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, 1996 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 (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, 1996. SALTON SEA FUNDING CORPORATION Form 10-Q September 30, 1996 ------------------------------------------------------- C O N T E N T S PART I: FINANCIAL INFORMATION Item 1. Financial Statements Page SALTON SEA FUNDING CORPORATION Independent Accountants Reports 4-5 Balance Sheets, September 30, 1996 and December 31, 1995 6 Statements of Operations for the Three and Nine Months Ended September 30, 1996 and from June 20, 1995 (Inception Date) through September 30, 1995 7 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and from June 20, 1995 (Inception Date) through September 30, 1995 8 Notes to Financial Statements 9 SALTON SEA GUARANTORS Independent Accountants Report 10 Combined Balance Sheets, September 30, 1996 and December 31, 1995 11 Combined Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 12 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 13 Notes to Combined Financial Statements 14 PARTNERSHIP GUARANTORS Independent Accountants Report 16 Combined Balance Sheets, September 30, 1996 and December 31, 1995 17 Combined Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 18 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 19 Notes to Combined Financial Statements 20 SALTON SEA ROYALTY COMPANY Independent Accountants Report 22 Balance Sheets, September 30, 1996 and December 31, 1995 23 Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 24 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 25 Notes to Financial Statements 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 PART II: OTHER INFORMATION Item 1. Legal Proceedings 34 Item 2. Changes in Securities 34 Item 3. Defaults on Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 34 Signatures 35 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, 1996, and the related statements of operations for the three and nine month periods ended September 30, 1996 and cash flows for the nine months ended September 30, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Salton Sea Funding Corporation as of December 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for the period from June 20, 1995 (inception date) through December 31, 1995 (not presented herein); and in our report dated January 26, 1996, 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, 1995 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 22, 1996 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholder Salton Sea Funding Corporation Omaha, Nebraska We have audited the accompanying statements of operations and cash flows of Salton Sea Funding Corporation (the "Company") for the period from June 20, 1995 through September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentations. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of Salton Sea Funding Corporation for the period from June 20, 1995 through September 30, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 4, 1996 SALTON SEA FUNDING CORPORATION BALANCE SHEETS (Dollars in Thousands) ------------------------------------------------------- September 30, December 31, 1996 1995 ------------------------------------- - - (unaudited) ASSETS Cash $ 49,396 $ 4,393 Restricted cash and short-term investments 15,138 57,256 Prepaid expenses and other assets 13,164 3,070 Notes receivables from affiliates 563,035 452,088 Investment in 1% of net assets of Guarantors 6,116 5,714 ------------- ------------- $646,849 $522,521 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accrued liabilities $ 13,044 $ 3,889 Due to affiliates 62,597 59,594 Senior secured notes and bonds 563,035 452,088 ------------- ------------- Total liabilities 638,676 515,571 Stockholder's equity: Common stock--authorized 1,000 shares, par value $.01 per share; issued and outstanding 100 shares - - Additional paid-in capital 5,308 5,443 Retained earnings 2,865 1,507 ------------- ------------- Total stockholder's equity 8,173 6,950 ------------- ------------- $646,849 $522,521 ======= ======= The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF OPERATIONS (Dollars in Thousands) ------------------------------------------------------- Three Months Nine MonthsFrom June 20, 1995 Ended Ended (Inception Date) September 30, September 30, through 1996 1996 September 30, 1995 ------------------------------------------------------------------- (unaudited) (unaudited) Revenues: Interest income $10,844 $28,504 7,414 Equity in earnings of Guarantors 303 537 185 ----------- ----------- --------- Total revenues 11,147 29,041 7,599 ----------- ----------- --------- Expenses: General and administrative expenses 241 467 - Interest expense 10,339 26,272 6,586 ----------- ----------- --------- Total expenses 10,580 26,739 6,586 ----------- ----------- --------- Income before income taxes 567 2,302 1,013 Provision for income taxes 232 944 339 ----------- ----------- --------- Net income $ 335 $ 1,358 $ 674 ====== ====== ===== The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS (Dollars in Thousands) ------------------------------------------------------- From June 20, 1995 Nine Months (Inception Date) Ended through September 30, 1996 September 30, 1995 ------------------ ------------------ (unaudited) Cash flows from operating activities: Net income $ 1,358 $ 674 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of guarantors (537) (185) Changes in assets and liabilities: Prepaid expenses and other assets (10,094) (6,793) Accrued liabilities 9,155 6,925 ----------- ----------- Net cash flows from operating activities (118) 621 ----------- ----------- Cash flows from investing activities: Decrease (increase) in restricted cash and short-term investments 42,118 (73,522) Secured project notes of Guarantors (135,000) (475,000) Decrease in notes receivable from affiliates 24,053 - ----------- ----------- Net cash flows from investing activities (68,829) (548,522) ----------- ----------- Cash flows from financing activities: Due to affiliates 3,003 95,568 Proceeds from offering of senior project notes and bonds 135,000 475,000 Repayment on loans payable (24,053) - ----------- ----------- Net cash flows from financing activities 113,950 570,568 ----------- ----------- Net change in cash 45,003 22,667 Cash at the beginning of period 4,393 - ----------- ----------- Cash at the end of period $49,396 $ 22,667 ====== ======= Non-cash investing and financing activities: Adjustments resulting from capital transactions of Guarantors $ (135) $ 2,000 ====== ======= The accompanying notes are an integral part of these financial statements. SALTON SEA FUNDING CORPORATION NOTES TO FINANCIAL STATEMENTS (in thousands) ------------------------------------------------------- 1. General: In the opinion of management of the Salton Sea Funding Corporation (the "Funding Corporation"), the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1996 and the results of operations for the three and nine months ended September 30, 1996 and from June 20, 1995 (inception date) through September 30, 1995 and cash flows for the nine months ended September 30, 1996 and from June 20, 1995 (inception date) through September 30, 1995. The results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. The Funding Corporation was formed on June 20, 1995 for the sole purpose of acting as issuer of senior secured notes and bonds. 2. Other Footnote Information: Reference is made to the Funding Corporation's most recently issued annual report on Form 10-K that included information necessary or useful to the understanding of the Funding Corporation's business and financial statement presentations. In particular, the significant accounting policies and practices were presented as Note 2 to the Funding Corporation financial statements included in that filing. 3. Debt Offering: On June 20, 1996, the Funding Corporation issued $135,000 of Senior Secured Notes and Bonds, consisting of $70,000, 7.02% Senior Secured Series D Notes, due May 30, 2000, and $65,000, 8.30% Senior Secured Series E Bonds, due May 30, 2011, with maturities of $25,850, $32,000, $22,728, $5,500, $1,000 and $47,922 for 1997, 1998, 1999, 2000, 2001 and thereafter, respectively. 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, 1996, and the related combined statements of operations for the three and nine month periods ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. These financial statements are the responsibility of the 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, 1995, 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 26, 1996, 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, 1995 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 22, 1996 SALTON SEA GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) ------------------------------------------------------- September 30, December 31, 1996 1995 ------------- ------------ (unaudited) ASSETS Cash $ 65 $ 454 Accounts receivable 22,070 10,436 Prepaid expenses and other assets 18,978 20,129 Property, plant, contracts and equipment, net 470,059 417,287 Goodwill, net 51,116 52,094 ------------- ------------- $562,288 $500,400 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 177 $ 939 Accrued liabilities 13,523 4,043 Due to affiliates 40,046 4,319 Senior secured project note 310,670 321,500 ------------- ------------- Total liabilities 364,416 330,801 Total Guarantors' equity 197,872 169,599 ------------- ------------- $562,288 $500,400 ======= ======= The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1996 1995 1996 1995 ---------- ------ --------- ------- Revenues: Sales of electricity $33,413 $23,724 $68,646 $55,807 Interest and other income 3 186 131 595 --------------------------------------------- Total revenues 33,416 23,910 68,777 56,402 -------------------------------------------- Expenses: Operating, general and administration 7,576 8,055 19,302 21,038 Depreciation and amortization 3,973 1,553 9,859 7,953 Interest expense 6,205 6,449 18,724 19,139 Less capitalized interest (1,174) (3,061) (7,381) (6,480) -------------------------------------------- Total expenses 16,580 12,996 40,504 41,650 -------------------------------------------- Income before minority interest 16,836 10,914 28,273 14,752 Minority interest - - - 1,393 -------------------------------------------- Net income $16,836 $ 10,914 $28,273 $ 13,359 ====== ====== ====== ====== The accompanying notes are an integral part of these financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Nine Months Ended September 30, ----------------------- 1996 1995 ----------------------- Cash flows from operating activities: Net income $28,273 $ 13,359 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,393 Depreciation and amortization 9,859 7,953 Changes in assets and liabilities: Accounts receivable (11,634) (5,203) Prepaid expenses and other assets 1,151 (3,664) Due to (from) affiliates 35,727 (32,734) Accounts payable and accrued liabilities 8,718 4,225 ------------------------- Net cash flows from operating activities 72,094 (14,671) ------------------------- Cash flows from investing activities: Purchase of Guarantors by CalEnergy, net of cash - (171,964) Capital expenditures (61,653) (48,221) Net decrease in marketable securities - 4,988 Decrease in restricted cash - 3,400 ------------------------- Net cash flows from investing activities (61,653) (211,797) ------------------------- Cash flows from financing activities: Repayments on loans payable (10,830) (298,672) Loan proceeds - 509,364 Contributions from parent - 29,176 Deferred financing costs - (8,400) Distributions to parent - (5,000) ------------------------- Net cash flows from financing activities (10,830) 226,468 ------------------------- Net change in cash (389) - Cash at beginning of period 454 - ------------------------ Cash at end of period $ 65 $ - ======= ======= The accompanying notes are an integral part of these financial statements. 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, 1996 and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. The combined financial statements include the accounts of the partnerships in which the Guarantors have a 100% interest. The results of operations for the three and nine months ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. 2. Other Footnote Information: Reference is made to the Salton Sea Funding Corporation's most recently issued annual report on Form 10-K that included information necessary or useful to the understanding of the Guarantors' business and financial statement presentations. In particular, the Guarantors' significant accounting policies and practices were presented as Note 2 to the Guarantors' combined financial statements included in that filing. 3. Property, Plant, Contracts and Equipment: Property, plant, contracts and equipment consisted of the following: September 30, December 31, 1996 1995 ------------- ----------- Plant and equipment $339,042 $173,509 Salton Sea Unit 4 construction in progress - 108,632 Power sale agreements 64,609 64,609 Mineral extraction 63,990 60,577 Exploration and development costs 19,132 17,793 ------------- ------------- 486,773 425,120 Less accumulated depreciation and amortization (16,714) (7,833) ------------- ------------- $470,059 $417,287 ======= ======= SALTON SEA GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands) ------------------------------------------------------- 4. Purchase of Magma Power Company: On January 10, 1995, CalEnergy Company, Inc. ("CECI") acquired approximately 51% of outstanding shares of common stock of Magma Power Company (the "Magma Common Stock") through a cash tender offer and completed the Magma acquisition on February 24, 1995 by acquiring approximately 49% of the outstanding shares of Magma Common Stock not owned by CECI through a merger. The transaction was accounted for as a purchase business combination. Unaudited pro forma combined revenue and net income of the Guarantors on a purchase, push down basis of accounting, for the nine months ended September 30, 1995, as if the acquisition had occurred at the beginning of the period after giving effect to certain pro forma adjustments related to the acquisition were $56,402 and $13,869, respectively. 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, 1996, and the related combined statements of operations for the three and nine month periods ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. These financial statements are the responsibility of the 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, 1995, 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 26, 1996, 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, 1995 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 22, 1996 PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) ------------------------------------------------------- September 30, December 31, 1996 1995 ------------- ------------ (unaudited) ASSETS Cash $ - $ 11,146 Restricted cash and short-term investments - 9,859 Accounts receivable 30,586 11,841 Due from affiliates 91,309 54,949 Prepaid expenses and other assets 24,588 9,651 Property, plant, contracts and equipment, net 369,646 298,956 Management fee 66,768 63,520 Goodwill, net 139,577 142,250 -------- -------- $722,474 $602,172 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 4,542 $ 3,566 Accrued liabilities 22,675 19,995 Loans payable - 43,766 Senior secured project notes 189,955 62,706 Deferred income taxes 105,799 98,407 ------------ ------------- Total liabilities 322,971 228,440 Guarantors' equity: Common stock 3 3 Additional paid-in capital 362,737 359,092 Retained earnings 36,763 14,637 ------------- ------------- Total Guarantors' equity 399,503 373,732 ------------- ------------- $722,474 $602,172 ======= ======= The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------ 1996 1995 1996 1995 ---------------------- ------------------ Revenues: Sales of electricity $46,031 $23,205 $98,186 $59,294 Interest and other income 2,608 5,359 6,757 8,029 --------------------------------------------- Total revenues 48,639 28,564 104,943 67,323 --------------------------------------------- Expenses: Operating, general and administration 17,016 8,333 41,426 23,792 Depreciation and amortization 9,870 8,787 24,159 14,040 Interest expense 4,193 6,767 9,455 14,162 Less capitalized interest (2,168) (5,914) (6,637) (5,914) -------------------------------------------- Total expenses 28,911 17,973 68,403 46,080 -------------------------------------------- Income before income taxes 19,728 10,591 36,540 21,243 Provision for income taxes 7,702 3,885 14,414 8,125 -------------------------------------------- Income before minority interest 12,026 6,706 22,126 13,118 Minority interest - - - 1,427 -------------------------------------------- Net income $12,026 $ 6,706 $22,126 $11,691 ====== ====== ====== ====== The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Nine Months Ended September 30, ----------------------- 1996 1995 ------------------------ Cash flows from operating activities: Net income $ 22,126 $ 11,691 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,427 Depreciation and amortization 24,159 14,040 Changes in assets and liabilities: Accounts receivable (4,268) (5,388) Due from affiliates (37,279) (2,320) Prepaid expenses and other assets (9,735) 1,340 Accounts payable and accrued liabilities 503 11,070 Deferred income taxes 4,192 - Other, net - (7,005) ------------------------- Net cash flows from operating activities (302) 24,855 ------------------------- Cash flows from investing activities: Purchase of Guarantors by CalEnergy, net of cash - (197,810) Capital expenditures (14,723) (1,977) Net decrease in marketable securities - 7,457 Management fee - (29,423) Decrease (increase) in restricted cash and short-term investments 23,085 (1,134) ------------------------- Net cash flows from investing activities 8,362 (222,887) ------------------------- Cash flows from financing activities: Repayments on loans payable (99,809) (221,877) Deferred finance costs - (9,714) Loan proceeds 135,000 288,185 Distributions to parent (54,397) 143,505 ------------------------- Net cash flows from financing activities (19,206) 200,099 ------------------------- Net change in cash (11,146) 2,067 Cash at beginning of period 11,146 - ------------------------- Cash at end of period $ 0 $ 2,067 ======= ======= During 1996, CalEnergy Company, Inc. contributed $71,000 of net assets acquired from Mission Edison, of which $12,956 was cash, to the Partnership Guarantors. The accompanying notes are an integral part of these financial statements. PARTNERSHIP GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands) ------------------------------------------------------- 1. General: In the opinion of management of the Partnership Guarantors (the "Guarantors"), the accompanying unaudited combined financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1996 and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. The combined financial statements include the proportionate share of the accounts of the partnerships in which the Guarantors have an interest. The results of operations for the three and nine months ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. 2. Other Footnote Information: Reference is made to the Salton Sea Funding Corporation's most recently issued annual report on Form 10-K that included information necessary or useful to the understanding of the Guarantors' business and financial statement presentations. In particular, the Guarantors' significant accounting policies and practices were presented as Note 2 to the Guarantors' combined financial statements included in that filing. 3. Property, Plant, Contracts and Equipment: Property, plant, contracts and equipment consisted of the following: September 30, December 31, 1996 1995 ------------- ----------- Plant and equipment $ 62,449 $ 58,532 Power sale agreements 122,997 44,966 Process license 46,290 46,290 Mineral extraction 118,987 112,350 Exploration and development costs 56,673 53,449 ------------ ------------- 407,396 315,587 Less accumulated depreciation and amortization (37,750) (16,631) ------------ ------------- $369,646 $298,956 ======= ======= PARTNERSHIP GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands) ------------------------------------------------------- 4. Purchase of Magma Power Company On January 10, 1995, CalEnergy Company, Inc. ("CECI") acquired approximately 51% of the outstanding shares of common stock of Magma Power Company (the "Magma Common Stock") through a cash tender offer and completed the Magma acquisition on February 24, 1995 by acquiring approximately 49% of the outstanding shares of Magma Common Stock not owned by CECI through a merger. The transaction was accounted for as a purchase business combination. 5. Purchase of Edison Mission Energy's Partnership Interests On April 17, 1996 CECI completed the indirect acquisition of Edison Mission Energy's partnership interests in the Vulcan, Hoch (Del Ranch), Leathers and Elmore geothermal operating facilities. Magma Power Company, a wholly-owned subsidiary of CECI, currently operates these facilities and directly or indirectly owns 100% interest in these facilities. Magma's direct ownership interest related to Del Ranch, Leathers, Elmore and Vulcan is assigned to the Partnership Guarantors. Unaudited proforma combined revenue and net income of the Guarantors on a purchase, push down basis of accounting, for the nine months ended September 30, 1996, as if both acquisitions had occurred at the beginning of the period after giving effect to certain pro forma adjustments related to the acquisitions were $123,582 and $23,259, respectively compared with revenue and net income of $137,953 and $24,245, respectively for the nine months ended September 30, 1995. 6. Debt Offering On June 20, 1996, the Guarantors issued $135,000 of Senior Secured Project Notes consisting of $70,000, 7.02% Senior Secured Notes, due May 30, 2000 and $65,000, 8.30% Senior Secured Notes, due May 30, 2011, with maturities of $25,850, $32,000, $22,728, $5,500, $1,000, and $47,922, for 1997, 1998, 1999, 2000, 2001 and thereafter, respectively. Proceeds from these Senior Secured Project Notes were used to repay approximately $96,000 in existing project level loans of the Guarantors, provide approximately $15,000 to fund the Capital Expenditures Fund and provide approximately $23,000 of the cost of the acquisition of Edison Mission Energy's partnership interests described above. 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, 1996, and the related statements of operations for the three and nine month periods ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. 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 the Salton Sea Royalty Company as of December 31, 1995, and the related statements of operations, equity, and cash flows for the year then ended (not presented herein); and in our report dated January 26, 1996, 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, 1995 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 22, 1996 SALTON SEA ROYALTY COMPANY BALANCE SHEETS (Dollars in Thousands) ------------------------------------------------------- September 30, December 31, 1996 1995 -------------- ------------ (unaudited) ASSETS Due from affiliates $17,214 $ 25,110 Royalty stream, net 46,715 53,744 Goodwill, net 35,231 35,912 Prepaid expenses and other assets 1,909 2,575 ------------- ------------- $101,069 $117,341 ======= ======= LIABILITIES AND EQUITY Liabilities: Accrued liabilities $ 11,238 $ 5,948 Senior secured project note 62,409 67,882 Deferred income taxes 13,152 15,460 -------------- ------------- Total liabilities 86,799 89,290 Equity: Common stock - - Additional paid-in capital 7,440 24,541 Retained earnings 6,830 3,510 ------------- ------------- Total equity 14,270 28,051 ------------- ------------- $101,069 $117,341 ======= ======= The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1996 1995 1996 1995 ------------------- ------------------- Revenues: Royalty income $ 7,784 $ 7,097 $22,422 $21,164 Expenses: Operating, general and administrative expenses 1,894 1,756 5,446 5,069 Amortization of royalty stream and goodwill 2,570 5,047 7,710 8,163 Interest expense 1,290 (568) 3,989 3,168 ------------------------------------------ Total expenses 5,754 6,235 17,145 16,400 ------------------------------------------ Income before income taxes 2,030 862 5,277 4,764 Provision for income taxes 592 (50) 1,957 1,210 ------------------------------------------ Income before minority interest 1,438 912 3,320 3,554 Minority interest - - - 1,092 ------------------------------------------ Net income $ 1,438 $ 912 $ 3,320 $ 2,462 ===== ====== ====== ====== The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) ------------------------------------------------------- Nine Months Ended September 30, ---------------------- 1996 1995 ---------------------- Cash flows from operating activities: Net income $3,320 $2,462 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,092 Amortization of royalty stream and goodwill 7,710 8,163 Changes in assets and liabilities: Prepaid expenses and other assets 666 481 Accrued liabilities and deferred income taxes 2,982 2,250 ---------------------- Net cash flows from operating activities 14,678 14,448 ---------------------- Net cash flows from investing activities: Purchase of Company by CECI, net of cash - (38,603) ---------------------- Net cash flows from investing activities - (38,603) ---------------------- Net cash flows from financing activities: Proceeds from issuance of debt - 115,446 Deferred financing costs - (3,499) Capital contributions - 1,647 Decrease (increase) in due from affiliates 7,896 (32,898) Payment of debt (5,473) (40,446) Distribution to parent (17,101) (16,095) ---------------------- Net cash flows from financing activities (14,678) 24,155 ---------------------- Net change in cash - - Cash at beginning of period - - ---------------------- Cash at end of period $ -$ - ====== ====== The accompanying notes are an integral part of these financial statements. SALTON SEA ROYALTY COMPANY NOTES TO FINANCIAL STATEMENTS (in thousands) ------------------------------------------------------- 1. General: In the opinion of management of the Salton Sea Royalty Company (the "Company"), the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1996 and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. The results of operations for the three and nine months ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. 2. Other Footnote Information: Reference is made to the Salton Sea Funding Corporation's most recently issued annual report on Form 10-K that included information necessary or useful to the understanding of the Guarantor's business and financial statement presentations. In particular, the Guarantor's significant accounting policies and practices were presented in Note 2 to the Company's financial statements included in that report. 3. Purchase of Magma Power Company On January 10, 1995, CalEnergy Company, Inc. ("CECI") acquired approximately 51% of the outstanding shares of common stock of Magma Power Company (the "Magma Common Stock") through a cash tender offer and completed the Magma acquisition on February 24, 1995 by acquiring approximately 49% of the outstanding shares of Magma Common Stock not owned by CECI through a merger. The transaction was accounted for as a purchase business combination. Unaudited proforma combined revenue and net income of the Company on a purchase, push down basis of accounting, for the nine months ended September 30, 1995, as if the acquisition had occurred at the beginning of the period after giving effect to certain pro forma adjustments related to the acquisition were $21,164 and $2,705, respectively. 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 Funding Corporation's and 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, as defined, 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 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 bonus 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 fixed rates for the first ten years of each contract and thereafter at Edison's Avoided Cost of Energy. The fixed energy price periods of the Partnership Project SO4 Agreements extend until December 1998, December 1998, and December 1999 for each of the Hoch (Del Ranch), Elmore and Leathers Partnerships, respectively. The fixed energy rates range from 12.7 cents per kWh in 1996 to 15.6 cents per kWh in 1999. The fixed energy price period on the Vulcan Partnership SO4 Agreement expired in February 1996. The Salton Sea I Project sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement, as amended (the "Salton Sea I PPA"), which provides for capacity and energy payments. The initial contract capacity and contract nameplate are each 10 MW. The energy payment is calculated using a Base Price which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Unit 1 was 5.07 cents per kWh during the nine months ended September 30, 1996. 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 IV project also sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement. The Salton Sea Unit IV contract also provides for fixed price capacity payments for the life of the contract. Approximately 56% of the kWhs are sold under the Salton Sea Unit IV PPA at a fixed energy price, which is subject to quarterly adjustments by reference to various inflation-related indices, through June 20, 2017 (and at SCE's Avoided Cost of Energy thereafter), while the remaining 44% of the Salton Sea Unit IV kWhs are sold according to a 10-year fixed price schedule followed by payments based on a modified Avoided Cost of Energy for the succeeding 5 years and at SCE's Avoided cost of Energy thereafter. The Salton Sea Unit IV project was operational on May 24, 1996. 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 II and Salton Sea III Projects sell electricity to Edison pursuant to 30-year modified SO4 Agreements. The contract capacities and contract nameplates are 15 MW and 20 MW for Salton Sea II and 47.5 MW and 49.8 MW for Salton Sea III, respectively. The contracts require Edison to make capacity payments, capacity bonus payments and energy payments. The price for contract capacity and contract capacity bonus payments is fixed for the life of the modified SO4 Agreements. The energy payments for the first ten year period, which period expires April 4, 2000 for Salton Sea II and February 13, 1999 for Salton Sea III, are levelized at a time period weighted average of 10.6 cents per kWh and 9.8 cents per kWh for Salton Sea II and Salton Sea III, respectively. Thereafter, the monthly energy payments will be at Edison's Avoided Cost of Energy. For Salton Sea II only, Edison is entitled to receive, at no cost, 5% of all energy delivered in excess of 80% of contract capacity for the period April 1, 1994 through March 31, 2004. The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4 agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indicies 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, 1996, Edison's average Avoided Cost of Energy was 2.3 cents per kWh which is substantially below the contract energy prices earned for the nine months ended September 30, 1996. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Company cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements and the modified SO4 Agreements at the expiration of the scheduled payment periods. The energy revenues generated by each of the projects operating under such Agreements could decline significantly after the expiration of the respective scheduled payment periods. 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 following data includes the combined Operating Capacity Factors and electricity production of Salton Sea Units I, II, III and IV: Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------- 1996 1995 1996 1995 ------------------------------------------ - -- Operating Capacity Factor 97.9% 93.8% 89.6% 86.3% Contract Capacity (NMW) (weighted average)* 119.4 79.8 97.4 79.8 kWh Produced (in thousands) 258,000 165,400 573,900 451,400 * Weighted average for the commencement of operations at the Salton Sea Unit IV. The following data includes combined Operating Capacity Factors and electricity production of Vulcan, Del Ranch, Elmore and Leathers: Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------ 1996 1995 1996 1995 ------------------------------------------ Operating Capacity Factor 106.4% 108.0% 106.5% 106.0% Contract Capacity (NMW) 148.0 148.0 148.0 148.0 Produced (in thousands) 347,700 353,000 1,016,300 1,027,600 The Salton Sea Guarantors' sales of electricity increased to $33,413 for the three months ended September 30, 1996 from $23,724 for the same period of 1995, a 40.8% increase. For the nine month period ended September 30, 1996, sales of electricity increased to $68,646 from $55,807 in 1995, a 23.0% increase. These increases were primarily due to the addition of Unit 4 production on June 1, 1996 and increased electric production at the other plants. The Partnership Guarantors' sales of electricity increased to $46,031 for the three months ended September 30, 1996 from $23,205 for the same period in 1995, a 98.4% increase. For the nine month period ended September 30, 1996, sales of electricity increased to $98,186 from $59,294 in 1995, a 65.6% increase. These increases were primarily due to the purchase of Edison Mission Energy's 50% partnership interest in the four geothermal operating facilities in April 1996. This was partially offset by a decreased price per kWh for the Vulcan project as a result of the expiration of the scheduled price period. 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 Royalty Guarantor revenue increased to $7,784 for the three months ended September 30, 1996 from $7,097 for the same period last year. For the nine month period ended September 30, 1996, revenue increased to $22,422 from $21,164 in 1995, a 5.9% increase. These increases were due primarily to higher energy sales at Del Ranch, Elmore and Leathers compared to the same periods of 1995. The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, decreased to $7,576, for the three months ended September 30, 1996 from $8,055 for the same period in 1995. For the nine month period ended September 30, 1996, operating expenses decreased to $19,302 from $21,038 in 1995. These decreases were primarily due to higher plant maintenance expenditures in 1995 and continuing work force efficiencies as a result of CECI's acquisition of the facilities, which were partially offset by the start up of the Salton Sea Unit IV plants operations in June 1996. The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $17,016 for the three months ended September 30, 1996 from $8,333 for the same period in 1995. For the nine month period ended September 30, 1996, operating expenses increased to $41,426 from $23,792 in 1995. These increases were primarily due to the Edison Mission Energy acquisition. The Royalty Guarantors' operating expenses increased to $1,894 for the three months ended September 30, 1996 from $1,756 for the same period in 1995, a 7.9% increase. For the nine month period ended September 30, 1996, operating expenses increased to $5,446 from $5,069 in 1995, a 7.4% 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. The Salton Sea Guarantors' depreciation and amortization increased to $3,973 for the three months ended September 30, 1996 from $1,553 for the same period of 1995, a 155.8% increase. For the nine month period ended September 30, 1996, depreciation and amortization increased to $9,859 from $7,953 in 1995. These increases were due primarily to the final push down allocation of purchase accounting adjustments related to the first quarter 1995 acquisition of Magma. The Partnership Guarantors' depreciation and amortization increased to $9,870 for the three months ended September 30, 1996 from $8,787 for the same period in 1995, a 12.3% increase. For the nine month period ended September 30, 1996, depreciation and amortization increased to $24,159 from $14,040 in 1995, a 72.1% increase. These increases were due primarily to the final push down allocation of purchase accounting adjustments related to the first quarter 1995 acquisition of Magma and the Edison Mission Energy Partnership Interest Acquisition. The Royalty Guarantors' amortization decreased to $2,570 for the three months ended September 30, 1996 from $5,047 for the same period of 1995, a 49.1% decrease. For the nine month period ended September 30, 1996, amortization decreased to $7,710 from $8,163 in 1995. These decreases were due primarily to the final push down allocation of purchase accounting adjustments related to the first quarter 1995 acquisition of Magma. 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, increased to $5,031 for the three months ended September 30, 1996 from $3,388 for the same period in 1995, a 48.5% increase. For the nine month period ended September 30, 1996, interest expense, net of capitalized amounts, decreased to $11,343 from $12,659 in 1995. These changes were due primarily to the capitalization of interest related to the Salton Sea Unit IV expansion, during the construction period, the mineral reserve project and the timing of current year debt payments partially offset by increased indebtedness from the issuance of the senior secured project notes in July of 1995. The Partnership Guarantors' interest expense, net of capitalized amounts, increased to $2,025 for the three months ended September 30, 1996 from $853 for the same period in 1995 as the result of additional indebtedness. For the nine month period ended September 30, 1996, interest expense, net of capitalized amounts, decreased to $2,818 from $8,248 in 1995. This increase were a result of lower indebtedness for the period and capitalization of interest to the mineral reserve project. The Royalty Guarantors' interest expense increased to $1,290 for the three months ended September 30, 1996 from ($568) from the same period in 1995. For the nine month period ended September 30, 1996, interest expense increased to $3,989 from $3,168 in 1995. The increase was the result of an adjustment in 1995 due to a reallocation of debt from the purchase accounting. The Salton Sea Guarantors are comprised of partnerships and one company which has a partial interest in the Salton Sea expansion. 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 increased to $7,702 for the three months ended September 30, 1996 from $3,885 for the same period in 1995, a 98.2% increase. For the nine month period ended September 30, 1996, the provision for income taxes increased to $14,414 from $8,125 in 1995, a 77.4% increase. These increases were primarily due to an increase in income before income taxes resulting from the Edison Mission Energy acquisition. Income taxes will be paid by the parent of the Guarantors from distributions to the parent company by the Guarantors which occur after operating expenses and debt service. The Royalty Guarantor's income tax provision was $592 for the three months ended September 30, 1996 compared to ($50) for the same period in 1995. For the nine month period ended September 30, 1996, the income tax provision was $1,957 compared to $1,210 for the same period in 1995. These increases were due primarily to increased earnings in the current year. 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. The increase was the result of an adjustment in 1995 due to a reallocation of debt from the purchase accounting. 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 Funding Corporation's net income for the three months ended September 30, 1996 was $335 and $1,358 for the nine month period ended September 30, 1996, which primarily represented interest income and expense, net of applicable tax, and the Salton Sea Funding Corporation's 1% equity in earnings of the Guarantors. The Funding Corporation was formed on June 20, 1995 for the sole purpose of acting as issuer of senior secured notes and bonds. Net income from June 20, 1995 (inception date) through September 30, 1995 was $674. The Salton Sea Guarantors' net income increased to $16,836 for the three months ended September 30, 1996 compared to $10,914 for the same period of 1995. For the nine month period ended September 30, 1996, net income increased to $28,273 compared to $13,359 in 1995. The Partnership Guarantors' net income increased to $12,026 for the three months ended September 30, 1996 compared to $6,706 for the same period of 1995. For the nine month period ended September 30, 1996, net income increased to $22,126 compared to $11,691 in 1995. The Royalty Guarantors' net income decreased to $1,438 for the three months ended September 30, 1996 compared to $912 for the same period of 1995. For the nine month period ended September 30, 1996, net income decreased to $3,320 compared to $2,462 in 1995. Liquidity and Capital Resources: The Salton Sea Guarantors' only source of revenue is payments received pursuant to long term power sales agreements with Edison, other than interest earned on funds on deposit. The Partnership Guarantors' primary source of revenue is payments received pursuant to long term power sales agreements with Edison. The Partnership Guarantors' also receive a special distribution. The Royalty Guarantor receives royalties pursuant to resource lease agreements with the Partnership Projects and the East Mesa Project. These payments, for each of the Guarantors, are expected to be sufficient to fund operating and maintenance expenses, payments of interest and principal on the Securities, projected capital expenditures and debt service reserve fund requirements. On April 17, 1996 CalEnergy Company, Inc., ("CECI") completed the acquisition of Edison Mission Energy's partnership interests in four geothermal operating facilities in California for a cash purchase price of $70,000. The acquisition has been accounted for as a purchase. The four projects, Vulcan, Hoch (Del Ranch), Leathers and Elmore, are located in the Imperial Valley of California. CECI operates the facilities and sells power to Southern California Edison ("Edison") under long-term SO4 contracts. Prior to this transaction, CECI indirectly owned 50% of these facilities. The acquisition of Edison Mission Energy's 50% interest results in CECI owning an additional 74 net MW of generating capacity. 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) On June 20, 1996 the Salton Sea Funding Corporation, completed a sale to institutional investors of $135,000 aggregate amount of Senior Secured Series D Notes and Series E Bonds. The Funding Corporation Series D Notes and Series E Bonds which mature in May 2000 and May 2011 respectively, bear an interest rate of 7.02% and 8.30% respectively. The proceeds of the offering were used to refinance $96,584 of existing project level indebtedness, to fund a portion of the purchase price of the Edison Mission Energy acquisition and for certain capital improvements at the Imperial Valley Project. SALTON SEA FUNDING CORPORATION PART II - OTHER INFORMATION Item 1 - Legal proceedings. The Salton Sea Funding Corporation is not a party to any material legal matters. Item 2 - Changes in Securities. Not applicable. Item 3 - Default on Senior Securities. Not applicable. Item 4 - Submission of Matters to a Vote of Security Holders. Not applicable. Item 5 - Other Information. Not applicable. Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 27 - Financial Data Schedule (b) Report on Form 8-K: Not applicable. 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 /s/Gregory E. Abel Date: November 14, 1996 Gregory E. Abel Executive Vice President and Chief Accounting Officer /s/John G. Sylvia John G. Sylvia Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit Page No. No. 27 Financial Data Schedule 37