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, 1997
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, 1997.
<PAGE>
SALTON SEA FUNDING CORPORATION
Form 10-Q
September 30, 1997
_____________
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, 1997
and December 31, 1996 5
Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996 6
Statement of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 9
Combined Balance Sheets, September 30, 1997
and December 31, 1996 10
Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1997 and 1996 11
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 12
Notes to Combined Financial Statements 13
<PAGE>
PARTNERSHIP GUARANTORS
Independent Accountants' Report 15
Combined Balance Sheets, September 30, 1997
and December 31, 1996 16
Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1997 and 1996 17
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 18
Notes to Combined Financial Statements 19
SALTON SEA ROYALTY COMPANY
Independent Accountants' Report 21
Balance Sheets, September 30, 1997
and December 31, 1996 22
Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996 23
Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 24
Notes to Financial Statements 25
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 3. Defaults on Senior Securities 33
Item 4. Submission of Matters to a Vote of
Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Exhibit Index 35
<PAGE>
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, 1997, and the related
statements of operations for the three and nine month periods
ended September 30, 1997 and 1996 and cash flows for the nine
months ended September 30, 1997 and 1996. 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, 1996, and the related statements
of operations, stockholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated
January 31, 1997, 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, 1996 is
fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 21, 1997
<PAGE>
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
1997 1996
___________ __________
(unaudited)
ASSETS
Cash $ 63,589 $ 13,218
Restricted cash and short-term
investments --- 14,044
Prepaid expenses and other assets 12,390 3,452
Secured project notes of Guarantors 493,868 538,982
Investment in 1% of net assets of
Guarantors 6,974 6,293
__________ __________
$ 576,821 $ 575,989
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 12,020 $ 3,291
Due to affiliates 61,198 25,022
Senior secured notes and bonds 493,868 538,982
__________ __________
Total liabilities 567,086 567,295
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 4,369 3,328
__________ __________
Total stockholder's equity 9,735 8,694
__________ __________
$ 576,821 $ 575,989
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Revenues:
Interest income $ 9,567$ 10,844 $ 30,314 $ 28,504
Equity in earnings of
Guarantors 340 303 681 537
_________ ________ ________ ________
Total revenues 9,907 11,147 30,995 29,041
_________ ________ ________ ________
Expenses:
General and
administrative expenses 233 241 692 467
Interest expense 9,047 10,339 28,538 26,272
_________ ________ ________ ________
Total expenses 9,280 10,580 29,230 26,739
_________ ________ ________ ________
Income before income taxes 627 567 1,765 2,302
Provision for income taxes 257 232 724 944
_________ ________ ________ ________
Net income $ 370 $ 335 $ 1,041 $ 1,358
========= ========= ======== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months ended
September 30,
1997 1996
Cash flows from operating activities:
Net income $ 1,041$ 1,358
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in earnings of Guarantors (681) (537)
Changes in assets and liabilities:
Prepaid expenses and other assets (8,938) (10,094)
Accrued liabilities 8,729 9,155
_________ __________
Net cash flows from operating activities 151 (118)
_________ __________
Cash flows from investing activities:
Decrease in restricted cash 14,044 42,118
Secured project notes of Guarantors - (135,000)
Principal repayments of secured project notes
of Guarantors 45,114 24,053
__________ _________
Net cash flows from investing activities 59,158 (68,829)
__________ _________
Cash flows from financing activities:
Increase in due to affiliates 36,176 3,003
Proceeds from offering of senior
project notes & bonds - 135,000
Repayment of senior secured notes and bonds (45,114) (24,053)
__________ _________
Net cash flows from financing activities (8,938) 113,950
__________ _________
Net change in cash 50,371 45,003
Cash at the beginning of period 13,218 4,393
__________ _________
Cash at the end of period $ 63,589 $ 49,396
========== =========
Supplemental disclosures:
Interest paid $ 19,777$ 16,158
====================
Non-cash investing and financing activities:
Adjustments resulting from capital transactions
of Guarantors $ - (135)
========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
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, 1997
and the results of operations for the three and nine months ended
September 30, 1997 and 1996 and cash flows for the nine months
ended September 30, 1997 and 1996.
The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
The Funding Corporation was formed on September 20, 1995 for the
sole purpose of acting as issuer of senior secured notes and
bonds.
2. Other Footnote Information:
Reference is made to the Funding Corporation's most recently
issued annual report on Form 10-K that included information
necessary or useful to the understanding of the Funding
Corporation's business and financial statement presentations.
<PAGE>
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, 1997, and the related
combined statements of operations for the three and nine month
periods ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. 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, 1996, 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 January 31, 1997, 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, 1996 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
October 21, 1997
<PAGE>
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Accounts receivable $ 21,763 $ 14,954
Prepaid expenses and other assets 14,691 16,008
Property, plant, contracts and
equipment, net 479,967 484,182
Excess of cost over fair value of
net assets acquired, net 49,812 50,790
_________ _________
$ 566,233 $ 565,934
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 38 $ 642
Accrued liabilities 13,781 9,989
Due to affiliates 42,985 64,091
Senior secured project note 283,024 299,840
_________ _________
Total liabilities 339,828 374,562
Total Guarantors' equity 226,405 191,372
_________ _________
$ 566,233 $ 565,934
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
_____________________ _____________________
1997 1996 1997 1996
________ ________ ________ ________
Revenues:
Sales of electricity $ 33,884 $ 33,413 $ 82,307 $ 68,646
Interest and other income 7 3 168 131
_______ _______ _______ _______
Total revenues 33,891 33,416 82,475 68,777
_______ _______ _______ _______
Expenses:
Operating, general and
administration 8,218 7,576 21,328 19,302
Depreciation and
amortization 4,149 3,973 12,333 9,859
Interest expense 5,701 6,205 17,398 18,724
Less capitalized interest (1,173) (1,174) (3,617) (7,381)
_______ _______ _______ _______
Total expenses 16,895 16,580 47,442 40,504
_______ _______ _______ _______
Net income $ 16,996$ 16,836 $ 35,033 $ 28,273
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
____________________
1997 1996
Cash flows from operating activities:
Net income $ 35,033 $ 28,273
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation and amortization 12,333 9,859
Changes in assets and liabilities:
Accounts receivable (6,809) (11,634)
Prepaid expenses and other assets 1,317 1,151
Accounts payable and accrued
liabilities 3,188 8,718
_________ _________
Net cash flows from operating activities 45,062 36,367
_________ _________
Cash flows from investing activities:
Capital expenditures (5,784) (61,653)
_________ _________
Net cash flows from investing activities (5,784) (61,653)
_________ _________
Cash flows from financing activities:
Increase (decrease) in due to affiliates (22,462) 35,727
Repayments of senior secured project note (16,816) (10,830)
___________________
Net cash flows from financing activities (39,278) 24,897
_________ _________
Net change in cash --- (389)
Cash at beginning of period --- 454
_________ _________
Cash at end of period $ ---$ 65
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
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, 1997 and the results of operations for the three
and nine months ended September 30, 1997 and 1996 and cash flows
for the nine months ended September 30, 1997 and 1996.
The combined financial statements include the accounts of the
partnerships in which the Guarantors have a 100% interest.
The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
2. Other Footnote Information:
Reference is made to the Salton Sea Funding Corporation's most
recently issued annual report on Form 10-K that included
information necessary or useful to the understanding of the
Guarantors' business and financial statement presentations.
<PAGE>
SALTON SEA GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands)
____________________
3. Property, Plant, Contracts and Equipment:
Property, plant, contracts and equipment consist of the
following:
September 30, December 31,
1997 1996
________ ________
Plant and equipment $ 329,894 $ 329,458
Power sale agreements 64,609 64,609
Mineral extraction 70,448 66,831
Exploration and development costs 43,597 42,220
________ ________
508,548 503,118
Less accumulated depreciation
and amortization (28,581) (18,936)
________ ________
$ 479,967 $ 484,182
======== ========
<PAGE>
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, 1997, and the related
combined statements of operations for the three and nine month
periods ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. 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, 1996, 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 January 31, 1997, 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, 1996 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
October 21, 1997
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Accounts receivable $ 32,893 $ 22,766
Due from affiliates 150,496 129,278
Prepaid expenses and other assets 16,259 19,083
Property, plant, contracts and
equipment, net 365,192 364,849
Management fee 69,768 67,521
Excess of cost over fair value of
net assets acquired, net 136,013 138,686
_________ _________
$ 770,621 $ 742,183
========= =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 287 $ 663
Accrued liabilities 25,896 22,977
Senior secured project notes 162,907 182,204
Deferred income taxes 125,810 108,277
_________ _________
Total liabilities 314,900 314,121
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 68,055 40,396
_________ _________
Total Guarantors' equity 455,721 428,062
_________ _________
$ 770,621 $ 742,183
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Revenues:
Sales of electricity $ 49,547 $ 46,031 $ 122,458 $ 98,186
Interest and other income 1,896 2,608 3,463 6,757
Total revenues 51,443 48,639 125,921 104,943
_________ _________ _________ _________
Expenses:
Operating, general and
administration 16,471 17,016 48,119 41,426
Depreciation and
amortization 9,657 9,870 28,987 24,159
Interest expense 3,332 4,193 10,531 9,455
Less capitalized interest (2,360) (2,168) (6,908) (6,637)
Total expenses 27,100 28,911 80,729 68,403
_________ _________ _________ _________
Income before income taxes 24,343 19,728 45,192 36,540
Provision for income taxes 9,424 7,702 17,533 14,414
_________ _________ _________ _________
Net income $ 14,919$ 12,026 $ 27,659 $ 22,126
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net income $ 27,659 $ 22,126
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation and amortization 28,987 24,159
Deferred income taxes 17,533 4,192
Changes in assets and liabilities:
Accounts receivable (10,127) (4,268)
Prepaid expenses and other assets 2,824 (6,120)
Accounts payable and accrued
liabilities 2,543 503
Net cash flows from operating activities 69,419 40,592
Cash flows from investing activities:
Capital expenditures (25,556) (14,723)
Management fee (3,348) (3,615)
Decrease in restricted cash - 23,085
Net cash flows from investing activities (28,904) 4,747
Cash flows from financing activities:
Repayments of senior secured project rates (19,297) (99,809)
Loan proceeds - 135,000
Increase in due from affiliates (21,218) (37,279)
Distributions to parent - (54,397)
Net cash flows from financing activities (40,515) (56,485)
_________ _________
Net change in cash - (11,146)
Cash at beginning of period - 11,146
_________ _________
Cash at end of period $ - $ -
========= =========
During 1996, CalEnergy Company, Inc. contributed $71,000 of net
assets acquired from Edison Mission Energy, of which $12,956 was
cash, to the Partnership Guarantors.
The accompanying notes are an integral part of these financial statements.
<PAGE>
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, 1997 and the results of operations
for the three and nine months ended September 30, 1997 and 1996
and cash flows for the nine months ended September 30, 1997 and
1996.
The combined financial statements include the proportionate share
of the accounts of the partnerships in which the Guarantors have
an interest.
The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
2. Other Footnote Information:
Reference is made to the Salton Sea Funding Corporation's most
recently issued annual report on Form 10-K that included
information necessary or useful to the understanding of the
Guarantors' business and financial statement presentations.
<PAGE>
PARTNERSHIP GUARANTORS
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands)
____________________
3. Property, Plant, Contracts and Equipment:
Property, plant, contracts and equipment consisted of the
following:
September 30, December 31,
1997 1996
Plant and equipment $ 69,875 $ 60,272
Power sale agreements 123,588 123,588
Process license 46,290 46,290
Mineral reserves 128,107 121,199
Exploration and development costs 68,799 59,303
__________ __________
436,659 410,652
Less accumulated depreciation
and amortization (71,467) (45,803)
__________ __________
$ 365,192 $ 364,849
========== ==========
4. Purchase of Edison Mission Energy's Partnership Interests
On April 17, 1996 CalEnergy Company, Inc. ("CECI") completed the
indirect acquisition of Edison Mission Energy's partnership
interests in the Vulcan, Hoch (Del Ranch), Leathers and Elmore
geothermal operating facilities. A subsidiary of Magma Power
Company ("Magma"), wholly-owned by CECI, currently operates these
facilities and Magma directly or indirectly owns 100% interest in
these facilities. Magma's ownership interest related to Del
Ranch, Leathers, Elmore and Vulcan is assigned to the Partnership
Guarantors.
Unaudited proforma combined revenue and net income of the
Guarantors on a purchase, push down basis of accounting, for the
nine months ended September 30, 1996, as if the acquisition had
occurred at the beginning of the period after giving effect to
certain pro forma adjustments related to the acquisitions were
$123,582 and $23,259, respectively.
<PAGE>
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, 1997, and the related
statements of operations for the three and nine month periods
ended September 30, 1997 and 1996 and cash flows for the nine
months ended September 30, 1997 and 1996. 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, 1996, and the related statements of
operations, equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 31, 1997, 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, 1996 is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 21, 1997
<PAGE>
SALTON SEA ROYALTY COMPANY
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Due from affiliates $ 17,154 $ 10,008
Royalty stream, net 37,707 44,372
Excess of cost over fair value of net assets
acquired, net 34,323 35,004
Prepaid expenses and other assets 1,158 1,689
__________ __________
$ 90,342 $ 91,073
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 17,530 $ 12,070
Senior secured project note 47,935 56,936
Deferred income taxes 9,594 12,227
__________ __________
Total liabilities 75,059 81,233
Equity:
Common stock, par value $.01 per share; 100
share authorized, issued and outstanding - -
Additional paid-in capital 1,561 1,561
Retained earnings 13,722 8,279
__________ __________
Total equity 15,283 9,840
__________ __________
$ 90,342 $ 91,073
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Revenues:
Royalty income $ 8,628 $ 7,784 $ 24,411 $ 22,422
Expenses:
Operating, general and
administrative expenses 2,096 1,894 5,928 5,446
Amortization of royalty stream
and goodwill 2,449 2,570 7,346 7,710
Interest expense 1,002 1,290 3,228 3,989
_______________________________________
Total expenses 5,547 5,754 16,502 17,145
_______________________________________
Income before income taxes 3,081 2,030 7,909 5,277
Provision for income taxes 981 592 2,466 1,957
_______________________________________
Net income $ 2,100 $ 1,438 $ 5,443 $ 3,320
=======================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net income $ 5,443 $ 3,320
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 7,346 7,710
Changes in assets and liabilities:
Prepaid expenses and other assets 531 666
Accrued liabilities and deferred
income taxes 2,827 2,982
Net cash flows from operating activities 16,147 14,678
Net cash flows from financing activities:
Decrease (increase) in due from affiliates (7,146) 7,896
Repayment of senior secured project note (9,001) (5,473)
Distribution to parent - (17,101)
Net cash flows from financing activities (16,147) (14,678)
_________ _________
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.
<PAGE>
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, 1997 and the results of operations for the three
and nine months ended September 30, 1997 and 1996 and cash flows
for the nine months ended September 30, 1997 and 1996.
The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
2. Other Footnote Information:
Reference is made to the Salton Sea Funding Corporation's most
recently issued annual report on Form 10-K that included
information necessary or useful to the understanding of the
Company's business and financial statement presentations.
<PAGE>
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 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 Company's SO4 Agreements provide for energy rates
ranging from 13.6 cents per kWh in 1997 to 15.6 cents per kWh in
1999.
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 initial contract capacity and contract nameplate
are each 10 MW. The energy payment is calculated using a Base
Price which is subject to quarterly adjustments based on a basket of
<PAGE>
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)
indices. The time period weighted average energy payment for
Salton Sea I was 5.3 cents per kWh during the nine months ended
September 30, 1997. 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. The contract
capacities and contract nameplates are 15 MW and 20 MW for Salton
Sea II and 47.5 MW and 49.8 MW for Salton Sea III, respectively.
The contracts require Edison to make 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 4, 2000 for Salton Sea
II and February 13, 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 March 31, 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, 1997, Edison's average
Avoided Cost of Energy was 3.2 cents per kWh which is
substantially below the contract energy prices earned for the
nine months ended September 30, 1997. 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
<PAGE>
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 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,
1997 1996 1997 1996
Operating capacity factor 95.7% 97.9% 94.6% 89.6%
Capacity (NMW)
(weighted average)* 119.4 119.4 119.4 97.4
kWh produced
(in thousands) 252,300 258,000 740,200 573,900
*Weighted average for the commencement of operations at the
Salton Sea Unit IV for 1996.
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,
1997 1996 1997 1996
Operating capacity factor 105.6% 106.4% 101.9% 106.5%
Capacity NMW (average) 148 148 148 148
kWh produced (in thousands)345,000 347,700 987,700 1,016,300
Revenues:
The Salton Sea Guarantors' sales of electricity increased to
$33,884 for the three months ended September 30, 1997 from
$33,413 for the same period of 1996, a 1.4% increase. For the
nine month period ended September 30, 1997, sales of electricity
increased to $82,307 from $68,646 in 1996, a 19.9% increase.
This increase was primarily due to the addition of Unit IV
production on June 1, 1996 and increased electric production at
the other plants.
The Partnership Guarantors' sales of electricity increased to
$49,547 for the three months ended September 30, 1997 from
$46,031 for the same period in 1996, a 7.6% increase. For the
nine month period ended September 30, 1997, sales of electricity
increased to $122,458 from $98,186 in 1996, a 24.7% increase.
These
<PAGE>
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)
increases were primarily due to the purchase of Edison Mission
Energy's 50% partnership interest in the four geothermal
operating facilities in April 1996 and a scheduled price increase
at some of the facilities offset partially by turbine overhauls
at Vulcan and Del Ranch in April 1997.
The Royalty Guarantor revenue increased to $8,628 for the three
months ended September 30, 1997 from $7,784 for the same period
last year. For the nine month period ended September 30, 1997,
revenue increased to $24,411 from $22,422 in 1996, an 8.9%
increase. These increases were due primarily to higher energy
sales at Del Ranch, Elmore and Leathers compared to the same
periods of 1996.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include
royalty, operating, and general and administrative expenses,
increased to $8,218, for the three months ended September 30,
1997 from $7,576 for the same period in 1996. For the nine month
period ended September 30, 1997, operating expenses increased to
$21,328 from $19,302 in 1996. This increase was primarily due to
the start up of the Salton Sea Unit IV plant in June 1996.
The Partnership Guarantors' operating expenses, which include
royalty, operating, and general and administrative expenses,
decreased to $16,471 for the three months ended September 30,
1997 from $17,016 for the same period in 1996. The decrease in
the second quarter was due to a general reduction in various
operating costs. For the nine month period ended September 30,
1997, operating expenses increased to $48,119 from $41,426 in
1996. The increase was primarily due to the Edison Mission Energy
acquisition.
The Royalty Guarantors' operating expenses increased to $2,096
for the three months ended September 30, 1997 from $1,894 for the
same period in 1996, a 10.7% increase. For the nine month period
ended September 30, 1997, operating expenses increased to $5,928
from $5,446 in 1996, an 8.9% increase. These increases were due
to the increase in the Partnership Projects' sales of electricity.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization
increased to $4,149 for the three months ended September 30, 1997
from $3,973 for the same period of 1996, a 4.4% increase. For
the nine month period ended September 30, 1997, depreciation and
amortization increased to $12,333 from $9,859 in 1996. The
increase was due primarily to the start up of the Salton Sea Unit
IV plant in June 1996.
<PAGE>
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' depreciation and amortization
decreased to $9,657 for the three months ended September 30, 1997
from $9,870 for the same period in 1996. For the nine month
period ended September 30, 1997, depreciation and amortization
increased to $28,987 from $24,159 in 1996, a 20.0% increase. The
increase was due primarily to the Edison Mission Energy
acquisition.
The Royalty Guarantors' amortization decreased to $2,449 for the
three months ended September 30, 1997 from $2,570 for the same
period of 1996, a 4.7% decrease. For the nine month period ended
September 30, 1997, amortization decreased to $7,346 from $7,710
in 1996. These decreases were due to decreases in allocated
purchase price depreciation.
Interest Expense:
The Salton Sea Guarantors' interest expense, net of capitalized
amounts, decreased to $4,528 for the three months ended September
30, 1997 from $5,031 for the same period in 1996, a 10.0%
decrease. The decrease is due to lower loan balances. For the
nine month period ended September 30, 1997, interest expense, net
of capitalized amounts, increased to $13,781 from $11,343 in
1996. Capitalized interest decreased upon completion of
construction at the Salton Sea Unit IV plant in June 1996.
The Partnership Guarantors' interest expense, net of capitalized
amounts, decreased to $972 for the three months ended September
30, 1997 from $2,025 for the same period in 1996. The decrease
was a result of reduced indebtedness. For the nine month period
ended September 30, 1997, interest expense, net of capitalized
amounts, increased to $3,623 from $2,818 in 1996. The increase
was a result of increased indebtedness due to the Edison Mission
Energy acquisition.
The Royalty Guarantors' interest expense decreased to $1,002 for
the three months ended September 30, 1997 from $1,290 for the
same period in 1996. For the nine month period ended September
30, 1997, interest expense decreased to $3,228 from $3,989 in
1996. 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.
<PAGE>
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 income tax provision increased to
$9,424 for the three months ended September 30, 1997 from $7,702
for the same period in 1996, a 22.4% increase. For the nine
month period ended September 30, 1997, the provision for income
taxes increased to $17,533 from $14,414 in 1996, a 21.6%
increase. These increases were primarily due to an increase in
income before income taxes resulting from the Edison Mission
Energy acquisition. 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 $981 for the
three months ended September 30, 1997 compared to $592 for the
same period in 1996. For the nine month period ended September
30, 1996, the income tax provision was $2,466 compared to $1,957
for the same period in 1996. 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, 1997 was $370 compared to $335 for the
same period in 1996. For the nine month period ended September
30, 1997 net income decreased to $1,041 compared to $1,358 in
1996. The net income primarily represents interest income and
expense, net of applicable tax, and the Salton Sea Funding
Corporation's 1% equity in earnings of the Guarantors.
The Salton Sea Guarantors' net income increased to $16,996 for
the three months ended September 30, 1997 compared to $16,836 for
the same period of 1996. For the nine month period ended
September 30, 1997, net income increased to $35,033 compared to
$28,273 in 1996.
The Partnership Guarantors' net income increased to $14,919 for
the three months ended September 30, 1997 compared to $12,026 for
the same period of 1996. For the nine month period ended
September 30, 1997, net income increased to $27,659 compared to
$22,126 in 1996.
The Royalty Guarantors' net income increased to $2,100 for the
three months ended September 30, 1997 compared to $1,438 for the
same period of 1996. For the nine month period ended September
30, 1997, net income increased to $5,443 compared to $3,320 in
1996.
<PAGE>
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 Funding Corporation's primary source of revenue is
principal and interest payments on the secured project notes of
the Guarantors. 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 Partnership Guarantors' also receive a special
distribution. The Royalty Guarantor receives Royalties 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.
<PAGE>
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.
<PAGE>
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, 1997 /s/ Craig M. Hammett
Craig M. Hammett
Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
27 Financial Data Schedule 36
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 63,589
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 576,821
<CURRENT-LIABILITIES> 0
<BONDS> 493,868
0
0
<COMMON> 0
<OTHER-SE> 9,735
<TOTAL-LIABILITY-AND-EQUITY> 576,821
<SALES> 0
<TOTAL-REVENUES> 30,995
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,538
<INCOME-PRETAX> 1,765
<INCOME-TAX> 724
<INCOME-CONTINUING> 1,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
