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, 1999
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. Delaware 33-0453364
Vulcan Power Company Nevada 95-3992087
CalEnergy Operating Corporation Delaware 33-0268085
Salton Sea Royalty LLC Delaware 47-0790492
VPC Geothermal LLC 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
Salton Sea Power LLC Delaware 47-0810713
CalEnergy Minerals LLC Delaware 47-0810718
CE Turbo LLC Delaware 47-0812159
CE Salton Sea Inc. Delaware 47-0810711
Salton Sea Minerals Corporation Delaware 47-0811261
(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,
1999.
<PAGE>
SALTON SEA FUNDING CORPORATION
Form 10-Q
September 30, 1999
-------------
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, 1999 and December 31, 1998 5
Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 6
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 7
Notes to Financial Statements 8
SALTON SEA GUARANTORS
Independent Accountants' Report 9
Combined Balance Sheets, September 30, 1999 and December 31, 1998 10
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 11
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 12
Notes to Combined Financial Statements 13
<PAGE>
PARTNERSHIP GUARANTORS
Independent Accountants' Report 14
Combined Balance Sheets, September 30, 1999 and December 31, 1998 15
Combined Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 16
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 17
Notes to Combined Financial Statements 18
SALTON SEA ROYALTY COMPANY
Independent Accountants' Report 19
Balance Sheets, September 30, 1999 and December 31, 1998 20
Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 21
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 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 33
- -------
ITEM 2. Changes in Securities 33
- -------
ITEM 3. Defaults on Senior Securities 33
- -------
ITEM 4. Submission of Matters to a Vote of
- ------ Security Holders 33
ITEM 5. Other Information 33
- -------
ITEM 6. Exhibits and Reports on Form 8-K 33
- -------
Signatures 34
Exhibit Index 35
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Salton Sea Funding Corporation
Omaha, Nebraska
We have reviewed the accompanying balance sheet of the Salton Sea Funding
Corporation as of September 30, 1999, and the related statements of operations
for the three and nine month periods ended September 30, 1999 and 1998 and cash
flows for the nine month periods ended September 30, 1999 and 1998. 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, 1998, 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 January 28, 1999, (March 3, 1999 as to Note 4) 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, 1998 is fairly stated, in
all material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 25, 1999
<PAGE>
SALTON SEA FUNDING CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1999 1998
----------- ----------
(unaudited)
ASSETS
Cash $ 34,868 $ 17,629
Prepaid expenses and other assets 15,822 6,768
Secured project notes from Guarantors 597,898 626,816
Investment in 1% of net assets of
Guarantors 8,557 8,124
---------- ----------
$ 657,145 $ 659,337
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued liabilities $ 15,076 $ 3,971
Due to affiliates 31,666 16,612
Senior secured notes and bonds 597,898 626,816
---------- ----------
Total liabilities 644,640 647,399
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 7,139 6,572
---------- ----------
Total stockholder's equity 12,505 11,938
---------- ----------
$ 657,145 $ 659,337
========== ==========
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,
1999 1998 1999 1998
--------- -------- ------ ------
Revenues:
Interest income .............. $11,625 $ 8,663 $35,736 $26,372
EQUITY IN EARNINGS OF GUARANTORS 225 383 433 780
------- ------- ------- -------
Total revenues ............... 11,850 9,046 36,169 27,152
------- ------- ------- -------
Expenses:
General and administrative expenses 148 336 551 809
Interest expense ............. 11,300 8,074 34,659 24,353
------- ------- ------- -------
Total expenses ............... 11,448 8,410 35,210 25,162
------- ------- ------- -------
Income before income taxes ... 402 636 959 1,990
Provision for income taxes ... 164 261 392 816
------- ------- ------- -------
Net income ................... $ 238 $ 375 $ 567 $ 1,174
======= ======= ======= =======
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,
1999 1998
Cash flows from operating activities:
Net income $ 567 $ 1,174
Adjustments to reconcile net income to net
cash flows from operating activities:
Equity in earnings of guarantors (433) (780)
Changes in assets and liabilities:
Prepaid expenses and other assets (9,054) (7,409)
Accrued liabilities 11,105 7,182
--------- ---------
Net cash flows from operating activities 2,185 167
--------- ---------
Cash flows from investing activities:
Principal repayments of secured project notes
from Guarantors 28,918 53,469
--------- ----------
Net cash flows from investing activities 28,918 53,469
--------- ----------
Cash flows from financing activities:
Increase in due to affiliates 15,054 48,767
Repayment of senior secured notes and bonds (28,918) (53,469)
---------- ---------
Net cash flows from financing activities (13,864) (4,702)
---------- ---------
Net change in cash 17,239 48,934
Cash at the beginning of period 17,629 15,568
---------- ---------
Cash at the end of period $ 34,868 $ 64,502
========== =========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
SALTON SEA FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
---------------------
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, 1999 and the results of
operations for the three and nine months ended September 30, 1999 and 1998 and
cash flows for the nine months ended September 30, 1999 and 1998. The results of
operations for the three and nine months ended September 30, 1999 and 1998 are
not necessarily indicative of the results to be expected for the full year.
The unaudited financial statements shall 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, 1998.
The Funding Corporation was formed on June 20, 1995 for the sole purpose of
acting as issuer of senior secured notes and bonds.
2. DISPOSITION OF POWER GENERATION ASSETS:
On February 8, 1999, MidAmerican Energy Holdings Company, the successor to
CalEnergy Company, Inc. ("MidAmerican"), created a new subsidiary, CE Generation
LLC ("CE Generation") and subsequently transferred its interest in the power
generation assets in the Imperial Valley to CE Generation. On March 3, 1999,
MidAmerican closed the sale of 50% of its ownership interests in CE Generation
to an affiliate of El Paso Energy Corporation.
<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, 1999, and the related combined statements of
operations for the three and nine month periods ended September 30, 1999 and
1998 and cash flows for the nine month periods ended September 30, 1999 and
1998. 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, 1998, and the related combined statements of operations,
Guarantors' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 28, 1999, (March 3, 1999 as to Note 6),
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, 1998 is fairly stated, in all material respects, in
relation to the combined balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 25, 1999
<PAGE>
SALTON SEA GUARANTORS
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1999 1998
---------- ---------
(unaudited)
ASSETS
Restricted cash $ 20,625 $ 71,673
Accounts receivable 18,326 15,957
Prepaid expenses and other assets 12,513 12,410
Property, plant, contracts and equipment, net 528,013 480,293
Excess of cost over fair value of net assets
acquired, net 47,204 48,182
--------- ---------
$ 626,681 $ 628,515
======== ========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 3 $ 504
Accrued liabilities 7,852 7,166
Due to affiliates 15,930 30,688
Senior secured project note 301,992 310,030
--------- ---------
Total liabilities 325,777 348,388
Total Guarantors' equity 300,904 280,127
--------- ---------
$ 626,681 $ 628,515
========= =========
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
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Sales of electricity $ 27,043 $ 34,359 $ 64,861 $ 82,156
Interest and other income 425 8 1,868 30
------- ------- ------- -------
Total revenues 27,468 34,367 66,729 82,186
------- ------- ------- -------
Expenses:
Operating, general and
administration 7,655 7,963 21,190 22,510
Depreciation and amortization 4,225 3,724 12,668 11,164
Interest expense 6,063 5,013 18,234 15,472
Less capitalized interest (2,489) (1,513) (6,140) (4,125)
------- ------- ------- -------
Total expenses 15,454 15,187 45,952 45,021
------- ------- ------- -------
Net income $ 12,014 $ 19,180 $ 20,777 $ 37,165
======= ======= ======= =======
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,
--------------------
1999 1998
------------ ---------
Cash flows from operating activities:
Net income $ 20,777 $ 37,165
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 12,668 11,164
Changes in assets and liabilities:
Accounts receivable (2,369) (6,933)
Prepaid expenses and other assets (103) 1,342
Accounts payable and accrued
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 185 5,413
--------- ---------
Net cash flows from operating activities 31,158 48,151
--------- ---------
Cash flows from investing activities:
Capital expenditures (59,410) (5,222)
Decrease in restricted cash 51,048 ---
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (8,362) (5,222)
--------- ---------
Cash flows from financing activities:
Decrease in due to affiliates (14,758) (23,204)
Repayments of senior secured project note (8,038) (19,725)
--------- ---------
Net cash flows from financing activities (22,796) (42,929)
--------- ---------
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
--------------------
1. GENERAL:
In the opinion of management of the Salton Sea 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, 1999 and the results of operations for
the three and nine months ended September 30, 1999 and 1998 and cash flows for
the nine months ended September 30, 1999 and 1998. The results of operations for
the three and nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
The unaudited combined financial statements shall 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, 1998.
The combined financial statements include the accounts of the partnerships in
which the Guarantors have a 100% interest.
2. DISPOSITION OF POWER GENERATION ASSETS:
On February 8, 1999, MidAmerican Energy Holdings Company, the successor to
CalEnergy Company, Inc. ("MidAmerican"), created a new subsidiary, CE Generation
LLC ("CE Generation") and subsequently transferred its interest in the power
generation assets in the Imperial Valley to CE Generation. On March 3, 1999,
MidAmerican closed the sale of 50% of its ownership interests in CE Generation
to an affiliate of El Paso Energy Corporation.
<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, 1999, and the related combined statements of
operations for the three and nine month periods ended September 30 1999 and 1998
and cash flows for the nine month periods ended September 30, 1999 and 1998.
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, 1998, and the related combined statements of operations,
Guarantors' equity and cash flows for the year then ended (not presented
herein); and in our report dated January 28, 1999, (March 3, 1999 as to Note
10), 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, 1998 is fairly stated, in all material respects, in
relation to the combined balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 25, 1999
<PAGE>
PARTNERSHIP GUARANTORS
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1999 1998
(unaudited)
ASSETS
Restricted cash $ 113,729 $ 164,983
Accounts receivable 25,572 33,404
Prepaid expenses and other assets 17,131 23,088
Due from affiliates 130,355 121,130
Property, plant, contracts and equipment, net 470,715 399,817
Management fee 71,770 71,596
Excess of cost over fair value of net assets
acquired, net 128,885 131,558
--------- ---------
$ 958,157 $ 945,576
========= =========
LIABILITIES AND GUARANTORS' EQUITY
Liabilities:
Accounts payable $ 2,894 $ 1,879
Accrued liabilities 53,941 53,647
Senior secured project notes 277,394 293,576
Deferred income taxes 109,089 97,641
--------- ---------
Total liabilities 443,318 446,743
Commitments and Contingencies (Note 3)
Guarantors' equity:
Common stock 3 3
Additional paid-in capital 387,663 387,663
Retained earnings 127,173 111,167
--------- ---------
Total Guarantors' equity 514,839 498,833
--------- ---------
$ 958,157 $ 945,576
========= =========
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,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Sales of electricity $ 35,940 $ 51,060 $ 82,192 $ 124,731
Interest and other income 1,467 1,743 5,941 3,775
--------- --------- --------- ---------
Total revenues 37,407 52,803 88,133 128,506
--------- --------- --------- ---------
Expenses:
Operating, general and
administration 12,483 16,937 35,548 46,721
Depreciation and amortization 6,241 12,146 18,721 36,312
Interest expense 5,483 2,435 16,818 8,188
Less capitalized interest (3,662) (2,257) (10,409) (7,144)
--------- --------- --------- ---------
Total expenses 20,545 29,261 60,678 84,077
--------- --------- --------- ---------
Income before income taxes 16,862 23,542 27,455 44,429
Provision for income taxes 7,318 9,122 11,449 17,280
--------- --------- --------- ---------
Net income $ 9,544 $ 14,420 $ 16,006 $ 27,149
========= ========= ========= =========
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,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 16,006 $ 27,149
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 18,721 36,312
Deferred income taxes 11,449 17,280
Changes in assets and liabilities:
Accounts receivable 7,833 (18,951)
Prepaid expenses and other assets 5,957 (4,737)
Accounts payable and accrued
liabilities 1,307 2,378
--------- ---------
Net cash flows from operating activities 61,273 59,431
--------- ---------
Cash flows from investing activities:
Capital expenditures (84,837) (32,156)
Decrease in restricted cash 51,254 ---
Management fee (2,283) (3,242)
--------- ---------
Net cash flows from investing activities (35,866) (35,398)
--------- ---------
Cash flows from financing activities:
Repayments of senior secured project notes (16,182) (25,881)
Increase (decrease) in due from affiliates (9,225) 1,848
--------- ---------
Net cash flows from financing activities (25,407) (24,033)
--------- ---------
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
--------------------
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, 1999 and the results of operations for
the three and nine months ended September 30, 1999 and 1998 and cash flows for
the nine months ended September 30, 1999 and 1998. The results of operations for
the three and nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
The unaudited combined financial statements shall 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, 1998.
The combined financial statements include the proportionate share of the
accounts of the partnerships in which the Guarantors have an interest.
2. DISPOSITION OF POWER GENERATION ASSETS:
On February 8, 1999, MidAmerican Energy Holdings Company, the successor to
CalEnergy Company, Inc. ("MidAmerican"), created a new subsidiary, CE Generation
LLC ("CE Generation") and subsequently transferred its interest in the power
generation assets in the Imperial Valley to CE Generation. On March 3, 1999,
MidAmerican closed the sale of 50% of its ownership interests in CE Generation
to an affiliate of El Paso Energy Corporation.
3. 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 made payments for energy deliveries
at 13.6 cents per kWh in 1998. This issue, along with other issues, was settled
in September, 1999, subject to California Public Utilities Commission approval,
with a net payment from Edison of approximately $3.7 million, which was received
in October, 1999, and a reduction of approximately $2.7 million was recorded
within Sales of Electricity on the income statement.
<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, 1999, and the related statements of operations for
the three and nine month periods ended September 30, 1999 and 1998 and cash
flows for the nine month periods ended September 30, 1999 and 1998. 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, 1998, and the related statements of operations, equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 28,
1999, (March 3, 1999 as to Note 5), 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, 1998 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 25, 1999
<PAGE>
SALTON SEA ROYALTY COMPANY
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1999 1998
----------- -----------
(unaudited)
ASSETS
Due from affiliates $ 54,091 $ 50,928
Royalty stream, net 17,291 22,932
Excess of cost over fair value of net assets
acquired, net 32,507 33,188
Prepaid expenses and other assets 304 513
---------- ----------
$ 104,193 $ 107,561
========== ==========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities $ 36,629 $ 39,584
Senior secured project note 18,512 23,210
Deferred income taxes 4,541 6,769
---------- ----------
Total liabilities 59,682 69,563
Equity:
Common stock, par value $.01 per share; 100
share authorized, issued and outstanding - -
Additional paid-in capital 1,561 1,561
Retained earnings 42,950 36,437
---------- ----------
Total equity 44,511 37,998
---------- ----------
$ 104,193 $ 107,561
========== ==========
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,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Royalty income $ 4,495 $ 12,846 $ 21,724 $ 37,526
Expenses:
Operating, general and
administrative expenses 1,258 2,204 3,412 6,095
Amortization of royalty stream
and goodwill 1,425 2,449 6,322 7,346
Interest expense 398 657 1,312 2,172
--------- --------- -------- ---------
Total expenses 3,081 5,310 11,046 15,613
--------- --------- -------- ---------
Income before income taxes 1,414 7,536 10,678 21,913
Provision for income
taxes 488 2,833 4,165 8,249
--------- --------- --------- ---------
Net income $ 926 $ 4,703 $ 6,513 $ 13,664
========= ========= ======== =========
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,
-----------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net income $ 6,513 $ 13,664
Adjustments to reconcile net income to net
cash flows from operating activities:
Amortization of royalty stream and goodwill 6,322 7,346
Changes in assets and liabilities:
Prepaid expenses and other assets 209 351
Accrued liabilities and deferred income taxes (5,183) 17,260
Net cash flows from operating activities 7,861 38,621
Net cash flows from financing activities:
Increase in due from affiliates (3,163) (30,758)
Repayment of senior secured project note (4,698) (7,863)
--------- ---------
Net cash flows from financing activities (7,861) (38,621)
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
--------------------
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, 1999 and the results of operations for
the three and nine months ended September 30, 1999 and 1998 and cash flows for
the nine months ended September 30, 1999 and 1998. The results of operations for
the three and nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
The unaudited financial statements shall 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, 1998.
2. DISPOSITION OF POWER GENERATION ASSETS:
On February 8, 1999, MidAmerican Energy Holdings Company, the successor to
CalEnergy Company, Inc. ("MidAmerican"), created a new subsidiary, CE Generation
LLC ("CE Generation") and subsequently transferred its interest in the power
generation assets in the Imperial Valley to CE Generation. On March 3, 1999,
MidAmerican closed the sale of 50% of its ownership interests in CE Generation
to an affiliate of El Paso Energy Corporation.
<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, December 1998 for the
Hoch (Del Ranch) and Elmore Partnerships, and extend until December 1999 for the
Leathers Partnership.
For 1999, Vulcan, Hoch and Elmore are receiving Edison's Avoided Cost of Energy
pursuant to their respective SO4 Agreements. The SO4 Agreement for Leathers
provides for energy rates of 15.6 cents per kWh in 1999.
<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
5.3 cents per kWh during the nine months ended September 30, 1999. 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 4, 2000 for Salton Sea II and expired on February 13, 1999 for Salton Sea
III, are levelized at a time period weighted average of 10.6 cents per kWh and
9.8 cents per kWh for Salton Sea II and Salton Sea III, respectively.
Thereafter, the monthly energy payments will be at Edison's Avoided Cost of
Energy. For Salton Sea II only, Edison is entitled to receive, at no cost, 5% of
all energy delivered in excess of 80% of contract capacity through March 31,
2004.
The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4
agreement which provides for contract capacity payments on 34 MW of capacity at
two different rates based on the respective contract capacities deemed
attributable to an option on the original Salton Sea I PPA (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, 1999, Edison's average Avoided Cost of
Energy was 2.9 cents per kWh which is substantially below the contract energy
prices earned for the nine months ended September 30,1999. 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 will likely 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,
--------------------- ---------------------
1999 1998 1999 1998
-------- ------- ------ ------
Overall capacity factor 96.4% 98.7% 91.2% 93.1%
Capacity (NMW) (average) 119.4 119.4 119.4 119.4
kWh produced (in thousands) 254,200 260,200 713,500 728,100
The overall capacity factor for the Salton Sea Projects decreased marginally for
the nine months ended September 30, 1999 compared to the same period in 1998 due
to increased overhauls and injection limitations which are currently being
addressed.
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,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- ---------
Overall capacity factor 105.2% 105.5% 102.2% 99.2%
Capacity (NMW) (average) 148 148 148 148
kWh produced (in thousands) 343,600 344,900 991,000 961,500
The overall capacity factor for the Partnership Projects increased for the nine
months ended September 30, 1999 compared to the same period in 1998 due to
scheduled overhauls at Leathers and Elmore in 1998.
<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 Guarantors' sales of electricity decreased to $27,043 for the
three months ended September 30, 1999 from $34,359 for the same period in 1998,
a 21.3% decrease. For the nine months ended September 30, 1999, revenues
decreased to $64,861 from $82,156 in 1998, a 21.1% decrease. These decreases
were primarily due to the expiration of the fixed price period at Salton Sea
Unit III in February, 1999.
The Partnership Guarantors' sales of electricity decreased to $35,940 for the
three months ended September 30, 1999 from $51,060 for the same period in 1998,
a 29.6% decrease. For the nine month period ended September 30, 1999, sales of
electricity decreased to $82,192 from $124,731 in 1998, a 34.1% decrease. These
decreases were primarily due to the expiration of the scheduled price period at
Elmore and Del Ranch at December 31, 1998.
The Royalty Guarantor revenue decreased to $4,495 for the three months ended
September 30, 1999 from $12,846 for the same period last year. For the nine
month period ended September 30, 1999, revenue decreased to $21,724 from $37,526
in 1998. This decrease was due primarily to a decrease in East Mesa royalty
income related to a royalty settlement and a reduction in royalty income from
Del Ranch and Elmore due to lower revenue.
Operating Expenses:
The Salton Sea Guarantors' operating expenses, which include royalty, operating,
and general and administrative expenses, decreased to $7,655, for the three
months ended September 30, 1999 from $7,963 for the same period in 1998. For the
nine month period ended September 30, 1999, operating expenses decreased to
$21,190 from $22,510 in 1998. These decreases were primarily due to lower
royalty costs resulting from lower revenues.
The Partnership Guarantors' operating expenses, which include royalty,
operating, and general and administrative expenses, decreased to $12,483 for the
three months ended September 30, 1999 from $16,937 for the same period in 1998.
For the nine month period ended September 30, 1999, operating expenses decreased
to $35,548 from $46,721 in 1998, a 23.9% decrease. These decreases were
primarily due to a reduction in royalty expenses due to the lower revenues.
The Royalty Guarantors' operating expenses decreased to $1,258 for the three
months ended September 30, 1999 from $2,204 for the same period in 1998, a 42.9%
decrease. For the nine month period ended September 30, 1999, operating expenses
decreased to $3,412 from $6,095 in 1998, a 44.0% decrease. These decreases were
due to lower royalty costs due to the end of the scheduled price periods at Del
Ranch and Elmore.
<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)
Depreciation and Amortization:
The Salton Sea Guarantors' depreciation and amortization increased to $4,225 for
the three months ended September 30, 1999 from $3,724 for the same period of
1998, a 13.5% increase. For the nine month period ended September 30, 1999,
depreciation and amortization increased to $12,668 from $11,164 in 1998. The
increase was due to an adjustment to the step up depreciation charges.
The Partnership Guarantors' depreciation and amortization decreased to $6,241
for the three months ended September 30, 1999 from $12,146 for the same period
in 1998. For the nine month period ended September 30, 1999, depreciation and
amortization decreased to $18,721 from $36,312 in 1998. The decrease was due
primarily to lower step up depreciation amortization after the end of the
scheduled price periods at Del Ranch and Elmore.
The Royalty Guarantors' amortization was $1,425 for the three months ended
September 30, 1999 compared to $2,449 for the same period of 1998. For the nine
month period ended September 30, 1999, amortization was $6,322 compared to
$7,346 in 1998. The decrease was due to lower amortization associated with the
end of the scheduled price periods at Del Ranch and Elmore.
Interest Expense:
The Salton Sea Guarantors' interest expense, net of capitalized amounts,
increased to $3,574 for the three months ended September 30, 1999 from $3,500
for the same period in 1998, a 2.1% increase. For the nine month period ended
September 30, 1999, interest expense, net of capitalized amounts, increased to
$12,094 from $11,347 in 1998. The increases were primarily due to increased
indebtedness from the issuance of the Series F notes in October 1998.
The Partnership Guarantors' interest expense, net of capitalized amounts,
increased to $1,821 for the three months ended September 30, 1999 from $178 for
the same period in 1998. For the nine month period ended September 30, 1999,
interest expense, net of capitalized amounts, increased to $6,409 from $1,044.
The increases were primarily due to increased indebtedness from the issuance of
the Series F notes in October 1998.
The Royalty Guarantors' interest expense decreased to $398 for the three months
ended September 30, 1999 from $657 from the same period in 1998. For the nine
month period ended September 30, 1999, interest expense decreased to $1,312 from
$2,172 in 1998. The decrease was due to reduced indebtedness.
Income Tax Provision:
The Salton Sea Guarantors are comprised of partnerships. Income taxes are the
responsibility of the partners and Salton Sea Guarantors have no obligation to
provide funds to the partners for payment of any tax liabilities. Accordingly,
the Salton Sea Guarantors have no tax obligations.
<PAGE>
THE SALTON SEA FUNDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER KWH DATA)
---------------------------------
RESULTS OF OPERATIONS: (continued)
The Partnership Guarantors income tax provision decreased to $7,318 for the
three months ended September 30,1999 from $9,122 for the same period in 1998, a
19.8% decrease. For the nine month period ended September 30, 1999, the
provision for income taxes decreased to $11,449 from $17,280 in 1998. This
decrease was primarily due to a lower pre-tax income. 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 $488 for the three months ended
September 30, 1999 compared to an income tax provision of $2,833 for the same
period in 1998. For the nine month period ended September 30, 1999, income tax
provision decreased to $4,165 from $8,249 in 1998. These decreases were
primarily due to lower 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, 1999 decreased to $238 compared to $567 for the same period in
1998. For the nine month period ended September 30, 1999, net income decreased
to $563 from $1,174 in 1998. The net income primarily represents interest income
and expense, net of applicable tax, and the Salton Sea Funding Corporation's 1%
equity in earnings of the Guarantors.
The Salton Sea Guarantors' net income decreased to $12,014 for the three months
ended September 30, 1999 compared to $19,180 for the same period of 1998. For
the nine month period ended September 30, 1999, net income decreased to $20,777
compared to $37,165 in 1998.
The Partnership Guarantors' net income decreased to $9,544 for the three months
ended September 30, 1999 compared to $14,420 for the same period of 1998. For
the nine month period ended September 30, 1999, net income decreased to $16,006
from $27,149 in 1998.
The Royalty Guarantors' net income decreased to $926 for the three months ended
September 30, 1999 compared to $4,703 for the same period of 1998. For the nine
month period ended September 30, 1999, net income decreased to $6,513 from
$13,664 in 1998.
<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:
CalEnergy Minerals LLC, a Partnership Guarantor ("Minerals LLC"), developed and
owns the rights to proprietary processes 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 facilities for the extraction of
manganese, silver, gold, lead, boron, lithium and other products as it further
develops the extraction technology. The Company is also investigating producing
silica as an extraction project. Silica is used as a filler for such products as
paint, plastics and high temperature cement.
Minerals LLC is constructing the Zinc Recovery Project which will recover zinc
from the geothermal brine (the "Zinc Recovery Project"). Facilities will be
installed near the Imperial Valley Project sites to extract a zinc chloride
solution from the geothermal 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. In September 1999, CalEnergy Minerals LLC
entered into a sales agreement whereby all zinc produced by the Zinc Recovery
Project will be sold to Cominco, LTD. The initial term of the agreement expires
in December 2005.
The Zinc Recovery Project is being 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 $200,900. Minerals LLC has
incurred approximately $60,500 of such costs through September 30, 1999.
Salton Sea Power LLC, a Salton Sea Guarantor, is constructing Salton Sea V.
Salton Sea V will be a 49 net MW geothermal power plant which will sell
approximately one-third of its net output to the Zinc Recovery Project. The
remainder will be sold through the California Power Exchange ("PX").
Salton Sea V is being constructed pursuant to a date certain, fixed price,
turn-key engineering, procurement and construction contract (the "Salton Sea V
EPC Contract") by Stone & Webster Engineering Corporation. Salton Sea V is
scheduled to commence commercial operation in mid-2000. Total project costs of
Salton Sea V are expected to be approximately $119,100. Salton Sea Power LLC has
incurred approximately $61,300 of such costs through September 30, 1999.
CE Turbo LLC, a Partnership Guarantor, is constructing the CE Turbo Project. The
CE Turbo Project will have a capacity of 10 net MW. The net output of the CE
Turbo Project will be sold to the Zinc Recovery Project or sold through the PX.
The Partnership Projects are upgrading 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
<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)
facilities will achieve economies through improved brine processing systems and
the utilization of more modern equipment. The Partnership Projects expect these
improvements will reduce brine-handling operating costs at the Vulcan Project
and the Del Ranch Project.
The CE Turbo Project and the Region 2 Brine Facilities Construction are being
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 are guaranteed by Stone & Webster,
Incorporated. The CE Turbo Project is scheduled to commence initial operations
in early-2000 and the Region 2 Brine Facilities Construction is scheduled to be
completed in early-2000. Total project costs for both the CE Turbo Project and
the Region 2 Brine Facilities Construction are expected to be approximately
$63,700. The Company has incurred approximately $29,300 of such costs through
September 30, 1999.
Total equity funding for the Zinc Recovery Project, Salton Sea V, CE Turbo
Project and the Region 2 Brine Facilities Construction is expected to be
approximately $122,500.
The operating Salton Sea Guarantors' primary source of revenue is payments
received pursuant to long term power sales agreements with Edison. The operating
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. 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 issue 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 item could result in an interruption in,
or a failure of, certain normal business activities or operations including the
generation, distribution, and supply of electricity. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition.
The Y2K issue creates uncertainty for the Company from potential issues with 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, Y2K 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.
<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 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 issue. The Company created a 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 the process of repairing or replacing those systems
which it believes are not year 2000 compliant. Through September 30, 1999, the
Company is approximately 100% complete in repairing or replacing those systems.
Total Y2K expenditures, for both repairing or replacing non-compliant systems,
are expected to total approximately $100. The Company has renovated or replaced
several non-compliant systems to gain enhanced functionalities. The cost of
these types of renovations and replacements is not reported herein since their
development and installation were not driven by Y2K concerns. 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.
A contingency plan identifying credible worst-case scenarios is being developed.
The contingency plan is comprised of both mitigation and recovery aspects.
Mitigation entails planning to reduce the impact of unresolved year 2000
problems, and recovery entails planning to restore services in the event that
year 2000 problems occur. Although plans are substantially complete, they will
be refined throughout the remainder of the year, based on results of contingency
planning drills and changes in circumstances.
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.
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development uncertainty, operating
uncertainty, acquisition uncertainty, uncertainties relating to doing business
outside of the United States, uncertainties relating to geothermal resources,
uncertainties relating to domestic and international economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy, industry deregulation and competition. Reference is made to
all of the Company's SEC filings, incorporated herein by reference, for a
description of such factors. The Company assumes no responsibility to update
forward-looking information contained herein.
<PAGE>
SALTON SEA FUNDING CORPORATION
PART II - OTHER INFORMATION
ITEM 1 - Legal proceedings.
Neither the Salton Sea Funding Corporation nor the Guarantors are
parties to any material legal matters.
ITEM 2 - Changes in Securities.
Not applicable.
ITEM 3 - Default on Senior Securities.
Not applicable.
ITEM 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
ITEM 5 - Other Information.
Not applicable.
ITEM 6 - Exhibits and Reports on Form 8-K.
(A) EXHIBITS:
Exhibit 27 - Financial Data Schedule
(B) REPORT ON FORM 8-K:
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALTON SEA FUNDING CORPORATION
Date: November 12, 1999 /s/ Patrick J. Goodman
Patrick J. Goodman
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
NO. NO.
27 Financial Data Schedule 36
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,868
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 657,145
<CURRENT-LIABILITIES> 0
<BONDS> 597,898
0
0
<COMMON> 0
<OTHER-SE> 12,375
<TOTAL-LIABILITY-AND-EQUITY> 657,145
<SALES> 0
<TOTAL-REVENUES> 36,169
<CGS> 0
<TOTAL-COSTS> 551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,659
<INCOME-PRETAX> 959
<INCOME-TAX> 392
<INCOME-CONTINUING> 567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
