SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
Commission File No. 33-95538
SALTON SEA FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
47-0790493
(IRS Employer Identification No.)
Salton Sea Brine Processing L.P. California 33-0601721
Salton Sea Power Generation L.P. California 33-0567411
Fish Lake Power Company Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Company Delaware 33-0268085
Salton Sea Royalty Company Delaware 47-0790492
BN Geothermal Inc. Delaware 91-1244270
San Felipe Energy Company California 33-0315787
Conejo Energy Company California 33-0268500
Niguel Energy Company California 33-0268502
Vulcan/BN Geothermal Power Company Nevada 33-3992087
Leathers, L.P. California 33-0305342
Del Ranch, L.P. California 33-0278290
Elmore, L.P. California 33-0278294
(Exact name of Registrants (State or other (I.R.S. Employer
as specified in their charters)jurisdiction of Identification No.)
incorporation or organization)
302 S. 36th Street, Suite 400-A, Omaha, NE 68131
(Address of principal executive offices and Zip Code of Salton
Sea Funding Corporation)
Salton Sea Funding Corporation's telephone number, including area
code: (402) 231-1641
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
All common stock of Salton Sea Funding Corporation is indirectly
held by Magma Power Company. 100 shares of Common Stock were
outstanding on September 30, 1998.
<PAGE>
SALTON SEA FUNDING CORPORATION
Form 10-Q
September 30, 1998
_____________
C O N T E N T S
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements Page
SALTON SEA FUNDING CORPORATION
Independent Accountants' Report 4
Balance Sheets, September 30, 1998
and December 31, 1997 5
Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 6
Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 9
Combined Balance Sheets, September 30, 1998
and December 31, 1997 10
Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997 11
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 12
Notes to Combined Financial Statements 13
<PAGE>
PARTNERSHIP GUARANTORS
Independent Accountants' Report 14
Combined Balance Sheets, September 30, 1998
and December 31, 1997 15
Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997 16
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 17
Notes to Combined Financial Statements 18
SALTON SEA ROYALTY COMPANY
Independent Accountants' Report 19
Balance Sheets, September 30, 1998
and December 31, 1997 20
Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 21
Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 22
Notes to Financial Statements 23
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults on Senior Securities 35
Item 4. Submission of Matters to a Vote of
Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
Exhibit Index 37
<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, 1998, and the related
statements of operations for the three and nine month periods
ended September 30, 1998 and 1997 and cash flows for the nine
month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Salton Sea Funding
Corporation as of December 31, 1997, and the related statements
of operations, stockholder's equity, and cash flows for the year
then ended (not presented herein); and in our report dated
February 12, 1998, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth
in the accompanying balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
November 12, 1998
<PAGE>
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
1998 1997
___________ __________
(unaudited)
ASSETS
Cash $ 64,502 $ 15,568
Prepaid expenses and other assets 10,232 2,823
Secured project notes from Guarantors 395,285 448,754
Investment in 1% of net assets of
Guarantors 7,924 7,144
__________ __________
$ 477,943 $ 474,289
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 9,964 $ 2,782
Due to affiliates 61,365 12,598
Senior secured notes and bonds 395,285 448,754
__________ __________
Total liabilities 466,614 464,134
Stockholder's equity:
Common stock--authorized 1,000
shares, par value $.01 per share;
issued and outstanding 100 shares --- ---
Additional paid-in capital 5,366 5,366
Retained earnings 5,963 4,789
__________ __________
Total stockholder's equity 11,329 10,155
__________ __________
$ 477,943 $ 474,289
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Revenues:
Interest income $ 8,663 $ 9,567 $ 26,372 $ 30,314
Equity in earnings
of Guarantors 383 340 780 681
_________ ________ ________ ________
Total revenues 9,046 9,907 27,152 30,995
_________ ________ ________ ________
Expenses:
General and administrative
expenses 336 233 809 692
Interest expense 8,074 9,047 24,353 28,538
_________ ________ ________ ________
Total expenses 8,410 9,280 25,162 29,230
_________ ________ ________ ________
Income before income taxes 636 627 1,990 1,765
Provision for income taxes 261 257 816 724
_________ ________ ________ ________
Net income $ 375 $ 370 $ 1,174 $ 1,041
========= ========= ======== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 1,174 $ 1,041
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in earnings of guarantors (780) (681)
Changes in assets and liabilities:
Prepaid expenses and other assets (7,409) (8,938)
Accrued liabilities 7,182 8,729
__________ _________
Net cash flows from operating activities 167 151
__________ _________
Cash flows from investing activities:
Decrease in restricted cash --- 14,044
Principal repayments of secured project notes
from Guarantors 53,469 45,114
__________ _________
Net cash flows from investing activities 53,469 59,158
__________ _________
Cash flows from financing activities:
Increase in due to affiliates 48,767 36,176
Repayment of senior secured notes and bonds(53,469) (45,114)
__________ _________
Net cash flows from financing activities (4,702) (8,938)
__________ _________
Net change in cash 48,934 50,371
Cash at the beginning of period 15,568 13,218
__________ _________
Cash at the end of period $ 64,502 $ 63,589
========== =========
Supplemental disclosures:
Interest paid $ 16,570 $ 19,777
========== =========
The accompanying notes are an integral part of these financial statements.
<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, 1998
and the results of operations for the three and nine months ended
September 30, 1998 and 1997 and cash flows for the nine months
ended September 30, 1998 and 1997. The results of operations for
the three and nine months ended September 30, 1998 and 1997 are
not necessarily indicative of the results to be expected for the
full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The Funding Corporation was formed on June 20, 1995 for the sole
purpose of acting as issuer of senior secured notes and bonds.
2. Accounting Pronouncement:
In April 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") No. 98-5,
"Reporting on the Costs of Start-Up Activities", which requires
that costs of start-up activities and organization costs be
expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Funding Corporation has not yet determined the impact of this
accounting pronouncement, however, any impact will not affect
cash flows.
3. Subsequent Event:
On October 13, 1998 the Funding Corporation completed a sale to
institutional investors of $285,000 aggregate amount of 7.475%
Senior Secured Series F Bonds due November 30, 2018. The
proceeds from the offering will be used to partially fund
construction of two new geothermal projects at the Salton Sea,
the costs of construction of the Zinc Recovery Project and other
capital improvements at existing Salton Sea projects.
<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, 1998, and the related
combined statements of operations for the three and nine month
periods ended September 30, 1998 and 1997 and cash flows for the
nine month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Salton Sea
Guarantors' management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such combined financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the combined balance sheet of the Salton Sea
Guarantors as of December 31, 1997, and the related combined
statements of operations, Guarantors' equity, and cash flows for
the year then ended (not presented herein); and in our report
dated February 12, 1998, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet
as of December 31, 1997 is fairly stated, in all material
respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
November 12, 1998
<PAGE>
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1998 1997
__________ _________
(unaudited)
ASSETS
Accounts receivable $ 22,756 $ 15,823
Prepaid expenses and other assets 11,701 13,043
Property, plant, contracts and
equipment, net 473,037 478,001
Excess of cost over fair value of
net assets acquired, net 48,508 49,486
_________ _________
$ 556,002 $ 556,353
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 1,610 $ 390
Accrued liabilities 12,019 7,826
Due to affiliates 24,537 47,741
Senior secured project note 246,483 266,208
_________ _________
Total liabilities 284,649 322,165
Total Guarantors' equity 271,353 234,188
_________ _________
$ 556,002 $ 556,353
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
_____________________ _____________________
1998 1997 1998 1997
________ ________ ________ ________
Revenues:
Sales of electricity $ 34,359 $ 33,884 $ 82,156 $ 82,307
Interest and other income 8 7 30 168
_______ _______ _______ _______
Total revenues 34,367 33,891 82,186 82,475
_______ _______ _______ _______
Expenses:
Operating, general and
administration 7,963 8,218 22,510 21,328
Depreciation and
amortization 3,724 4,149 11,164 12,333
Interest expense 5,013 5,701 15,472 17,398
Less capitalized interest (1,513) (1,173) (4,125) (3,617)
_______ _______ _______ _______
Total expenses 15,187 16,895 45,021 47,442
_______ _______ _______ _______
Net income $ 19,180 $ 16,996 $ 37,165 $ 35,033
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
____________________
1998 1997
_________ _________
Cash flows from operating activities:
Net income $ 37,165 $ 35,033
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 11,164 12,333
Changes in assets and liabilities:
Accounts receivable (6,933) (6,809)
Prepaid expenses and other assets 1,342 1,317
Accounts payable and accrued
liabilities 5,413 3,188
_________ _________
Net cash flows from operating activities 48,151 45,062
_________ _________
Cash flows from investing activities:
Capital expenditures (5,222) (5,784)
_________ _________
Cash flows from financing activities:
Decrease in due to affiliates (23,204) (22,462)
Repayments of senior secured project note (19,725) (16,816)
___________________
Net cash flows from financing activities (42,929) (39,278)
_________ _________
Net change in cash --- ---
Cash at beginning of period --- ---
_________ _________
Cash at end of period $ --- $ ---
========= =========
The accompanying notes are an integral part of these financial statements.
<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, 1998 and the results of operations for the three
and nine months ended September 30, 1998 and 1997 and cash flows
for the nine months ended September 30, 1998 and 1997. The
results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The combined financial statements include the accounts of the
partnerships in which the Guarantors have a 100% interest.
2. Accounting Pronouncement:
In April 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") No. 98-5,
"Reporting on the Costs of Start-Up Activities", which requires
that costs of start-up activities and organization costs be
expensed as incurred. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Guarantors have not yet determined the impact of this
accounting pronouncement, however, any impact will not affect
cash flows.
<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, 1998, and the related
combined statements of operations for the three and nine month
periods ended September 30, 1998 and 1997 and cash flows for the
nine month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Partnership
Guarantors' management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such combined financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the combined balance sheet of the Partnership
Guarantors as of December 31, 1997, and the related combined
statements of operations, Guarantors' equity and cash flows for
the year then ended (not presented herein); and in our report
dated February 12, 1998, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the
information set forth in the accompanying combined balance sheet
as of December 31, 1997 is fairly stated, in all material
respects, in relation to the combined balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
November 12, 1998
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1998 1997
(unaudited)
ASSETS
Accounts receivable $ 42,432 $ 23,481
Prepaid expenses and other assets 17,858 13,121
Due from affiliates 122,464 124,311
Property, plant, contracts
and equipment, net 371,143 370,666
Management fee from affiliates 71,364 70,082
Excess of cost over fair value of
net assets acquired, net 132,449 135,122
_________ _________
$ 757,710 $ 736,783
========= =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,606 $ 1,338
Accrued liabilities 24,396 23,285
Senior secured project notes 117,729 143,610
Deferred income taxes 124,131 106,851
_________ _________
Total liabilities 268,862 275,084
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 101,182 74,033
_________ _________
Total Guarantors' equity 488,848 461,699
_________ _________
$ 757,710 $ 736,783
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
_________ _________ _________ _________
Revenues:
Sales of electricity $ 51,060 $ 49,547$ 124,731 $ 122,458
Interest and other income 1,743 1,896 3,775 3,463
_________ _________ _________ _________
Total revenues 52,803 51,443 128,506 125,921
_________ _________ _________ _________
Expenses:
Operating, general and
administration 16,937 16,471 46,721 48,119
Depreciation and
amortization 12,146 9,657 36,312 28,987
Interest expense 2,435 3,332 8,188 10,531
Less capitalized interest (2,257) (2,360) (7,144) (6,908)
_________ _________ _________ _________
Total expenses 29,261 27,100 84,077 80,729
_________ _________ _________ _________
Income before income taxes 23,542 24,343 44,429 45,192
Provision for income taxes 9,122 9,424 17,280 17,533
_________ _________ _________ _________
Net income $ 14,420 $ 14,919 $ 27,149 $ 27,659
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
_________ _________
Cash flows from operating activities:
Net income $ 27,149 $ 27,659
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation and amortization 36,312 28,987
Deferred income taxes 17,280 17,533
Changes in assets and liabilities:
Accounts receivable (18,951) (10,127)
Prepaid expenses and other assets (4,737) 2,824
Accounts payable and accrued
liabilities 2,378 2,543
_________ _________
Net cash flows from operating activities 59,431 69,419
_________ _________
Cash flows from investing activities:
Capital expenditures (32,156) (25,556)
Management fee (3,242) (3,348)
_________ _________
Net cash flows from investing activities (35,398) (28,904)
_________ _________
Cash flows from financing activities:
Repayments of senior secured project notes (25,881) (19,297)
Decrease (increase) in due from affiliates 1,848 (21,218)
_________ _________
Net cash flows from financing activities (24,033) (40,515)
_________ _________
Net change in cash - -
Cash at beginning of period - -
_________ _________
Cash at end of period $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
<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, 1998 and the results of operations
for the three and nine months ended September 30, 1998 and 1997
and cash flows for the nine months ended September 30, 1998 and
1997. The results of operations for the three and nine months
ended September 30, 1998 and 1997 are not necessarily indicative
of the results to be expected for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
The combined financial statements include the proportionate share
of the accounts of the partnerships in which the Guarantors have
an interest.
2. Contingencies:
On February 26, 1998, Del Ranch and Elmore initiated an action
against Edison in Imperial County Superior Court for payment for
energy delivered to Edison pursuant to long term power sale
agreements at the escalated rate of 14.6 cents for 1998. For the
Elmore and Del Ranch partnerships, Edison has asserted that
prices should not be escalated for 1998 and is currently making
payments for energy deliveries at 13.6 cents per kWh. That
action is in the early discovery stages and the Del Ranch and
Elmore partnerships intend to vigorously prosecute all available
claims.
<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, 1998, and the related
statements of operations for the three and nine month periods
ended September 30, 1998 and 1997 and cash flows for the nine
month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Salton Sea Royalty
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of the Salton Sea Royalty
Company as of December 31, 1997, and the related statements of
operations, equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1998, we
expressed an unqualified opinion on those financial statements.
In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
November 12, 1998
<PAGE>
SALTON SEA ROYALTY COMPANY
BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
September 30, December 31,
1998 1997
___________ ___________
(unaudited)
ASSETS
Due from affiliates $ 49,872 $ 19,114
Royalty stream, net 25,153 31,818
Excess of cost over fair value of net assets
acquired, net 33,415 34,096
Prepaid expenses and other assets 630 981
__________ __________
$ 109,070 $ 86,009
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 41,199 $ 21,306
Senior secured project note 31,071 38,934
Deferred income taxes 4,635 7,268
__________ __________
Total liabilities 76,905 67,508
Equity:
Common stock, par value $.01 per share; 100
share authorized, issued and outstanding - -
Additional paid-in capital 1,561 1,561
Retained earnings 30,604 16,940
__________ __________
Total equity 32,165 18,501
__________ __________
$ 109,070 $ 86,009
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
_____________________ ____________________
1998 1997 1998 1997
_______ _______ ________ ________
Revenues:
Royalty income $ 12,846 $ 8,628 $ 37,526 $ 24,411
Expenses:
Operating, general and
administrative expenses 2,204 2,096 6,095 5,928
Amortization of royalty stream
and goodwill 2,449 2,449 7,346 7,346
Interest expense 657 1,002 2,172 3,228
_______________________________________
Total expenses 5,310 5,547 15,613 16,502
_______________________________________
Income before income taxes 7,536 3,081 21,913 7,909
Provision for income taxes 2,833 981 8,249 2,466
_______________________________________
Net income $ 4,703 $ 2,100 $ 13,664 $ 5,443
=======================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
SALTON SEA ROYALTY COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
_____________________
1998 1997
_________ ________
Cash flows from operating activities:
Net income $ 13,664 $ 5,443
Adjustments to reconcile net income to net
cash flow from operating activities:
Amortization of royalty stream and goodwill 7,346 7,346
Deferred income taxes (2,633) (1,755)
Changes in assets and liabilities:
Prepaid expenses and other assets 351 531
Accrued liabilities 19,893 4,582
Net cash flows from operating activities 38,621 16,147
Net cash flows from financing activities:
Increase in due from affiliates (30,758) (7,146)
Repayment of senior secured project note (7,863) (9,001)
_________ _________
Net cash flows from financing activities (38,621) (16,147)
Net change in cash - -
Cash at beginning of period - -
_________ _________
Cash at end of period $ - $ -
========= =========
The accompanying notes are an integral part of these financial statements.
<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, 1998 and the results of operations for the three
and nine months ended September 30, 1998 and 1997 and cash flows
for the nine months ended September 30, 1998 and 1997. The
results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
The unaudited financial statements should be read in conjunction
with the financial statements included in the Salton Sea Funding
Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
<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 plants
operations and thereafter at Edison's Avoided Cost of Energy.
The scheduled energy price periods of the Partnership Project SO4
Agreements extended until February 1996 for the Vulcan
Partnership and extend until December 1998, December 1998, and
December 1999 for each of the Hoch (Del Ranch), Elmore and
Leathers Partnerships, respectively.
Excluding Vulcan, which is receiving Edison's Avoided Cost of
Energy, the Companys SO4 Agreements provide for energy rates
ranging from 14.6 cents per kWh in 1997 to 15.6 cents per kWh in
1999. Edison has been paying Del Ranch and Elmore for energy at
a rate of 13.6 cents per kWh for 1998 and those partnerships have
filed a complaint against Edison seeking payment at 14.6 cents
per kWh.
<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 I Project sells electricity to Edison pursuant to
a 30-year negotiated power purchase agreement, as amended (the
"Salton Sea I PPA"), which provides for capacity and energy
payments. The energy payment is calculated using a Base Price
which is subject to quarterly adjustments based on a basket of
indices. The time period weighted average energy payment for
Salton Sea I was 5.4 cents per kWh during the nine months ended
September 30, 1998. As the Salton Sea I PPA is not an SO4
Agreement, the energy payments do not revert to Edison's Avoided
Cost of Energy.
The Salton Sea II and Salton Sea III Projects sell electricity to
Edison pursuant to 30-year modified SO4 Agreements that provide
for capacity payments, capacity bonus payments and energy
payments. The price for contract capacity and contract capacity
bonus payments is fixed for the life of the modified SO4
Agreements. The energy payments for the first ten year period,
which expires April 2000 for Salton Sea II and February 1999 for
Salton Sea III, are levelized at a time period weighted average
of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and
Salton Sea III, respectively. Thereafter, the monthly energy
payments will be at Edison's Avoided Cost of Energy. For Salton
Sea II only, Edison is entitled to receive, at no cost, 5% of all
energy delivered in excess of 80% of contract capacity through
September 30, 2004.
The Salton Sea IV Project sells electricity to Edison pursuant to
a modified SO4 agreement which provides for contract capacity
payments on 34 MW of capacity at two different rates based on the
respective contract capacities deemed attributable to the
original Salton Sea PPA option (20 MW) and to the original Fish
Lake PPA (14 MW). The capacity payment price for the 20 MW
portion adjusts quarterly based upon specified indices and the
capacity payment price for the 14 MW portion is a fixed levelized
rate. The energy payment (for deliveries up to a rate of 39.6
MW) is at a fixed price for 55.6% of the total energy delivered
by Salton Sea IV and is based on an energy payment schedule for
44.4% of the total energy delivered by Salton Sea IV. The
contract has a 30-year term but Edison is not required to
purchase the 20 MW of capacity and energy originally attributable
to the Salton Sea I PPA option after September 30, 2017, the
original termination date of the Salton Sea I PPA.
For the nine months ended September 30, 1998, Edison's average
Avoided Cost of Energy was 3.0 cents per kWh which is
substantially below the contract energy prices earned for the
nine months ended September 30, 1998. Estimates of Edison's
future Avoided Cost of Energy vary substantially from year to
year.
<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 Company cannot predict the likely level of Avoided Cost of
Energy prices under the SO4 Agreements and the modified SO4
Agreements at the expiration of the scheduled payment periods.
The revenues generated by each of the projects operating under
such Agreements could decline significantly after the expiration
of the respective scheduled payment periods.
The following data includes the aggregate capacity and
electricity production of Salton Sea Units I, II, III and IV:
Three Months Ended Nine Months Ended
September 30, September 30,
______________________________________
1998 1997 1998 1997
________ _________ __________________
Overall capacity factor 98.7% 95.7% 93.1% 94.6%
Capacity (NMW) (average) 119.4 119.4 119.4 119.4
kWh produced (in thousands)260,200 252,300 728,100 740,200
The overall capacity factor for the Salton Sea Projects increased
for the three months ended September 30, 1998 compared to the
same period in 1997 due to operating efficiencies resulting from
equipment upgrades. The overall capacity factor for the Salton
Sea Projects decreased for the nine months ended September 30,
1998 compared to the same period in 1997 due to longer downtime
during the 1998 overhauls.
The following data includes the aggregate capacity and
electricity production of Vulcan, Del Ranch, Elmore and Leathers:
Three Months Ended Nine Months Ended
September 30, September 30,
_________________________________________
1998 1997 1998 1997
________ _________ __________________
Overall capacity factor 105.5% 105.6% 99.2% 101.9%
Capacity NMW (average) 148 148 148 148
kWh produced (in thousands)344,900 345,000 961,500 987,700
<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 $8,663
for the three months ended September 30, 1998 from $9,567 for the
same period in 1997, a 9.4% decrease. For the nine months ended
September 30, 1998, revenues decreased to $26,372 from $30,314 in
1997, a 13.0% decrease. These decreases are due to lower
interest income due to lower cash balances which resulted from
additional capital expenditures from the Salton Sea and
Partnership Projects and debt repayment.
The Salton Sea Guarantors' sales of electricity increased to
$34,359 for the three months ended September 30, 1998 from
$33,884 for the same period of 1997, a 1.4% increase. The
increase was primarily due to increased electric production. For
the nine month period ended September 30, 1998, sales of
electricity decreased to $82,156 from $82,307 in 1997, a 0.2%
decrease.
The Partnership Guarantors' sales of electricity increased to
$51,060 for the three months ended September 30, 1998 from
$49,547 for the same period in 1997, a 3.1% increase. For the
nine month period ended September 30, 1998, sales of electricity
increased to $124,731 from $122,458 in 1997, a 1.9% increase.
These increases were primarily due to a scheduled price increase
at Leathers, Elmore and Del Ranch offset partially by turbine
overhauls at Elmore and Leathers.
The Royalty Guarantor revenue increased to $12,846 for the three
months ended September 30, 1998 from $8,628 for the same period
last year, a 48.9% increase. For the nine month period ended
September 30, 1998, revenue increased to $37,526 from $24,411 in
1997, a 53.7% increase. These increases were due primarily to an
increase in East Mesa royalty income related to a royalty
settlement agreement.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include
royalty, operating, and general and administrative expenses,
decreased to $7,963, for the three months ended September 30,
1998 from $8,218 for the same period in 1997, a 3.1% decrease.
For the nine month period ended September 30, 1998, operating
expenses increased to $22,510 from $21,328 in 1997.
<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 $16,937 for the three months ended September 30,
1998 from $16,471 for the same period in 1997. For the nine month
period ended September 30, 1998, operating expenses decreased to
$46,721 from $48,119 in 1997, a 2.9% decrease. The decrease in
the nine months was due to a reduction in operating and
maintenance costs.
The Royalty Guarantors' operating expenses increased to $2,204
for the three months ended September 30, 1998 from $2,096 for the
same period in 1997, a 5.2% increase. For the nine month period
ended September 30, 1998, operating expenses increased to $6,095
from $5,928 in 1997, a 2.8% increase. These increases were due
to a scheduled increase in third party lessor royalties related
to the increase in the Partnership Projects' sales of
electricity.
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization
decreased to $3,724 for the three months ended September 30, 1998
from $4,149 for the same period of 1997, a 10.2% decrease. For
the nine month period ended September 30, 1998, depreciation and
amortization decreased to $11,164 from $12,333 in 1997.
The Partnership Guarantors' depreciation and amortization
increased to $12,146 for the three months ended September 30,
1998 from $9,657 for the same period in 1997, a 25.8% increase.
For the nine month period ended September 30, 1998, depreciation
and amortization increased to $36,312 from $28,987 in 1997, a
25.3% increase. These increases were due primarily to an
acceleration in the step up depreciation related to the
acquisition of Magma.
The Royalty Guarantors' amortization was $2,449 for the three
months ended September 30, 1998 compared to $2,449 for the same
period of 1997. For the nine month period ended June 30, 1998,
depreciation and amortization was $7,346 compared to $7,346 in
1997.
Interest Expense:
The Salton Sea Funding Corporation's interest expense decreased
to $8,074 for the three months ended September 30, 1998 from
$9,047 for the same period in 1997, a 10.8% decrease. For the
nine month period ended September 30, 1998, interest expense
decreased to $24,353 from $28,538 in 1997, a 14.7% decrease.
These decreases were due to reduced indebtedness.
<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 $3,500 for the three months ended September
30, 1998 from $4,528 for the same period in 1997, a 22.7%
decrease. For the nine month period ended September 30, 1998,
interest expense, net of capitalized amounts, decreased to
$11,347 from $13,781 in 1997, a 17.7% decrease. These decreases
were due primarily to reduced indebtedness.
The Partnership Guarantors' interest expense, net of capitalized
amounts, decreased to $178 for the three months ended September
30, 1998 from $972 for the same period in 1997. For the nine
month period ended September 30, 1998, interest expense, net of
capitalized amounts, decreased to $1,044 from $3,623 in 1997.
These decreases were a result of reduced indebtedness.
The Royalty Guarantors' interest expense decreased to $657 for
the three months ended September 30, 1998 from $1,002 from the
same period in 1997. For the nine month period ended September
30, 1998, interest expense decreased to $2,172 from $3,228 in
1997. These decreases were a result of reduced indebtedness.
Income Tax Provision:
The Salton Sea Guarantors are comprised of partnerships. Income
taxes are the responsibility of the partners and Salton Sea
Guarantors have no obligation to provide funds to the partners
for payment of any tax liabilities. Accordingly, the Salton Sea
Guarantors have no tax obligations.
The Partnership Guarantors income tax provision decreased to
$9,122 for the three months ended September 30, 1998 from $9,424
for the same period in 1997, a 3.2% decrease. The decrease was
primarily due to lower pre-tax income. For the nine month period
ended September 30, 1998, the provision for income taxes
decreased marginally to $17,280 from $17,533 in 1997. Income
taxes will be paid by the parent of the Guarantors from
distributions to the parent company by the Guarantors which occur
after operating expenses and debt service.
The Royalty Guarantor's income tax provision was $2,833 for the
three months ended September 30, 1998 compared to $981 for the
same period in 1997. For the nine month period ended September
30, 1998, the income tax provision was $8,249 compared to $2,466
for the same period in 1997. The increases are a result of
<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)
higher pre-tax income. Tax obligations of the Royalty Guarantor
will be remitted to the parent company only to the extent of cash
flows available after operating expenses and debt service.
Net Income:
The Salton Sea Funding Corporation's net income for the three
months ended September 30, 1998 was $375 compared to $370 for the
same period in 1997. For the nine month period ended September
30, 1998 net income increased to $1,174 compared to $1,041 in
1997.
The Salton Sea Guarantors' net income increased to $19,180 for
the three months ended September 30, 1998 compared to $16,996 for
the same period of 1997. For the nine month period ended
September 30, 1998, net income increased to $37,165 compared to
$35,033 in 1997.
The Partnership Guarantors' net income decreased to $14,420 for
the three months ended September 30, 1998 compared to $14,919 for
the same period of 1997. For the nine month period ended
September 30, 1998, net income decreased to $27,149 compared to
$27,659 in 1997.
The Royalty Guarantors' net income increased to $4,703 for the
three months ended September 30, 1998 compared to $2,100 for the
same period of 1997. For the nine month period ended September
30, 1998, net increased to $13,664 compared to $5,443 in 1997.
<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 Funding Corporation and the Guarantors (the "Company")
developed and own the rights to a proprietary process for the
extraction of minerals from elements in solution in the
geothermal brine and fluids utilized at its Imperial Valley
plants (the "Salton Sea Extraction Project") as well as the
production of power to be used in the extraction process. A
pilot plant has successfully produced commercial quality zinc at
the Company's Imperial Valley Project. The Company intends to
sequentially develop manganese, silver, gold, lead, boron,
lithium and other products as it further develops the extraction
technology. The Company is also investigating producing silica
from the solids precipitated out of the geothermal power process.
Silica is used as a filler for such products as paint, plastics
and high temperature cement. If successfully developed, the
mineral extraction process will provide an environmentally
responsible and low cost minerals recovery methodology.
Minerals LLC, an indirect wholly-owned subsidiary of the Company
is constructing the Zinc Recovery Project which will recover zinc
from the geothermal brine that has been extracted from the ground
for use in the Imperial Valley Projects (the "Zinc Recovery
Project"). The Zinc Recovery Project will utilize geothermal
brine after the brine has been used by the Imperial Valley
Projects but before the brine is re-injected into the ground.
Four facilities will be installed near Imperial Valley Project
sites to extract a zinc chloride solution from the brine through
an ion exchange process. This solution will be transported to a
central processing plant where zinc ingots will be produced
through solvent extraction, electrowinning and casting processes.
The Zinc Recovery Project is designed to have a capacity of
approximately 30,000 metric tonnes per year and is scheduled to
commence commercial operation in mid-2000. The zinc produced by
the Zinc Recovery Project is expected to be sold primarily to
U.S. West Coast customers such as steel companies, alloyers and
galvanizers.
The Zinc Recovery Project will be constructed by Kvaerner U.S.
Inc. ("Kvaerner") pursuant to a date certain, fixed-price,
turnkey engineering, procurement and construction contract (the
"Zinc Recovery Project EPC Contract"). Kvaerner is a wholly-
owned indirect subsidiary of Kvaerner ASA, an internationally
recognized engineering and construction firm experienced in the
metals, mining and processing industries. Total project costs of
the Zinc Recovery Project are expected to be approximately
$200,925.
<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 (continued):
Power LLC, an indirect wholly owned subsidiary of the Company,
proposes to expand the generating capacity of the Salton Sea
Project by constructing Salton Sea Unit V. Salton Sea Unit V
will be a 49 net MW geothermal power plant which will extract
unutilized geothermal energy from geothermal brine that has
previously passed through the other Salton Sea Projects.
Approximately one-third of the net output of Salton Sea Unit V
will be sold to the Zinc Recovery Project. The remainder will be
sold through the California Power Exchange ("PX").
Salton Sea Unit V will be constructed pursuant to a date certain,
fixed price, turnkey engineering, procurement and construction
contract (the "Salton Sea Unit V EPC Contract") by Stone &
Webster Engineering Corporation ("SWEC"). SWEC is one of the
world's leading engineering and construction firms for the
construction of electric power plants and, in particular,
geothermal power plants. SWEC provided the engineering for the
construction of Salton Sea Unit III and has completed
engineering, procurement, construction or other related work on
twenty-seven other geothermal power plants over the past five
years. Salton Sea Unit V is scheduled to commence commercial
operation in mid-2000. Total project costs of Salton Sea Unit V
are expected to be approximately $119,067.
Turbo LLC, an indirect wholly-owned subsidiary of the Company,
proposes to construct the TurboExpander Project. The
TurboExpander Project is designed to generate electricity from
excess geothermal energy produced from the wells in the region of
the wellfield currently supplying the Vulcan and Del Ranch
Projects. The TurboExpander Project will have a capacity of 10
net MW. Because the TurboExpander Project will rely on
geothermal energy that is already available, the TurboExpander
Project will not require additional geothermal production or
injection wells. The net output of the TurboExpander Project will
be sold to the Zinc Recovery Project or sold through the PX.
The Partnership Projects propose to upgrade the geothermal brine
processing facilities at the Vulcan and Del Ranch Projects with
the Region 2 Brine Facilities Construction. In addition to
incorporating the pH Modification Process, which has reduced
operating costs at the Salton Sea Projects, the new, more
efficient facilities will achieve economies of scale through
improved brine processing systems and the utilization of more
modern equipment. The Partnership Projects expect these
improvements to reduce brine-handling operating costs at the
Vulcan Project and the Del Ranch Project.
<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 (continued):
The TurboExpander Project and the Region 2 Brine Facilities
Construction will be constructed by SWEC pursuant to a date
certain, fixed price, turnkey engineering, procurement and
construction contract (the "Region 2 Upgrade EPC Contract"). The
obligations of SWEC will be guaranteed by Stone & Webster,
Incorporated. The TurboExpander Project is scheduled to commence
initial operations in mid-2000 and the Region 2 Brine Facilities
Construction is scheduled to be completed in early-2000. Total
project costs for the TurboExpander Project and the Region 2
Brine Facilities Construction are expected to be approximately
$63,747.
On October 13, 1998 the Funding Corporation completed a sale to
institutional investors of $285,000 aggregate amount of 7.475%
Senior Secured Series F Bonds due November 30, 2018. The proceeds
from the offering will be used to fund construction of the Zinc
Recovery Project, Salton Sea Unit V, the TurboExpander Project,
the Region 2 Brine Facilities Construction, additional capital
improvements and financing costs. Total equity funding for these
projects is expected to be approximately $122,513.
The Salton Sea Guarantors' only source of revenue is payments
received pursuant to long term power sales agreements with
Edison, other than interest earned on funds on deposit. The
Partnership Guarantors' primary source of revenue is payments
received pursuant to long term power sales agreements with
Edison. The Royalty Guarantor's only source of revenue is
royalties received pursuant to resource lease agreements with the
Partnership Projects and the East Mesa Project. These payments,
for each of the Guarantors, are expected to be sufficient to fund
operating and maintenance expenses, payments of interest and
principal on the Securities, projected capital expenditures and
debt service reserve fund requirements.
What is generally known as the year 2000 ("Y2K") computer problem
arose because many existing computer programs and embedded
systems use only the last two digits to refer to a year.
Therefore, those computer programs do not properly distinguish
between a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create
erroneous results. The failure to correct a material Y2K problem
could result in an interruption in, or a failure of, certain
normal business activities or operations. Such failures could
materially and adversely affect the Company's results of
operations, liquidity and financial condition.
<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 (continued):
The Y2K problem creates uncertainty for the Company from
potential problems in its own computer systems and from third
parties with whom the Company deals on transactions worldwide.
The Company's operations utilize systems and equipment provided
by other organizations. As a result, year 2000 readiness of
suppliers, vendors, service providers or customers could impact
the Company's operations. The Company is assessing the readiness
of such constituent entities and the impacts on those entities
that rely upon the Company's services. The Company is unable to
determine at this time whether the consequences of Y2K failures
of third parties will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company has commenced, for all of its information systems, a
Y2K date conversion project to address all necessary code
changes, testing and implementation in order to resolve the Y2K
problem. This project involves use of a worldwide Y2K project
team to identify, assess and correct all of its information
technology (IT) and non-IT systems, as well as, identify and
assess third party systems. The Company has identified and
assessed substantially all of its IT and non-IT systems and is
currently in process of repairing or replacing those systems
which are not year 2000 compliant. Through September, the
Company is approximately 87% complete in repairing or replacing
their own computer systems. The Company expects to be 95%
complete by December 31, 1998 and 100% complete of correcting,
testing, and compliance by April 1999.
Total Y2K expenditures, for both repairing or replacing non-
compliant systems, are expected to total approximately $100. The
Company is not aware of any additional material costs needed to
be incurred to bring all of its systems into compliance however,
there is no assurance that additional costs will not be incurred.
Although management believes that the Y2K project will be
substantially complete before January 1, 2000, any unforeseen
failures of the Company's and/or third parties' computer systems
could have a material impact on the Company's ability to conduct
its business. Accordingly, the Company is developing a formal
contingency plan that is expected to be completed by mid year 1999
to mitigate any potential business interruption.
<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 except those described in Footnote
#2.
Item 2 - Changes in Securities.
Not applicable.
Item 3 - Default on Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K:
Not applicable.
<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, 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 38
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 64,502
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 477,943
<CURRENT-LIABILITIES> 0
<BONDS> 395,285
0
0
<COMMON> 0
<OTHER-SE> 11,329
<TOTAL-LIABILITY-AND-EQUITY> 477,943
<SALES> 0
<TOTAL-REVENUES> 26,372
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,353
<INCOME-PRETAX> 1,990
<INCOME-TAX> 816
<INCOME-CONTINUING> 1,174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,174
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
