SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
47-0790493
(IRS Employer Identification No.)
Salton Sea Brine Processing L.P. California 33-0601721
Salton Sea Power Generation L.P. California 33-0567411
Fish Lake Power Company Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Company Delaware 33-0268085
Salton Sea Royalty Company Delaware 47-0790492
BN Geothermal Inc. Delaware 91-1244270
San Felipe Energy Company California 33-0315787
Conejo Energy Company California 33-0268500
Niguel Energy Company California 33-0268502
Vulcan/BN Geothermal Power Company Nevada 33-3992087
Leathers, L.P. California 33-0305342
Del Ranch, L.P. California 33-0278290
Elmore, L.P. California 33-0278294
(Exact name of Registrants (State or other (I.R.S.Employer
as specified in their charters) jurisdiction of Identification No.)
incorporation or
organization)
302 S. 36th Street, Suite 400-A, Omaha, NE 68131
(Address of principal executive offices and Zip Code of Salton
Sea Funding Corporation)
Salton Sea Funding Corporation's telephone number, including area
code: (402) 231-1641
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
All common stock of Salton Sea Funding Corporation is indirectly
held by Magma Power Company. 100 shares of Common Stock were
outstanding on June 30, 1998.
<PAGE>
SALTON SEA FUNDING CORPORATION
Form 10-Q
June 30, 1998
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements Page
SALTON SEA FUNDING CORPORATION
Independent Accountants' Report 4
Balance Sheets, June 30, 1998
and December 31, 1997 5
Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997 6
Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 9
Combined Balance Sheets, June 30, 1998
and December 31, 1997 10
Combined Statements of Operations for the Three
and Six Months Ended June 30, 1998 and 1997 11
Combined Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 12
Notes to Combined Financial Statements 13
<PAGE>
PARTNERSHIP GUARANTORS
Independent Accountants' Report 14
Combined Balance Sheets, June 30, 1998
and December 31, 1997 15
Combined Statements of Operations for the Three
and Six Months Ended June 30, 1998 and 1997 16
Combined Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 17
Notes to Combined Financial Statements 18
SALTON SEA ROYALTY COMPANY
Independent Accountants' Report 19
Balance Sheets, June 30, 1998
and December 31, 1997 20
Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997 21
Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 22
Notes to Financial Statements 23
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults on Senior Securities 32
Item 4. Submission of Matters to a Vote of
Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Exhibit Index 34
<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 June 30, 1998, and the related
statements of operations for the three and six month periods
ended June 30, 1998 and 1997 and cash flows for the six month
periods ended June 30, 1998 and 1997. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Salton Sea Funding
Corporation as of December 31, 1997, and the related statements
of operations, stockholder's equity, and cash flows for the year
then ended (not presented herein); and in our report dated
February 12, 1998, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth
in the accompanying balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 23, 1998
<PAGE>
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
1998 1997
___________ __________
(unaudited)
ASSETS
Cash $ 5,984 $ 15,568
Prepaid expenses and other assets 2,527 2,823
Secured project notes from Guarantors 395,285 448,754
Investment in 1% of net assets of
Guarantors 7,541 7,144
__________ __________
$ 411,337 $ 474,289
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 2,407 $ 2,782
Due to affiliates 2,691 12,598
Senior secured notes and bonds 395,285 448,754
__________ __________
Total liabilities 400,383 464,134
Stockholder's equity:
Common stock--authorized 1,000
shares, par value $.01 per share;
issued and outstanding 100 shares --- ---
Additional paid-in capital 5,366 5,366
Retained earnings 5,588 4,789
__________ __________
Total stockholder's equity 10,954 10,155
__________ __________
$ 411,337 $ 474,289
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
Revenues:
Interest income $ 8,719 $ 10,342 $ 17,709 $ 20,747
Equity in earnings of Guarantors 236 198 397 341
_________ ________ ________ ________
Total revenues 8,955 10,540 18,106 21,088
_________ ________ ________ ________
Expenses:
General and administrative
expenses 235 219 473 459
Interest expense 8,020 9,717 16,279 19,491
_________ ________ ________ ________
Total expenses 8,255 9,936 16,752 19,950
_________ ________ ________ ________
Income before income taxes 700 604 1,354 1,138
Provision for income taxes 286 248 555 467
_________ _________ ________ ________
Net income $ 414 $ 356 $ 799 $ 671
========= ========= ======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 799 $ 671
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in earnings of guarantors (397) (341)
Changes in assets and liabilities:
Prepaid expenses and other assets 296 410
Accrued liabilities (375) (286)
__________ _________
Net cash flows from operating activities 323 454
__________ _________
Cash flows from investing activities:
Decrease in restricted cash --- 7,773
Principal repayments of secured project notes
from Guarantors 53,469 45,114
__________ _________
Net cash flows from investing activities 53,469 52,887
__________ _________
Cash flows from financing activities:
Decrease in due to affiliates (9,907) (21,445)
Repayment of senior secured notes and bonds (53,469) (45,114)
__________ _________
Net cash flows from financing activities (63,376) (66,559)
__________ _________
Net change in cash (9,584) (13,218)
Cash at the beginning of period 15,568 13,218
__________ _________
Cash at the end of period $ 5,984 $ ---
========== =========
Supplemental disclosures:
Interest paid $ 16,570 $ 19,777
========== ==========
Non-cash investing activities:
Adjustments resulting from capital transactions
of Guarantors $ --- $ (28)
========== =========
The accompanying notes are an integral part of these financial statements.
<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 June 30, 1998 and the
results of operations for the three and six months ended June 30,
1998 and 1997 and cash flows for the six months ended June 30,
1998 and 1997. The results of operations for the three and six
months ended June 30, 1998 and 1997 are not necessarily
indicative of the results to be expected for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The Funding Corporation was formed on June 20, 1995 for the sole
purpose of acting as issuer of senior secured notes and bonds.
2. Accounting Pronouncement:
In April 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") No. 98-5,
"Reporting on the Costs of Start-Up Activities", which requires
that costs of start-up activities and organization costs be
expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Funding Corporation has not yet determined the impact of this
accounting pronouncement, however, any impact will not affect
cash flows.
<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 June 30, 1998, and the related
combined statements of operations for the three and six month
periods ended June 30, 1998 and 1997 and cash flows for the six
month periods ended June 30, 1998 and 1997. These financial
statements are the responsibility of the Salton Sea Guarantors'
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such combined financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the combined balance sheet of the Salton Sea
Guarantors as of December 31, 1997, and the related combined
statements of operations, Guarantors' equity, and cash flows for
the year then ended (not presented herein); and in our report
dated February 12, 1998, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet
as of December 31, 1997 is fairly stated, in all material
respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 23, 1998
<PAGE>
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1998 1997
__________ _________
(unaudited)
ASSETS
Accounts receivable $ 19,612 $ 15,823
Prepaid expenses and other assets 11,146 13,043
Property, plant, contracts and equipment, net 474,823 478,001
Excess of cost over fair value of net assets
acquired, net 48,834 49,486
_________ _________
$ 554,415 $ 556,353
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 280 $ 390
Accrued liabilities 6,784 7,826
Due to affiliates 48,695 47,741
Senior secured project note 246,483 266,208
_________ _________
Total liabilities 302,242 322,165
Total Guarantors' equity 252,173 234,188
_________ _________
$ 554,415 $ 556,353
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
_____________________ _____________________
1998 1997 1998 1997
________ ________ ________ ________
Revenues:
Sales of electricity $ 27,612 $ 25,169 $ 47,797 $ 48,423
Interest and other income 7 152 22 161
_______ _______ _______ _______
Total revenues 27,619 25,321 47,819 48,584
_______ _______ _______ _______
Expenses:
Operating, general and
administration 7,800 6,844 14,547 14,005
Depreciation and amortization 3,726 3,647 7,440 7,289
Interest expense 5,199 5,833 10,459 11,697
Less capitalized interest (1,280) (1,219) (2,612) (2,444)
_______ _______ _______ _______
Total expenses 15,445 15,105 29,834 30,547
_______ _______ _______ _______
Net income $ 12,174 $ 10,216 $ 17,985 $ 18,037
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
____________________
1998 1997
_________ _________
Cash flows from operating activities:
Net income $ 17,985 $ 18,037
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 7,440 7,289
Changes in assets and liabilities:
Accounts receivable (3,789) (2,344)
Prepaid expenses and other assets 1,897 2,465
Accounts payable and accrued
liabilities (1,152) (2,655)
_________ _________
Net cash flows from operating activities 22,381 22,792
_________ _________
Cash flows from investing activities:
Capital expenditures (3,610) (3,420)
_________ _________
Cash flows from financing activities:
Increase (decrease) in due to affiliates 954 (2,556)
Repayments of senior secured project note (19,725) (16,816)
_________ __________
Net cash flows from financing activities (18,771) (19,372)
_________ _________
Net change in cash --- ---
Cash at beginning of period --- ---
_________ _________
Cash at end of period $ --- $ ---
========= =========
The accompanying notes are an integral part of these financial statements.
<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 June 30, 1998 and the results of operations for the three and
six months ended June 30, 1998 and 1997 and cash flows for the
six months ended June 30, 1998 and 1997. The results of
operations for the three and six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected
for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The combined financial statements include the accounts of the
partnerships in which the Guarantors have a 100% interest.
2. Accounting Pronouncement:
In April 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") No. 98-5,
"Reporting on the Costs of Start-Up Activities", which requires
that costs of start-up activities and organization costs be
expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Guarantors have not yet determined the impact of this
accounting pronouncement, however, any impact will not affect
cash flows.
<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 June 30, 1998, and the related
combined statements of operations for the three and six month
periods ended June 30, 1998 and 1997 and cash flows for the six
month periods ended June 30, 1998 and 1997. These financial
statements are the responsibility of the Partnership Guarantors'
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such combined financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the combined balance sheet of the Partnership
Guarantors as of December 31, 1997, and the related combined
statements of operations, Guarantors' equity and cash flows for
the year then ended (not presented herein); and in our report
dated February 12, 1998, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet
as of December 31, 1997 is fairly stated, in all material
respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 23, 1998
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1998 1997
(unaudited)
ASSETS
Accounts receivable $ 33,761 $ 23,481
Prepaid expenses and other assets 16,318 13,121
Due from affiliates 107,508 124,311
Property, plant, contracts
and equipment, net 369,260 370,666
Management fee from affiliates 70,254 70,082
Excess of cost over fair value of
net assets acquired, net 133,340 135,122
_________ _________
$ 730,441 $ 736,783
========= =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,401 $ 1,338
Accrued liabilities 20,874 23,285
Senior secured project notes 117,729 143,610
Deferred income taxes 115,009 106,851
_________ _________
Total liabilities 256,013 275,084
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 86,762 74,033
_________ _________
Total Guarantors' equity 474,428 461,699
_________ _________
$ 730,441 $ 736,783
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
_________ _________ _________ _________
Revenues:
Sales of electricity $ 39,574 $ 38,165 $ 73,671 $ 72,911
Interest and other income 1,298 1,022 2,032 1,567
_________ _________ _________ _________
Total revenues 40,872 39,187 75,703 74,478
_________ _________ _________ _________
Expenses:
Operating, general and
administration 15,694 15,366 29,784 31,648
Depreciation and
amortization 14,011 9,686 24,166 19,330
Interest expense 2,456 3,548 5,753 7,199
Less capitalized interest (2,425) (2,302) (4,887) (4,548)
_________ _________ _________ _________
Total expenses 29,736 26,298 54,816 53,629
_________ _________ _________ _________
Income before income taxes 11,136 12,889 20,887 20,849
Provision for income taxes 4,357 5,006 8,158 8,109
_________ _________ _________ _________
Net income $ 6,779 $ 7,883 $ 12,729 $ 12,740
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
__________________
Cash flows from operating activities:
Net income $ 12,729 $ 12,740
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation and amortization 24,166 19,330
Deferred income taxes 8,158 8,109
Changes in assets and liabilities:
Accounts receivable (10,280) (5,242)
Prepaid expenses and other assets (3,197) 2,818
Accounts payable and accrued
liabilities (1,348) (985)
_________ _________
Net cash flows from operating activities 30,228 36,770
_________ _________
Cash flows from investing activities:
Capital expenditures (19,671) (19,383)
Management fee (1,479) (1,490)
_________ _________
Net cash flows from investing activities (21,150) (20,873)
_________ _________
Cash flows from financing activities:
Repayments of senior secured project notes (25,881) (19,297)
Decrease in due from affiliates 16,803 6,193
Distributions to parent - (2,793)
_________ _________
Net cash flows from financing activities (9,078) (15,897)
_________ _________
Net change in cash - -
Cash at beginning of period - -
_________ _________
Cash at end of period $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
<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 June 30, 1998 and the results of operations for
the three and six months ended June 30, 1998 and 1997 and cash
flows for the six months ended June 30, 1998 and 1997. The
results of operations for the three and six months ended June 30,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The combined financial statements include the proportionate share
of the accounts of the partnerships in which the Guarantors have
an interest.
2. Contingencies.
On February 26, 1998, Del Ranch and Elmore initiated an action against
Edison in Imperial County Superior Court for payment for energy delivered
to Edison pursuant to long term power sale agreements at the escalated
rate of 14.6 cents for 1998. For the Elmore and Del Ranch partnerships,
Edison has asserted that prices should not be escalated for 1998 and is
currently making payments for energy deliveries at 13.6 cents per kWh.
That action is in the early discovery stages and the Del Ranch and Elmore
partnerships intend to vigorously prosecute all available claims.
<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 June 30, 1998, and the related statements
of operations for the three and six month periods ended June 30,
1998 and 1997 and cash flows for the six month periods ended June
30, 1998 and 1997. These financial statements are the
responsibility of the Salton Sea Royalty Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of the Salton Sea Royalty
Company as of December 31, 1997, and the related statements of
operations, equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1998, we
expressed an unqualified opinion on those financial statements.
In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 23, 1998
<PAGE>
SALTON SEA ROYALTY COMPANY
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
June 30, December 31,
1998 1997
___________ ___________
(unaudited)
ASSETS
Due from affiliates $ 36,390 $ 19,114
Royalty stream, net 27,375 31,818
Excess of cost over fair value of net assets
acquired, net 33,642 34,096
Prepaid expenses and other assets 747 981
__________ __________
$ 98,154 $ 86,009
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 34,108 $ 21,306
Senior secured project note 31,071 38,934
Deferred income taxes 5,513 7,268
__________ __________
Total liabilities 70,692 67,508
Equity:
Common stock, par value $.01 per share; 100
share authorized, issued and outstanding - -
Additional paid-in capital 1,561 1,561
Retained earnings 25,901 16,940
__________ __________
Total equity 27,462 18,501
__________ __________
$ 98,154 $ 86,009
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
_____________________ ____________________
1998 1997 1998 1997
_______ _______ ________ ________
Revenues:
Royalty income $ 12,642 $ 7,922 $ 24,680 $ 15,783
Expenses:
Operating, general and
administrative expenses 2,032 1,955 3,891 3,832
Amortization of royalty stream
and goodwill 2,448 2,448 4,897 4,897
Interest expense 739 1,094 1,515 2,226
________ ______ ________ _______
Total expenses 5,219 5,497 10,303 10,955
________ ______ ________ _______
Income before income taxes 7,423 2,425 14,377 4,828
Provision for income taxes 2,791 748 5,416 1,485
________ ______ ________ _______
Net income $ 4,632 $ 1,677 $ 8,961 $ 3,343
======== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
_____________________
1998 1997
_________ ________
Cash flows from operating activities:
Net income $ 8,961 $ 3,343
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 4,897 4,897
Deferred income taxes (1,755) (1,755)
Changes in assets and liabilities:
Prepaid expenses and other assets 234 354
Accrued liabilities 12,802 2,776
Net cash flows from operating activities 25,139 9,615
Net cash flows from financing activities:
Increase in due from affiliates (17,276) (614)
Repayment of senior secured project note (7,863) (9,001)
_________ _________
Net cash flows from financing activities (25,139) (9,615)
Net change in cash - -
Cash at beginning of period - -
_________ _________
Cash at end of period $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
<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 June 30, 1998 and the results of operations for the three and
six months ended June 30, 1998 and 1997 and cash flows for the
six months ended June 30, 1998 and 1997. The results of
operations for the three and six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected
for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
<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 bonus payments and energy payments. Edison
makes fixed annual capacity payments to the projects, and to the
extent that capacity factors exceed certain benchmarks is
required to make capacity bonus payments. The price for capacity
and capacity bonus payments is fixed for the life of the SO4
Agreements and the capacity payments are significantly higher in
the months of June through September. Energy is sold at
increasing scheduled rates for the first ten years of each
contract and thereafter at Edison's Avoided Cost of Energy.
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan
Partnership and extend until December 1998, December 1998, and
December 1999 for each of the Hoch (Del Ranch), Elmore and
Leathers Partnerships, respectively.
Excluding Vulcan, which is receiving Edison's Avoided Cost of
Energy, the Companys SO4 Agreements provide for energy rates
ranging from 14.6 cents per kWh in 1997 to 15.6 cents per kWh in
1999. Edison has been paying Del Ranch and Elmore for energy at a
rate of 13.6 cents per kWh for 1998 and those partnerships have
filed a complaint against Edison seeking payment at 14.6 cents per kWh.
The Salton Sea I Project sells electricity to Edison pursuant to
a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy
payments. The energy payment is calculated
<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)
using a Base Price which is subject to quarterly adjustments
based on a basket of indices. The time period weighted average
energy payment for Salton Sea I was 5.3 cents per kWh during the
six months ended June 30, 1998. As the Salton Sea I PPA is not
an SO4 Agreement, the energy payments do not revert to Edison's
Avoided Cost of Energy.
The Salton Sea II and Salton Sea III Projects sell electricity to
Edison pursuant to 30-year modified SO4 Agreements that provide
for capacity payments, capacity bonus payments and energy
payments. The price for contract capacity and contract capacity
bonus payments is fixed for the life of the modified SO4
Agreements. The energy payments for the first ten year period,
which expires April 2000 for Salton Sea II and February 1999 for
Salton Sea III, are levelized at a time period weighted average
of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and
Salton Sea III, respectively. Thereafter, the monthly energy
payments will be at Edison's Avoided Cost of Energy. For Salton
Sea II only, Edison is entitled to receive, at no cost, 5% of all
energy delivered in excess of 80% of contract capacity through
September 30, 2004.
The Salton Sea IV Project sells electricity to Edison pursuant to
a modified SO4 agreement which provides for contract capacity
payments on 34 MW of capacity at two different rates based on the
respective contract capacities deemed attributable to the
original Salton Sea PPA option (20 MW) and to the original Fish
Lake PPA (14 MW). The capacity payment price for the 20 MW
portion adjusts quarterly based upon specified indices and the
capacity payment price for the 14 MW portion is a fixed levelized
rate. The energy payment (for deliveries up to a rate of 39.6
MW) is at a fixed price for 55.6% of the total energy delivered
by Salton Sea IV and is based on an energy payment schedule for
44.4% of the total energy delivered by Salton Sea IV. The
contract has a 30-year term but Edison is not required to
purchase the 20 MW of capacity and energy originally attributable
to the Salton Sea I PPA option after September 30, 2017, the
original termination date of the Salton Sea I PPA.
For the six months ended June 30, 1998, Edison's average Avoided
Cost of Energy was 3.0 cents per kWh which is substantially below
the contract energy prices earned for the six months ended June
30, 1998. Estimates of Edison's future Avoided Cost of Energy
vary substantially from year to year. The Company cannot predict
the likely level of Avoided Cost of Energy prices under the SO4
Agreements and the modified SO4 Agreements at the expiration of
the scheduled payment periods. The revenues generated by each of
the projects operating
<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)
under such Agreements could decline significantly after the
expiration of the respective scheduled payment periods.
The following data includes the aggregate capacity and
electricity production of Salton Sea Units I, II, III and IV:
Three Months Ended Six Months Ended
June 30, June 30,
_________________________________________
1998 1997 1998 1997
________ _________ __________ ________
Overall capacity factor 98.9% 89.4% 90.2% 94.1%
Capacity (NMW) (average) 119.4 119.4 119.4 119.4
kWh produced (in thousands) 258,000 233,100 467,900 487,900
The overall capacity factor for the Salton Sea Projects increased
for the three months ended June 30, 1998 compared to the same
period in 1997 due to the scheduled overhauls in May 1997. The
overall capacity factor for the Salton Sea Projects decreased for
the six months ended June 30, 1998 compared to the same period in
1997 due to longer downtime during the 1998 overhauls.
The following data includes the aggregate capacity and
electricity production of Vulcan, Del Ranch, Elmore and Leathers:
Three Months Ended Six Months Ended
June 30, June 30,
_________________________________________
1998 1997 1998 1997
________ _________ __________________
Overall capacity factor 93.5% 98.2% 95.9% 100.0%
Capacity NMW (average) 148 148 148 148
kWh produced (in thousands) 302,100 317,400 616,600 642,700
The overall capacity factor decreased for the three and six
months ended June 30, 1998 compared to the same periods in 1997
due to turbine overhauls at Elmore and Leathers and well
workovers at Elmore partially offset by 1997 overhauls at Vulcan
and Del Ranch.
<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)
Revenues:
The Salton Sea Funding Corporation's revenues decreased to $8,955
for the three months ended June 30, 1998 from $10,540 for the
same period in 1997, a 15.0% decrease. For the six months ended
June 30, 1998, revenues decreased to $18,106 from $21,088 in
1997, a 14.1% decrease. These decreases are due to lower
interest income due to lower cash balances which resulted from
additional capital expenditures and debt repayment.
The Salton Sea Guarantors' sales of electricity increased to
$27,612 for the three months ended June 30, 1998 from $25,169 for
the same period of 1997, a 9.7% increase. The increase was
primarily due to increased electric production. For the six month
period ended June 30, 1998, sales of electricity decreased to
$47,797 from $48,423 in 1997, a 1.3% decrease.
The Partnership Guarantors' sales of electricity increased to
$39,574 for the three months ended June 30, 1998 from $38,165 for
the same period in 1997, a 3.7% increase. For the six month
period ended June 30, 1998, sales of electricity increased to
$73,671 from $72,911 in 1997, a 1.0% increase. These increases
were primarily due to a scheduled price increase at Leathers,
Elmore and Del Ranch offset partially by turbine overhauls at
Elmore and Leathers.
The Royalty Guarantor revenue increased to $12,642 for the three
months ended June 30, 1998 from $7,922 for the same period last
year, a 59.6% increase. For the six month period ended June 30,
1998, revenue increased to $24,680 from $15,783 in 1997, a 56.4%
increase. These increases were due primarily to an increase in
East Mesa royalty income related to a royalty settlement
agreement.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include
royalty, operating, and general and administrative expenses,
increased to $7,800, for the three months ended June 30, 1998
from $6,844 for the same period in 1997, a 14.0% increase. This
increase is primarily due to higher maintenance expense and
higher royalty expense from increased revenue. For the six month
period ended June 30, 1998, operating expenses increased to
$14,547 from $14,005 in 1997.
<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' operating expenses, which include
royalty, operating, and general and administrative expenses,
increased to $15,694 for the three months ended June 30, 1998
from $15,366 for the same period in 1997. For the six month
period ended June 30, 1998, operating expenses decreased to
$29,784 from $31,648 in 1997, a 5.9% decrease. The decrease in
the second quarter was due to a reduction in operating and
maintenance costs.
The Royalty Guarantors' operating expenses increased to $2,032
for the three months ended June 30, 1998 from $1,955 for the same
period in 1997, a 3.9% increase. For the six month period ended
June 30, 1998, operating expenses increased to $3,891 from $3,832
in 1997, a 1.5% increase. These increases were due to a
scheduled increase in third party lessor royalties related to the
increase in the Partnership Projects' sales of electricity.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization
increased to $3,726 for the three months ended June 30, 1998 from
$3,647 for the same period of 1997, a 2.2% increase. For the six
month period ended June 30, 1998, depreciation and amortization
increased to $7,440 from $7,289 in 1997.
The Partnership Guarantors' depreciation and amortization
increased to $14,011 for the three months ended June 30, 1998
from $9,686 for the same period in 1997, a 44.7% increase. For
the six month period ended June 30, 1998, depreciation and
amortization increased to $24,166 from $19,330 in 1997, a 25.0%
increase. These increases were due primarily to an increase in
the step up depreciation.
The Royalty Guarantors' amortization was $2,448 for the three
months ended June 30, 1998 compared to $2,448 for the same period
of 1997. For the six month period ended June 30, 1998,
depreciation and amortization was $4,897 compared to $4,897 in
1997.
Interest Expense:
The Salton Sea Funding Corporation's interest expense decreased
to $8,020 for the three months ended June 30, 1998 from $9,717
for the same period in 1997, a 17.5% decrease. For the six month
period ended June 30, 1998, interest expense decreased to $16,279
from $19,491 in 1997, a 16.5% decrease. These decreases were due
to reduced indebtedness.
<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 Salton Sea Guarantors' interest expense, net of capitalized
amounts, decreased to $3,919 for the three months ended June 30,
1998 from $4,614 for the same period in 1997, a 15.1% decrease.
For the six month period ended June 30, 1998, interest expense,
net of capitalized amounts, decreased to $7,847 from $9,253 in
1997, a 15.2% decrease. These decreases were due primarily to
reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized
amounts, decreased to $30 for the three months ended June 30,
1998 from $1,246 for the same period in 1997. For the six month
period ended June 30, 1998, interest expense, net of capitalized
amounts, decreased to $866 from $2,651 in 1997. These decreases
were a result of reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $739 for
the three months ended June 30, 1998 from $1,094 from the same
period in 1997. For the six month period ended June 30, 1998,
interest expense decreased to $1,515 from $2,226 in 1997. These
decreases were a result of reduced indebtedness.
Income Tax Provision:
The Salton Sea Guarantors are comprised of partnerships. Income
taxes are the responsibility of the partners and Salton Sea
Guarantors have no obligation to provide funds to the partners
for payment of any tax liabilities. Accordingly, the Salton Sea
Guarantors have no tax obligations.
The Partnership Guarantors income tax provision decreased to
$4,357 for the three months ended June 30, 1998 from $5,006 for
the same period in 1997, a 13.0% decrease. The decrease was
primarily due to the increased step up depreciation. For the six
month period ended June 30, 1998, the provision for income taxes
increased marginally to $8,158 from $8,109 in 1997. Income taxes
will be paid by the parent of the Guarantors from distributions
to the parent company by the Guarantors which occur after
operating expenses and debt service.
The Royalty Guarantor's income tax provision was $2,791 for the
three months ended June 30, 1998 compared to $748 for the same
period in 1997. For the six month period ended June 30, 1998,
the income tax provision was $5,416 compared to $1,485 for the
same period in 1997. The increases are a result of higher pre-
tax income. Tax obligations of the Royalty Guarantor will be
remitted to the parent company only to the extent of cash flows
available after operating expenses and debt service.
<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)
Net Income:
The Salton Sea Funding Corporation's net income for the three
months ended June 30, 1998 was $414 compared to $356 for the same
period in 1997. For the six month period ended June 30, 1998 net
income increased to $799 compared to $671 in 1997.
The Salton Sea Guarantors' net income increased to $12,174 for
the three months ended June 30, 1998 compared to $10,216 for the
same period of 1997. For the six month period ended June 30,
1998, net income decreased to $17,985 compared to $18,037 in
1997.
The Partnership Guarantors' net income decreased to $6,779 for
the three months ended June 30, 1998 compared to $7,883 for the
same period of 1997. For the six month period ended June 30,
1998, net income decreased to $12,729 compared to $12,740 in
1997.
The Royalty Guarantors' net income increased to $4,632 for the
three months ended June 30, 1998 compared to $1,677 for the same
period of 1997. For the six month period ended June 30, 1998,
net increased to $8,961 compared to $3,343 in 1997.
<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 Guarantors' only source of revenue is payments
received pursuant to long term power sales agreements with
Edison, other than interest earned on funds on deposit. The
Partnership Guarantors' primary source of revenue is payments
received pursuant to long term power sales agreements with
Edison. The Royalty Guarantor's only source of revenue is
royalties received pursuant to resource lease agreements with the
Partnership Projects and the East Mesa Project. These payments,
for each of the Guarantors, are expected to be sufficient to fund
operating and maintenance expenses, payments of interest and
principal on the Securities, projected capital expenditures and
debt service reserve fund requirements.
The Funding Corporation and Guarantors have commenced, for all of
its information systems, a year 2000 date conversion project to
address all necessary code changes, testing and implementation.
The "Year 2000 Computer Problem" creates risk for the Funding
Corporation and the Guarantors from unforeseen problems in its
own computer systems and from third parties with whom the Funding
Corporation and the Guarantors deals on financial transactions
worldwide. Such failures of the Funding Corporation's or
Guarantors' and/or third parties' computer systems could have a
material impact on the Funding Corporation's or Guarantors'
ability to conduct its business, and especially to process and
account for the transfer of funds electronically. Management
believes that it will substantially complete the year 2000
implementation before January 1, 2000 and that the related costs
and potential effect should not have a material financial impact
on the Funding Corporation and the Guarantors.
<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: August 13, 1998 /s/ Craig M. Hammett
Craig M. Hammett
Senior Vice President and
Chief Financial Officer
/s/ Patrick J. Goodman
Patrick J. Goodman
Vice President, Chief Accounting
Officer and Controller
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
27 Financial Data Schedule 35
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,984
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 411,337
<CURRENT-LIABILITIES> 0
<BONDS> 395,285
0
0
<COMMON> 0
<OTHER-SE> 10,954
<TOTAL-LIABILITY-AND-EQUITY> 411,337
<SALES> 0
<TOTAL-REVENUES> 18,106
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,279
<INCOME-PRETAX> 1,354
<INCOME-TAX> 555
<INCOME-CONTINUING> 799
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 799
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</TABLE>
