximately
$16.0 million. Under the credit facility pursuant to which GECC issued such
letter of credit, the Saranac Partnership has additional availability of
approximately $4.5 million for additional letters of credit. Annual fees related
to these letters of credit are calculated as 1.75% of the issued balance and
..05% of the unissued balance. A financial institution has issued for the account
of CE Generation a debt service reserve letter of credit in the current amount
of $24.2 million in favor of the holders of the Senior Secured
Bonds.
 
 **Off
Balance Sheet Arrangements**
 
 The
Company does not have any obligations which meet the definition of an
off-balance sheet arrangement and which have or are reasonably likely to have a
material effect on the financial statements.
 
 **New
Accounting Pronouncements**
 
 In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest,
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
In December 2003, the FASB issued FASB Interpretation No. 46R (“Fin 46R”) which
served to clarify guidance in FIN 46. During the fourth quarter of 2003, the
Company adopted the provisions of FIN 46R with respect to special purpose
entities. The adoption did not have a significant impact on the Company’s
financial position, results of operations or cash flows. During the first
quarter of 2004, the Company adopted the provisions of FIN 46R related to
non-special purpose entities. The Company has considered the provisions of FIN
46R for all subsidiaries and their related power purchase, power sale or tolling
agreements. Factors considered in the analysis include the duration of the
agreements, how capacity and energy payments are determined, source of payment
terms for fuel, as well as responsibility and payment for operating and
maintenance expenses. As a result of these considerations, the Company has
determined its power purchase, power sale and tolling agreements do not
represent significant variable interests. Accordingly, the Company has concluded
that it is appropriate to continue to consolidate its power plant
projects.
 
 19
 **Critical
Accounting Policies**
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Note 2 to the consolidated financial statements in this annual report
describes the significant accounting policies and methods used in the
preparation of the consolidated financial statements. Estimates are used for,
but not limited to, the accounting for the allowance for doubtful accounts,
impairment of long-lived assets, contingent liabilities and income taxes. Actual
results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
by management in the preparation of the consolidated financial
statements.
 
 Allowance
for Doubtful Accounts
 
 The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than the Company’s historical experience,
estimates of the recoverability of amounts due could be adversely
affected.
 
 Impairment
of Long-Lived Assets and Goodwill
 
 The
Company’s long-lived assets consist primarily of properties, plants and
equipment. Depreciation is computed using the straight-line method based on
economic lives. The Company believes the useful lives assigned to the
depreciable assets, which generally range from 3 to 30 years, are
reasonable.
 
 The
Company periodically evaluates long-lived assets, including properties, plants
and equipment, when events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Upon the occurrence of a
triggering event, the carrying amount of a long-lived asset or intangible asset
is reviewed to assess whether the recoverable amount has declined below its
carrying amount. The recoverable amount is the estimated net future cash flows
that the Company expects to recover from the future use of the asset,
undiscounted and without interest, including the asset’s residual value on
disposal. Where the recoverable amount of the long-lived asset or intangible
asset is less than the carrying value, an impairment loss would be recognized to
write down the asset to its fair value that is based on discounted estimated
cash flows from the future use of the asset including the asset’s residual value
on disposal.
 
 The
estimate of cash flows arising from future use of the asset that are used in the
impairment analysis requires judgment regarding what the Company would expect to
recover from future use of the asset. Any changes in the estimates of cash flows
arising from future use of the asset or the residual value of the asset on
disposal based on changes in the market conditions, changes in the use of the
asset, management’s plans, the determination of the useful life of the asset and
technology changes in the industry could significantly change the calculation of
the fair value or recoverable amount of the asset and the resulting impairment
loss, which could significantly affect the results of operations. The
determination of whether impairment has occurred is based on an estimate of
undiscounted cash flows attributable to the assets, as compared to the carrying
value of the assets. An impairment analysis of generating facilities requires
estimates of possible future market prices, load growth, competition and many
other factors over the lives of the facilities. The amount of a resulting
impairment loss is highly dependent on these underlying
assumptions.
 
 The
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
which establishes the accounting for acquired goodwill and other intangible
assets, and provides that goodwill and indefinite-lived intangible assets will
not be amortized, requires allocating goodwill to each reporting unit and
testing for impairment using a two-step approach. The goodwill impairment test
is performed annually or whenever an event has occurred that would more likely
than not reduce the fair value of the reporting unit below its carrying amount.
The Company completed its annual review pursuant to SFAS 142 for its reporting
unit as of October 31, 2004, primarily using a discounted cash flow methodology.
No impairment was indicated as a result of this assessment.
 
 Contingent
Liabilities
 
 The
Company establishes reserves for estimated loss contingencies, such as
environmental, legal and income taxes, when it is management’s assessment that a
loss is probable and the amount of the loss can be reasonably estimated.
Revisions to contingent liabilities are reflected in operations in the period in
which different facts or information become known or circumstances change that
affect the previous assumptions with respect to the likelihood or amount of
loss. Reserves for contingent liabilities are based upon management’s
assumptions and estimates, and advice of legal counsel or other third parties
regarding the probable outcomes of any matters. Should the outcomes differ from
the assumptions and estimates, revisions to the estimated reserves for
contingent liabilities would be required.
 
 20
 Income
Taxes
 
 CE
Generation and its subsidiaries file a consolidated federal tax return. Deferred
tax assets and liabilities are recognized based on the difference between the
financial statement and tax bases of assets and liabilities using estimated tax
rates in effect for the year in which the differences are expected to reverse.
The calculation of current and deferred income taxes requires management to
apply judgment related to the application of complex tax laws or related
interpretations and uncertainties related to the outcomes of tax audits. Changes
in such factors may result in changes to management’s estimates which could
require the Company to adjust its currently recorded tax assets and liabilities
and record additional income tax expense or benefits.
 
 **Item
7A.** **Quantitative and Qualitative Disclosures About Market
Risk.**
 
 **Interest
Rate Risk**
 
 At
December 31, 2004 and 2003, the Company had fixed-rate long-term debt of
$622.2 million and $802.0 million, respectively, with a fair value of $669.5
million and $826.8 million, respectively. These instruments are fixed-rate and
therefore do not expose the Company to the risk of earnings loss due to changes
in market interest rates. However, the fair value of these instruments would
decrease by approximately $20.0 million and $44.7 million, respectively, if
interest rates were to increase by 10% from their levels at December 31,
2004 and 2003, respectively. In general, a decrease in fair value would impact
earnings and cash flows only if the Company were to reacquire all or a portion
of these instruments prior to their maturity.
 
 At
December 31, 2004 and 2003 the Company had floating-rate obligations of
$100.5 million and $122.6 million, respectively, which exposes the Company to
the risk of increased interest expense in the event of increases in short-term
interest rates. The Company has entered into interest rate swap agreements for
the purpose of completely offsetting these interest rate fluctuations. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the instruments. At December 31, 2004 and 2003, these
interest rate swaps had an aggregate notional amount of $100.5 million and
$122.6 million, respectively, which the Company could terminate at a cost of
approximately $6.4 million and $13.9 million. A decrease of 10% in the
December 31, 2004 and 2003 level of interest rates would increase the cost
of terminating the swaps by approximately $1.2 million and $3.2 million,
respectively. These termination costs would impact the Company’s earnings and
cash flows only if all or a portion of the swap instruments were terminated
prior to their expiration.
  21
 **Item
8.**  **Financial Statements and Supplementary
Data.**
 
 
 Report
      of Independent Registered Public Accounting Firm
    23Consolidated
      Balance Sheets
    24Consolidated
      Statements of Operations and Other Comprehensive Income
    25Consolidated
      Statements of Members' Equity
    26Consolidated
      Statements of Cash Flows
    27Notes
      to Consolidated Financial Statements
    28
 
 
  22
  **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To the
Board of Directors and Members
 CE
Generation, LLC
 Omaha,
Nebraska
 
 We have
audited the accompanying consolidated balance sheets of CE Generation, LLC and
subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of operations and other comprehensive income, of
members’ equity, and of cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of CE Generation, LLC and subsidiaries as of
December 31, 2004 and 2003 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
 
 As
discussed in Note 2 to the consolidated financial statements, the Company
changed its accounting policy for asset retirement obligations in
2003.
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 February 25,
2005
 
 
   23
 
 **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 (In
thousands)
 **As
      of December 31,****2004**
    
    **2003****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    32,540
    
    $
    33,853Restricted
      cash
    
    
    7,252
    
    
    7,297Trade
      accounts receivable, net of allowance of $- and $6,268
    
    
    49,800
    
    
    49,434Trade
      accounts receivable from affiliate
    
    
    1,285
    
    
    1,564Inventories
    
    
    26,604
    
    
    25,265Prepaid
      expenses and other current assets
    
    
    6,088
    
    
    6,104Note
      receivable from related party and other due from
affiliates
    
    
    1,165
    
    
    137,034Total
      current assets
    
    
    124,734
    
    
    260,551Restricted
      cash
    
    
    1,732
    
    
    6,419Properties,
      plants and equipment, net
    
    
    916,419
    
    
    1,020,087Goodwill
    
    
    265,897
    
    
    265,897Intangible
      assets, net
    
    
    131,482
    
    
    147,272Deferred
      financing charges and other assets
    
    
    7,124
    
    
    8,516**Total
      assets**
    
    $
    1,447,388
    
    $
    1,708,742**LIABILITIES
      AND MEMBERS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    1,990
    
    $
    1,262Accrued
      interest
    
    
    2,915
    
    
    3,156Interest
      rate swap liability
    
    
    6,391
    
    
    13,873Accrued
      natural gas liability
    
    
    7,590
    
    
    7,748Other
      accrued liabilities
    
    
    24,706
    
    
    24,145Income
      tax payable
    
    
    1,949
    
    
    1,138Current
      portion of long-term debt
    
    
    69,612
    
    
    201,915Total
      current liabilities
    
    
    115,153
    
    
    253,237Project
      loans
    
    
    74,281
    
    
    100,473Salton
      Sea notes and bonds
    
    
    269,757
    
    
    298,377Senior
      secured bonds
    
    
    309,000
    
    
    323,800Deferred
      income taxes
    
    
    247,978
    
    
    257,045Other
      long-term liabilities
    
    
    8,220
    
    
    8,039Total
      liabilities
    
    
    1,024,389
    
    
    1,240,971Minority
      interest
    
    
    45,658
    
    
    48,886Commitments
      and contingencies (Note 10)Members’
      equity:Members’
      equity
    
    
    380,238
    
    
    425,122Accumulated
      other comprehensive loss
    
    
    (2,897
    )
    
    (6,237
    )Total
      members’ equity
    
    
    377,341
    
    
    418,885**Total
      liabilities and members’ equity**
    
    $
    1,447,388
    
    $
    1,708,742
 
 The
accompanying notes are an integral part of these financial
statements.
  24
 **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME**
 (In
thousands)
  **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue**:Operating
      revenue
    
    $
    439,866
    
    $
    483,397
    
    $
    500,729Interest
      and other income
    
    
    4,362
    
    
    4,025
    
    
    9,353Total
      revenue
    
    
    444,228
    
    
    487,422
    
    
    510,082**Costs****and expenses:**Fuel
    
    
    92,065
    
    
    118,334
    
    
    121,736Plant
      operations
    
    
    133,939
    
    
    129,815
    
    
    134,065General
      and administrative
    
    
    3,983
    
    
    4,416
    
    
    6,899Depreciation
      and amortization
    
    
    84,221
    
    
    87,665
    
    
    82,055Interest
      expense
    
    
    61,468
    
    
    69,421
    
    
    76,697Asset
      impairment (Note 3)
    
    
    61,171
    
    
    3,862
    
    
    -Total
      costs and expenses
    
    
    436,847
    
    
    413,513
    
    
    421,452**Income
      before provision (benefit) for income taxes**
    
    
    7,381
    
    
    73,909
    
    
    88,630Provision
      (benefit) for income taxes
    
    
    (11,570
    )
    
    15,721
    
    
    9,559**Income
      before minority interest and cumulative effect of change in accounting
      principle**
    
    
    18,951
    
    
    58,188
    
    
    79,071Minority
      interest
    
    
    22,035
    
    
    20,847
    
    
    20,757**Income
      (loss) before cumulative effect of change in accounting
      principle**
    
    
    (3,084
    )
    
    37,341
    
    
    58,314Cumulative
      effect of change in accounting principle, net of tax (Note
    2)
    
    
    -
    
    
    (2,467
    )
    
    -**Net
      income (loss)**
    
    $
    (3,084
    )
    $
    34,874
    
    $
    58,314**Other
      comprehensive income:**Unrealized
      gain (loss) on cash flow hedges, net of tax of $1,857, $1,999 and $(1,438)
    
    
    3,340
    
    
    3,616
    
    
    (2,157
    )**Comprehensive
      income**
    
    $
    256
    
    $
    38,490
    
    $
    56,157
 
 The
accompanying notes are an integral part of these financial
statements.
  25
 **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF MEMBERS' EQUITY**
 (In
thousands)
 
 **Accumulated****Other****Members'**
    
    **Comprehensive****Equity**
    
    **Loss**
    
    **Total****Balance,
      January 1, 2002**
    
    $
    475,073
    
    **$**
    ****(7,696
    ****)
    $
    467,377Distributions
    
    
    (33,639
    )
    
    **-**
    
    
    (33,639
    )Net
      income
    
    
    58,314
    
    
    **-**
    
    
    58,314Other
      comprehensive income - Fair value adjustment on cash flow hedges, net of
      tax of $(1,438)
    
    
    -
    
    
    (2,157
    )
    
    (2,157
    )**Balance,
      December 31, 2002**
    
    
    499,748
    
    
    (9,853
    )
    
    489,895Distributions
    
    
    (109,500
    )
    
    **-**
    
    
    (109,500
    )Net
      income
    
    
    34,874
    
    
    **-**
    
    
    34,874Other
      comprehensive income - Fair value adjustment on cash flow hedges, net of
      tax of $1,999
    
    
    -
    
    
    3,616
    
    
    3,616**Balance,
      December 31, 2003**
    
    
    425,122
    
    
    (6,237
    )
    
    418,885Distributions
    
    
    (41,800
    )
    
    **-**
    
    
    (41,800
    )Net
      loss
    
    
    (3,084
    )
    
    **-**
    
    
    (3,084
    )Other
      comprehensive income - Fair value adjustment on cash flow hedges, net of
      tax of $1,857
    
    
    -
    
    
    3,340
    
    
    3,340**Balance,
      December 31, 2004**
    
    $
    380,238
    
    $
    (2,897
    )
    $
    377,341
 
 The
accompanying notes are an integral part of these financial
statements.
 
  26
 **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 (In
thousands)
  **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      flows from operating activities:**Net
      income (loss)
    
    $
    (3,084
    )
    $
    34,874
    
    $
    58,314Adjustments
      to reconcile net income (loss) to cash flows from operating
      activities:Depreciationand amortization
    
    
    84,221
    
    
    87,665
    
    
    82,055Provision
      for deferred income taxes
    
    
    (10,924
    )
    
    8,657
    
    
    10,490Distributions
      to minority interest in excess of income
    
    
    (5,515
    )
    
    (5,029
    )
    
    (5,222
    )Cumulative
      effect of change in accounting principle, net of tax
    
    
    -
    
    
    2,467
    
    
    -Asset
      impairment
    
    
    61,171
    
    
    3,862
    
    
    -Amortization
      of deferred financing costs
    
    
    1,248
    
    
    1,488
    
    
    1,824Changesin
      other items:Trade
      accounts receivable, net
    
    
    (87
    )
    
    12,556
    
    
    65,171Inventories
    
    
    (1,339
    )
    
    (216
    )
    
    (1,344
    )Due
      from affiliates, net
    
    
    488
    
    
    (1,057
    )
    
    538Accounts
      payable and other accrued liabilities
    
    
    1,882
    
    
    (2,584
    )
    
    (12,397
    )Other
      assets
    
    
    186
    
    
    3,926
    
    
    (1,882
    )Net
      cash flows from operating activities
    
    
    128,247
    
    
    146,609
    
    
    197,547**Cash****flows from investing activities:**Capital
      expenditures, net of warranty settlement
    
    
    (26,960
    )
    
    (22,534
    )
    
    (28,640
    )Proceeds
      from related party note receivable
    
    
    136,383
    
    
    1,406
    
    
    2,107Decrease
      (increase) in restricted cash
    
    
    4,687
    
    
    7,880
    
    
    (290
    )Net
      cash flows from investing activities
    
    
    114,110
    
    
    (13,248
    )
    
    (26,823
    )**Cash****flows from financing activities:**Repayment
      of project loans
    
    
    (22,100
    )
    
    (40,568
    )
    
    (35,864
    )Repayment
      of Salton Sea notes and bonds
    
    
    (165,215
    )
    
    (28,087
    )
    
    (28,572
    )Repayment
      of Senior secured bonds
    
    
    (14,600
    )
    
    (18,000
    )
    
    (20,600
    )Distributions
    
    
    (41,800
    )
    
    (109,500
    )
    
    (33,639
    )Decrease
      (increase) in restricted cash
    
    
    45
    
    
    52,941
    
    
    (43,213
    )Net
      cash flows from financing activities
    
    
    (243,670
    )
    
    (143,214
    )
    
    (161,888
    )**Net****change****in cash and cash equivalents**
    
    
    (1,313
    )
    
    (9,853
    )
    
    8,836**Cash****and cash equivalents at beginning of year**
    
    
    33,853
    
    
    43,706
    
    
    34,870**Cash
      and cash equivalents at end of year**
    
    $
    32,540
    
    $
    33,853
    
    $
    43,706**Supplemental
      disclosure:**Interest
      paid
    
    $
    58,898
    
    $
    66,653
    
    $
    74,067Income
      taxes paid (refunded)
    
    $
    (1,356
    )
    $
    1,614
    
    $
    1,199
 
 The
accompanying notes are an integral part of these financial
statements.
  27
 **CE
GENERATION, LLC AND SUBSIDIARIES**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **1.** **Organization
and Operations**
 
 In
February 1999, MidAmerican Energy Holdings Company ("MEHC") completed a
strategic restructuring in conjunction with its acquisition of MHC Inc.
(formerly MidAmerican Energy Holdings Company), in which MEHC's common stock
interests in Magma Power Company ("Magma"), FSRI Holdings, Inc. ("FSRI") and
California Energy Development Corporation, and their subsidiaries (which own the
geothermal and natural gas-fired combined cycle cogeneration facilities
described below) were contributed by MEHC to the newly created CE Generation,
LLC ("CE Generation" or the "Company").
 
 On
March 3, 1999, MEHC closed the sale of 50% of its ownership interests in CE
Generation to El Paso CE Generation Holding Company ("El Paso").
 
 On
January 29, 2003, TransAlta USA Inc. ("TransAlta"), a wholly owned
subsidiary of TransAlta Corporation, purchased El Paso’s 50% interest in CE
Generation.
 
 In these
notes to consolidated financial statements, references to KW means kilowatts, MW
means megawatts, MWh means megawatt hours, and MMBtus means million British
thermal units.
 
 General
 
 CE
Generation is engaged in the independent power business. The following table
sets out information concerning CE Generation's projects:
 
 **Facility**
    
    
    
    
    
    **Purchase****Net**
    
    
    
    
    
    **Power****Capacity**
    
    **Net
      MW**
    
    
    
    **Agreement****Operating
      Project**
    
    **(MW)**
    
    **Owned**
    
    **Location**
    
    **Expiration****Geothermal
      Facilities:**Salton
      Sea ProjectsSalton
      Sea I
    
    10
    
    10
    
    California
    
    2017Salton
      Sea II
    
    20
    
    20
    
    California
    
    2020Salton
      Sea III
    
    50
    
    50
    
    California
    
    2019Salton
      Sea IV
    
    40
    
    40
    
    California
    
    2026Salton
      Sea V
    
    49
    
    49
    
    California
    
    VariesTotal
      Salton Sea Projects
    
    169
    
    169Partnership
      ProjectsVulcan
    
    34
    
    34
    
    California
    
    2016Elmore
    
    38
    
    38
    
    California
    
    2018Leathers
    
    38
    
    38
    
    California
    
    2019Del
      Ranch
    
    38
    
    38
    
    California
    
    2019CE
      Turbo
    
    10
    
    10
    
    California
    
    VariesTotal
      Partnership Projects
    
    158
    
    158Total
      geothermal facilities
    
    327
    
    327**Gas
      Facilities:**Saranac
    
    240
    
    180
    
    New
      York
    
    2009Power
      Resources
    
    212
    
    212
    
    Texas
    
    2005Yuma
    
    50
    
    50
    
    Arizona
    
    2024Total
      gas facilites
    
    502
    
    442**Total
      operating projects**
    
    829
    
    769
 
 CE
Generation affiliates currently own and operate ten geothermal plants in the
Imperial Valley in California known as the Salton Sea I Project, Salton Sea II
Project, Salton Sea III Project, Salton Sea IV Project and Salton Sea V Project
(collectively, the "Salton Sea Projects"), the Vulcan Project, Elmore Project,
Leathers Project, Del Ranch Project and CE Turbo Project (collectively the
"Partnership Projects" and, together with the Salton Sea Projects the “Imperial
Valley Projects”).
 
 28
 CE
Generation affiliates currently operate three gas fired facilities (the "Gas
Projects") located in New York, Texas and Arizona. The Gas Projects consist of
the "Saranac Project", the "Power Resources Project", and the "Yuma Project",
respectively.
 
 **2.**  **Summary
of Significant Accounting Policies**
 
 Basis
of Presentation
 
 These
consolidated financial statements of CE Generation reflect the consolidated
financial statements of Magma and subsidiaries, FSRI and subsidiaries and Yuma
Cogeneration Associates, each a wholly-owned subsidiary. All intercompany
transactions and balances have been eliminated in consolidation.
 
 Based on
the nature of the Company’s products, production and distribution processes,
types of customers and the regulatory environment and the economic
characteristics of its operations, the Company has determined that it operates
in one reportable segment.
 
 Reclassifications
 
 Certain
amounts in the fiscal 2003 and 2002 consolidated financial statements and
supporting note disclosures have been reclassified to conform to the fiscal 2004
presentation. Such reclassification did not impact previously reported net
income or retained earnings.
 
 Use of
Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions 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
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 Cash
and Cash Equivalents
 
 CE
Generation considers all investment instruments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash is not
considered a cash equivalent.
 
 Restricted
Cash
 
 The
current restricted cash balance is composed of debt service funds that are
legally restricted as to their use and require the maintenance of specific
minimum balances equal to the next debt service payment. The non-current
restricted cash balance is composed of restricted accounts for capital
expenditures and major maintenance expenditures.
 
 Allowance
for Doubtful Accounts
 
 The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is deterioration of a major customer's credit worthiness or
actual defaults are higher than the Company’s historical experience, estimates
of the recoverability of amounts due to the Company could be adversely
affected.
  29
 Inventories
 
 Inventories
consist of spare parts and supplies and are valued at the lower of cost or
market. Cost for large replacement parts is determined using the specific
identification method. For the remaining supplies, cost is determined using the
weighted average cost method.
 
 Properties,
Plants and Equipment, Net
 
 Properties,
plants and equipment are recorded at historical cost. The cost of major
additions and betterments are capitalized, while replacements, maintenance,
overhaul and well rework and repairs that do not improve or extend the lives of
the respective assets are expensed. Depreciation
of the operating power plant costs, net of salvage value if applicable, is
computed using the straight-line method based on economic lives. The Company
believes the useful lives assigned to the depreciable assets, which generally
range from 2 to 30 years, are reasonable.
 
 Intangible
Assets, Net
 
 The
Company’s intangible assets consist of acquired power sales agreements and are
amortized using the straight-line method over the remaining contract periods,
which have ranged from 4 to 30 years.
 
 Impairment
of Long-Lived Assets
 
 The
Company periodically evaluates long-lived assets, including properties, plants
and equipment, and intangible assets when events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. Upon
the occurrence of a triggering event, the carrying amount of a long-lived asset
or intangible asset is reviewed to assess whether the recoverable amount has
declined below its carrying amount. The recoverable amount is the estimated net
future cash flows that the Company expects to recover from the future use of the
asset, undiscounted and without interest, including the asset’s residual value
on disposal. Where the recoverable amount of the long-lived asset or intangible
asset is less than the carrying value, an impairment loss would be recognized to
write down the asset to its fair value that is based on discounted estimated
cash flows from the future use of the asset, including the asset’s residual
value on disposal.
 
 Goodwill
 
 The
provisions of Statement of Financial Accounting Standard (“SFAS”) No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the
accounting for acquired goodwill and other intangible assets, and provides that
goodwill and indefinite-lived intangible assets will not be amortized, requires
allocating goodwill to each reporting unit and testing for impairment using a
two step approach. The goodwill impairment test is performed annually or
whenever an event has occurred that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. The
Company completed its annual review pursuant to SFAS 142 as of October 31,
2004 using a discounted cash flow methodology. No impairment was indicated as a
result of the assessment.
 
 Revenue
Recognition and Significant Customers
 
 CE
Generation recognizes revenue and related accounts receivable from sales of
electricity on an accrual basis. All of CE Generation’s sales of electricity
(except for the CE Turbo Project, a portion of the Salton Sea V Project and the
Power Resources Project) are under long-term power purchase
contracts.
 
 CE
Generation’s sales of electricity from the Imperial Valley Projects comprised
approximately 47%, 39%, and 37%, of 2004, 2003, and 2002 operating revenue,
respectively. Of these sales, approximately 87%, 90% and 95% were to Southern
California Edison Company ("Edison") in 2004, 2003 and 2002, respectively. Sales
of electricity from the Saranac Project comprised approximately 44%, 39% and
37%, of the 2004, 2003 and 2002 operating revenue, respectively. Of these sales,
approximately 99% were to New York State Electric and Gas Corporation
("NYSE&G"). Sales of electricity from the Power Resources Project comprised
approximately 1%, 16% and 19%, of the 2004, 2003 and 2002 operating revenues,
respectively. In 2003 and 2002 approximately 97% of these sales were to TXU
Power Generation Company LP ("TXU"). The Power Resources power purchase
agreement with TXU expired September 30, 2003. The trade accounts receivable
balances are primarily uncollateralized receivables from long-term power
purchase contracts. At December 31, 2004 and 2003 the trade accounts receivable
balance from Edison was $26.6 million and $23.8 million, respectively, and from
NYSE&G was $17.2 million and $16.9 million, respectively.
 
 30
 Income
Taxes
 
 CE
Generation and its subsidiaries file a consolidated federal tax return. Deferred
tax assets and liabilities are recognized based on the difference between the
financial statement and tax bases of assets and liabilities using estimated tax
rates in effect for the year in which the differences are expected to reverse.
The calculation of current and deferred income taxes requires management to
apply judgment related to the application of complex tax laws or related
interpretations and uncertainties related to the outcomes of tax audits. Changes
in such factors may result in changes to management’s estimates which could
require the Company to adjust its currently recorded tax assets and liabilities
and record additional income tax expense or benefits.
 
 Financial
Instruments
 
 The
Company follows SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedge Activities", which requires an entity to recognize
all of its derivatives as either assets or liabilities in its statement of
financial position and measure those instruments at fair value. The interest
rate swap agreements are considered cash flow hedges and therefore the fair
value is recorded in accumulated other comprehensive income.
 
 CE
Generation utilizes swap agreements to manage market risks and reduce its
exposure resulting from fluctuation in interest rates. For interest rate swap
agreements, the net cash amounts paid or received on the agreements are accrued
and recognized as an adjustment to interest expense. CE Generation's practice is
not to hold or issue financial instruments for trading purposes. These
instruments are either exchange traded or with counterparties of high credit
quality; therefore, the risk of nonperformance by the counterparties is
considered to be negligible. Fair values of financial instruments are estimated
based on quoted market prices for debt issues actively traded or on market
prices of similar instruments.
 
 **New
Accounting Pronouncements**
 
 In
January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest, or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
issued FASB Interpretation No. 46R (“FIN 46R”) which served to clarify guidance
in FIN 46. During the fourth quarter of 2003, the Company adopted the provisions
of FIN 46R with respect to special purpose entities. The adoption did not have a
significant impact on the Company’s financial position, results of operations or
cash flows. During the first quarter of 2004, the Company adopted the provisions
of FIN 46R related to non-special purpose entities. The Company has considered
the provisions of FIN 46R for all subsidiaries and their related power purchase,
power sale or tolling agreements. Factors considered in the analysis include the
duration of the agreements, how capacity and energy payments are determined,
source of payment terms for fuel, as well as responsibility and payment for
operating and maintenance expenses. As a result of these considerations, the
Company has determined its power purchase, power sale and tolling agreements do
not represent significant variable interests. Accordingly, the Company has
concluded that it is appropriate to continue to consolidate its power plant
projects.
 
 On
January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement provides accounting and disclosure
requirements for retirement obligations associated with long-lived assets. The
effect of initially applying this statement was recognized as a cumulative
effect of a change in accounting principle of $2.5 million, net of tax of $1.6
million, as of January 1, 2003.
 
  31
 The
Company’s review identified legal retirement obligations for landfill and plant
abandonment costs. The Company used an expected cash flow approach to measure
the obligations. The change in the balance of the asset retirement obligation
liability is summarized as follows (in thousands):
 
 **December
      31,****2004**
    
    **2003**Balance,
      January 1
    
    $
    8,039
    
    $
    7,462Accretion
      and amortization expense
    
    
    181
    
    
    577Balance,
      December 31
    
    $
    8,220
    
    $
    8,039
 
 **3.** **Properties,
Plants and Equipment, Net**
 
 Properties,
plants and equipment comprise the following at December 31 (in thousands):
 
 **Estimated****Useful
      Lives**
    
    **2004**
    
    **2003**Properties,
      plants and equipment, net:Power
      plants
    
    
    25
      to 30 years
    
    $
    1,189,443
    
    $
    1,297,186Wells
      and resource development
    
    
    2
      to 30 years
    
    
    198,395
    
    
    190,079Equipment
    
    
    3
      to 30 years
    
    
    4,210
    
    
    4,210Total
      operating assets
    
    
    
    
    
    1,392,048
    
    
    1,491,475Accumulated
      depreciation and amortization
    
    
    
    
    
    (475,629
    )
    
    (471,388
    )Properties,
      plants and equipment, net
    
    
    
    
    $
    916,419
    
    $
    1,020,087
 
 Asset
Impairments
 
 On
August 5, 2003, Power Resources, Ltd. ("Power Resources") entered into a
Tolling Agreement with ONEOK Energy, Marketing and Trading Company, L.P.
("ONEOK"). The agreement commenced October 1, 2003 and expires
December 31, 2005. Under the terms of the agreement, Power Resources, as an
exempt wholesale generator, sells its electricity and capacity to ONEOK for a
fixed price per KW-month plus variable operating and maintenance recovery
fees.
 
 The
Company has efforts underway to evaluate and execute long-term business
alternatives for the Power Resources Project. However, given the
December 31, 2005 expiration of the Tolling Agreement with ONEOK and the
surplus of generation capacity and depressed energy prices in the Electric
Reliability Council of Texas markets,
the Company has been evaluating Power Resources’ long-lived assets to assess
whether the carrying value of the assets is recoverable.
 
 During
the fourth quarter of 2004, management determined that a portion of the carrying
value of the Power Resources long-lived assets is no longer recoverable. As a
result, the Company recognized a non-cash impairment charge of $33.5 million,
net of tax of $21.0 million in accordance with SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," to write down the long-lived assets to their
fair value. The fair value was determined based on discounted estimated cash
flows from the future use of the long-lived assets. The impairment charge will
not result in any current or future cash expenditures.
 
 Additionally,
the Company wrote down $6.7 million and $3.9 million of abandoned equipment in
2004 and 2003, respectively.
 
 Stone
and Webster, Inc. (“Stone & Webster”)
 
 The
Salton Sea V Project was constructed by Stone & Webster, pursuant to a date
certain, fixed-price, turnkey engineering, procure, construct and manage
contract (the "Salton Sea V Project EPC Contract"). On March 7, 2002,
Salton Sea Power LLC ("Salton Sea Power"), the owner of the Salton Sea V
Project, filed a Demand for Arbitration against Stone & Webster for breach
of contract and breach of warranty arising from deficiencies in Stone &
Webster’s design, engineering, construction and procurement of equipment for the
Salton Sea V Project pursuant to the Salton Sea V Project EPC Contract. On
April 25, 2003, Salton Sea Power entered into a settlement agreement with
Stone & Webster. The Settlement Agreement resulted in a total payment of
$12.1 million from Stone & Webster in the second quarter 2003 and the
arbitration was dismissed. The settlement was recorded as a $4.5 million
reduction of incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.
 
 32
 On
November 25, 2002, Vulcan/BN Geothermal Power Company, Del Ranch, L.P., and
CE Turbo, LLC ("CE Turbo") entered into a settlement agreement with Stone &
Webster related to a Demand for Arbitration against Stone & Webster for
breach of contract and breach of warranty arising from deficiencies in Stone
& Webster’s design, engineering, construction and procurement of equipment
for the CE Turbo Project. The settlement agreement resulted in a $3.5 million
payment from Stone & Webster which was recorded as a reduction of
incremental capital expenditures.
 
 **4.** **Intangible** **Assets, Net**
 
 Intangible
assets comprise the following at December 31 (in thousands):
 
 **2004**
    
    **2003****Gross**
    
    
    
    **Gross****Estimated**
    
    **Carrying**
    
    **Accumulated**
    
    **Carrying**
    
    **Accumulated****Useful
      Lives**
    
    **Amount**
    
    **Amortization**
    
    **Amount**
    
    **Amortization**Power
      Purchase Contracts
    
    
    4
      to 30 years
    
    $
    315,434
    
    $
    210,999
    
    $
    315,434
    
    $
    197,138Patented
      Technology
    
    
    24
      years
    
    
    46,290
    
    
    19,243
    
    
    46,290
    
    
    17,314Total
    
    
    
    
    $
    361,724
    
    $
    230,242
    
    $
    361,724
    
    $
    214,452
 
 Amortization
expense on acquired intangible assets was $15.8 million, $18.7 million and $18.3
million for the years ended December 31, 2004, 2003 and 2002, respectively.
CE Generation expects amortization expense on acquired intangible assets to be
$15.8 million for each of the four succeeding fiscal years and $11.1 million in
2009.
 
 **5.**  **Project
Loans**
 
 Each of
CE Generation's direct or indirect subsidiaries is organized as a legal entity
separate and apart from CE Generation, its other subsidiaries. Pursuant to
separate project financing agreements applicable to the Imperial Valley Projects
and the Saranac Project, the assets of each subsidiary with an indirect or
direct ownership interest in the Imperial Valley Projects and the Saranac
Project are pledged or encumbered to support or otherwise provide the security
for their own project or subsidiary debt. It should not be assumed that any
asset of any subsidiary of CE Generation, will be available to satisfy the
obligations of CE Generation or any of its other subsidiaries; provided,
however, that unrestricted cash or other assets which are available for
distribution may, subject to applicable law and the terms of financing
arrangements for such parties, be advanced, loaned, paid as dividends or
otherwise distributed or contributed to CE Generation or affiliates thereof. For
purposes of the immediately preceding two sentences, the term “subsidiary” means
all of CE Generation's direct or indirect subsidiaries (1) owning direct or
indirect interests in the Imperial Valley Projects other than Magma and Salton
Sea Power, or (2) owning direct interests in the subsidiary that owns interests
in the Saranac Project.
 
 On
October 7, 1994, Saranac Power Partners L.P. ("Saranac Partnership") signed
a 14-year note payable agreement with a lender for an initial principal amount
of $204.6 million. Under the terms of the note payable agreement, interest rate
alternatives include an option to use a Eurodollar rate or the lender’s base
rate. Each option includes an interest margin in addition to the applicable rate
selected. The outstanding balance at December 31, 2004 and 2003 was $100.5
million and $122.6 million, respectively. The selected interest rate, plus
interest margin, at December 31, 2004, 2003, and 2002 was 3.10%, 2.27% and
2.92%, respectively.
 
 Effective
October 7, 1994, the Saranac Partnership entered into an interest rate swap
agreement with the lender as a means of hedging floating interest rate exposure
related to its 14-year note payable. The swap agreement had an initial notional
amount of $204.6 million and effectively fixes the interest rate at 8.31% in
October 2001 and which will increase to 8.56% in October 2005. The Saranac
Partnership may be exposed to credit loss in the event of nonperformance by the
lender under the interest rate swap agreement. However, the Saranac Partnership
does not anticipate nonperformance by the lender. The fair value of the swap as
of December 31, 2004 and 2003 was $6.4 million and $13.9 million,
respectively, and is included in interest rate swap liability in the
accompanying consolidated balance sheets.
 
  33
 Annual
repayments of the note payable for the years ending December 31 are as follows
(in thousands):
 
 **Amount**2005
    
    $
    26,1922006
    
    
    31,1042007
    
    
    34,3782008
    
    
    8,799Total
    
    $
    100,473
 
 The note
agreements are collateralized by all of the Saranac Partnership’s assets. The
Saranac Partnership is restricted by the terms of the note payable agreement
from making distributions or withdrawing any capital accounts without the
consent of the lender. Under the terms of the note payable agreement,
distributions may be made to the partners in accordance with the terms of the
Saranac Partnership Agreement. The note payable agreement also requires the
Saranac Partnership to maintain certain covenants. The Saranac Partnership was
in compliance with these requirements at December 31, 2004.
 
 General
Electric Capital Corporation ("GECC"), an indirect owner of the Saranac
Partnership, has issued an irrevocable letter of credit for the account of the
Saranac Partnership to its gas supplier in the amount of approximately $16.0
million. Under the credit facility pursuant to which GECC issued such letter of
credit, the Saranac Partnership has additional availability of approximately
$4.5 million for additional letters of credit. Annual fees related to these
letters of credit are calculated as 1.75% of the issued balance and 0.5% of the
unissued balance.
 
 **6.**  **Salton** **** **Sea
Notes and Bonds**
 
 The
Salton Sea Funding Corporation ("Funding Corporation"), a wholly-owned indirect
subsidiary of CE Generation, has issued debt securities as follows (in
thousands):
 
 **Senior**
    
    
    
    
    
    **December
      31,****Issued
      Date**
    
    **Secured
      Series**
    
    **Final
      Maturity Date**
    
    **Rate**
    
    **2004**
    
    **2003**July
      21, 1995
    
    
    B
      Bonds
    
    
    May
      30, 2005
    
    
    7.37%
    
    $
    21,504
    
    $
    41,662July
      21, 1995
    
    
    C
      Bonds
    
    
    May
      30, 2010
    
    
    7.84%
    
    
    98,396
    
    
    102,014June
      20, 1996
    
    
    E
      Bonds
    
    
    May
      30, 2011
    
    
    8.30%
    
    
    40,072
    
    
    43,322October
      13, 1998
    
    
    F
      Bonds
    
    
    November
      30, 2018
    
    
    7.48%
    
    
    138,405
    
    
    276,594$
    298,377
    
    $
    463,592
 
 Principal
and interest payments are made in semi-annual installments. Funding Corporation
debt is non-recourse to CE Generation.
 
 The net
revenues, equity distributions and royalties from the Salton Sea Projects and
the Partnership Projects are used to pay principal and interest payments on
outstanding senior secured bonds issued by Funding Corporation, the final series
of which is scheduled to mature in November 2018. Funding Corporation debt is
guaranteed by certain subsidiaries of Magma and secured by the capital stock of
certain subsidiaries of CE Generation. The proceeds of Funding Corporation debt
were loaned by Funding Corporation pursuant to loan agreements and notes (the
"Imperial Valley Project Loans") to certain subsidiaries of Magma and used for
construction of certain Imperial Valley Projects, refinancing of certain
indebtedness and other purposes. Debt service on the Imperial Valley Project
Loans is used to repay debt service on Funding Corporation debt. The Imperial
Valley Project Loans and the guarantees of Funding Corporation debt are secured
by substantially all of the assets of the guarantors, including the Imperial
Valley Projects, and by the equity interests in the guarantors.
 
 On
October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285 million aggregate amount of 7.475% Senior Secured Series F
Bonds due November 30, 2018 (the "Series F Bonds"). A portion of the
proceeds was advanced to CalEnergy Minerals LLC ("CalEnergy Minerals"), an
indirect wholly owned subsidiary of MEHC, to fund the cost of construction of
the zinc recovery facility (the "Zinc Recovery Project"). The direct and
indirect owners of the Zinc Recovery Project (the "Zinc Guarantors," which
include CalEnergy Minerals and its sole member, Salton Sea Minerals Corp.) are
among the guarantors of the Funding Corporation debt. In connection with the
divestiture of 50% of CE Generation, MEHC guaranteed the payment by the Zinc
Guarantors of a specified portion of the scheduled debt service on and certain
prepayments of the Imperial Valley Project Loans.
 
 34
 On
March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of $136.4 million of the Series F Bonds, pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC, and MEHC performed under that demand, for the full amount
remaining on MEHC's guarantee of the Series F Bonds in order to fund the
redemption. Given the payment under MEHC's guarantee, MEHC no longer has any
liability with respect to its guarantee.
 
 In
May 2003, the previous $65.4 million debt service reserve letter of credit
issued by a financial institution for the account of Funding Corporation, which
was due to expire, was replaced by a letter of credit issued in the current
amount of $25.3 million by a financial institution for the account of TransAlta
and a letter of credit issued in the current amount of $26.7 million by a
financial institution for the account of MEHC. Due to the pending expiration of
the previous debt service reserve letter of credit, certain cash balances became
restricted in a debt service reserve account maintained on behalf of Funding
Corporation. Upon the issuance of the new letters of credit, such cash was
released from the debt service reserve account and distributed to CE Generation
on May 29, 2003. During 2003, CE Generation distributed a total of $109.5
million to MEHC and TransAlta.
 
 Annual
repayments of Funding Corporation debt for the years ending December 31 are
as follows (in thousands):
 
 **Amount**2005
    
    $
    28,6202006
    
    
    25,9172007
    
    
    25,0912008
    
    
    28,0652009
    
    
    26,210Thereafter
    
    
    164,474Total
    
    $
    298,377
 
 CE
Generation's ability to obtain distributions from its investment in the Salton
Sea Projects and Partnership Projects is subject to the following
conditions:
 
 ·
    the
      depository accounts for Funding Corporation debt must be fully
      funded;
 
 ·
    there
      cannot have occurred and be continuing any default or event of default
      under Funding Corporation debt;
 
 ·
    the
      historical debt service coverage ratio of Funding Corporation for the
      prior four fiscal quarters must be at least 1.5 to 1.0; and
 
 ·
    there
      must be sufficient geothermal resources to operate the Imperial Valley
      Projects at their required levels.
  35
 **7** **.**  **Senior
Secured Bonds**
 
 On
March 2, 1999, CE Generation issued $400 million of 7.416% Senior Secured
Bonds due 2018 (the "Senior Secured Bonds"). These securities are senior secured
debt which rank equally in right of payment with CE Generation's other senior
secured debt permitted under the indenture for the Securities, share equally in
the collateral with CE Generation's other senior secured debt permitted under
the indenture for the Securities, and rank senior to any of CE Generation's
subordinated debt permitted under the indenture for the Securities. These
securities are effectively subordinated to the existing project financing debt
and all other debt of CE Generation's consolidated subsidiaries. The outstanding
balance as of December 31, 2004 and 2003 was $323.8 million and $338.4
million, respectively.
 
 The
Senior Secured Bonds are primarily secured by the following
collateral:
 
 ·
    all
      available cash flow (as defined);
 
 ·
    a
      pledge of 99% of the equity interests in Salton Sea Power and all of CE
      Generation's equity interests in its other consolidated
      subsidiaries;
 
 ·
    a
      pledge of all of the capital stock of SECI Holding
Inc.;
 
 ·
    a
      grant of a lien on and security interest in the depository accounts;
      and
 
 ·
    to
      the extent possible, a grant of a lien on and security interest in all of
      CE Generation's other tangible and intangible property, to the extent
      assignable.
 
 A
financial institution has issued for the account of CE Generation a debt service
reserve letter of credit in the amount of $24.2 million in favor of the holders
of the Senior Secured Bonds.
 
 Annual
repayments of the Senior Secured Bonds for the years ending December 31 are
as follows (in thousands):
 
 **Amount**2005
    
    $
    14,8002006
    
    
    19,2002007
    
    
    18,0002008
    
    
    28,2002009
    
    
    24,600Thereafter
    
    
    219,000Total
    
    $
    323,800
 
 **8.**  **Income
Taxes**
 
 The
provision (benefit) for income taxes consists of the following for the year
ended December 31 (in thousands):
 
 **2004**
    
    **2003**
    
    **2002**Current:Federal
    
    $
    (807
    )
    $
    5,161
    
    $
    (873
    )State
    
    
    161
    
    
    1,903
    
    
    (58
    )(646
    )
    
    7,064
    
    
    (931
    )Deferred:Federal
    
    
    (9,431
    )
    
    6,410
    
    
    8,991State
    
    
    (1,493
    )
    
    2,247
    
    
    1,499(10,924
    )
    
    8,657
    
    
    10,490Total
      provision (benefit)
    
    $
    (11,570
    )
    $
    15,721
    
    $
    9,559
 
 
 
 36
 A
reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision (benefit) for income taxes
follows:
 
 **2004**
    
    **2003**
    
    **2002**Federal
      statutory rate
    
    
    35.0
    %
    
    35.0
    %
    
    35.0
    %Increases
      (reductions) in taxes resulting from:Percentage
      depletion
    
    
    (57.8
    )
    
    (3.7
    )
    
    (18.1
    )Investment
      and energy tax credits
    
    
    (13.2
    )
    
    (1.3
    )
    
    (2.3
    )State
      taxes, net of federal benefit
    
    
    (11.7
    )
    
    3.6
    
    
    3.3Minority
      interest
    
    
    (104.5
    )
    
    (9.9
    )
    
    (8.2
    )Other
      items, net
    
    
    (4.6
    )
    
    (2.4
    )
    
    1.1Effective
      tax rate
    
    
    (156.8
    )%
    
    21.3
    %
    
    10.8
    %
 
 During
2002, the Company made progress on several significant income tax examination
matters for prior tax years, including percentage of depletion, which resulted
in a decrease in income tax expense of $15.1 million in 2002. Federal and state
income tax returns for 1999 through 2003 have been examined or are currently
under examination by the internal revenue service. The Company believes it has
adequately reserved for federal and state income taxes, and does not expect that
resolution of these exams will have a material adverse effect on its financial
condition, results of operations or liquidity.
 
 Income
tax expense is only provided for the taxable earnings of the Company, including
its partnership interests. No provision for income taxes is provided in the
accompanying consolidated financial statements for the minority interests’ share
of the partnership earnings.
  CE
Generation has a federal energy tax credit carryforward of $8.5 million that
begins to expire in 2021 unless previously utilized. CE Generation has federal
and state alternative minimum tax credit carryforwards of $0.9 million that do
not expire and will carryforward indefinitely until utilized. CE Generation has
a $0.6 million deferred tax asset related to California net operating loss
carryfowards ("NOL") that will expire in 2013 unless previously
utilized.
  Deferred
tax liabilities (assets) consist of the following at December 31 (in
thousands):
 
 **2004**
    
    **2003**Deferred
      tax liabilities:Properties,
      plant, contracts and equipment
    
    $
    258,031
    
    $
    274,436Other
    
    
    4,766
    
    
    3,130Total
      deferred tax liabilities
    
    
    262,797
    
    
    277,566Deferred
      tax assets:Accruals
      not currently deductible for tax purposes
    
    
    (4,723
    )
    
    (6,375
    )NOL
      and credit carryforwards
    
    
    (10,096
    )
    
    (14,146
    )Total
      deferred tax assets
    
    
    (14,819
    )
    
    (20,521
    )Net
      deferred tax liabilities
    
    $
    247,978
    
    $
    257,045
 
 **9.**  **Fair
Value of Financial Instruments**
 
 The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts, which CE
Generation could realize in a current transaction.
 
 The
methods and assumptions used to estimate fair value are as follows:
 
 Note
receivable from related party - The fair value of the note receivable from
related party is estimated based on the quoted market price of the corresponding
debt issue.
 
 37
 Debt
instruments - The fair
value of all debt instruments has been estimated based upon quoted market prices
as supplied by third-party broker dealers. The Company is unable to estimate a
fair value for the project loans as there are no quoted market prices
available.
 
 Other
financial instruments - All other financial instruments of a material nature are
short-term and the fair value approximates the carrying
amount.
 
 The
carrying amounts in the table below are included in the accompanying
consolidated balance sheets under the indicated captions (in
thousands):
 
 **2004**
    
    **2003****Carrying**
    
    **Estimated**
    
    **Carrying**
    
    **Estimated****Value**
    
    **Fair
      Value**
    
    **Value**
    
    **Fair
      Value**Financial
      Assets:Note
      receivable from related party
    
    $
    -
    
    $
    -
    
    $
    136,383
    
    $
    141,821Financial
      Liabilities:Interest
      rate swaps
    
    
    6,391
    
    
    6,391
    
    
    13,873
    
    
    13,873Project
      loans
    
    
    100,473
    
    
    100,473
    
    
    122,573
    
    
    122,573Salton
      Sea notes and bonds
    
    
    298,377
    
    
    327,756
    
    
    463,591
    
    
    483,312Senior
      secured bonds
    
    
    323,800
    
    
    336,752
    
    
    338,400
    
    
    343,476
 
 **10.**  **Commitments
and Contingencies**
 
 Edison
and the California Power Exchange
 
 On
July 10, 2003, the Salton Sea IV Project’s 40 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea IV Project’s turbine returned to service, on
September 17, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea IV power purchase agreement totaling $2.5 million. Salton Sea Power
Generation, L.P. ("SSPG"), with Fish Lake Power Company, owner of the Salton Sea
IV Project, served notices of error on Edison for such unpaid amounts. As a
result, the Company had established an allowance for doubtful accounts of $1.7
million for capacity payments as of December 31, 2003. In December 2004, as
a result of a Settlement Agreement dated December 7, 2004 resolving the
dispute, which settlement is contingent upon approval by the California Public
Utility Commission, the allowance was released and the associated receivable was
written off.
 
 On
October 9, 2003, the Salton Sea III Project’s 50 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea III Project’s turbine returned to service, on
December 12, 2003. Edison failed to recognize the uncontrollable force
event and as such has not paid amounts otherwise due and owing under the Salton
Sea III power purchase agreement totaling $0.8 million. SSPG, owner of the
Salton Sea III Project, served notice of error on Edison for such unpaid
amounts. As a result, the Company had established an allowance for doubtful
accounts for the full amount of this receivable. Pursuant to a letter agreement
dated December 2, 2004, Edison made a
settlement payment of $0.6 million  on
December 13, 2004. Consequently,
in December 2004 the allowance for doubtful accounts was released and the
remaining receivable of $0.2 million was written off.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo had not received payment for power sold to El Paso
Merchant Energy Company (“EPME”) under certain transaction agreements during
December 2000 and January 2001 of $3.8 million (the "PX Receivable"). Salton Sea
Power and CE Turbo had established an allowance for doubtful accounts for this
balance as of December 31, 2003. On September 29, 2004, Salton Sea
Power and CE Turbo entered into separate Transfer of Claims Agreements with
TransAlta and MEHC (the "Transfer of Claims Agreements"), pursuant to which
Salton Sea Power and CE Turbo received an aggregate of $3.7 million in exchange
for transferring the rights to receive payment on the PX Receivable to TransAlta
and MEHC. As a result of the transaction, Salton Sea Power and CE Turbo
wrote-off the PX Receivable and the related allowance for doubtful accounts and
recorded a $3.8 million current liability to reflect the collection risk
retained under the Transfer of Claims Agreements. Pursuant to the Transfer of
Claims Agreements, to the extent that the PX Receivable becomes uncollectible,
Salton Sea Power and CE Turbo can be required to pay the PX Receivable, plus
interest, to MEHC and TransAlta.
 
  38
 Environmental
 
 The
Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics. State and
federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company’s existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company’s cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company’s facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediation of sites, other companies’ clean-up experience and
data released by the Environmental Protection Agency (“EPA”) or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances, and are included in the
accompanying balance sheets at their undiscounted amounts. As of
December 31, 2004 and 2003, the environmental liabilities recorded on the
consolidated balance sheet as current liabilities were $2.7 million and $4.6
million, respectively.
 
 On
December 4, 2003, the EPA announced that development of its Interstate Air
Quality Rule, now known as the Clean Air Interstate Rule. The rule was developed
in an effort to reduce ozone and fine particulate matter in the Eastern United
States by requiring reductions of sulfur dioxide and nitrogen oxides emissions
from the power sector in 29 states, including New York where the Company’s
Saranac facility is located. The Clean Air Interstate Rule could, in whole or in
part, be superseded or made more stringent by one of a number of multi-pollutant
emission reduction proposals currently under consideration at the federal level
as well as possible new federal regulation of carbon dioxide and other gases
that may affect global climate change.
 
 Other
 
 The
Saranac Partnership has a contract to purchase natural gas from a third party,
for its cogeneration facility for a period of 15 years for an amount up to
51,000 MMBtus per day which expires in 2009. The price for such deliveries is a
stated rate, escalated annually at a rate of 4%. The minimum volumes under the
agreement for the years ending December 31 are included in the future
minimum payments under the contract as follows (in thousands):
 
 **Amount**2005
    
    $
    68,5442006
    
    
    71,2862007
    
    
    74,1372008
    
    
    77,3132009
    
    
    37,536Total
    
    $
    328,816
 
 The
Salton Sea V Project is obligated to supply the electricity demands of the Zinc
Recovery Project, at the market rates available to the Salton Sea V Project,
less the wheeling costs. On
September 10, 2004, CalEnergy Minerals ceased operations of the Zinc
Recovery Project. Accordingly, except for sales during the dismantling and
decommissioning phases of the Zinc Recovery Project, no further sales to
CalEnergy Minerals are expected.
 
 **11.** **Related
Party Transactions**
 
 Pursuant
to the Administrative Services Agreement between MEHC and CE Generation (the
"Administrative Services Agreement"), MEHC provides certain administrative and
management services to CE Generation, and MEHC’s executive, financial, legal,
tax and other corporate staff departments perform certain services for CE
Generation. On August 1, 2002, the Administrative Services Agreement
between MEHC and CE Generation was amended to provide for a fixed monthly fee in
lieu of certain expenses, which were being allocated. The fixed fee, which was
retroactive to January 1, 2002 and ended December 31, 2004, was $3.1
million annually and is included in general and administrative expense in the
accompanying consolidated statements of operations. On October 22, 2004,
the Administrative Services Agreement was amended to extend the fixed fee at
$3.0 million annually beginning January 1, 2005 through December 31,
2007.
 
 39
 The
Company participates in multi-employer pension plans sponsored by MEHC. The
Company’s contribution to the various plans was approximately $2.1 million, $2.3
million and $1.8 million in 2004, 2003 and 2002, respectively.
 
 Commencing
on March 27, 2001, Salton Sea Power and CE Turbo entered into a series of
transaction agreements to sell available power from the Salton Sea V Project and
CE Turbo Project to EPME based on percentages of the Dow Jones SP-15 Index. On
February 11, 2003, Salton Sea Power and CE Turbo ceased selling available power
to EPME. Pursuant to these transaction agreements, sales to EPME totaled
$1.2 million and $8.9 million in 2003 and 2002, respectively. As of
December 31, 2004 and 2003, there were no accounts receivable balances from
EPME.
 
 Pursuant
to a transaction agreement dated January 29, 2003 (the “TransAlta
Transaction Agreement”), Salton Sea Power and CE Turbo began selling available
power from the Salton Sea V Project and CE Turbo Project to TransAlta on
February 12, 2003 based on percentages of the Dow Jones SP-15 Index. The
TransAlta Transaction Agreement shall continue until the earlier of: (a) 30 days
following a written notice of termination; or (b) any other termination date
mutually agreed to by the parties. No such notice of termination has been given
by either party. Pursuant to this agreement, sales to TransAlta totaled $10.5
million and $9.9 million in 2004 and 2003, respectively. As of December 31,
2004 and 2003, accounts receivable balances from TransAlta were $1.3 million and
$1.6 million, respectively.
 
 On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 MWh of generation, a "Green Tag") associated with
up to 931,800 MWh of available generation of the Salton Sea V Project and CE
Turbo Project through December 31, 2008 to TransAlta Energy Marketing (US)
Inc. ("TransAlta Marketing") at a market price per Green Tag. Pursuant to this
agreement, sales to TransAlta Marketing commenced in July 2004 and totaled
$0.5 million in 2004. As of December 31, 2004, there were no accounts
receivable balances from TransAlta Marketing.
 
 Pursuant
to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton
Sea Power and CE Turbo provided CalEnergy Minerals with the Zinc Recovery
Project’s electrical energy requirements at the market rates available to them,
less wheeling costs. Pursuant to these agreements, sales to CalEnergy Minerals
from Salton Sea Power totaled $1.3 million, $0.9 million and $0.4 million for
the years ended December 31, 2004, 2003 and 2002, respectively, and there
were no sales to CalEnergy Minerals from CE Turbo for the years ended
December 31, 2004, 2003 or 2002. On September 10, 2004, CalEnergy
Minerals ceased operations of the Zinc Recovery Project. Accordingly, except for
sales during the dismantling and decommissioning phases of the Zinc Recovery
Project, no further sales to CalEnergy Minerals are expected. There were no
material accounts receivable balances at December 31, 2004 or
2003.
 
 On
December 31, 2004, in connection with the dismantling and decommissioning
of the Zinc Recovery Project, CalEnergy Minerals sold certain equipment to the
Imperial Valley Projects. The equipment was sold at a fair market value of
approximately $0.4 million, which amount was paid in January 2005.
 
 **Item
9.**  **Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.**
 
 None.
 
 **Item
9A.** **Controls and Procedures.**
 
 An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the chief executive officer and chief accounting
officer, regarding the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2004. Based on that evaluation, the Company’s management,
including the chief executive officer and chief accounting officer, concluded
that the Company’s disclosure controls and procedures were effective. There have
been no significant changes during the fourth quarter of 2004 in the Company’s
internal controls or in other factors that could significantly affect internal
controls.
 
 40
 **Item
9B.**  **Other Information.**
 
 None.
  41
  **PART
III**
 
 **Item
10.**  **Directors and Executive Officers of the
Registrant.**
 
 **Executive
      Officer**
    
    **Position**Stefan
      A. Bird
    
    PresidentDouglas
      L. Anderson
    
    Senior
      Vice PresidentWayne
      F. Irmiter
    
    Vice
      President and ControllerIan
      A. Bourne
    
    DirectorJ.
      Thomas Coyle
    
    DirectorPatrick
      J. Goodman
    
    DirectorMitchell
      L. Pirnie
    
    Vice
      President, General Counsel and Director
 
 STEFAN A.
BIRD, 38, President of CE Generation, is responsible for independent power plant
operations and construction in the United States. Mr. Bird
joined MEHC in January 1998 as Project Development Manager and was promoted to
Vice President, Project Development in August 1999. Prior to joining MEHC, Mr.
Bird held various positions at Koch Industries from 1989 to 1997 including
Director of Finance, Latin America for Koch Industries International in Mexico
City; Director of Marketing and Risk Manager for Koch Power Services in Houston,
Texas; Senior Financial Analyst for Koch International Financial Services in
Fribourg, Switzerland; Project Manager, Corporate Development for Koch
Industries in Wichita, Kansas; and Project Engineer and Maintenance Planner for
Koch Refining Company in St. Paul, Minnesota.
 
 DOUGLAS
L. ANDERSON, 46, Senior Vice President and General Counsel of MEHC and a Senior
Vice President of CE Generation. Mr. Anderson joined MEHC in February 1993.
Prior to that, Mr. Anderson was an attorney in private practice.
 
 WAYNE F.
IRMITER, 39, Vice President and Controller of CE Generation. Mr. Irmiter joined
MEHC as Vice President and Chief Accounting Officer in November 2002. Mr.
Irmiter is a Certified Public Accountant and from 1988 to 1993 he worked in
public accounting. Most recently, Mr. Irmiter was with Gateway, Inc. in various
management positions including Director-Strategic Initiatives and
Director-Finance.
 
 IAN A.
BOURNE, 57, Executive Vice President and Chief Financial Officer of TransAlta
and a director of CE Generation. Mr. Bourne joined TransAlta in January 1998 as
senior vice president and chief financial officer and was appointed to his
current position June 1, 1998. Immediately prior to joining TransAlta, Mr.
Bourne had been senior vice president and chief financial officer of Canada Post
Corporation from 1992. Prior to 1992 Mr. Bourne gained extensive financial
experience with General Electric Company, including positions as European
treasurer, based in London; chief financial officer for GE Canada, and chief
financial officer for GE Medical Systems Europe, based in Paris.
 
 J. THOMAS
COYLE, 57, President of TransAlta Energy Marketing (U.S.) Inc. and a director of
CE Generation. Mr. Coyle joined TransAlta in 1998 as Director, Risk Portfolio
Management, Energy Marketing. Prior to joining TransAlta, Mr. Coyle held various
positions at Petro-Canada from 1986 to 1997 including Portfolio Manager -
Natural Gas Marketing, Manager Market Development - Natural Gas Marketing and
Risk Manager.
 
 PATRICK
J. GOODMAN, 38, Senior Vice President and Chief Financial Officer of MEHC and a
director of CE Generation. Mr. Goodman
joined MEHC in 1995 and served in various accounting positions including Senior
Vice President and Chief Accounting Officer. Prior to joining MEHC,
Mr. Goodman was a financial manager for National Indemnity Company and a
senior associate at Coopers & Lybrand.
 
 MITCHELL
L. PIRNIE, 46, Vice President, General Counsel and Director of CE Generation.
Mr. Pirnie joined MEHC in November 1997. Prior to joining MEHC, Mr. Pirnie was
an attorney in private practice.
 
 **Audit
Committee and Audit Committee Financial Expert**
 
 The
Company does not have a separately designated audit committee. No member of the
Board of Directors has the qualifications required to be considered an
independent audit committee financial expert for purposes of the SEC rules and
regulations. Currently, the Company is not required to have an audit committee
or an audit committee financial expert under the Sarbanes-Oxley Act of 2002 or
any other applicable regulation.
 
 42
 **Item
11.** **Executive Compensation.**
 
 CE
Generation's directors and executive officers receive no remuneration for
serving in such capacities.
 
 **Item
12.** **Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.**
 
 Fifty
percent of CE Generation’s interests are owned by MEHC and the other 50% are
owned by TransAlta. There is no public trading market for CE Generation’s
membership interests. None of the directors or executive officers beneficially
owns any of the equity interests. MEHC’s common stock is not publicly traded.
TransAlta is owned by TransAlta Corporation. TransAlta Corporation’s common
stock is publicly traded on the New York Stock Exchange.
 
 **Item
13.** **Certain Relationships and Related
Transactions.**
 
 CE
Generation is 50% owned by MEHC and 50% owned by TransAlta. CE Generation’s
activities are restricted by the terms of the indenture for the Securities to:
(1) ownership of the Company’s subsidiaries and related activities; (2) acting
as issuer of securities and other indebtedness as permitted under the indenture
and related activities; and (3) other activities which could not reasonably be
expected to result in a material adverse effect so long as the rating agencies
confirm that these activities will not result in a downgrade of their ratings of
the Securities. CE Generation and each of the assigning subsidiaries have been
organized and are operated as legal entities separate and apart from MEHC,
TransAlta and their other affiliates, and, accordingly, the Company’s assets and
the assets of the assigning subsidiaries will not be generally available to
satisfy the obligations of MEHC, TransAlta or any of their other affiliates.
However, the Company’s and the assigning subsidiaries’ unrestricted cash and
other assets which are available for distribution may, subject to applicable law
and the terms of CE Generation’s and the assigning subsidiaries’ financing
arrangements, be advanced, loaned, paid as dividends or otherwise distributed or
contributed to MEHC, TransAlta or their affiliates. The securities are
non-recourse to MEHC and TransAlta.
 
 MEHC
entered into the Administrative Services Agreement with CE Generation, which
provides CE Generation administrative services from MEHC in exchange for a fixed
fee through December 31, 2007. TransAlta has entered into Transaction
Agreements with Salton Sea Power and CE Turbo. Pursuant to a Transaction
Agreement, Salton Sea Power and CE Turbo sell available power to TransAlta based
on percentages of the Dow Jones SP-15 Index. The agreement continues until
termination notice by either party. No such notice of termination has been
given. TransAlta Marketing has entered into a Green Energy Tag Purchase and Sale
Agreement with Salton Sea Power and CE Turbo to sell a specified volume of Green
Tags made available by generation from the Salton Sea V Project and the CE Turbo
Project through December 31, 2008 at a market price per Green
Tag.
 
 Pursuant
to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton
Sea Power and CE Turbo provided CalEnergy Minerals with the Zinc Recovery
Project’s electrical energy requirements at the market rates available to them,
less wheeling costs. On September 10, 2004, CalEnergy Minerals ceased
operations of the Zinc Recovery Project. Accordingly, except for sales during
the dismantling and decommissioning phases of the Zinc Recovery Project, no
further sales to CalEnergy Minerals are expected.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo have not received payment for the PX Receivable.
Salton Sea Power and CE Turbo had established an allowance for doubtful accounts
for this balance as of December 31, 2003. On September 29, 2004,
Salton Sea Power and CE Turbo entered into Transfer of Claims Agreements,
pursuant to which Salton Sea Power and CE Turbo received an aggregate of $3.7
million in exchange for transferring the rights to receive payment on the PX
Receivable to TransAlta and MEHC. As a result of the transaction, Salton Sea
Power and CE Turbo wrote-off the PX Receivable and the related allowance for
doubtful accounts and recorded a $3.8 million current liability to reflect the
collection risk retained under the Transfer of Claims Agreements. Pursuant to
the Transfer of Claims Agreements, to the extent that the PX Receivable becomes
uncollectible, Salton Sea Power and CE Turbo can be required to pay the PX
Receivable, plus interest, to MEHC and TransAlta.
 
 On
December 31, 2004, in connection with the dismantling and decommissioning
of the Zinc Recovery Project, CalEnergy Minerals sold certain equipment to the
Imperial Valley Projects. The equipment was sold at a fair market value of
approximately $0.4 million, which amount was paid in January 2005.
 
 CE
Generation also has an agreement with MEHC and TransAlta to provide TransAlta
with a right of first refusal for the Company to participate in the development
of any future geothermal power projects or combined geothermal power and mineral
recovery projects proposed by MEHC in the area of the geothermal reservoir that
currently supplies geothermal resources to the Imperial Valley Projects in
return for the payment of a royalty to MEHC. If TransAlta elects to not have the
Company participate, the agreement gives MEHC the right to develop the new
project upon showing that there are sufficient geothermal resources for both the
new project and the Company’s existing projects.
 
 43
 **Item
14.** **Principal Accountant Fees and Services.**
 
 As
discussed in "Item 13. Certain Relationships and Related Transactions" MEHC
entered into the Administrative Services Agreement with CE Generation. The
agreement includes principal accountant fees and services. CE Generation does
not have preapproval policies and procedures and does not specifically identify
principal accountant fees and services as they are part of the administrative
fees paid to MEHC. The fees and services of CE Generation’s principal accountant
are preapproved by the audit committee of MEHC.
  44
 **PART
IV**
 
 **Item
15.** **Exhibits
and Financial Statement Schedules.**
 
 (a)
    Financial
      Statements and Schedules(i)
    Financial
      StatementsFinancial
      Statements are included in Item 8 of this Form 10-K(ii)
    Financial
      Statement SchedulesSee
      Schedule II on page 46.Schedules
      not listed above have been omitted because they are either not applicable,
      not required or the information required to be set forth therein is
      included in the consolidated financial statements or notes
      thereto.(b)
    ExhibitsThe
      exhibitslistedon
      the accompanying Exhibit Index are filed as part of this Annual
      Report.(c)
    Financial
      statements required by Regulation S-X, which are excluded from the Annual
      Report by Rule 14a-3(b).Not
      applicable
 
  45
  **SCHEDULE
II**
 
 
 **CE
GENERATION, LLC**
 **CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS**
 **FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**
 (Amounts
in thousands)
 
 **Column
      A**
    
    **Column
      B**
    
    **Column
      C**
    
    **Column
      D**
    
    **Column
      E****Balance
      at**
    
    **Additions**
    
    
    
    **Balance****Beginning**
    
    **Charged**
    
    
    
    **at
      End****Description**
    
    **of
      Year**
    
    **to
      Income**
    
    **Deductions**
    
    **of
      Year**Reserves
      Deducted From Assets To Which They Apply:Allowance
      for doubtful accountsYear
      ended 2004
    
    $
    6,268
    
    $
    -
    
    $
    (6,268
    )
    $
    -Year
      ended 2003
    
    $
    6,496
    
    $
    2,433
    
    $
    (2,661
    )
    $
    6,268Year
      ended 2002
    
    $
    24,754
    
    $
    2,661
    
    $
    (20,919
    )
    **$**
    ****6,496Reserves
      Not Deducted from Assets(1):Year
      ended 2004
    
    $
    6,124
    
    $
    -
    
    $
    (1,959
    )
    $
    4,165Year
      ended 2003
    
    $
    6,300
    
    $
    2,604
    
    $
    (2,780
    )
    $
    6,124Year
      ended 2002
    
    $
    6,132
    
    $
    3,509
    
    $
    (3,341
    )
    $
    6,300
 
 (1)  Reserves
not deducted from assets include estimated liabilities for litigation and
environmental compliance at the Imperial Valley Projects.
  46
  **SIGNATURES**
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, in the City of Omaha, State of
Nebraska, on this 25 th day of
February 2005.
 
 **CE
      Generation, LLC**By:
    /s/
      Stefan A. BirdStefan
      A. BirdPresident
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director
 
  47
 **EXHIBIT
INDEX**
 
 
 Exhibit
      No.3.1
    Certificate
      of Formation of CE Generation, LLC (incorporated by reference to Exhibit
      3.1 to the Company’s Registration Statement on Form
  S-4).3.2
    Amended
      and Restated Limited Liability Company Operating Agreement of CE
      Generation, LLC.3.3
    First
      Amendment to Amended and Restated Limited Liability Company Operating
      Agreement of CE Generation, LLC, dated as of October 28,
    2002.4.1
    Indenture,
      dated as of March 2, 1999, by and between CE Generation, LLC and Chase
      Manhattan Bank and Trust Company, National Association (incorporated by
      reference to Exhibit 4.1 to the Company’s Registration Statement on Form
      S-4).4.2
    Form
      of First Supplemental Indenture to be entered into by and between CE
      Generation, LLC and Chase Manhattan Bank and Trust Company, National
      Association, Trustee (incorporated by reference to Exhibit 4.2 to the
      Company’s Registration Statement on Form S-4).4.3
    Intentionally
      left blank.4.4
    Intentionally
      left blank.4.5
    Debt
      Service Reserve Letter of Credit and Reimbursement Agreement, dated as of
      March 2, 1999, by and among CE Generation, LLC, the banks named therein
      and Credit Suisse First Boston, as Agent (incorporated by reference to
      Exhibit 4.5 to the Company’s Registration Statement on Form
      S-4).4.6
    Deposit
      and Disbursement Agreement, dated as of March 2, 1999, by and among CE
      Generation, LLC, Magma Power Company, Salton Sea Power Company, Falcon
      Seaboard Resources, Inc., Falcon Seaboard Power Corporation, Falcon
      Seaboard Oil Company, California Energy Development Corporation, CE Texas
      Energy LLC and Chase Manhattan Bank and Trust Company, National
      Association, as Collateral Agent and Depositary Bank (incorporated by
      reference to Exhibit 4.6 to the Company’s Registration Statement on Form
      S-4).4.7
    Intercreditor
      Agreement, dated as of March 2, 1999, by and among CE Generation, LLC,
      Magma Power Company, Salton Sea Power Company, Falcon Seaboard Resources,
      Inc., Falcon Seaboard Power Corporation, Falcon Seaboard Oil Company,
      California Energy Development Corporation, CE Texas Energy LLC, Credit
      Suisse First Boston and Chase Manhattan Bank and Trust Company, National
      Association, as Trustee, Collateral Agent and Depositary Bank
      (incorporated by reference to Exhibit 4.7 to the Company’s Registration
      Statement on Form S-4).4.8
    Assignment
      and Security Agreement, dated as of March 2, 1999, by and among Magma
      Power Company, Salton Sea Power Company, Falcon Seaboard Resources, Inc.,
      Falcon Seaboard Power Corporation, Falcon Seaboard Oil Company, California
      Energy Development Corporation, CE Texas Energy LLC, Credit Suisse First
      Boston and Chase Manhattan Bank and Trust Company, National Association,
      as Collateral Agent (incorporated by reference to Exhibit 4.8 to the
      Company’s Registration Statement on Form S-4).4.9
    Assignment
      and Security Agreement, dated as of March 2, 1999, by and between CE
      Generation, LLC and Chase Manhattan Bank and Trust Company, National
      Association, as Collateral Agent (incorporated by reference to Exhibit 4.9
      to the Company’s Registration Statement on Form S-4).4.10
    Pledge
      Agreement (SSPC Stock), dated as of March 2, 1999, by Magma Power Company
      in favor of Chase Manhattan Bank and Trust Company, National Association,
      as Collateral Agent (incorporated by reference to Exhibit 4.10 to the
      Company’s Registration Statement on Form
S-4).
  48
 4.11
    Pledge
      Agreement (FSRI Holdings, Inc. Stock and California Energy Development
      Corporation Stock), dated as of March 2, 1999 by CE Generation, LLC in
      favor of Chase Manhattan Bank and Trust Company, National Association, as
      Collateral Agent (incorporated by reference to Exhibit 4.11 to the
      Company’s Registration Statement on Form S-4).4.12
    Securities
      Account Control Agreement, dated as of March 2, 1999, by and among CE
      Generation, LLC, Magma Power Company, Salton Sea Power Company, Falcon
      Seaboard Resources, Inc., Falcon Seaboard Power Corporation, Falcon
      Seaboard Oil Company, California Energy Development Corporation, CE Texas
      Energy LLC, Credit Suisse First Boston and Chase Manhattan Bank and Trust
      Company, National Association, as Collateral Agent and Depositary Bank
      (incorporated by reference to Exhibit 4.12 to the Company’s Registration
      Statement on Form S-4).14.1
    CE
      Generation, LLC - Code of Ethics for Chief Executive Officer, Chief
      Financial Officer and Chief Accounting Officer (incorporated by reference
      to Exhibit 14.1 to the Company’s Form 10K dated December 31,
      2003.31.1
    ChiefExecutive Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    ChiefAccounting Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
    ChiefExecutive Officer’s Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
    Chief
      Accounting Officer’s Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 
   49