-----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, Ap7Fv1fpvJ8J1mqLACHPZ8UWP5wqWq7jR5Y+refrtMo27fdHpvcC5BKBkT8JfzGA sPG2gbtuIzwB1KB9Qh7TnQ== 0000949149-98-000006.txt : 19981116 0000949149-98-000006.hdr.sgml : 19981116 ACCESSION NUMBER: 0000949149-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98747131 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 September 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 September 30, 1998. SALTON SEA FUNDING CORPORATION Form 10-Q September 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, September 30, 1998 and December 31, 1997 5 Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 6 Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 7 Notes to Financial Statements 8 SALTON SEA GUARANTORS Independent Accountants' Report 9 Combined Balance Sheets, September 30, 1998 and December 31, 1997 10 Combined Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 11 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 12 Notes to Combined Financial Statements 13 PARTNERSHIP GUARANTORS Independent Accountants' Report 14 Combined Balance Sheets, September 30, 1998 and December 31, 1997 15 Combined Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 16 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 17 Notes to Combined Financial Statements 18 SALTON SEA ROYALTY COMPANY Independent Accountants' Report 19 Balance Sheets, September 30, 1998 and December 31, 1997 20 Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 21 Statements of Cash Flows for the Nine Months Ended September 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 35 Item 2. Changes in Securities 35 Item 3. Defaults on Senior Securities 35 Item 4. Submission of Matters to a Vote of Security Holders 35 Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 Signatures 36 Exhibit Index 37 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 September 30, 1998, and the related statements of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 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 November 12, 1998 SALTON SEA FUNDING CORPORATION BALANCE SHEETS (Dollars in Thousands, Except per Share Amounts) September 30, December 31, 1998 1997 ___________ __________ (unaudited) ASSETS Cash $ 64,502 $ 15,568 Prepaid expenses and other assets 10,232 2,823 Secured project notes from Guarantors 395,285 448,754 Investment in 1% of net assets of Guarantors 7,924 7,144 __________ __________ $ 477,943 $ 474,289 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accrued liabilities $ 9,964 $ 2,782 Due to affiliates 61,365 12,598 Senior secured notes and bonds 395,285 448,754 __________ __________ Total liabilities 466,614 464,134 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 5,963 4,789 __________ __________ Total stockholder's equity 11,329 10,155 __________ __________ $ 477,943 $ 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 Nine Months Ended September 30 September 30 1998 1997 1998 1997 Revenues: Interest income $ 8,663 $ 9,567 $ 26,372 $ 30,314 Equity in earnings of Guarantors 383 340 780 681 _________ ________ ________ ________ Total revenues 9,046 9,907 27,152 30,995 _________ ________ ________ ________ Expenses: General and administrative expenses 336 233 809 692 Interest expense 8,074 9,047 24,353 28,538 _________ ________ ________ ________ Total expenses 8,410 9,280 25,162 29,230 _________ ________ ________ ________ Income before income taxes 636 627 1,990 1,765 Provision for income taxes 261 257 816 724 _________ ________ ________ ________ Net income $ 375 $ 370 $ 1,174 $ 1,041 ========= ========= ======== ========= The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Nine Months Ended September 30, 1998 1997 Cash flows from operating activities: Net income $ 1,174 $ 1,041 Adjustments to reconcile net income to net cash flow from operating activities: Equity in earnings of guarantors (780) (681) Changes in assets and liabilities: Prepaid expenses and other assets (7,409) (8,938) Accrued liabilities 7,182 8,729 __________ _________ Net cash flows from operating activities 167 151 __________ _________ Cash flows from investing activities: Decrease in restricted cash --- 14,044 Principal repayments of secured project notes from Guarantors 53,469 45,114 __________ _________ Net cash flows from investing activities 53,469 59,158 __________ _________ Cash flows from financing activities: Increase in due to affiliates 48,767 36,176 Repayment of senior secured notes and bonds(53,469) (45,114) __________ _________ Net cash flows from financing activities (4,702) (8,938) __________ _________ Net change in cash 48,934 50,371 Cash at the beginning of period 15,568 13,218 __________ _________ Cash at the end of period $ 64,502 $ 63,589 ========== ========= Supplemental disclosures: Interest paid $ 16,570 $ 19,777 ========== ========= 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 September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 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. 3. Subsequent Event: On October 13, 1998 the Funding Corporation completed a sale to institutional investors of $285,000 aggregate amount of 7.475% Senior Secured Series F Bonds due November 30, 2018. The proceeds from the offering will be used to partially fund construction of two new geothermal projects at the Salton Sea, the costs of construction of the Zinc Recovery Project and other capital improvements at existing Salton Sea projects. 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 September 30, 1998, and the related combined statements of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 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 November 12, 1998 SALTON SEA GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) September 30, December 31, 1998 1997 __________ _________ (unaudited) ASSETS Accounts receivable $ 22,756 $ 15,823 Prepaid expenses and other assets 11,701 13,043 Property, plant, contracts and equipment, net 473,037 478,001 Excess of cost over fair value of net assets acquired, net 48,508 49,486 _________ _________ $ 556,002 $ 556,353 ======== ======== LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 1,610 $ 390 Accrued liabilities 12,019 7,826 Due to affiliates 24,537 47,741 Senior secured project note 246,483 266,208 _________ _________ Total liabilities 284,649 322,165 Total Guarantors' equity 271,353 234,188 _________ _________ $ 556,002 $ 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 Nine Months Ended September 30 September 30 _____________________ _____________________ 1998 1997 1998 1997 ________ ________ ________ ________ Revenues: Sales of electricity $ 34,359 $ 33,884 $ 82,156 $ 82,307 Interest and other income 8 7 30 168 _______ _______ _______ _______ Total revenues 34,367 33,891 82,186 82,475 _______ _______ _______ _______ Expenses: Operating, general and administration 7,963 8,218 22,510 21,328 Depreciation and amortization 3,724 4,149 11,164 12,333 Interest expense 5,013 5,701 15,472 17,398 Less capitalized interest (1,513) (1,173) (4,125) (3,617) _______ _______ _______ _______ Total expenses 15,187 16,895 45,021 47,442 _______ _______ _______ _______ Net income $ 19,180 $ 16,996 $ 37,165 $ 35,033 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Nine Months Ended September 30, ____________________ 1998 1997 _________ _________ Cash flows from operating activities: Net income $ 37,165 $ 35,033 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 11,164 12,333 Changes in assets and liabilities: Accounts receivable (6,933) (6,809) Prepaid expenses and other assets 1,342 1,317 Accounts payable and accrued liabilities 5,413 3,188 _________ _________ Net cash flows from operating activities 48,151 45,062 _________ _________ Cash flows from investing activities: Capital expenditures (5,222) (5,784) _________ _________ Cash flows from financing activities: Decrease in due to affiliates (23,204) (22,462) Repayments of senior secured project note (19,725) (16,816) ___________________ Net cash flows from financing activities (42,929) (39,278) _________ _________ 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 September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 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 September 30, 1998, and the related combined statements of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 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 November 12, 1998 PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) September 30, December 31, 1998 1997 (unaudited) ASSETS Accounts receivable $ 42,432 $ 23,481 Prepaid expenses and other assets 17,858 13,121 Due from affiliates 122,464 124,311 Property, plant, contracts and equipment, net 371,143 370,666 Management fee from affiliates 71,364 70,082 Excess of cost over fair value of net assets acquired, net 132,449 135,122 _________ _________ $ 757,710 $ 736,783 ========= ========= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 2,606 $ 1,338 Accrued liabilities 24,396 23,285 Senior secured project notes 117,729 143,610 Deferred income taxes 124,131 106,851 _________ _________ Total liabilities 268,862 275,084 Guarantors' equity: Common stock 3 3 Additional paid-in capital 387,663 387,663 Retained earnings 101,182 74,033 _________ _________ Total Guarantors' equity 488,848 461,699 _________ _________ $ 757,710 $ 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 Nine Months Ended September 30 September 30 1998 1997 1998 1997 _________ _________ _________ _________ Revenues: Sales of electricity $ 51,060 $ 49,547$ 124,731 $ 122,458 Interest and other income 1,743 1,896 3,775 3,463 _________ _________ _________ _________ Total revenues 52,803 51,443 128,506 125,921 _________ _________ _________ _________ Expenses: Operating, general and administration 16,937 16,471 46,721 48,119 Depreciation and amortization 12,146 9,657 36,312 28,987 Interest expense 2,435 3,332 8,188 10,531 Less capitalized interest (2,257) (2,360) (7,144) (6,908) _________ _________ _________ _________ Total expenses 29,261 27,100 84,077 80,729 _________ _________ _________ _________ Income before income taxes 23,542 24,343 44,429 45,192 Provision for income taxes 9,122 9,424 17,280 17,533 _________ _________ _________ _________ Net income $ 14,420 $ 14,919 $ 27,149 $ 27,659 ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Nine Months Ended September 30, 1998 1997 _________ _________ Cash flows from operating activities: Net income $ 27,149 $ 27,659 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation and amortization 36,312 28,987 Deferred income taxes 17,280 17,533 Changes in assets and liabilities: Accounts receivable (18,951) (10,127) Prepaid expenses and other assets (4,737) 2,824 Accounts payable and accrued liabilities 2,378 2,543 _________ _________ Net cash flows from operating activities 59,431 69,419 _________ _________ Cash flows from investing activities: Capital expenditures (32,156) (25,556) Management fee (3,242) (3,348) _________ _________ Net cash flows from investing activities (35,398) (28,904) _________ _________ Cash flows from financing activities: Repayments of senior secured project notes (25,881) (19,297) Decrease (increase) in due from affiliates 1,848 (21,218) _________ _________ Net cash flows from financing activities (24,033) (40,515) _________ _________ 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 September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 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 September 30, 1998, and the related statements of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 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 November 12, 1998 SALTON SEA ROYALTY COMPANY BALANCE SHEETS (Dollars in Thousands, Except per Share Amounts) September 30, December 31, 1998 1997 ___________ ___________ (unaudited) ASSETS Due from affiliates $ 49,872 $ 19,114 Royalty stream, net 25,153 31,818 Excess of cost over fair value of net assets acquired, net 33,415 34,096 Prepaid expenses and other assets 630 981 __________ __________ $ 109,070 $ 86,009 ========== ========== LIABILITIES AND EQUITY Liabilities: Accrued liabilities $ 41,199 $ 21,306 Senior secured project note 31,071 38,934 Deferred income taxes 4,635 7,268 __________ __________ Total liabilities 76,905 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 30,604 16,940 __________ __________ Total equity 32,165 18,501 __________ __________ $ 109,070 $ 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 Nine Months Ended September 30 September 30 _____________________ ____________________ 1998 1997 1998 1997 _______ _______ ________ ________ Revenues: Royalty income $ 12,846 $ 8,628 $ 37,526 $ 24,411 Expenses: Operating, general and administrative expenses 2,204 2,096 6,095 5,928 Amortization of royalty stream and goodwill 2,449 2,449 7,346 7,346 Interest expense 657 1,002 2,172 3,228 _______________________________________ Total expenses 5,310 5,547 15,613 16,502 _______________________________________ Income before income taxes 7,536 3,081 21,913 7,909 Provision for income taxes 2,833 981 8,249 2,466 _______________________________________ Net income $ 4,703 $ 2,100 $ 13,664 $ 5,443 ======================================= The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Nine Months Ended September 30, _____________________ 1998 1997 _________ ________ Cash flows from operating activities: Net income $ 13,664 $ 5,443 Adjustments to reconcile net income to net cash flow from operating activities: Amortization of royalty stream and goodwill 7,346 7,346 Deferred income taxes (2,633) (1,755) Changes in assets and liabilities: Prepaid expenses and other assets 351 531 Accrued liabilities 19,893 4,582 Net cash flows from operating activities 38,621 16,147 Net cash flows from financing activities: Increase in due from affiliates (30,758) (7,146) Repayment of senior secured project note (7,863) (9,001) _________ _________ Net cash flows from financing activities (38,621) (16,147) 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 September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 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 plants operations 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 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 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 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 5.4 cents per kWh during the nine months ended September 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 nine months ended September 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 nine months ended September 30, 1998. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. 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 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 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 Nine Months Ended September 30, September 30, ______________________________________ 1998 1997 1998 1997 ________ _________ __________________ Overall capacity factor 98.7% 95.7% 93.1% 94.6% Capacity (NMW) (average) 119.4 119.4 119.4 119.4 kWh produced (in thousands)260,200 252,300 728,100 740,200 The overall capacity factor for the Salton Sea Projects increased for the three months ended September 30, 1998 compared to the same period in 1997 due to operating efficiencies resulting from equipment upgrades. The overall capacity factor for the Salton Sea Projects decreased for the nine months ended September 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 Nine Months Ended September 30, September 30, _________________________________________ 1998 1997 1998 1997 ________ _________ __________________ Overall capacity factor 105.5% 105.6% 99.2% 101.9% Capacity NMW (average) 148 148 148 148 kWh produced (in thousands)344,900 345,000 961,500 987,700 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 $8,663 for the three months ended September 30, 1998 from $9,567 for the same period in 1997, a 9.4% decrease. For the nine months ended September 30, 1998, revenues decreased to $26,372 from $30,314 in 1997, a 13.0% decrease. These decreases are due to lower interest income due to lower cash balances which resulted from additional capital expenditures from the Salton Sea and Partnership Projects and debt repayment. The Salton Sea Guarantors' sales of electricity increased to $34,359 for the three months ended September 30, 1998 from $33,884 for the same period of 1997, a 1.4% increase. The increase was primarily due to increased electric production. For the nine month period ended September 30, 1998, sales of electricity decreased to $82,156 from $82,307 in 1997, a 0.2% decrease. The Partnership Guarantors' sales of electricity increased to $51,060 for the three months ended September 30, 1998 from $49,547 for the same period in 1997, a 3.1% increase. For the nine month period ended September 30, 1998, sales of electricity increased to $124,731 from $122,458 in 1997, a 1.9% 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 $12,846 for the three months ended September 30, 1998 from $8,628 for the same period last year, a 48.9% increase. For the nine month period ended September 30, 1998, revenue increased to $37,526 from $24,411 in 1997, a 53.7% 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, decreased to $7,963, for the three months ended September 30, 1998 from $8,218 for the same period in 1997, a 3.1% decrease. For the nine month period ended September 30, 1998, operating expenses increased to $22,510 from $21,328 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 $16,937 for the three months ended September 30, 1998 from $16,471 for the same period in 1997. For the nine month period ended September 30, 1998, operating expenses decreased to $46,721 from $48,119 in 1997, a 2.9% decrease. The decrease in the nine months was due to a reduction in operating and maintenance costs. The Royalty Guarantors' operating expenses increased to $2,204 for the three months ended September 30, 1998 from $2,096 for the same period in 1997, a 5.2% increase. For the nine month period ended September 30, 1998, operating expenses increased to $6,095 from $5,928 in 1997, a 2.8% 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 decreased to $3,724 for the three months ended September 30, 1998 from $4,149 for the same period of 1997, a 10.2% decrease. For the nine month period ended September 30, 1998, depreciation and amortization decreased to $11,164 from $12,333 in 1997. The Partnership Guarantors' depreciation and amortization increased to $12,146 for the three months ended September 30, 1998 from $9,657 for the same period in 1997, a 25.8% increase. For the nine month period ended September 30, 1998, depreciation and amortization increased to $36,312 from $28,987 in 1997, a 25.3% increase. These increases were due primarily to an acceleration in the step up depreciation related to the acquisition of Magma. The Royalty Guarantors' amortization was $2,449 for the three months ended September 30, 1998 compared to $2,449 for the same period of 1997. For the nine month period ended June 30, 1998, depreciation and amortization was $7,346 compared to $7,346 in 1997. Interest Expense: The Salton Sea Funding Corporation's interest expense decreased to $8,074 for the three months ended September 30, 1998 from $9,047 for the same period in 1997, a 10.8% decrease. For the nine month period ended September 30, 1998, interest expense decreased to $24,353 from $28,538 in 1997, a 14.7% 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 $3,500 for the three months ended September 30, 1998 from $4,528 for the same period in 1997, a 22.7% decrease. For the nine month period ended September 30, 1998, interest expense, net of capitalized amounts, decreased to $11,347 from $13,781 in 1997, a 17.7% decrease. These decreases were due primarily to reduced indebtedness. The Partnership Guarantors' interest expense, net of capitalized amounts, decreased to $178 for the three months ended September 30, 1998 from $972 for the same period in 1997. For the nine month period ended September 30, 1998, interest expense, net of capitalized amounts, decreased to $1,044 from $3,623 in 1997. These decreases were a result of reduced indebtedness. The Royalty Guarantors' interest expense decreased to $657 for the three months ended September 30, 1998 from $1,002 from the same period in 1997. For the nine month period ended September 30, 1998, interest expense decreased to $2,172 from $3,228 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 $9,122 for the three months ended September 30, 1998 from $9,424 for the same period in 1997, a 3.2% decrease. The decrease was primarily due to lower pre-tax income. For the nine month period ended September 30, 1998, the provision for income taxes decreased marginally to $17,280 from $17,533 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 $2,833 for the three months ended September 30, 1998 compared to $981 for the same period in 1997. For the nine month period ended September 30, 1998, the income tax provision was $8,249 compared to $2,466 for the same period in 1997. The increases are a result of 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) 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. Net Income: The Salton Sea Funding Corporation's net income for the three months ended September 30, 1998 was $375 compared to $370 for the same period in 1997. For the nine month period ended September 30, 1998 net income increased to $1,174 compared to $1,041 in 1997. The Salton Sea Guarantors' net income increased to $19,180 for the three months ended September 30, 1998 compared to $16,996 for the same period of 1997. For the nine month period ended September 30, 1998, net income increased to $37,165 compared to $35,033 in 1997. The Partnership Guarantors' net income decreased to $14,420 for the three months ended September 30, 1998 compared to $14,919 for the same period of 1997. For the nine month period ended September 30, 1998, net income decreased to $27,149 compared to $27,659 in 1997. The Royalty Guarantors' net income increased to $4,703 for the three months ended September 30, 1998 compared to $2,100 for the same period of 1997. For the nine month period ended September 30, 1998, net increased to $13,664 compared to $5,443 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 Funding Corporation and the Guarantors (the "Company") developed and own the rights to a proprietary process for the extraction of minerals from elements in solution in the geothermal brine and fluids utilized at its Imperial Valley plants (the "Salton Sea Extraction Project") as well as the production of power to be used in the extraction process. A pilot plant has successfully produced commercial quality zinc at the Company's Imperial Valley Project. The Company intends to sequentially develop manganese, silver, gold, lead, boron, lithium and other products as it further develops the extraction technology. The Company is also investigating producing silica from the solids precipitated out of the geothermal power process. Silica is used as a filler for such products as paint, plastics and high temperature cement. If successfully developed, the mineral extraction process will provide an environmentally responsible and low cost minerals recovery methodology. Minerals LLC, an indirect wholly-owned subsidiary of the Company is constructing the Zinc Recovery Project which will recover zinc from the geothermal brine that has been extracted from the ground for use in the Imperial Valley Projects (the "Zinc Recovery Project"). The Zinc Recovery Project will utilize geothermal brine after the brine has been used by the Imperial Valley Projects but before the brine is re-injected into the ground. Four facilities will be installed near Imperial Valley Project sites to extract a zinc chloride solution from the brine through an ion exchange process. This solution will be transported to a central processing plant where zinc ingots will be produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tonnes per year and is scheduled to commence commercial operation in mid-2000. The zinc produced by the Zinc Recovery Project is expected to be sold primarily to U.S. West Coast customers such as steel companies, alloyers and galvanizers. The Zinc Recovery Project will be constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procurement and construction contract (the "Zinc Recovery Project EPC Contract"). Kvaerner is a wholly- owned indirect subsidiary of Kvaerner ASA, an internationally recognized engineering and construction firm experienced in the metals, mining and processing industries. Total project costs of the Zinc Recovery Project are expected to be approximately $200,925. 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 (continued): Power LLC, an indirect wholly owned subsidiary of the Company, proposes to expand the generating capacity of the Salton Sea Project by constructing Salton Sea Unit V. Salton Sea Unit V will be a 49 net MW geothermal power plant which will extract unutilized geothermal energy from geothermal brine that has previously passed through the other Salton Sea Projects. Approximately one-third of the net output of Salton Sea Unit V will be sold to the Zinc Recovery Project. The remainder will be sold through the California Power Exchange ("PX"). Salton Sea Unit V will be constructed pursuant to a date certain, fixed price, turnkey engineering, procurement and construction contract (the "Salton Sea Unit V EPC Contract") by Stone & Webster Engineering Corporation ("SWEC"). SWEC is one of the world's leading engineering and construction firms for the construction of electric power plants and, in particular, geothermal power plants. SWEC provided the engineering for the construction of Salton Sea Unit III and has completed engineering, procurement, construction or other related work on twenty-seven other geothermal power plants over the past five years. Salton Sea Unit V is scheduled to commence commercial operation in mid-2000. Total project costs of Salton Sea Unit V are expected to be approximately $119,067. Turbo LLC, an indirect wholly-owned subsidiary of the Company, proposes to construct the TurboExpander Project. The TurboExpander Project is designed to generate electricity from excess geothermal energy produced from the wells in the region of the wellfield currently supplying the Vulcan and Del Ranch Projects. The TurboExpander Project will have a capacity of 10 net MW. Because the TurboExpander Project will rely on geothermal energy that is already available, the TurboExpander Project will not require additional geothermal production or injection wells. The net output of the TurboExpander Project will be sold to the Zinc Recovery Project or sold through the PX. The Partnership Projects propose to upgrade the geothermal brine processing facilities at the Vulcan and Del Ranch Projects with the Region 2 Brine Facilities Construction. In addition to incorporating the pH Modification Process, which has reduced operating costs at the Salton Sea Projects, the new, more efficient facilities will achieve economies of scale through improved brine processing systems and the utilization of more modern equipment. The Partnership Projects expect these improvements to reduce brine-handling operating costs at the Vulcan Project and the Del Ranch Project. 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 (continued): The TurboExpander Project and the Region 2 Brine Facilities Construction will be constructed by SWEC pursuant to a date certain, fixed price, turnkey engineering, procurement and construction contract (the "Region 2 Upgrade EPC Contract"). The obligations of SWEC will be guaranteed by Stone & Webster, Incorporated. The TurboExpander Project is scheduled to commence initial operations in mid-2000 and the Region 2 Brine Facilities Construction is scheduled to be completed in early-2000. Total project costs for the TurboExpander Project and the Region 2 Brine Facilities Construction are expected to be approximately $63,747. On October 13, 1998 the Funding Corporation completed a sale to institutional investors of $285,000 aggregate amount of 7.475% Senior Secured Series F Bonds due November 30, 2018. The proceeds from the offering will be used to fund construction of the Zinc Recovery Project, Salton Sea Unit V, the TurboExpander Project, the Region 2 Brine Facilities Construction, additional capital improvements and financing costs. Total equity funding for these projects is expected to be approximately $122,513. 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. What is generally known as the year 2000 ("Y2K") computer problem arose because many existing computer programs and embedded systems use only the last two digits to refer to a year. Therefore, those computer programs do not properly distinguish between a year that begins with "20" instead of "19". If not corrected, many computer applications could fail or create erroneous results. The failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. 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 (continued): The Y2K problem creates uncertainty for the Company from potential problems in its own computer systems and from third parties with whom the Company deals on transactions worldwide. The Company's operations utilize systems and equipment provided by other organizations. As a result, year 2000 readiness of suppliers, vendors, service providers or customers could impact the Company's operations. The Company is assessing the readiness of such constituent entities and the impacts on those entities that rely upon the Company's services. The Company is unable to determine at this time whether the consequences of Y2K failures of third parties will have a material impact on the Company's results of operations, liquidity or financial condition. The Company has commenced, for all of its information systems, a Y2K date conversion project to address all necessary code changes, testing and implementation in order to resolve the Y2K problem. This project involves use of a worldwide Y2K project team to identify, assess and correct all of its information technology (IT) and non-IT systems, as well as, identify and assess third party systems. The Company has identified and assessed substantially all of its IT and non-IT systems and is currently in process of repairing or replacing those systems which are not year 2000 compliant. Through September, the Company is approximately 87% complete in repairing or replacing their own computer systems. The Company expects to be 95% complete by December 31, 1998 and 100% complete of correcting, testing, and compliance by April 1999. Total Y2K expenditures, for both repairing or replacing non- compliant systems, are expected to total approximately $100. The Company is not aware of any additional material costs needed to be incurred to bring all of its systems into compliance however, there is no assurance that additional costs will not be incurred. Although management believes that the Y2K project will be substantially complete before January 1, 2000, any unforeseen failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. Accordingly, the Company is developing a formal contingency plan that is expected to be completed by mid year 1999 to mitigate any potential business interruption. 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 except those described in Footnote #2. 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: November 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 38 EX-27 2
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 64,502 0 0 0 0 0 0 0 477,943 0 395,285 0 0 0 11,329 477,943 0 26,372 0 0 809 0 24,353 1,990 816 1,174 0 0 0 1,174 0 0
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