-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N9/I33o0OnSsmfwvA7ZopMWBPsJQnqgMogkhDrLAggvWrmqSBMYbkPHYQh7uABWU 09tmQc1oOhQ25i6ESGYAlg== 0000949149-98-000004.txt : 19980817 0000949149-98-000004.hdr.sgml : 19980817 ACCESSION NUMBER: 0000949149-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALTON SEA FUNDING CORP CENTRAL INDEX KEY: 0000949149 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 470790493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-95538 FILM NUMBER: 98687823 BUSINESS ADDRESS: STREET 1: 302 S 36TH STE 400-A CITY: OMAHA STATE: NE ZIP: 68131 BUSINESS PHONE: 4023414500 MAIL ADDRESS: STREET 1: 302 SOUTH 36TH ST STREET 2: STE 400 A CITY: OMAHA STATE: NE ZIP: 68131 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998 Commission File No. 33-95538 SALTON SEA FUNDING CORPORATION (Exact name of registrant as specified in its charter) 47-0790493 (IRS Employer Identification No.) Salton Sea Brine Processing L.P. California 33-0601721 Salton Sea Power Generation L.P. California 33-0567411 Fish Lake Power Company Delaware 33-0453364 Vulcan Power Company Nevada 95-3992087 CalEnergy Operating Company Delaware 33-0268085 Salton Sea Royalty Company Delaware 47-0790492 BN Geothermal Inc. Delaware 91-1244270 San Felipe Energy Company California 33-0315787 Conejo Energy Company California 33-0268500 Niguel Energy Company California 33-0268502 Vulcan/BN Geothermal Power Company Nevada 33-3992087 Leathers, L.P. California 33-0305342 Del Ranch, L.P. California 33-0278290 Elmore, L.P. California 33-0278294 (Exact name of Registrants (State or other (I.R.S.Employer as specified in their charters) jurisdiction of Identification No.) incorporation or organization) 302 S. 36th Street, Suite 400-A, Omaha, NE 68131 (Address of principal executive offices and Zip Code of Salton Sea Funding Corporation) Salton Sea Funding Corporation's telephone number, including area code: (402) 231-1641 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 All common stock of Salton Sea Funding Corporation is indirectly held by Magma Power Company. 100 shares of Common Stock were outstanding on June 30, 1998. SALTON SEA FUNDING CORPORATION Form 10-Q June 30, 1998 _____________ C O N T E N T S PART I: FINANCIAL INFORMATION Item 1. Financial Statements Page SALTON SEA FUNDING CORPORATION Independent Accountants' Report 4 Balance Sheets, June 30, 1998 and December 31, 1997 5 Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 6 Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 7 Notes to Financial Statements 8 SALTON SEA GUARANTORS Independent Accountants' Report 9 Combined Balance Sheets, June 30, 1998 and December 31, 1997 10 Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 11 Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 12 Notes to Combined Financial Statements 13 PARTNERSHIP GUARANTORS Independent Accountants' Report 14 Combined Balance Sheets, June 30, 1998 and December 31, 1997 15 Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 16 Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 17 Notes to Combined Financial Statements 18 SALTON SEA ROYALTY COMPANY Independent Accountants' Report 19 Balance Sheets, June 30, 1998 and December 31, 1997 20 Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 21 Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 22 Notes to Financial Statements 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 PART II: OTHER INFORMATION Item 1. Legal Proceedings 32 Item 2. Changes in Securities 32 Item 3. Defaults on Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 Signatures 33 Exhibit Index 34 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholder Salton Sea Funding Corporation Omaha, Nebraska We have reviewed the accompanying balance sheet of the Salton Sea Funding Corporation as of June 30, 1998, and the related statements of operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Salton Sea Funding Corporation as of December 31, 1997, and the related statements of operations, stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 12, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Omaha, Nebraska July 23, 1998 SALTON SEA FUNDING CORPORATION BALANCE SHEETS (Dollars in Thousands, Except per Share Amounts) June 30, December 31, 1998 1997 ___________ __________ (unaudited) ASSETS Cash $ 5,984 $ 15,568 Prepaid expenses and other assets 2,527 2,823 Secured project notes from Guarantors 395,285 448,754 Investment in 1% of net assets of Guarantors 7,541 7,144 __________ __________ $ 411,337 $ 474,289 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accrued liabilities $ 2,407 $ 2,782 Due to affiliates 2,691 12,598 Senior secured notes and bonds 395,285 448,754 __________ __________ Total liabilities 400,383 464,134 Stockholder's equity: Common stock--authorized 1,000 shares, par value $.01 per share; issued and outstanding 100 shares --- --- Additional paid-in capital 5,366 5,366 Retained earnings 5,588 4,789 __________ __________ Total stockholder's equity 10,954 10,155 __________ __________ $ 411,337 $ 474,289 ========== ========== The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 Revenues: Interest income $ 8,719 $ 10,342 $ 17,709 $ 20,747 Equity in earnings of Guarantors 236 198 397 341 _________ ________ ________ ________ Total revenues 8,955 10,540 18,106 21,088 _________ ________ ________ ________ Expenses: General and administrative expenses 235 219 473 459 Interest expense 8,020 9,717 16,279 19,491 _________ ________ ________ ________ Total expenses 8,255 9,936 16,752 19,950 _________ ________ ________ ________ Income before income taxes 700 604 1,354 1,138 Provision for income taxes 286 248 555 467 _________ _________ ________ ________ Net income $ 414 $ 356 $ 799 $ 671 ========= ========= ======== ======== The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net income $ 799 $ 671 Adjustments to reconcile net income to net cash flow from operating activities: Equity in earnings of guarantors (397) (341) Changes in assets and liabilities: Prepaid expenses and other assets 296 410 Accrued liabilities (375) (286) __________ _________ Net cash flows from operating activities 323 454 __________ _________ Cash flows from investing activities: Decrease in restricted cash --- 7,773 Principal repayments of secured project notes from Guarantors 53,469 45,114 __________ _________ Net cash flows from investing activities 53,469 52,887 __________ _________ Cash flows from financing activities: Decrease in due to affiliates (9,907) (21,445) Repayment of senior secured notes and bonds (53,469) (45,114) __________ _________ Net cash flows from financing activities (63,376) (66,559) __________ _________ Net change in cash (9,584) (13,218) Cash at the beginning of period 15,568 13,218 __________ _________ Cash at the end of period $ 5,984 $ --- ========== ========= Supplemental disclosures: Interest paid $ 16,570 $ 19,777 ========== ========== Non-cash investing activities: Adjustments resulting from capital transactions of Guarantors $ --- $ (28) ========== ========= The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION NOTES TO FINANCIAL STATEMENTS (in thousands) _____________________ 1. General: In the opinion of management of the Salton Sea Funding Corporation (the "Funding Corporation"), the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. The unaudited financial statements should be read in conjunction with the financial statements included in the Funding Corporation's annual report on Form 10-K for the year ended December 31, 1997. The Funding Corporation was formed on June 20, 1995 for the sole purpose of acting as issuer of senior secured notes and bonds. 2. Accounting Pronouncement: In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities", which requires that costs of start-up activities and organization costs be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Funding Corporation has not yet determined the impact of this accounting pronouncement, however, any impact will not affect cash flows. INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have reviewed the accompanying combined balance sheet of the Salton Sea Guarantors as of June 30, 1998, and the related combined statements of operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Salton Sea Guarantors' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such combined financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the combined balance sheet of the Salton Sea Guarantors as of December 31, 1997, and the related combined statements of operations, Guarantors' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 12, 1998, we expressed an unqualified opinion on those combined financial statements. In our opinion, the information set forth in the accompanying combined balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Omaha, Nebraska July 23, 1998 SALTON SEA GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) June 30, December 31, 1998 1997 __________ _________ (unaudited) ASSETS Accounts receivable $ 19,612 $ 15,823 Prepaid expenses and other assets 11,146 13,043 Property, plant, contracts and equipment, net 474,823 478,001 Excess of cost over fair value of net assets acquired, net 48,834 49,486 _________ _________ $ 554,415 $ 556,353 ======== ======== LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 280 $ 390 Accrued liabilities 6,784 7,826 Due to affiliates 48,695 47,741 Senior secured project note 246,483 266,208 _________ _________ Total liabilities 302,242 322,165 Total Guarantors' equity 252,173 234,188 _________ _________ $ 554,415 $ 556,353 ========= ========= The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 _____________________ _____________________ 1998 1997 1998 1997 ________ ________ ________ ________ Revenues: Sales of electricity $ 27,612 $ 25,169 $ 47,797 $ 48,423 Interest and other income 7 152 22 161 _______ _______ _______ _______ Total revenues 27,619 25,321 47,819 48,584 _______ _______ _______ _______ Expenses: Operating, general and administration 7,800 6,844 14,547 14,005 Depreciation and amortization 3,726 3,647 7,440 7,289 Interest expense 5,199 5,833 10,459 11,697 Less capitalized interest (1,280) (1,219) (2,612) (2,444) _______ _______ _______ _______ Total expenses 15,445 15,105 29,834 30,547 _______ _______ _______ _______ Net income $ 12,174 $ 10,216 $ 17,985 $ 18,037 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, ____________________ 1998 1997 _________ _________ Cash flows from operating activities: Net income $ 17,985 $ 18,037 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 7,440 7,289 Changes in assets and liabilities: Accounts receivable (3,789) (2,344) Prepaid expenses and other assets 1,897 2,465 Accounts payable and accrued liabilities (1,152) (2,655) _________ _________ Net cash flows from operating activities 22,381 22,792 _________ _________ Cash flows from investing activities: Capital expenditures (3,610) (3,420) _________ _________ Cash flows from financing activities: Increase (decrease) in due to affiliates 954 (2,556) Repayments of senior secured project note (19,725) (16,816) _________ __________ Net cash flows from financing activities (18,771) (19,372) _________ _________ Net change in cash --- --- Cash at beginning of period --- --- _________ _________ Cash at end of period $ --- $ --- ========= ========= The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands) ____________________ 1. General: In the opinion of management of the Salton Sea Guarantors (the "Guarantors"), the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. The unaudited financial statements should be read in conjunction with the financial statements included in the Salton Sea Funding Corporation's annual report on Form 10-K for the year ended December 31, 1997. The combined financial statements include the accounts of the partnerships in which the Guarantors have a 100% interest. 2. Accounting Pronouncement: In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities", which requires that costs of start-up activities and organization costs be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Guarantors have not yet determined the impact of this accounting pronouncement, however, any impact will not affect cash flows. INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have reviewed the accompanying combined balance sheet of the Partnership Guarantors as of June 30, 1998, and the related combined statements of operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Partnership Guarantors' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such combined financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the combined balance sheet of the Partnership Guarantors as of December 31, 1997, and the related combined statements of operations, Guarantors' equity and cash flows for the year then ended (not presented herein); and in our report dated February 12, 1998, we expressed an unqualified opinion on those combined financial statements. In our opinion, the information set forth in the accompanying combined balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Omaha, Nebraska July 23, 1998 PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) June 30, December 31, 1998 1997 (unaudited) ASSETS Accounts receivable $ 33,761 $ 23,481 Prepaid expenses and other assets 16,318 13,121 Due from affiliates 107,508 124,311 Property, plant, contracts and equipment, net 369,260 370,666 Management fee from affiliates 70,254 70,082 Excess of cost over fair value of net assets acquired, net 133,340 135,122 _________ _________ $ 730,441 $ 736,783 ========= ========= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 2,401 $ 1,338 Accrued liabilities 20,874 23,285 Senior secured project notes 117,729 143,610 Deferred income taxes 115,009 106,851 _________ _________ Total liabilities 256,013 275,084 Guarantors' equity: Common stock 3 3 Additional paid-in capital 387,663 387,663 Retained earnings 86,762 74,033 _________ _________ Total Guarantors' equity 474,428 461,699 _________ _________ $ 730,441 $ 736,783 ========= ========= The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 _________ _________ _________ _________ Revenues: Sales of electricity $ 39,574 $ 38,165 $ 73,671 $ 72,911 Interest and other income 1,298 1,022 2,032 1,567 _________ _________ _________ _________ Total revenues 40,872 39,187 75,703 74,478 _________ _________ _________ _________ Expenses: Operating, general and administration 15,694 15,366 29,784 31,648 Depreciation and amortization 14,011 9,686 24,166 19,330 Interest expense 2,456 3,548 5,753 7,199 Less capitalized interest (2,425) (2,302) (4,887) (4,548) _________ _________ _________ _________ Total expenses 29,736 26,298 54,816 53,629 _________ _________ _________ _________ Income before income taxes 11,136 12,889 20,887 20,849 Provision for income taxes 4,357 5,006 8,158 8,109 _________ _________ _________ _________ Net income $ 6,779 $ 7,883 $ 12,729 $ 12,740 ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, 1998 1997 __________________ Cash flows from operating activities: Net income $ 12,729 $ 12,740 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 24,166 19,330 Deferred income taxes 8,158 8,109 Changes in assets and liabilities: Accounts receivable (10,280) (5,242) Prepaid expenses and other assets (3,197) 2,818 Accounts payable and accrued liabilities (1,348) (985) _________ _________ Net cash flows from operating activities 30,228 36,770 _________ _________ Cash flows from investing activities: Capital expenditures (19,671) (19,383) Management fee (1,479) (1,490) _________ _________ Net cash flows from investing activities (21,150) (20,873) _________ _________ Cash flows from financing activities: Repayments of senior secured project notes (25,881) (19,297) Decrease in due from affiliates 16,803 6,193 Distributions to parent - (2,793) _________ _________ Net cash flows from financing activities (9,078) (15,897) _________ _________ Net change in cash - - Cash at beginning of period - - _________ _________ Cash at end of period $ - $ - ========= ========= The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands) ____________________ 1. General: In the opinion of management of the Partnership Guarantors (the "Guarantors"), the accompanying unaudited combined financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. The unaudited financial statements should be read in conjunction with the financial statements included in the Salton Sea Funding Corporation's annual report on Form 10-K for the year ended December 31, 1997. The combined financial statements include the proportionate share of the accounts of the partnerships in which the Guarantors have an interest. 2. Contingencies. On February 26, 1998, Del Ranch and Elmore initiated an action against Edison in Imperial County Superior Court for payment for energy delivered to Edison pursuant to long term power sale agreements at the escalated rate of 14.6 cents for 1998. For the Elmore and Del Ranch partnerships, Edison has asserted that prices should not be escalated for 1998 and is currently making payments for energy deliveries at 13.6 cents per kWh. That action is in the early discovery stages and the Del Ranch and Elmore partnerships intend to vigorously prosecute all available claims. INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have reviewed the accompanying balance sheet of the Salton Sea Royalty Company as of June 30, 1998, and the related statements of operations for the three and six month periods ended June 30, 1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Salton Sea Royalty Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of the Salton Sea Royalty Company as of December 31, 1997, and the related statements of operations, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 12, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Omaha, Nebraska July 23, 1998 SALTON SEA ROYALTY COMPANY BALANCE SHEETS (Dollars in Thousands, Except per Share Amounts) June 30, December 31, 1998 1997 ___________ ___________ (unaudited) ASSETS Due from affiliates $ 36,390 $ 19,114 Royalty stream, net 27,375 31,818 Excess of cost over fair value of net assets acquired, net 33,642 34,096 Prepaid expenses and other assets 747 981 __________ __________ $ 98,154 $ 86,009 ========== ========== LIABILITIES AND EQUITY Liabilities: Accrued liabilities $ 34,108 $ 21,306 Senior secured project note 31,071 38,934 Deferred income taxes 5,513 7,268 __________ __________ Total liabilities 70,692 67,508 Equity: Common stock, par value $.01 per share; 100 share authorized, issued and outstanding - - Additional paid-in capital 1,561 1,561 Retained earnings 25,901 16,940 __________ __________ Total equity 27,462 18,501 __________ __________ $ 98,154 $ 86,009 ========== ========== The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 _____________________ ____________________ 1998 1997 1998 1997 _______ _______ ________ ________ Revenues: Royalty income $ 12,642 $ 7,922 $ 24,680 $ 15,783 Expenses: Operating, general and administrative expenses 2,032 1,955 3,891 3,832 Amortization of royalty stream and goodwill 2,448 2,448 4,897 4,897 Interest expense 739 1,094 1,515 2,226 ________ ______ ________ _______ Total expenses 5,219 5,497 10,303 10,955 ________ ______ ________ _______ Income before income taxes 7,423 2,425 14,377 4,828 Provision for income taxes 2,791 748 5,416 1,485 ________ ______ ________ _______ Net income $ 4,632 $ 1,677 $ 8,961 $ 3,343 ======== ======= ======== ======= The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, _____________________ 1998 1997 _________ ________ Cash flows from operating activities: Net income $ 8,961 $ 3,343 Adjustments to reconcile net income to net cash flow from operating activities: Amortization of royalty stream and goodwill 4,897 4,897 Deferred income taxes (1,755) (1,755) Changes in assets and liabilities: Prepaid expenses and other assets 234 354 Accrued liabilities 12,802 2,776 Net cash flows from operating activities 25,139 9,615 Net cash flows from financing activities: Increase in due from affiliates (17,276) (614) Repayment of senior secured project note (7,863) (9,001) _________ _________ Net cash flows from financing activities (25,139) (9,615) Net change in cash - - Cash at beginning of period - - _________ _________ Cash at end of period $ - $ - ========= ========= The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY NOTES TO FINANCIAL STATEMENTS (in thousands) ____________________ 1. General: In the opinion of management of the Salton Sea Royalty Company (the "Company"), the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. The unaudited financial statements should be read in conjunction with the financial statements included in the Salton Sea Funding Corporation's annual report on Form 10-K for the year ended December 31, 1997. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: The following is management's discussion and analysis of certain significant factors which have affected the Salton Sea Funding Corporation's (the "Funding Corporation") and the Salton Sea Guarantors, the Partnership Guarantors and the Salton Sea Royalty Company's (collectively, the "Guarantors") financial condition and results of operations during the periods included in the accompanying statements of operations. Funding Corporation was organized for the sole purpose of acting as issuer of senior secured notes and bonds (the "Securities"). The Securities are payable from the proceeds of payments made of principal and interest on the senior secured project notes by the Guarantors to the Funding Corporation. The Securities are guaranteed on a joint and several basis by the Guarantors. The guarantees of the Partnership Guarantors and Salton Sea Royalty Company are limited to available cash flow. The Funding Corporation does not conduct any operations apart from the Securities. The Vulcan, Leathers, Del Ranch and Elmore partnerships (collectively, the "Partnership Projects") sell all electricity generated by the respective plants pursuant to four long-term SO4 Agreements between the projects and Southern California Edison Company ("Edison"). These SO4 Agreements provide for capacity payments, capacity bonus payments and energy payments. Edison makes fixed annual capacity payments to the projects, and to the extent that capacity factors exceed certain benchmarks is required to make capacity bonus payments. The price for capacity and capacity bonus payments is fixed for the life of the SO4 Agreements and the capacity payments are significantly higher in the months of June through September. Energy is sold at increasing scheduled rates for the first ten years of each contract and thereafter at Edison's Avoided Cost of Energy. The scheduled energy price periods of the Partnership Project SO4 Agreements extended until February 1996 for the Vulcan Partnership and extend until December 1998, December 1998, and December 1999 for each of the Hoch (Del Ranch), Elmore and Leathers Partnerships, respectively. Excluding Vulcan, which is receiving Edison's Avoided Cost of Energy, the Companys SO4 Agreements provide for energy rates ranging from 14.6 cents per kWh in 1997 to 15.6 cents per kWh in 1999. Edison has been paying Del Ranch and Elmore for energy at a rate of 13.6 cents per kWh for 1998 and those partnerships have filed a complaint against Edison seeking payment at 14.6 cents per kWh. The Salton Sea I Project sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement, as amended (the "Salton Sea I PPA"), which provides for capacity and energy payments. The energy payment is calculated THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) using a Base Price which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Salton Sea I was 5.3 cents per kWh during the six months ended June 30, 1998. As the Salton Sea I PPA is not an SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy. The Salton Sea II and Salton Sea III Projects sell electricity to Edison pursuant to 30-year modified SO4 Agreements that provide for capacity payments, capacity bonus payments and energy payments. The price for contract capacity and contract capacity bonus payments is fixed for the life of the modified SO4 Agreements. The energy payments for the first ten year period, which expires April 2000 for Salton Sea II and February 1999 for Salton Sea III, are levelized at a time period weighted average of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and Salton Sea III, respectively. Thereafter, the monthly energy payments will be at Edison's Avoided Cost of Energy. For Salton Sea II only, Edison is entitled to receive, at no cost, 5% of all energy delivered in excess of 80% of contract capacity through September 30, 2004. The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4 agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA (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 energy payment (for deliveries up to a rate of 39.6 MW) is at a fixed price for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. 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. For the six months ended June 30, 1998, Edison's average Avoided Cost of Energy was 3.0 cents per kWh which is substantially below the contract energy prices earned for the six months ended June 30, 1998. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Company cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements and the modified SO4 Agreements at the expiration of the scheduled payment periods. The revenues generated by each of the projects operating THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) under such Agreements could decline significantly after the expiration of the respective scheduled payment periods. The following data includes the aggregate capacity and electricity production of Salton Sea Units I, II, III and IV: Three Months Ended Six Months Ended June 30, June 30, _________________________________________ 1998 1997 1998 1997 ________ _________ __________ ________ Overall capacity factor 98.9% 89.4% 90.2% 94.1% Capacity (NMW) (average) 119.4 119.4 119.4 119.4 kWh produced (in thousands) 258,000 233,100 467,900 487,900 The overall capacity factor for the Salton Sea Projects increased for the three months ended June 30, 1998 compared to the same period in 1997 due to the scheduled overhauls in May 1997. The overall capacity factor for the Salton Sea Projects decreased for the six months ended June 30, 1998 compared to the same period in 1997 due to longer downtime during the 1998 overhauls. The following data includes the aggregate capacity and electricity production of Vulcan, Del Ranch, Elmore and Leathers: Three Months Ended Six Months Ended June 30, June 30, _________________________________________ 1998 1997 1998 1997 ________ _________ __________________ Overall capacity factor 93.5% 98.2% 95.9% 100.0% Capacity NMW (average) 148 148 148 148 kWh produced (in thousands) 302,100 317,400 616,600 642,700 The overall capacity factor decreased for the three and six months ended June 30, 1998 compared to the same periods in 1997 due to turbine overhauls at Elmore and Leathers and well workovers at Elmore partially offset by 1997 overhauls at Vulcan and Del Ranch. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) Revenues: The Salton Sea Funding Corporation's revenues decreased to $8,955 for the three months ended June 30, 1998 from $10,540 for the same period in 1997, a 15.0% decrease. For the six months ended June 30, 1998, revenues decreased to $18,106 from $21,088 in 1997, a 14.1% decrease. These decreases are due to lower interest income due to lower cash balances which resulted from additional capital expenditures and debt repayment. The Salton Sea Guarantors' sales of electricity increased to $27,612 for the three months ended June 30, 1998 from $25,169 for the same period of 1997, a 9.7% increase. The increase was primarily due to increased electric production. For the six month period ended June 30, 1998, sales of electricity decreased to $47,797 from $48,423 in 1997, a 1.3% decrease. The Partnership Guarantors' sales of electricity increased to $39,574 for the three months ended June 30, 1998 from $38,165 for the same period in 1997, a 3.7% increase. For the six month period ended June 30, 1998, sales of electricity increased to $73,671 from $72,911 in 1997, a 1.0% increase. These increases were primarily due to a scheduled price increase at Leathers, Elmore and Del Ranch offset partially by turbine overhauls at Elmore and Leathers. The Royalty Guarantor revenue increased to $12,642 for the three months ended June 30, 1998 from $7,922 for the same period last year, a 59.6% increase. For the six month period ended June 30, 1998, revenue increased to $24,680 from $15,783 in 1997, a 56.4% increase. These increases were due primarily to an increase in East Mesa royalty income related to a royalty settlement agreement. Operating Expenses: The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $7,800, for the three months ended June 30, 1998 from $6,844 for the same period in 1997, a 14.0% increase. This increase is primarily due to higher maintenance expense and higher royalty expense from increased revenue. For the six month period ended June 30, 1998, operating expenses increased to $14,547 from $14,005 in 1997. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $15,694 for the three months ended June 30, 1998 from $15,366 for the same period in 1997. For the six month period ended June 30, 1998, operating expenses decreased to $29,784 from $31,648 in 1997, a 5.9% decrease. The decrease in the second quarter was due to a reduction in operating and maintenance costs. The Royalty Guarantors' operating expenses increased to $2,032 for the three months ended June 30, 1998 from $1,955 for the same period in 1997, a 3.9% increase. For the six month period ended June 30, 1998, operating expenses increased to $3,891 from $3,832 in 1997, a 1.5% increase. These increases were due to a scheduled increase in third party lessor royalties related to the increase in the Partnership Projects' sales of electricity. Depreciation and Amortization: The Salton Sea Guarantors' depreciation and amortization increased to $3,726 for the three months ended June 30, 1998 from $3,647 for the same period of 1997, a 2.2% increase. For the six month period ended June 30, 1998, depreciation and amortization increased to $7,440 from $7,289 in 1997. The Partnership Guarantors' depreciation and amortization increased to $14,011 for the three months ended June 30, 1998 from $9,686 for the same period in 1997, a 44.7% increase. For the six month period ended June 30, 1998, depreciation and amortization increased to $24,166 from $19,330 in 1997, a 25.0% increase. These increases were due primarily to an increase in the step up depreciation. The Royalty Guarantors' amortization was $2,448 for the three months ended June 30, 1998 compared to $2,448 for the same period of 1997. For the six month period ended June 30, 1998, depreciation and amortization was $4,897 compared to $4,897 in 1997. Interest Expense: The Salton Sea Funding Corporation's interest expense decreased to $8,020 for the three months ended June 30, 1998 from $9,717 for the same period in 1997, a 17.5% decrease. For the six month period ended June 30, 1998, interest expense decreased to $16,279 from $19,491 in 1997, a 16.5% decrease. These decreases were due to reduced indebtedness. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) The Salton Sea Guarantors' interest expense, net of capitalized amounts, decreased to $3,919 for the three months ended June 30, 1998 from $4,614 for the same period in 1997, a 15.1% decrease. For the six month period ended June 30, 1998, interest expense, net of capitalized amounts, decreased to $7,847 from $9,253 in 1997, a 15.2% decrease. These decreases were due primarily to reduced indebtedness. The Partnership Guarantors' interest expense, net of capitalized amounts, decreased to $30 for the three months ended June 30, 1998 from $1,246 for the same period in 1997. For the six month period ended June 30, 1998, interest expense, net of capitalized amounts, decreased to $866 from $2,651 in 1997. These decreases were a result of reduced indebtedness. The Royalty Guarantors' interest expense decreased to $739 for the three months ended June 30, 1998 from $1,094 from the same period in 1997. For the six month period ended June 30, 1998, interest expense decreased to $1,515 from $2,226 in 1997. These decreases were a result of reduced indebtedness. Income Tax Provision: The Salton Sea Guarantors are comprised of partnerships. Income taxes are the responsibility of the partners and Salton Sea Guarantors have no obligation to provide funds to the partners for payment of any tax liabilities. Accordingly, the Salton Sea Guarantors have no tax obligations. The Partnership Guarantors income tax provision decreased to $4,357 for the three months ended June 30, 1998 from $5,006 for the same period in 1997, a 13.0% decrease. The decrease was primarily due to the increased step up depreciation. For the six month period ended June 30, 1998, the provision for income taxes increased marginally to $8,158 from $8,109 in 1997. Income taxes will be paid by the parent of the Guarantors from distributions to the parent company by the Guarantors which occur after operating expenses and debt service. The Royalty Guarantor's income tax provision was $2,791 for the three months ended June 30, 1998 compared to $748 for the same period in 1997. For the six month period ended June 30, 1998, the income tax provision was $5,416 compared to $1,485 for the same period in 1997. The increases are a result of higher pre- tax income. Tax obligations of the Royalty Guarantor will be remitted to the parent company only to the extent of cash flows available after operating expenses and debt service. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Results of Operations: (continued) Net Income: The Salton Sea Funding Corporation's net income for the three months ended June 30, 1998 was $414 compared to $356 for the same period in 1997. For the six month period ended June 30, 1998 net income increased to $799 compared to $671 in 1997. The Salton Sea Guarantors' net income increased to $12,174 for the three months ended June 30, 1998 compared to $10,216 for the same period of 1997. For the six month period ended June 30, 1998, net income decreased to $17,985 compared to $18,037 in 1997. The Partnership Guarantors' net income decreased to $6,779 for the three months ended June 30, 1998 compared to $7,883 for the same period of 1997. For the six month period ended June 30, 1998, net income decreased to $12,729 compared to $12,740 in 1997. The Royalty Guarantors' net income increased to $4,632 for the three months ended June 30, 1998 compared to $1,677 for the same period of 1997. For the six month period ended June 30, 1998, net increased to $8,961 compared to $3,343 in 1997. THE SALTON SEA FUNDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per kwh data) _________________________________ Liquidity and Capital Resources: The Salton Sea Guarantors' only source of revenue is payments received pursuant to long term power sales agreements with Edison, other than interest earned on funds on deposit. The Partnership Guarantors' primary source of revenue is payments received pursuant to long term power sales agreements with Edison. The Royalty Guarantor's only source of revenue is royalties received pursuant to resource lease agreements with the Partnership Projects and the East Mesa Project. These payments, for each of the Guarantors, are expected to be sufficient to fund operating and maintenance expenses, payments of interest and principal on the Securities, projected capital expenditures and debt service reserve fund requirements. The Funding Corporation and Guarantors have commenced, for all of its information systems, a year 2000 date conversion project to address all necessary code changes, testing and implementation. The "Year 2000 Computer Problem" creates risk for the Funding Corporation and the Guarantors from unforeseen problems in its own computer systems and from third parties with whom the Funding Corporation and the Guarantors deals on financial transactions worldwide. Such failures of the Funding Corporation's or Guarantors' and/or third parties' computer systems could have a material impact on the Funding Corporation's or Guarantors' ability to conduct its business, and especially to process and account for the transfer of funds electronically. Management believes that it will substantially complete the year 2000 implementation before January 1, 2000 and that the related costs and potential effect should not have a material financial impact on the Funding Corporation and the Guarantors. SALTON SEA FUNDING CORPORATION PART II - OTHER INFORMATION Item 1 - Legal proceedings. The Salton Sea Funding Corporation is not a party to any material legal matters. Item 2 - Changes in Securities. Not applicable. Item 3 - Default on Senior Securities. Not applicable. Item 4 - Submission of Matters to a Vote of Security Holders. Not applicable. Item 5 - Other Information. Not applicable. Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 27 - Financial Data Schedule (b) Report on Form 8-K: Not applicable. 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. SALTON SEA FUNDING CORPORATION Date: August 13, 1998 /s/ Craig M. Hammett Craig M. Hammett Senior Vice President and Chief Financial Officer /s/ Patrick J. Goodman Patrick J. Goodman Vice President, Chief Accounting Officer and Controller EXHIBIT INDEX Exhibit Page No. No. 27 Financial Data Schedule 35 EX-27 2
5 1,000 6-MOS DEC-31-1998 JUN-30-1998 5,984 0 0 0 0 0 0 0 411,337 0 395,285 0 0 0 10,954 411,337 0 18,106 0 0 473 0 16,279 1,354 555 799 0 0 0 799 0 0
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