**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-Q**
 
 **[
X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934**
 
 For the
quarterly period ended March 31, 2005
 
 **OR**
 
 **[  
] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934**
 
 For the
transition period from ____ to ____
 
 Commission
File No. 333-89521
 
 **CE
GENERATION, LLC**
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
    
    47-0818523(State
      or other jurisdiction of
      incorporation
      or organization)
    
    (I.R.S.
      Employer
      Identification
      No.)302
      South 36thStreet, Suite 400
      Omaha,
      Nebraska
    
    68131(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 (402)
      341-4500(Registrant’s
      telephone number, including area code)
  (Former
      name, former address and former fiscal year, if changed since last
      report)
 
 
 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 T No £
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
 
 The
members’ equity accounts are held 50% by MidAmerican Energy Holdings Company and
50% by TransAlta USA Inc. as of April 30, 2005.
 
  
  
 **TABLE
OF CONTENTS**
  **PART
      I - FINANCIAL INFORMATION**Item 1.
    Financial Statements
    3Item 2.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    11Item 3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    16Item 4.
    Controls and Procedures
    16**PART
      II - OTHER INFORMATION**Item 1.
    Legal Proceedings
    17Item 2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    17Item 3.
    Defaults Upon Senior Securities
    17Item 4.
    Submission of Matters to a Vote of Security
      Holders
    17Item 5.
    Other Information
    17Item 6.
    Exhibits
    17Signatures
    
    18Exhibit Index
    
    19
  2
  **PART
I - FINANCIAL INFORMATION**
 
 **Item
1.** **Financial Statements.**
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To the
Board of Directors and Members
 CE
Generation, LLC
 
 We have
reviewed the accompanying consolidated balance sheet of CE Generation, LLC and
subsidiaries (collectively, the “Company”) as of March 31, 2005, and the
related consolidated statements of operations and other comprehensive income,
and of cash flows for the three-month periods ended March 31, 2005 and
2004. These interim financial statements are the responsibility of the Company’s
management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of CE
Generation, LLC and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations and other comprehensive income, members’
equity and cash flows for the year then ended (not presented herein); and in our
report dated February 25, 2005, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
2004 is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 May 5,
2005
 
  3
  **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 (In
thousands)
 
 **As
      of****March
      31,**
    
    **December
      31,****2005**
    
    **2004****(Unaudited)****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    49,701
    
    $
    27,540Short-term
      investments
    
    
    11,250
    
    
    5,000Restricted
      cash
    
    
    7,090
    
    
    7,252Trade
      accounts receivable, net
    
    
    47,507
    
    
    49,800Trade
      accounts receivable from affiliate
    
    
    1,868
    
    
    1,285Inventories
    
    
    30,459
    
    
    26,604Prepaid
      expenses and other current assets
    
    
    8,177
    
    
    6,088Note
      receivable from related party and other due from
affiliates
    
    
    -
    
    
    1,165Total
      current assets
    
    
    156,052
    
    
    124,734Restricted
      cash
    
    
    1,779
    
    
    1,732Properties,
      plants and equipment, net
    
    
    906,993
    
    
    916,419Goodwill
    
    
    265,897
    
    
    265,897Intangible
      assets, net
    
    
    127,535
    
    
    131,482Deferred
      financing charges and other assets
    
    
    6,825
    
    
    7,124**Total
      assets**
    
    $
    1,465,081
    
    $
    1,447,388**LIABILITIES
      AND MEMBERS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    4,641
    
    $
    1,990Accrued
      interest
    
    
    14,661
    
    
    2,915Interest
      rate swap liability
    
    
    4,380
    
    
    6,391Accrued
      natural gas liability
    
    
    7,842
    
    
    7,590Other
      accrued liabilities
    
    
    25,111
    
    
    24,706Income
      tax payable
    
    
    2,391
    
    
    1,949Due
      to affiliates
    
    
    2,210
    
    
    -Current
      portion of long-term debt
    
    
    70,840
    
    
    69,612Total
      current liabilities
    
    
    132,076
    
    
    115,153Project
      loans
    
    
    66,505
    
    
    74,281Salton
      Sea notes and bonds
    
    
    269,757
    
    
    269,757Senior
      secured bonds
    
    
    309,000
    
    
    309,000Deferred
      income taxes
    
    
    249,087
    
    
    247,978Other
      long-term liabilities
    
    
    8,374
    
    
    8,220Total
      liabilities
    
    
    1,034,799
    
    
    1,024,389Minority
      interest
    
    
    46,451
    
    
    45,658Commitments
      and contingencies (Note 5)Members’
      equity:Members’
      equity
    
    
    385,848
    
    
    380,238Accumulated
      other comprehensive loss
    
    
    (2,017
    )
    
    (2,897
    )Total
      members’ equity
    
    
    383,831
    
    
    377,341**Total
      liabilities and members’ equity**
    
    $
    1,465,081
    
    $
    1,447,388
 
 The
accompanying notes are an integral part of these financial
statements.
 
  4
  **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **AND
OTHER COMPREHENSIVE INCOME**
 (In
thousands)
  **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Operating
      revenue**
    
    $
    106,521
    
    $
    99,126**Costs
      and expenses:**Fuel
    
    
    24,125
    
    
    20,364Plant
      operations
    
    
    29,148
    
    
    31,860General
      and administrative
    
    
    1,015
    
    
    1,034Depreciation
      and amortization
    
    
    23,726
    
    
    20,748Total
      costs and expenses
    
    
    78,014
    
    
    74,006**Operating
      income**
    
    
    28,507
    
    
    25,120**Other
      income (expense):**Interest
      expense
    
    
    (14,489
    )
    
    (15,809
    )Interest
      and other income
    
    
    851
    
    
    802Total
      other income (expense)
    
    
    (13,638
    )
    
    (15,007
    )**Income
      before provision for income taxes and minority
      interest**
    
    
    14,869
    
    
    10,113Provision
      for income taxes
    
    
    2,273
    
    
    1,454Minority
      interest
    
    
    6,986
    
    
    6,359**Net
      income**
    
    $
    5,610
    
    $
    2,300**Other
      comprehensive income:**Unrealized
      gain (loss) on cash flow hedges, net of tax of $490 and
    $(312)
    
    
    880
    
    
    (562
    )**Comprehensive
      income**
    
    $
    6,490
    
    $
    1,738
  The
accompanying notes are an integral part of these financial
statements.
 
  5
  **CE
GENERATION, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 (In
thousands)
  **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Cash
      flows from operating activities:**Net
      income
    
    $
    5,610
    
    $
    2,300Adjustments
      to reconcile net income to net cash flows from operating
      activities:Depreciation
      and amortization
    
    
    23,726
    
    
    20,748Provision
      for deferred income taxes
    
    
    618
    
    
    2,550Distributions
      to minority interest less than (in excess of) income
    
    
    151
    
    
    (590
    )Amortization
      of deferred financing costs
    
    
    299
    
    
    312Changes
      in other items:Trade
      accounts receivable, net
    
    
    1,710
    
    
    1,601Inventories
    
    
    (3,855
    )
    
    3,022Due
      from affiliates, net
    
    
    3,375
    
    
    (17
    )Other
      assets
    
    
    (2,087
    )
    
    (7,584
    )Accounts
      payable and other accrued liabilities
    
    
    15,650
    
    
    13,052Net
      cash flows from operating activities
    
    
    45,197
    
    
    35,394**Cash
      flows from investing activities:**Capital
      expenditures
    
    
    (10,353
    )
    
    (3,744
    )Proceeds
      from related party note receivable
    
    
    -
    
    
    136,383Purchases
      of available-for-sale securities
    
    
    (40,000
    )
    
    (88,050
    )Proceeds
      from sale of available-for-sale securities
    
    
    33,750
    
    
    79,550Increase
      in restricted cash
    
    
    (47
    )
    
    (202
    )Net
      cash flows from investing activities
    
    
    (16,650
    )
    
    123,937**Cash
      flows from financing activities:**Repayment
      of project loans
    
    
    (6,548
    )
    
    (5,525
    )Repayment
      of Salton Sea notes and bonds
    
    
    -
    
    
    (136,383
    )Decrease
      in restricted cash
    
    
    162
    
    
    174Net
      cash flows from financing activities
    
    
    (6,386
    )
    
    (141,734
    )**Net
      increase in cash and cash equivalents**
    
    
    22,161
    
    
    17,597**Cash
      and cash equivalents at beginning of period**
    
    
    27,540
    
    
    30,003**Cash
      and cash equivalents at end of period**
    
    $
    49,701
    
    $
    47,600**Supplemental
      Disclosure:**Interest
      paid
    
    $
    2,087
    
    $
    3,263Income
      taxes paid
    
    $
    1,260
    
    $
    159
 The
accompanying notes are an integral part of these financial
statements.
 
  6
  **CE
GENERATION, LLC AND SUBSIDIARIES**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **1.**
    **General**
 
 In the
opinion of the management of CE Generation, LLC (“CE Generation” or the
“Company”), the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2005, and the results of
operations and cash flows for the three-month periods ended March 31, 2005
and 2004. The results of operations for the three-month periods ended
March 31, 2005 are not necessarily indicative of the results to be expected
for the full year.
 
 The
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2004.
In particular, the Company’s significant accounting policies are presented in
Note 2 to the consolidated financial statements included therein.
  Certain
amounts in the prior period consolidated financial statements and supporting
note disclosures have been reclassified to conform to the current period
presentation, including the reclassification of auction rate securities. Such
reclassifications did not impact previously reported net income or retained
earnings.
 
 The
accompanying combined balance sheet as of December 31, 2004, reflects a
reclassification of instruments used in the Company’s cash management program
from cash and cash equivalents to short-term investments of $5.0 million.
This reclassification is to present certain auction rate securities as
short-term investments rather than as cash equivalents due to the stated
maturities of these investments. These instruments are classified as
available-for-sale securities as management does not intend to hold them to
maturity nor are they bought and sold with the objective of generating profits
on short-term differences in price. The carrying value of these instruments
approximates their fair value. Additionally, in the accompanying combined
statements of cash flows, cash and cash equivalents were reduced by
$5.0 million, $12.4 million and $3.9 million at December 31,
2004, March 31, 2004 and December 31, 2003, respectively, to reflect
the reclassification of these instruments from cash and cash equivalents to
short-term investments.
 ****
 **2.**
    **New
      Accounting
Pronouncements**
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Company is required to adopt the provisions of FIN 47 by December 2005. Adoption
of FIN 47 is not expected to have a material effect on the Company’s financial
position, results of operations or cash flows.
 
 7
 ****
 **3.**
    **Properties,
      Plants and Equipment,
Net**
 Properties,
plants and equipment comprise the following at March 31, 2005 and December 31,
2004, respectively (in thousands):
 
 **Estimated**
    
    **March
      31,**
    
    **December
      31,****Useful
      Lives**
    
    **2005**
    
    **2004**Properties,
      plants and equipment, net:Power
      plants
    
    
    25
      to 30 years
    
    $
    1,191,912
    
    $
    1,189,443Wells
      and resource development
    
    
    2
      to 30 years
    
    
    199,854
    
    
    198,395Equipment
    
    
    3
      to 30 years
    
    
    4,969
    
    
    4,210Total
      operating assets
    
    
    
    
    
    1,396,735
    
    
    1,392,048Accumulated
      depreciation and amortization
    
    
    
    
    
    (489,742
    )
    
    (475,629
    )Properties,
      plants and equipment, net
    
    
    
    
    $
    906,993
    
    $
    916,419
 
 During
the three-month period ended March 31, 2005, the Company made a decision to
replace certain pipe with remaining net book value of $3.5 million,
which was charged to depreciation expense in the accompanying consolidated
statement of operations.
 
 **4.**
    **Intangible
      Assets, Net**
 Intangible
assets comprise the following as of March 31, 2005 and December 31, 2004,
respectively (in thousands):
 
 **March
      31, 2005**
    
    **December
      31, 2004****Gross
      Carrying**
    
    **Accumulated**
    
    **Gross
      Carrying**
    
    **Accumulated****Amount**
    
    **Amortization**
    
    **Amount**
    
    **Amortization**Power
      Purchase Contracts
    
    $
    315,434
    
    $
    214,464
    
    $
    315,434
    
    $
    210,999Patented
      Technology
    
    
    46,290
    
    
    19,725
    
    
    46,290
    
    
    19,243Total
    
    $
    361,724
    
    $
    234,189
    
    $
    361,724
    
    $
    230,242
 
 Amortization
expense on acquired intangible assets was $4.0 million for each of the
three-month periods ended March 31, 2005 and 2004. CE Generation
expects amortization expense on acquired intangible assets to be $11.8 million
for the remaining nine months in 2005 and $15.8 million for each of the three
succeeding fiscal years and $11.1 million in 2009.
 
 **5.**
    **Commitments
      and Contingencies**
 
 Southern
California Edison (“Edison”) and the California Power Exchange
 
 On
July 10, 2003, the Salton Sea IV Project’s 40 megawatt
(“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., with Fish Lake Power LLC, 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.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power L.L.C. (“Salton Sea Power”) and CE Turbo LLC (“CE Turbo”) had
not received payment for power sold to El Paso Merchant Energy Company 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 USA Inc. (“TransAlta”) and
MidAmerican Energy Holdings Company (“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. As of
March 31, 2005, the California Power Exchange has not made any
payments.
 
 8
 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 March 31,
2005 and December 31, 2004, the environmental liabilities recorded on the
balance sheet were $2.4 million and $2.7 million, respectively.
  On March
10, 2005, the EPA released the final Clean Air Interstate Rule (“CAIR”), calling
for reductions of sulfur dioxide and nitrogen oxides emissions (NO x ) in the
eastern United States through a market-based cap and trade system. The State of
New York, where the Saranac Project is located, has been determined by the EPA
to significantly contribute to nonattainment of the fine particulate standard in
Pennsylvania, New Jersey, Connecticut and Delaware and to nonattainment of the
ozone standard in Connecticut, New Jersey and Rhode Island. Under the final
CAIR, the first phase reductions of NO x emissions are effective on January 1, 2009, with the second phase reductions
effective January 1, 2015. Depending on New York’s implementation of the CAIR,
the CAIR emission reduction requirements could impact the Saranac Project. The
CAIR 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.
 
 **6.**
    **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. The expense for each of the three-month
periods ended March 31, 2005 and 2004 was $0.8 million and is included in
plant operations, general and administrative expense. The Administrative
Services Agreement between MEHC and CE Generation provided for a fixed fee of
$3.1 million annually through December 31, 2004 and provides for a fixed
fee of $3.0 million annually from 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 $0.4 million and $0.5 million
for the three-month periods ended March 31, 2005 and 2004,
respectively.
 
 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 $3.0 million and $2.1 million during the three-month
periods ended March 31, 2005 and 2004, respectively. As of March 31,
2005 and December 31, 2004, accounts receivable balances from TransAlta
were $1.7 million and $1.3 million, respectively.
 
 9
 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 megawatt hour of generation, a “Green Tag”)
associated with up to 931,800 megawatt hours of available generation at the
Salton Sea V and CE Turbo Projects 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 for the three-month period ended
March 31, 2005. As of March 31, 2005 and December 31, 2004,
accounts receivable balances from TransAlta Marketing were $0.2 million and $-
million, respectively.
 
 Pursuant
to November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea
Power and CE Turbo provided CalEnergy Minerals LLC (“CalEnergy Minerals”) with
its zinc recovery facility’s (the “Zinc Recovery Project”) 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 $- million and $0.4 million for the three-month periods ended March 31,
2005 and 2004, respectively. There were no sales to CalEnergy Minerals from CE
Turbo for the three-month periods ended March 31, 2005 or 2004. On
September 10, 2004, CalEnergy Minerals ceased operations of its 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 as of March 31, 2005 and December 31, 2004, respectively.
  10
 ****
 **Item
2.** **Management’s Discussion and Analysis of Financial Condition and
Results of Operations.**
 
 The
following is management’s discussion and analysis of certain significant factors
which have affected the financial condition and results of operations of CE
Generation, LLC (“CE Generation” or the “Company”), during the periods included
in the accompanying financial statements. This discussion should be read in
conjunction with the Company’s historical financial statements and the notes to
those statements. The Company’s actual results in the future could differ
significantly from the historical results.
 
 **Forward-Looking
Statements**
 
 From time
to time, CE Generation may make forward-looking statements within the meaning of
the federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of CE Generation’s expectations, beliefs, future plans and
strategies, anticipated events or trends and similar comments concerning matters
that are not historical facts. These types of forward-looking statements are
based on current expectations and involve a number of known and unknown risks
and uncertainties that could cause the actual results and performance of the
Company to differ materially from any expected future results or performance,
expressed or implied, by the forward-looking statements. In connection with the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
CE Generation has identified important factors that could cause actual results
to differ materially from those expectations, including weather effects on
revenues and other operating uncertainties, uncertainties relating to economic
and political conditions and uncertainties regarding the impact of regulations,
changes in government policy and competition. The Company does not assume any
responsibility to update forward-looking information contained
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
the three-month periods ended March 31, 2005 and 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 MidAmerican Energy Holdings
      Company (“MEHC”).
  ·
    In
      January 2004, the Saranac Project reduced production and attendant fuel
      consumption in order to remarket the unused fuel pursuant to a gas
      remarketing transaction under the Gas Remarketing Agreement between the
      Saranac Project, its power purchaser and fuelsupplier.
  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 reporting period. At March 31, 2005, the capacity
factors for the Company’s facilities commonly 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”) plants were based on
capacity amounts of approximately 10, 20, 50, 40, and 49 net megawatt (“MW”),
respectively. At March 31, 2005, the capacity factors for the Company’s
geothermal power generation facilities commonly known as 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”) plants were based on capacity amounts
of approximately 34, 38, 38, 38 and 10 net MW, respectively. At March 31, 2005,
the capacity factors for the Company’s natural gas fired power generation
facilities commonly known as the Saranac Project, Power Resources Project and
Yuma Project (collectively, the “Gas Projects”) were based on capacity amounts
of approximately 240, 212 and 50 net 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.
 
 11
 The
following operating data represents the aggregate capacity and electricity
production of the Imperial Valley Projects:
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004**Overall
      capacity factor
    
    
    90.7
    %
    
    91.1
    %Megawatt
      hour (“MWh”) produced
    
    
    639,700
    
    
    649,400Capacity
      (net MW) (weighted average)
    
    
    326.4
    
    
    326.4Operating
      revenue (in millions)
    
    
    $43.6
    
    
    $42.0
 
 The
decreases in the overall capacity factor and MWh produced in the three-month
period ended March 31, 2005 as compared to the same period in 2004 are due to
the length of scheduled maintenance outages.
 
 The
following operating data represents the aggregate capacity and electricity
production of the Gas Projects:
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004**Overall
      capacity factor
    
    
    56.3
    %
    
    50.2
    %MWh
      produced
    
    
    610,100
    
    
    550,400Capacity
      (net MW) (weighted average)
    
    
    502.0
    
    
    502.0Operating
      revenue (in millions)
    
    
    $62.9
    
    
    $57.1
 
 The
increases in the overall capacity factor and MWh produced in the three-month
period ended March 31, 2005, as compared to the same period in 2004, are a
result of increased production at the Saranac Project in 2005 due to the January
2004 gas remarketing transaction, partially offset by higher utility curtailment
at the Yuma Project in 2005.
 
 **Results
of Operations for the Three-Month Periods Ended March 31, 2005 and
2004**
 
 Operating
revenue increased $7.4 million, or 7.5%, to $106.5 million for the three-month
period ended March 31, 2005, from $99.1 million for the same period in 2004. The
increase was due to Saranac January 2004 gas remarketing transaction, which
reduced production in 2004, and higher prices at the Yuma, Saranac and Imperial
Valley Projects.
 
 Fuel
expense increased $3.7 million, or 18.1%, to $24.1 million for the three-month
period ended March 31, 2005, from $20.4 million for the same period in 2004. The
increase was due to higher unit costs at the Saranac and Yuma Projects and the
increased production at the Saranac Project.
 
 Plant
operations decreased $2.8 million, or 8.8%, to $29.1 million for the three-month
period ended March 31, 2005, from $31.9 million for the same period in
2004. The decrease was due to less extensive maintenance repairs at the Imperial
Valley Projects in 2005.
 
 Depreciation
and amortization increased $3.0 million to $23.7 million for the three-month
period ended March 31, 2005, from $20.7 million for the same period in 2004. The
increase was due to the disposal of certain replaced pipe at the Imperial Valley
Projects in 2005 with a remaining net book value of $3.5 million, partially
offset by a decrease in depreciation as the result of partial
impairment of Power Resources’ long-lived assets in 2004.
  Interest
expense decreased $1.3 million to $14.5 million for the three-month period ended
March 31, 2005, from $15.8 million for the same period in 2004. The
decrease is due to lower outstanding debt balances.
 
 The
provision for income taxes increased $0.8 million to $2.3 million for the
three-month period ended March 31, 2005, from $1.5 million for the same period
in 2004. Tax expense increased due to the increase in pre-tax income.
  12
 **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 Power Company and
Salton Sea Power Company; or (2) owning direct interests in the subsidiary that
owns interest in the Saranac Project.
 
 CE
Generation generated cash flows from operations of $45.2 million for the
three-month period ended March 31, 2005 compared with $35.4 million for the same
period in 2004. The increase was due to higher net income and timing of working
capital uses.
 
 The
Imperial Valley Projects' only source of electricity revenue is payments
received pursuant to long-term power sales agreements with Southern California
Edison (“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 Imperial Valley 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
debt securities, projected capital expenditures and debt service reserve fund
requirements.
 
 Cash flow
used in investing activities was $16.7 million for the three-month period ended
March 31, 2005 compared with cash flows generated of $123.9 million for the same
period in 2004. The change is primarily due to the concurrent payment in 2004
under the MEHC guarantee related to the redemption of a portion of the Series F
Bonds, as described below.
 
 Capital
expenditures increased to $10.4 million for the three-month period ended March
31, 2005 from $3.7 million for the same period in 2004. Capital expenditures
increased in 2005 due to the expansion of the Imperial Valley Project’s landfill
in 2005 and increased capital pipe replacement. Forecasted capital expenditures
for 2005 are $36 million.  Capital expenditure needs are reviewed regularly
by management and may change significantly as a result of such reviews.  CE
Generation expects to meet these capital expenditures with cash flows from
operations.
 
 Cash flow
used in financing activities decreased to $6.4 million for the three-month
period ended March 31, 2005 compared with $141.7 million for the same period in
2004. The decrease is primarily due to the 2004 redemption of a portion of the
Series F Bonds, as described below.
 
 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.
 
 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., with Fish Lake Power LLC, 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.
 
 13
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power L.L.C. (“Salton Sea Power”) and CE Turbo LLC (“CE Turbo”) had
not received payment for power sold to El Paso Merchant Energy Company 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. The
California Power Exchange has not made any payments.
  Environmental
Liabilities
 
 The
Company is subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics. State and
federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Company’s existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Company’s cost of waste disposal and (vi) reducing the
reliability of service provided by the Company and the amount of energy
available from the Company’s facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Company in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in 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 March 31,
2005 and December 31, 2004, the environmental liabilities recorded on the
balance sheet were $2.4 million and $2.7 million, respectively.
 
 On March
10, 2005, the EPA released the final Clean Air Interstate Rule ("CAIR"), calling
for reductions of sulfur dioxide and nitrogen oxides emissions (NO x ) in the
eastern United States through a market-based cap and trade system. The State of
New York, where the Saranac Project is located, has been determined by the EPA
to significantly contribute to nonattainment of the fine particulate standard in
Pennsylvania, New Jersey, Connecticut and Delaware and to nonattainment of the
ozone standard in Connecticut, New Jersey and Rhode Island. Under the final
CAIR, the first phase reductions of NO x emissions are effective on January 1, 2009, with the second phase reductions
effective January 1, 2015. Depending on New York’s implementation of the CAIR,
the CAIR emission reduction requirements could impact the Saranac Project. The
CAIR 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.
 **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. The expense for each of the three-month
periods ended March 31, 2005 and 2004 was $0.8 million and is included in
plant operations, general and administrative expense. The Administrative
Services Agreement between MEHC and CE Generation provided for a fixed fee of
$3.1 million annually through December 31, 2004 and provides for a fixed
fee of $3.0 million annually from 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 $0.4 million and $0.5 million
for the three-month periods ended March 31, 2005 and 2004,
respectively.
 
 Pursuant
to a transaction agreement dated January 29, 2003 (the “TransAlta
Transaction Agreement”), Salton Sea Power LLC (“Salton Sea Power”) and CE Turbo
LLC (“CE Turbo”) began selling available power from the Salton Sea V Project and
CE Turbo Project to TransAlta USA, Inc. (“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
$3.0 million and $2.1 million during the three-month periods ended
March 31, 2005 and 2004, respectively. As of March 31, 2005 and
December 31, 2004, accounts receivable balances from TransAlta were $1.7
million and $1.3 million, respectively.
 
 14
 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 megawatt hour of generation, a “Green Tag”)
associated with up to 931,800 megawatt hours of available generation at the
Salton Sea V and CE Turbo Projects 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 for the three-month period ended
March 31, 2005. As of March 31, 2005 and December 31, 2004,
accounts receivable balances from TransAlta Marketing were $0.2 million and $-
million, respectively.
 
 Pursuant
to November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea
Power and CE Turbo provided CalEnergy Minerals LLC (“CalEnergy Minerals”) with
its zinc recovery facility’s (the “Zinc Recovery Project”) 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 $- million and $0.4 million for the three-month periods ended March 31,
2005 and 2004, respectively. There were no sales to CalEnergy Minerals from CE
Turbo for the three-month periods ended March 31, 2005 or 2004. On
September 10, 2004, CalEnergy Minerals ceased operations of its 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 as of March 31, 2005 and December 31, 2004, respectively.
   **Contractual
Obligations and Commercial Commitments**
 
 During
the three months ended March 31, 2005, there were no material changes in the
contractual obligations and commercial commitments from the information provided
in Item 7 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004.
 
 **New
Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Company is required to adopt the provisions of FIN 47 by December 2005. Adoption
of FIN 47 is not expected to have a material effect on the Company’s financial
position, results of operations or cash flows.
 
 **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 Company’s consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004
describes the significant accounting policies and methods used in the
preparation of the consolidated financial statements. Estimates are used for,
but not limited to, the accounting for the allowance for doubtful accounts,
impairment of long-lived assets and goodwill, contingent liabilities and income
taxes. Actual results could differ from these estimates.
 
 For
additional discussion of the Company’s critical accounting policies, see
åManagement’s Discussion and Analysis of Financial Condition and Results of
Operationsæ included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004. There were no material changes to the Company’s
critical accounting policies during the three-month period ended March 31,
2005.
 
 15
 **Item
3.** **Quantitative and Qualitative Disclosures About Market
Risk.**
 
 For
quantitative and qualitative disclosures about market risk affecting CE
Generation, see Item 7A “Qualitative and Quantitative Disclosures About Market
Risk” of CE Generation’s Annual Report on Form 10-K for the year ended
December 31, 2004. During the three months ended March 31, 2005, there were
no material changes to the Company’s market risk.
 
 **Item
4.** **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
March 31, 2005. 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
changes during the quarter covered by this report in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
 
  16
  
 **PART
II - OTHER INFORMATION**
 
 **Item
1.** **Legal Proceedings.**
 
 For a
description of certain legal proceedings affecting the Company, please review
Note 3 to the Interim Financial Statements, “Commitments and
Contingencies”.
 
 **Item
2.** **Unregistered Sales of Equity Securities and Use of
Proceeds.**
 
 Not
applicable.
 
 **Item
3.** **Defaults Upon Senior Securities.**
 
 Not
applicable.
 
 **Item
4.** **Submission of Matters to a Vote of Security
Holders.**
 
 Not
applicable.
 
 **Item
5.** **Other Information.**
 
 Not
applicable.
 ****
 **Item
6.** **Exhibits.**
 
 The
exhibits listed on the accompanying Exhibit Index are filed as part of this
Quarterly Report.
 
  17
  
 **SIGNATURES**
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 CE
      Generation, LLC(Registrant)Date:
      May 6, 2005
    
    /s/
      Wayne F. IrmiterWayne
      F. IrmiterVice
      President and Controller
 
  18
  
 **EXHIBIT INDEX**
 
 Exhibit
      No.
    
    Description31.1
    
    Chief
      Executive Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    
    Chief
      Accounting Officer’s Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
    
    Chief
      Executive 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.
 
 
   19