SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 BN Geothermal Inc. Delaware 91-1244270 San Felipe Energy Company California 33-0315787 Conejo Energy Company California 33-0268500 Niguel Energy Company California 33-0268502 Vulcan/BN Geothermal Power Company Nevada 33-3992087 Leathers, L.P. California 33-0305342 Del Ranch, L.P. California 33-0278290 Elmore, L.P. California 33-0278294 (Exact name of Registrants (State or other (I.R.S. Employer as specified in their charters) jurisdiction of Identification No.) incorporation or organization) 302 S. 36th Street, Suite 400-A, Omaha, NE 68131 (Address of principal executive offices and Zip Code of Salton Sea Funding Corporation) Salton Sea Funding Corporation's telephone number, including area code: (402) 231-1641 Securities registered pursuant to Section 12(b) of the Act: N/A Securities registered pursuant to Section 12(g) of the Act: N/A 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be containeed, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] All common stock of Salton Sea Funding Corporation is indirectly held by Magma Power Company. 100 Shares of Common Stock were outstanding on March 17, 1997 Documents incorporated by reference: N/A TABLE OF CONTENTS PART I 2 ITEM 1. Business 2 The Exchange Offer 3 Structure of and Collateral for the Securities 4 The Projects 6 Transaction Structure 7 Salton Sea Projects 7 Partnership Projects 7 Royalties and Royalty Projects 8 Reliance on Single Utility Customer 8 Terms of the New Securities and the Old Securities 9 Priority of Payments 12 Debt Service Reserve Fund 12 Optional Redemption 13 Mandatory Redemption 13 Distributions 13 Ranking and Security for the Securities 14 Recourse Only to the Funding Corporation and the Guarantors 14 Incurrence of Additional Debt 14 Principal Covenants 15 The Project Notes 15 Principal Covenants 16 Considerations Regarding Limitation on Remedies 16 Uncertainties Relating to Exploration and Development of Geothermal Energy Resources 16 Insurance 17 Regulatory and Environmental Matters 17 Employees 18 ITEM 2: Properties 18 ITEM 3: Legal Proceedings 18 ITEM 4: Submission of Matters to a Vote of Security Holders 18 PART II 19 ITEM 5: Market for Registrant's Common Equity and Related Stockholder's Matters 19 ITEM 6: Selected Financial Data 19 Salton Sea Funding Corporation 19 Salton Sea Guarantors 20 Partnership Guarantors 21 Royalty Guarantor 22 ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Factors Affecting Results of Operations 23 Power Purchase Agreements 23 Capacity Utilizations 24 Results of Operations for the Years Ended December 31, 1996 and 1995 25 Revenues 25 Operating Expenses 25 Depreciation and Amortization 26 Interest Expense 26 Income Tax Provision 26 Net Income 27 Results of Operations for the Years Ended December 31, 1995 and 1994 27 Revenues 27 Operating Expenses 27 Depreciation and Amortization 28 Interest Expense 28 Income Tax Provision 28 Net Income 29 Capital Resources and Liquidity 29 Changing Prices and the Effect of Inflation 30 ITEM 8: Financial Statements and Supplementary Data 31 Index to Financial Statements - Salton Sea Funding Corporation 31 Index to Financial Statements - Salton Sea Guarantors 31 Index to Financial Statements - Partnership Guarantors 32 Index to Financial Statements - Salton Sea Royalty Company 32 Index to Financial Statements - Salton Sea Royalty Company - Predecessor 32 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 82 PART III 83 ITEM 10. Directors and Executive Officers of the Registrant 83 ITEM 11. Executive Compensation 84 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 84 Description of Capital Stock 84 Principal Holders 84 ITEM 13. Certain Relationships and Related Transactions 84 Other Relationships and Related Transactions 84 Relationship of the Funding Corporation and the Guarantors to Magma and CalEnergy 84 PART IV 86 ITEM 14. Exhibits, Financial Statements Schedule and Reports on Form 8-K 86 Signatures 87 Index to Exhibits 102 PART 1 ITEM 1. Business Salton Sea Funding Corporation ("Funding Corporation") is a special purpose Delaware corporation and an indirect wholly-owned subsidiary of CalEnergy Company, Inc. ("CalEnergy") formed for the sole purpose of issuing securities in its individual capacity as principal and as agent acting on behalf of the Guarantors (as defined below). The principal executive office of the Funding Corporation is located at 302 South 36th Street, Suite 400-A, Omaha, Nebraska 68131 and its telephone number is (402) 231-1641. CalEnergy was formed in 1971 and is engaged in the exploration for, and development and operation of, environmentally responsible independent power production facilities worldwide utilizing geothermal resources or other energy sources, such as hydroelectric, natural gas, oil and coal. CalEnergy owns all of the capital stock of Magma Power Company ("Magma"). CalEnergy has an aggregate net ownership interest of 1,623 MW of electrical generating capacity in power plants in operation or under construction in the United States and overseas, which have an aggregate net capacity of 3,765 MW (including its interests in the Salton Sea Projects and the Partnership Projects as defined below). As of December 31, 1996, CalEnergy had over $5.7 billion in assets and its common stock is publicly traded on the New York, Pacific and London Stock Exchanges under the symbol "CE". Approximately 32% of CalEnergy's common stock is beneficially owned, through indirect subsidiaries, by Peter Kiewit Sons, Inc. ("Kiewit"), a privately held construction, mining and telecommunications company headquartered in Omaha, Nebraska. In February 1995, CalEnergy completed the acquisition of all the outstanding stock of Magma (the "Magma Acquisition"). Magma had previously owned or controlled substantially all of the assets of the Guarantors, including the three Salton Sea Projects then in operation and 50% partnership interests in each of the four Partnership Projects. At the time of the Magma Acquisition, Magma's interests in the Guarantors generated substantially all of Magma's earnings. The purchase price for the Magma Acquisition was $958 million, of which $458 million was funded by CalEnergy and $500 million was provided by an interim bank facility which was borrowed on a non-recourse basis to CalEnergy and secured by the stock of Magma. The Magma Acquisition loan was subsequently refinanced with a portion of the proceeds of the offering of the Securities (defined below) and other cash provided by CalEnergy and Magma. Since the Magma Acquisition, the operations of the Salton Sea Projects and the Partnership Projects acquired in such acquisition have substantially improved, and significant cost savings and efficiencies have been realized. On April 17, 1996, a subsidiary of CalEnergy acquired all of the stock of BN Geothermal, Inc. ("BNG"), Niguel Energy Company ("Niguel"), San Felipe Energy Company ("San Felipe") and Conejo Energy Company ("Conejo") from Edison Mission Energy ("Mission") for $70 million. Such acquired partnership companies owned 50% partnership interests in each of the Partnership Projects. As a result of such acquisition (the "Partnership Interest Acquisition"), CalEnergy obtained full operating and ownership control of all of the Partnership Projects. Magma directly or indirectly owns all of the capital stock of or partnership interests in the Funding Corporation and the Guarantors. CalEnergy Operating Company ("CEOC"), a subsidiary in which Magma owns a 99% interest and the Funding Corporation owns a 1% interest, currently operates each of the Salton Sea Projects and the Partnership Projects. Affiliates of Magma control, through a variety of fee, leasehold, and royalty interests, rights to geothermal resources for power production in the Salton Sea Known Geothermal Resource Area ("SSKGRA"). The Funding Corporation believes that such resources will be sufficient to operate the Salton Sea Projects and the Partnership Projects at contract capacity under their respective power purchase agreements through the final maturity date of the Securities. Each of the Salton Sea Guarantors, the Partnership Guarantors and the Royalty Guarantor is an indirect wholly-owned subsidiary of CalEnergy. Salton Sea Brine Processing, L.P. ("SSBP"), Salton Sea Power Generation, L.P. ("SSPG") and Fish Lake Power Company ("Fish Lake") (collectively, the "Salton Sea Guarantors") own four geothermal power plants located in Imperial Valley, California known as Salton Sea Unit I, Salton Sea Unit II, Salton Sea Unit III and Salton Sea Unit IV (collectively, the "Salton Sea Projects"). Each of the Vulcan/BN Geothermal Power Company ("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers") and Del Ranch, L.P. ("Del Ranch" and, collectively with Vulcan, Elmore and Leathers, the "Partnership Project Companies") owns a geothermal power plant located in Imperial Valley, California known as the Vulcan Project, the Elmore Project, the Leathers Project and the Del Ranch Project, respectively (such projects, collectively, the "Partnership Projects"). As is more fully described below, the other Partnership Guarantors (as defined below) collectively own or have the right to receive cash flow from 100% of the equity in such Partnership Project Companies. Vulcan Power Company ("VPC") and its wholly-owned subsidiary, BNG, own 100% of the partnership interests in Vulcan. CEOC and its wholly-owned subsidiaries, Niguel, San Felipe and Conejo, collectively own 90% partnership interests in each of Elmore, Leathers and Del Ranch, respectively. Magma owns all of the remaining 10% interests in each of Elmore, Leathers and Del Ranch. CEOC is entitled to receive from Magma, as payment for certain data and services provided by CEOC, all of the partnership distributions Magma receives with respect to its 10% ownership interests in each of the Elmore, Leathers and Del Ranch and Magma's special distributions equal to 4.5% of total energy revenues from the Leathers Project. BNG, Niguel, San Felipe and Conejo and their interest in the Partnership Project Companies (collectively, the "Additional Partnership Guarantors"), together with CEOC and VPC and their original interest in the Partnership Project Companies (collectively the "Initial Partnership Guarantors"), are collectively referred to as the "Partnership Guarantors". Salton Sea Royalty Company ("SSRC" or the "Royalty Guarantor") received an assignment of certain fees and royalties ("Royalties") paid by three Partnership Projects, Elmore, Leathers and Del Ranch. In addition, the Royalty Guarantor received an assignment of certain Royalties payable by certain geothermal power plants located in Imperial Valley, California which are owned by an unaffiliated third party (the "East Mesa Project", and together with the Salton Sea Projects and the Partnership Projects, the "Projects"). Such Royalties are subject to netting and reduction from time to time to reflect various operating costs, as reflected in the financial statements herein. The principal executive offices of the Salton Sea Guarantors are located at 302 South 36th Street, Suite 400-B, Omaha, Nebraska 68131. The principal executive offices of the Partnership Guarantors is 302 South 36th Street, Suite 400-C, Omaha, Nebraska 68131. The principal executive office of the Royalty Guarantor is 302 South 36th Street, Suite 400-D, Omaha, Nebraska 68131. The Salton Sea Guarantors, Partnership Guarantors and the Royalty Guarantor are sometimes referred to collectively herein as the "Guarantors". The Exchange Offer In 1996, Funding Corporation issued $70,000,000 aggregate principal amount of the Old Series D Securities and $65,000,000 aggregate principal amount of the Old Series E Securities. Subsequently, the Funding Corporation exchanged (i) $70,000,000 aggregate principal amount of Old Series D Securities for an equal principal amount of New Series D Securities, and $65,000,000 aggregate principal amount of Old Series E Securities for an equal amount of New Series E Securities. In 1995, the Funding Corporation exchanged (i) $232,750,000 aggregate principal amount of Old Series A Securities for an equal principal amount of New Series A Securities, (ii) $133,000,000 aggregate principal amount of Old Series B Securities for an equal principal amount of New Series B Securities, and (iii) $109,250,000 aggregate principal amount of Old Series C Securities for an equal principal amount of New Series C Securities. The Old Series A Securities, the Old Series B Securities, the Old Series C Securities, the Old Series D Securities and the Old Series E Securities are sometimes referred to herein as the "Old Securities", and the New Series A Securities, New Series B Securities, the New Series C Securities, New Series D Securities and New Series E Securities are sometimes referred to herein as the "New Securities". The exchange offer of New Securities for the Old Securities is sometimes referred to herein as the "Exchange Offer". The New Securities are obligations of the Funding Corporation evidencing the same indebtedness as the Old Securities and will be entitled to the benefits of the Indenture, which governs both the Old Securities and the New Securities. The form and terms (including principal amount, interest rate, maturity and ranking) of the New Securities are the same as the form and terms of the Old Securities, except that (i) the New Securities have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Securities and will not be entitled to registration rights, and (ii) the New Securities will not provide for any increase in the interest rate thereon. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Indenture, as amended, between Chemical Trust Company of California and Funding Corporation. The Funding Corporation received no proceeds from the exchange pursuant to the Exchange Offers. The net proceeds received by the Funding Corporation from the issuance of the Old Securities to the Initial Purchasers in the two separate offerings (after deduction of certain transaction costs) was approximately $604 million and was used for the following purposes: (a) approximately $253 million to repay certain non-recourse indebtedness of CalEnergy incurred in connection with the Magma Acquisition; (b) approximately $102 million to refinance existing indebtedness of the Salton Sea Projects; (c) approximately $115 million to finance the Salton Sea Expansion, (d) approximately $96 million to refinance all of the existing project-level indebtedness under credit agreements of the Partnership Project Companies; (e) approximately $15 million to fund the Capital Expenditure Fund to be used for certain capital improvements to the Partnership Projects and the Salton Sea Projects, and (f) approximately $23 million to fund a portion of the purchase price payable by the Initial Partnership Guarantors for the Acquired Partnership Companies. There is no existing trading market for the New Securities and there can be no assurance regarding the future development of such a market for the New Securities or the ability of holders of the New Securities to sell their New Securities or the price at which such holders may be able to sell their New Securities. If such a market were to develop, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the operating results of the Funding Corporation and the Guarantors, and the market for similar securities. The Funding Corporation does not intend to apply for listing or quotation of the New Securities on any securities exchange or stock market. Structure of and Collateral for the Securities The New Securities and any additional securities issued pursuant to the Indenture (the "Securities") will be payable from the proceeds of payments made in respect of principal and interest on the Project Notes by the Guarantors to the Funding Corporation. The Securities are secured by the capital stock of the Funding Corporation and guaranteed by the Guarantors. The Guarantees (which are unlimited in the case of the Salton Sea Guarantors and which are limited to Available Cash Flow, in the case of the Partnership Guarantors and the Royalty Guarantor) are secured: (i) in the case of the Salton Sea Guarantee, by a senior first priority lien on substantially all of the assets of the Salton Sea Guarantors, a pledge of the equity interests in the Salton Sea Guarantors and an assignment of the cost overrun funding commitment provided by CalEnergy to the Salton Sea Guarantors in connection with the substantial completion of the Salton Sea Expansion (the "Cost Overrun Commitment"); (ii)in the case of the Partnership Guarantee, by a senior first priority Lien on substantially all of the assets of the Partnership Project Companies, a senior first priority Lien on the Equity Cash Flows and Royalties of the Initial Partnership Guarantors and a pledge of the stock and of other equity interests in the Partnership Guarantors; and (iii) in the case of the Royalty Guarantee, by a senior first priority lien on all Royalties paid to the Royalty Guarantor and a pledge of the capital stock of the Royalty Guarantor. CEOC, VPC and the Royalty Guarantor receive various Royalties and Equity Cash Flows from the Partnership Project Companies and an unaffiliated third party. At the time of the initial offering of the Old Series A Securities, Old Series B Securities and Old Series C Securities, CEOC and VPC owned or had the right to receive (among other things) equity distributions relating to 50% of the Partnership Project Companies. In connection with such initial offering of the Old Series A Securities, Old Series B Securities and Old Series C Securities, CEOC, VPC and the Royalty Guarantor pledged all such Royalties and Equity Cash Flows as Collateral for their obligations under the Project Notes and Guarantees (the "Existing Partnership Collateral"). Similarly, in connection with such initial offering of the Old Series A Securities, Old Series B Securities and Old Series C Securities, CEOC, VPC and the Royalty Guarantor agreed to deposit all such Royalties and Equity Cash Flows with the Depositary Agent pursuant to the Depositary Agreement for purposes of paying, inter alia, their obligations under the Project Notes (the "Existing Partnership Cash Flow Deposits"). In connection with the offering of the Old Series D Securities and Old Series E Securities, CEOC and VPC acquired the remaining 50% equity interests in the Partnership Project Companies and retired existing non-recourse debt of the Partnership Project Companies. As security for the Partnership Project Note and the Partnership Guarantee, the Partnership Project Companies pledged all of their revenues and assets as Collateral for their obligations under the Partnership Project Note and the Partnership Guarantee (the "Additional Partnership Collateral") and agreed to deposit all of their revenues with the Depositary Agent pursuant to the Depositary Agreement for purposes of paying, inter alia, their obligations under the Project Notes (the "Additional Partnership Revenue Deposits"). The Funding Corporation believed that these changes benefit Security holders by increasing the revenues available to pay the Securities, and, by refinancing existing Del Ranch, Elmore and Leathers indebtedness, removing the structural subordination of the Project assets. However, since the Royalties and Equity Cash Flows constituting the Existing Partnership Collateral (other than the East Mesa Royalties) are payable solely out of the revenues of the Partnership Project Companies pledged as Additional Partnership Collateral, the supplemental benefits of such Existing Partnership Collateral and Existing Partnership Cash Flow Deposits are, as a practical matter, largely subsumed and included within the grant of the Additional Partnership Collateral and Additional Partnership Revenue Deposits. Accordingly, the Additional Partnership Collateral and Additional Partnership Revenue Deposits should be viewed as comprising all of the material Partnership Project Note and Partnership Guarantee. The structure has been designed to cross-collateralize cash flows from each Guarantor without cross- collateralizing all of the Guarantor's assets. Therefore, if a Guarantor defaults on its Credit Agreement, Project Notes or its Guarantee, without causing a payment default on the Securities, then the Trustee may direct the Collateral Agent to exercise remedies only with respect to the Collateral securing such Credit Agreement, Project Notes and Guarantee. If, however, such default causes a payment default on the Securities, then the Trustee may accelerate the Securities and direct the Collateral Agent to exercise remedies against all such Collateral and, if different, the Collateral from the Salton Sea Guarantors. The Funding Corporation and the Guarantors are initially obligated to maintain a Debt Service Reserve Fund and/or a Debt Service Reserve Fund Letter of Credit in an aggregate initial amount equal to the maximum remaining semiannual scheduled debt service on the Securities. After January 1, 2000, the Debt Service Reserve Fund Required Balance will increase to the maximum remaining annual scheduled debt service on the Securities. The Funding Corporation is a special purpose finance subsidiary of Magma. Its ability to make payments on the Securities will be entirely dependent on the Guarantors' performance of their obligations under the Project Notes and the Guarantees. As is common in non-recourse, project finance structures, the assets and cash flows of the Guarantors are the sole source of repayment of the Project Notes and the Guarantees. The Salton Sea Guarantors conduct no other business and own no other significant assets except those related to the ownership or operation of the Salton Sea Projects. The Partnership Guarantors conduct no business other than owning their respective ownership interests in the Partnership Projects and providing operation, maintenance, administrative and technical services for Magma, the Salton Sea Projects and the Partnership Projects. The Royalty Guarantor has been organized solely to receive royalty payments owed by the Partnership Projects and the East Mesa Project and conducts no other business and owns no other assets. In the event of a default by any Guarantor under a Project Note, Credit Agreement or Guarantee, there is no assurance that the exercise of remedies under such Project Note, Credit Agreement or Guarantee, including foreclosure on the assets of such Guarantor, would provide sufficient funds to pay such Guarantor's obligation under the Project Notes and the Guarantees. Moreover, unless such default causes a payment default under the Indenture (in which case remedies may be exercised against the defaulting Guarantor's and the Salton Sea Guarantors' assets), remedies may be exercised only against the assets of the defaulting Guarantors. No shareholders, partners or affiliates of the Funding Corporation (other than the Guarantors) and no directors, officers or employees of the Funding Corporation or the Guarantors will guarantee or be in any way liable for the payment of the Securities, the Project Notes or the Guarantees. In addition, the obligations of the Partnership Guarantors and the Royalty Guarantor under the Guarantees are limited to the Available Cash Flows of such Guarantors. As a result, payment of amounts owed pursuant to the Project Notes, the Guarantees and the Securities is dependent upon the availability of sufficient revenues and royalty payments from the Guarantors' businesses or holdings, after the payment of operating expenses and the satisfaction of certain other obligations. The Projects Set forth below is a table describing certain characteristics of the Salton Sea Projects and the Partnership Projects, and the Guarantors' collective interests therein. All the Salton Sea Projects and Partnership Projects are located in the Imperial Valley, California and sell power to Southern California Edison Company ("Edison"). FACILITY CAPACITY AND NET PROJECT OWNERSHIP DATE OF CONTRACT CONTRACT INTEREST OF COMMERCIAL EXPIRATION TYPE GUARANTORS OPERATION (IN MW)(1)(2) Salton Sea Projects Salton Sea Unit I 10.0 7/1987 6/2017 Negotiated Salton Sea Unit II 20.0 4/1990 4/2020 SO4 Salton Sea Unit III 49.8 2/1989 2/2019 SO4 Salton Sea Unit IV 39.6 6/1996 5/2026 Negotiated Subtotal 119.4 Partnership Projects Vulcan 34.0 2/1986 2/2016 SO4 Elmore 38.0 1/1989 12/2018 SO4 Leathers 38.0 1/1990 12/2019 SO4 Del Ranch 38.0 1/1989 12/2018 SO4 Subtotal 148.0 Total 267.4 (1)Facility Capacity does not necessarily reflect electric output available for sale to Edison. (2) CEOC and its wholly-owned subsidiaries collectively own an aggregate 90% interest in, and CEOC is entitled to receive the additional 10% equity distribution payable to Magma by, each of Elmore, Leathers and Del Ranch. VPC and its wholly-owned subsidiary own Vulcan. Transaction Structure Salton Sea Projects The Salton Sea Guarantors collectively own the four Salton Sea Projects with an aggregate net generating capacity of approximately 119.4 MW. All of the Salton Sea Projects have executed long term power purchase agreements, providing for the sale of capacity and energy to Edison. Salton Sea Unit II and Salton Sea Unit III have modified SO4 Agreements with Edison. These contracts provide for fixed price capacity payments for the life of the contract, and fixed price energy payments for the first 10 years. Thereafter, the energy payments paid by Edison will be based on Edison's then-current, published short-run avoided cost of energy (the "Avoided Cost of Energy"). The fixed price energy periods expire on April 4, 2000 and February 13, 1999 for Salton Sea Unit II and Salton Sea Unit III, respectively. Salton Sea Unit I and Salton Sea Unit IV have negotiated contracts with Edison. The Salton Sea Unit I contract provides for a capacity payment and energy payment for the life of the contract. Both payments are based upon an initial value that is subject to quarterly adjustment by reference to various inflation-related indices. 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 adjustment by reference to various inflation-related indices, through June 20, 2017 (and at Edison'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 Edison's Avoided Cost of Energy thereafter. All of the Salton Sea Projects, other than Salton Sea Unit IV, have been operating for at least 5 years. The three operating Salton Sea Projects operated at a combined facility capacity factor of 90.8% in 1994, 86.5% in 1995 and 90.4% in 1996. The Salton Sea Guarantors recently expanded the capacity of the Salton Sea Projects through the construction of Salton Sea Unit IV adjacent to the site where Salton Sea Unit III is currently located. Such construction and the installation of the pH modification process at Salton Sea Units I and III is referred to herein as the "Salton Sea Expansion". The pH Modification Process has been in use at Salton Sea Unit II for over 5 years. The process lowers the pH of the geothermal resource thereby significantly reducing the amount of solids in the geothermal fluid which precipitate out of solution. This is expected to result in significantly lower operation and maintenance costs. Partnership Projects The Partnership Projects have an aggregate facility generating capacity of 148 MW. The Partnership Guarantors own 100% of the Vulcan Project and 90% partnership interests in the Elmore, Leathers and Del Ranch Projects. Magma owns the remaining 10% interests in each of the Elmore, Leathers and Del Ranch Projects and has agreed to pay to CEOC the partnership distributions it receives from such interests in exchange for certain proprietary data and services provided by CEOC. Magma has collaterally assigned to CEOC Magma's right to such payments and such payments are collateral for the Securities. The 50% interest of the Partnership Projects previously owned by certain affiliates of Edison were acquired by a subsidiary of CalEnergy on April 17, 1996 and subsequently transferred to CEOC and VPC. All of the Partnership Projects have executed SO4 Agreements for the sale of capacity and energy to Edison which contracts provide for fixed price capacity payments for the life of the contract and scheduled price energy payments for the first 10 years. Thereafter, the energy payments paid by Edison will be based on Edison's Avoided Cost of Energy. The scheduled price energy period for the Vulcan Project expired on February 9, 1996 and will expire on December 31, 1998 for the Del Ranch and Elmore Projects, and December 31, 1999 for the Leathers Project. All of the Partnership Projects have been operating for at least 5 years. The Partnership Projects operated at a combined facility capacity factor of 103.8% in 1994, 105.9% in 1995 and 104.8% in 1996. Royalties and Royalty Projects The Royalty Guarantor has received an assignment from Magma of certain royalties ("Royalties") received from the Leathers, Del Ranch and Elmore Projects and the East Mesa Project in exchange for the provision to those projects of the rights to use certain geothermal resources, as well as the assignment of a power purchase agreement. Substantially all of the assigned Royalties are based on a percentage of energy and capacity revenues of the respective projects. Pursuant to the assignment, the Royalty Guarantor is entitled to receive the aggregate percentages of such project's energy and capacity revenues as illustrated in the chart below. The Partnership Guarantors are also entitled to receive Royalties from the Partnership Projects as illustrated in the chart below. Royalties are subject to netting and reduction from time to time to reflect various operating costs, as reflected in the financial statements herein. All such Royalties (other than the various operating costs, as reflected in the financial statements) are payable from revenues which will constitute Partnership collateral. ROYALTIES TO BE PAID TO ROYALTIES TO BE PAID TO ROYALTY GUARANTOR PARTNERSHIP GUARANTORS(1) PROJECT FACILITY % ENERGY % CAPACITY % ENERGY% CAPACITY CAPACITY REVENUES REVENUES REVENUES REVENUES (MW) Del Ranch 38 23.33 1.00 5.67 3.00 Elmore 38 23.33 1.00 5.67 3.00 Leathers 38 21.50 0.00 7.50 3.00 Vulcan 34 0.00 0.00 4.17 0.00 East Mesa Sr. Royalty(2) 37 4.00 4.00 0.00 0.00 Jr. Royalty -- 10.00 10.00 0.00 0.00 Total 185 (1) CEOC is also entitled to receive Royalties as described herein. Such Royalties are payable from revenues that will constitute Partnership collateral. (2)The East Mesa Junior Royalties (which are due but have not been paid to date), are junior to debt service of the East Mesa Project. The East Mesa Senior Royalties are senior to debt service of the East Mesa Project. The East Mesa Project has executed a long term power sales agreement with Edison providing for fixed price capacity payments for the life of the agreement and fixed price energy payments for the first 10 years. Thereafter, the energy payments will be based on Edison's Avoided Cost of Energy. The fixed price energy period for the East Mesa Project expires on December 31, 1999. The East Mesa Project has been operating for over 5 years. Reliance on Single Utility Customer Each of the Projects relies on an agreement with Edison to generate 100% of its operating revenues. The payments under these agreements have constituted 100% of the operating revenues of each Project since its inception, and are expected to continue to do so for the life of the Securities. Any material failure of Edison to fulfill its contractual obligations under the Power Purchase Agreements could have a material adverse effect on the ability of the Funding Corporation to pay principal of and interest on the Securities. The power purchase agreements pursuant to which all of the Projects (other than Salton Sea Unit I and Salton Sea Unit IV) sell electricity to Edison are SO4 Agreements. The SO4 Agreements provide for both capacity payments and energy payments for a term of 30 years. While the basis for the capacity payment of each SO4 Agreement is fixed for the entire 30-year term, the price of energy payments is fixed only for the first ten years of the term (the "Scheduled Price Period"). Thereafter, the required energy payment converts to Edison's Avoided Cost of Energy, as filed with the California Public Utility Commission ("CPUC"). The Scheduled Price Period expired in 1996 for Vulcan and will expire in 1999 for Salton Sea Unit III, Del Ranch and Elmore and in 2000 for Salton Sea Unit II, Leathers and East Mesa. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Funding Corporation and the Guarantors cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements with Edison at the expiration of the Scheduled Price Periods. Edison's Avoided Cost of Energy as determined by the CPUC is currently substantially below the scheduled energy prices for the Scheduled Price Periods under the respective SO4 Agreements. For the year ended December 1996, the time period-weighted average of Edison's Avoided Cost of Energy was 2.5 cents per kWh, compared to the time period- weighted average for 1996 energy selling prices pursuant to the SO4 Agreements of approximately 9.7 cents per kWh, for the combined Salton Sea and Partnership Projects. Thus, the revenues generated by each of the Projects operating under SO4 Agreements are likely to decline significantly after the expiration of the relevant Scheduled Price Period. Terms of the New Securities and the Old Securities The New Securities were issued as part of two separate Exchange Offers which applied to the recapitalization of $610,000,000 aggregate principal amount of the Old Securities. On July 21, 1995 Funding Corporation issued $475,000,000 of Salton Sea Notes and Bonds Series A, B and C, the Old Series A Securities, Old Series B Securities and Old Series C Securities. On June 20, 1996 Funding Corporation issued additional securities of $135,000,000 of Salton Sea Notes and Bonds Series D and E, the Old Series D Securities and the Old Series E Securities. The New Securities are obligations of the Funding Corporation evidencing the same indebtedness as the Old Securities and will be entitled to the benefits of the Indenture, which governs both the Old Securities and the New Securities. The form and terms (including principal amount, interest rate, maturity and ranking) of the New Securities are the same as the form and terms of the Old Securities, except that (i) the New Securities have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Securities and will not be entitled to registration rights, and (ii) the New Securities will not provide for any increase in the interest rate thereon. The Securities are issued by Funding Corporation. Payment of the Securities is guaranteed by the Partnership Guarantors and the Royalty Guarantor to the extent of their Available Cash Flow, and the Salton Sea Guarantors. The Interest Payment Dates for the Securities are May 30 and November 30, commencing November 30, 1995. The Old Securities were rated "Baa3" by Moody's Investors Service, Inc. ("Moody's") and "BBB-" by Standard & Poor's Ratings Group ("S&P"). The initial average life of the Series A Securities was 2.42 years. The initial average life of the Series B Securities was 6.89 years. The initial average life of the Series C Securities was 12.36 years. The initial average life of the Series D Securities was 2.01 years. The initial average life of the Series E Securities was 10.01 years. The $232,750,000 principal of the 6.69% Series A Securities due May 30, 2000 are payable in semiannual installments, which commenced November 30, 1995, as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE November 30, 1995 9.8440386681% May 30, 1996 10.3342642320% November 30, 1996 10.3342642320% May 30, 1997 13.8298603652% November 30, 1997 13.8298603652% May 30, 1998 10.5087003222% November 30, 1998 10.5087003222% May 30, 1999 6.4240601504% November 30, 1999 6.4240601504% May 30, 2000 7.9621911923% The $133,000,000 principal of the 7.37% Series B Securities due May 30, 2005 will be payable in semiannual installments, commencing May 30, 1998, as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE May 30, 1998 9.7819548872% November 30, 1998 9.7819548872% May 30, 1999 1.9563909774% November 30, 1999 1.9563909774% May 30, 2000 0.3909774436% November 30, 2000 0.3909774436% May 30, 2001 8.0360902256% November 30, 2001 8.0360902256% May 30, 2002 8.5330827068% November 30, 2002 8.5330827068% May 30, 2003 5.6390977444% November 30, 2003 5.6390977444% May 30, 2004 7.5781954887% November 30, 2004 7.5781954887% May 30, 2005 16.1684210526% The $109,250,000 principal of the 7.84% Series C Securities due May 30, 2010 will be payable in semiannual installments, commencing May 30, 2003, as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE May 30, 2003 3.3116704805% November 30, 2003 3.3116704805% May 30, 2004 1.6558352403% November 30, 2004 1.6558352403% May 30, 2005 0.8283752860% November 30, 2005 0.8283752860% May 30, 2006 9.8572082380% November 30, 2006 9.8572082380% May 30, 2007 9.8425629291% November 30, 2007 9.8425629291% May 30, 2008 10.0851258581% November 30, 2008 10.0851258581% May 30, 2009 10.0118993135% November 30, 2009 10.0118993135% May 30, 2010 8.8146453090% The $70,000,000 principal of the 7.02% Series D Securities due May 30, 2000 will be payable in semiannual installments, commencing May 30, 1997, as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE May 30, 1997 18.4642857143% November 30, 1997 18.4642857143% May 30, 1998 22.8571428571% November 30, 1998 22.8571428571% May 30, 1999 7.6071428571% November 30, 1999 7.6071428571% May 30, 2000 2.1428571430% The $65,000,000 principal of the 8.30% Series E Securities due May 30, 2011 will be payable in semiannual installments, commencing May 30, 1999, as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE May 30, 1999 9.2907692308% November 30, 1999 9.2907692308% May 30, 2000 3.0769230769% November 30, 2000 3.0769230769% May 30, 2001 0.7692307692% November 30, 2001 0.7692307692% May 30, 2002 1.2307692308% November 30, 2002 1.2307692308% May 30, 2003 2.3076923077% November 30, 2003 2.3076923077% May 30, 2004 2.5000000000% November 30, 2004 2.5000000000% May 30, 2005 2.6923076923% November 30, 2005 2.6923076923% May 30, 2006 1.9230769231% November 30, 2006 1.9230769231% May 30, 2007 1.9230769231% November 30, 2007 1.9230769231% May 30, 2008 2.6923076923% November 30, 2008 2.6923076923% May 30, 2009 2.5000000000% November 30, 2009 2.5000000000% May 30, 2010 10.3846153846% November 30, 2010 10.3846153846% May 30, 2011 17.4184615384% Priority of Payments All revenues received by the Salton Sea Guarantors from the Salton Sea Projects, all revenues received by the Partnership Project Companies from the Partnership Projects,all Equity Cash Flows and Royalties received by the Initial Partnership Guarantors and all Royalties received by the Royalty Guarantor shall be paid into a Revenue Fund maintained by a Depositary. Amounts paid into the Revenue Fund shall be distributed in the following order of priority: (a) to pay Operating and Maintenance Costs of the Guarantors; (b) to pay certain administrative costs of the agents for the secured parties under the Financing Documents; (c) to pay principal of, premium (if any) and interest on the Securities and the Debt Service Reserve Bonds, if any, and interest and certain fees payable to the Debt Service Reserve LOC Provider; (d) to pay principal of Debt Service Reserve LOC Loans and certain related fees and charges; (e) to replenish any shortfall in the Debt Service Reserve Fund; (f) to pay certain breakage costs in respect of Debt Service Reserve LOC Loans, and indemnification and other expenses to the Secured Parties, and (g) to the Distribution Fund or Distribution Suspense Fund, as applicable. Debt Service Reserve Fund A Debt Service Reserve Fund for the benefit of the Security Holders and the Debt Service Reserve Letter of Credit Provider has been established under the Depositary Agreement. The amounts available to be drawn under the Debt Service Reserve Letter of Credit and all other amounts held in the Debt Service Reserve Fund shall at all times (a) on or prior to December 31, 1999, be required to equal the remaining maximum semiannual scheduled principal and interest payments on the Securities and (b) subsequent to December 31, 1999, be required to equal the remaining maximum annual scheduled principal and interest payments on the Securities. The Debt Service Reserve Letter of Credit must be issued by a financial institution rated at least "A" by S&P and "A2" by Moody's. Drawings on the Debt Service Reserve Letter of Credit will be available to pay principal of and interest on the Securities and interest on loans created by drawings on such Debt Service Reserve Letter of Credit. Optional Redemption The Series E Securities are subject to optional redemption, in whole or in part, pro rata at par plus accrued interest to the Redemption Date plus a premium calculated to "make whole" to comparable U.S. Treasury securities plus 50 basis points. The Series B Securities and Series C Securities are subject to optional redemption, in whole or in part, pro rata at par plus accrued interest to the Redemption Date plus a premium calculated to "make whole" to comparable U.S. treasury securities plus 50 basis points. The Series A Securities and Series D Securities are not subject to optional redemption. Mandatory Redemption The Securities are subject to mandatory redemption, pro rata within each maturity, at par plus accrued interest to the Redemption Date, (a) if a Permitted Power Contract Buy-Out occurs unless the Rating Agencies confirm the then current Rating of the Securities; (b) upon the acceleration of a Project Note in an amount equal to the principal amount of such note plus accrued interest; (c) upon the occurrence of certain events of loss, condemnation, title defects or similar events related to the Salton Sea Projects or the Partnership Projects or (d) upon the foreclosure by the Collateral Agent of Collateral securing the Guarantor's obligations under the Salton Sea Guarantee, the Partnership Guarantee or Royalty Guarantee. Distributions Distributions may be made only from and to the extent of monies on deposit in the Distribution Fund. Such distributions are subject to the prior satisfaction of the following conditions: (a) the amounts contained in the Principal Fund and the Interest Fund shall be equal to or greater than the aggregate scheduled principal and interest payments next due on the Securities; (b) no Default or Event of Default under the Indenture shall have occurred and be continuing; (c) the Debt Service Coverage Ratio for the preceding four fiscal quarters, measured as one annual period (or, with respect to any proposed distribution date prior to the first anniversary of the Closing Date, using a combination of historical and projected results, as provided in the Indenture), is equal to or greater than 1.4 to 1, if such distribution date occurs prior to the year 2000, and, if in or subsequent to the year 2000, is equal to or greater than 1.5 to 1, as certified by an officer of the Funding Corporation; (d) the projected Debt Service Coverage Ratio of the Securities for the succeeding four fiscal quarters measured as one annual period is equal to or greater than 1.4 to 1, if such distribution date occurs prior to the year 2000, and, if such distribution date occurs in or subsequent to the year 2000, is equal to or greater than 1.5 to 1, as certified by an officer of the Funding Corporation; (e) the Debt Service Reserve Fund shall have a balance equal to or greater than the Debt Service Reserve Letter (or Letters) of Credit shall be equal to or greater than (collectively with the balance, if any, in the Debt Service Reserve Fund) the Debt Service Reserve Fund Required Balance; (f) an officer of the Funding Corporation provides a certificate (based on customary assumptions) that there are sufficient geothermal resources to operate the Salton Sea Projects and the Partnership Projects at contract capacity through the Final Maturity Date; and (g) Substantial Completion of the Salton Sea Expansion has occurred on or prior to January 1, 1997; provided that, if such condition is not satisfied, no distributions shall be made unless and until (i) Substantial Completion of the Salton Sea Expansion occurs prior to January 1, 1998, or (ii) Series B Securities and Series C Securities having an aggregate principal amount of $150 million are redeemed or (iii) the Funding Corporation and the Guarantors take such actions as the Rating Agencies require to confirm the Investment Grade Rating of the Securities; provided further, that this condition to distribution shall only apply after January 1, 1997, unless the Salton Sea Guarantors have previously notified the Trustee that the Salton Sea Expansion has been abandoned. Ranking and Security for the Securities The Securities shall be senior debt of the Funding Corporation. Payment of the Securities is provided for by payments to be made by the Guarantors under their Project Notes, and the Securities are secured by a pledge to the Collateral Agent of all of the outstanding capital stock of the Funding Corporation and the Guarantees. Recourse Only to the Funding Corporation and the Guarantors The obligations to pay principal, premium, if any, and interest on the Securities are obligations solely of the Funding Corporation, secured by a pledge of the capital stock of the Funding Corporation and entitled to the benefits of the Guarantees. None of CalEnergy or Magma (nor any stockholder, officer, director or employee thereof or of the Funding Corporation, or of the Guarantors nor any affiliate thereof other than the Guarantors pursuant to their Guarantees) will guarantee the payment of the Securities or has any obligation with respect to the payment of the Securities. Incurrence of Additional Debt The Funding Corporation shall not incur any Debt other than "Permitted Debt". "Permitted Debt" means: (a) The Securities; (b) Debt incurred to acquire the East Mesa Project in whole or in part; provided that no such Debt may be incurred unless at the time of such incurrence (i) no Default or Event of Default has occurred and is continuing and (ii) the Rating Agencies confirm that the incurrence of such Debt will not result in a Rating Downgrade; (c) Debt incurred to develop, construct, own, operate or acquire additional Permitted Facilities in the Imperial Valley ("Additional Projects"); provided that no such debt may be incurred unless at the time of such incurrence (i) no Default or Event of Default has occurred and is continuing and (ii) the Rating Agencies confirm that the Securities will maintain an Investment Grade Rating after giving effect to such Debt; (d) Debt incurred to finance the making of capital improvements to the Salton Sea Projects, the Partnership Projects or Additional Projects required to maintain compliance with applicable law or anticipated changes therein; provided that no such Debt may be incurred unless at the time of such incurrence the Independent Engineer confirms as reasonable (i) a certification by the Funding Corporation (containing customary qualifications) that the proposed capital improvements are reasonably expected to enable such Project to comply with applicable or anticipated legal requirements and (ii) the calculations of the Funding Corporation that demonstrate, after giving effect to the incurrence of such Debt, the minimum projected Debt Service Coverage Ratio (x) for the next four consecutive fiscal quarters, commencing with the quarter in which such Debt is incurred, taken as one annual period, and (y) for each subsequent fiscal year through the Final Maturity Date, will not be less than 1.2 to 1; (e) Debt incurred to finance the making of capital improvements to the Salton Sea Projects, the Partnership Projects or Additional Projects not required by applicable law so long as after giving effect to the incurrence of such Debt (i) no Default or Event of Default has occurred and is continuing, and (ii) (A) the Independent Engineer confirms as reasonable (x) the calculations of the Funding Corporation that demonstrate that the minimum projected Debt Service Coverage Ratio for the next four consecutive quarters, taken as one annual period, and each subsequent fiscal year, will not be less than 1.4 to 1, and (y) the calculations of the Funding Corporation that demonstrate the average projected Debt Service Coverage Ratio for all succeeding fiscal years until the Final Maturity Date will not be less than 1.7 to 1 or (B) the Rating Agencies confirm that the incurrence of such Debt will not result in a Rating Downgrade; (f) Working Capital Debt in an aggregate amount not to exceed $15,000,000; (g) Debt incurred under the Debt Service Reserve LOC Reimbursement Agreement; (h) Debt incurred in connection with certain permitted interest rate swap arrangements; (i) Debt incurred by the Funding Corporation in an aggregate amount not to exceed $30,000,000, in connection with the development, construction, ownership, operation, maintenance or acquisition of Permitted Facilities; (j) Subordinated Debt from Affiliates in an aggregate amount not to exceed $200,000,000 which shall be used to finance capital, operating or other costs with respect to the Projects or Additional Projects; and (k) Debt incurred to support a Working Capital Facility. All Permitted Debt incurred by the Funding Corporation shall be loaned to the Guarantors and guaranteed by the Guarantors. Principal Covenants Principal covenants under the Indenture require the Funding Corporation to agree, subject to certain exceptions and qualifications, (a) not to exercise any remedies or waive any defaults under the Credit Agreements and the Project Notes, except as otherwise permitted under the Indenture; (b) not to incur (i) any Debt except Permitted Debt or (ii) any Lien upon any of its properties except Permitted Liens and (c) not to enter into any transaction of merger or consolidation or change its form of organization or its business. The Project Notes The Salton Sea Guarantors jointly and severally issued a Project Note in an initial principal amount of $325,000,000; the Partnership Guarantors jointly and severally issued a Project Note in an initial principal amount of $75,000,000, and an additional project note in an amount of $135,000,000, and the Royalty Guarantor issued a Project Note in an initial principal amount of $75,000,000. The Guarantee and Project Notes issued by the Salton Sea Guarantors are senior secured Debt of the Salton Sea Guarantors. Security for payment of the Guarantee and Project Notes issued by the Salton Sea Guarantors includes: (a) an assignment of all revenues received by the Salton Sea Guarantors from the Salton Sea Projects which will be applied in accordance with the priorities of payment established under the Depositary Agreement; (b) a Lien on the geothermal property interests of each of the Salton Sea Guarantors and the Salton Sea Projects; (c) a collateral assignment of certain material contracts; (d) a pledge of the equity interests in the Salton Sea Guarantors; and (e) a Lien on the Expansion Fund and any other funds of the Salton Sea Guarantors on deposit under the Depositary Agreement. The assets described in clauses (a) through (e) and any other assets securing the Guarantee and Project Notes issued by the Salton Sea Guarantors at any time are collectively referred to herein as the "Salton Sea Collateral." The Guarantee and Project Notes issued by the Partnership Guarantors are senior secured Debt of the Partnership Guarantors. Security for payment of the Guarantee and Project Notes issued by the Partnership Guarantors includes: (a) an assignment of all revenues received by the Partnership Project Companies from the Partnership Projects and of all available Equity Cash Flows and Royalties of the Initial Partnership Guarantors which will be applied in accordance with the priorities of payment established under the Depositary Agreement; (b) a Lien on substantially all of the assets of each of the Partnership Project Companies and the Partnership Projects; (c) a collateral assignment of certain material contracts and payment rights; (d) a pledge of the capital stock of (or other equity interests in) the Partnership Guarantors; and (e) a Lien on the Capital Expenditure Fund and any other funds of the Partnership Guarantors on deposit under the Depositary Agreement. The assets described in clauses (a) through (e) and any other assets securing the Guarantee and the Project Notes issued by the Partnership Guarantors at any time are collectively referred to herein as the "Partnership Collateral." The Guarantee and Project Note issued by the Royalty Guarantor are senior secured Debt of the Royalty Guarantor. Security for the payment of the Guarantee and Project Note or Notes issued by the Royalty Guarantor includes: (a) an assignment of all Royalties paid to the Royalty Guarantor which will be applied in accordance with the priorities of payment established under the Depositary Agreement; (b) a collateral assignment of certain material contracts; (c) a pledge of the capital stock of the Royalty Guarantor; and (d) a Lien on any funds of the Royalty Guarantor on deposit under the Depositary Agreement. The assets described in clauses (a) through (d) and any other assets securing the Guarantee and Project Note issued by the Royalty Guarantor at any time are collectively referred to herein as the "Royalty Collateral." Principal Covenants Principal covenants under the Credit Agreements require each Guarantor to agree, subject to certain exceptions and qualifications, (a) not to enter into any transaction of merger or consolidation, change its form of organization, liquidate, wind-up or dissolve itself; (b) not to enter into non-arm's length transactions or agreements with Affiliates; (c) not to incur (i) any Debt except Permitted Guarantor Debt and (ii) any Liens except for Permitted Liens; (d) not to engage in any business other than as contemplated by the respective Credit Agreement; and (e) not to amend, terminate or otherwise modify certain of the Project Documents to which they are a party except as permitted under the respective Credit Agreements. In addition to these principal covenants, in the Salton Sea Credit Agreement and the Partnership Credit Agreement, the Salton Sea Guarantors and the Partnership Guarantors have agreed (a) not to sell, lease or transfer any property or assets material to the Salton Sea Projects or the Partnership Projects, as applicable, except in the ordinary course of business; and (b) to maintain insurance as is generally carried by companies engaged in similar businesses and owning similar properties. Considerations Regarding Limitation on Remedies A significant portion of the proceeds of the Initial Offering have been distributed to CalEnergy to repay certain non-recourse indebtedness incurred by CalEnergy in connection with the acquisition of Magma (including the Guarantors). The Royalty Guarantor has purchased an assignment of the Royalties from Magma pursuant to the Magma Assignment Agreement. Magma has also agreed to make certain payments to CEOC pursuant to the Magma Services Agreement and to secure such payment obligation with a collateral assignment of certain cash flows. The Guarantors have executed Guarantees with respect to the entire amount of Securities. Under certain circumstances (including a proceeding under Title 11 of the United States Code or any similar proceeding), it is possible that a creditor of a Guarantor or Magma could make a claim, under federal or state fraudulent conveyance laws, that the Funding Corporation's claims under the Credit Agreements, the Security Holders' claims under the Guarantees, the Royalty Guarantor's interest pursuant to the Magma Assignment Agreement or CEOC's rights under the Magma Services Agreement should be subordinated or not enforced in accordance with such instruments' terms or that payments thereunder (including payments to the Holders of the Securities) should be recovered. In order to prevail on such a claim, a claimant would have to demonstrate that the obligations incurred under any Guarantor's Credit Agreement or Guarantee or the transfers made under the Magma Assignment Agreement or the Magma Services Agreement were not incurred in good faith or that any Guarantor or Magma did not receive fair consideration in connection with such obligations and transfers, and that any Guarantor or Magma is and was insolvent at the time of entering into the Credit Agreement, Guarantee, the Magma Assignment Agreement and/or the Magma Services Agreement or that it did not have and will not have sufficient capital for carrying on its business or was not and will not be able to pay its debts as they mature. Uncertainties Relating to Exploration and Development of Geothermal Energy Resources Geothermal exploration, development and operations are subject to uncertainties which vary among different geothermal reservoirs and are similar to those typically associated with oil and gas exploration and development, including dry holes and uncontrolled releases. Because of the geological complexities of geothermal reservoirs, the geographic area and sustainable output of geothermal reservoirs can only be estimated and cannot be definitively established. There is, accordingly, a risk of an unexpected decline in the capacity of geothermal wells and a risk of geothermal reservoirs not being sufficient for sustained generation of the electrical power capacity desired. In addition, both the cost of operations and the operating performance of geothermal power plants may be adversely affected by a variety of operating factors. Production and injection wells can require frequent maintenance or replacement. Corrosion caused by high-temperature and high-salinity geothermal fluids may require the replacement or repair of certain equipment, vessels or pipelines. New production and injection wells may be required for the maintenance of current operating levels, thereby requiring substantial capital expenditures. Insurance The Salton Sea Projects and the Partnership Projects currently possess property, business interruption, catastrophic and general liability insurance. Proceeds of insurance received in connection with the Salton Sea Projects will be payable to the Depositary for the account of the Salton Sea Guarantors and will be applied as required under the Financing Documents. However, proceeds of insurance received in connection with the Partnership Projects will be payable to or for the account of the Partnership Project Companies and will not be payable to the Partnership Guarantors except in the event that such proceeds are paid to the Partnership Guarantors as an equity distribution. There can be no assurance that such comprehensive insurance coverage will be available in the future at commercially reasonable costs or terms or that the amounts for which the Salton Sea Guarantors and the Partnership Guarantors are or will be insured will cover all potential losses. Because geothermally active areas such as the area in which the Projects are located are subject to frequent low-level seismic disturbances, and serious seismic disturbances are possible, the power generating plants and other facilities at the Projects are designed and built to withstand relatively significant levels of seismic disturbance. However, there is no assurance that seismic disturbances of a nature and magnitude so as to cause material damage to the Projects or gathering systems or a material change in the nature of the geothermal resource will not occur, that insurance with respect to seismic disturbances will be maintained by or on behalf of all of the Projects, that insurance proceeds will be adequate to cover all potential losses sustained, or that insurance will continue to be available in the future in amounts adequate to insure against such seismic disturbances. Regulatory and Environmental Matters The Guarantors are subject to a number of environmental laws and regulations affecting many aspects of their present and future operations, including the disposal of various forms of materials resulting from geothermal reservoir production, the construction of the Salton Sea Expansion and the drilling and operation of new wells. Such laws and regulations generally require the Guarantors to obtain and comply with a wide variety of licenses, permits and other approvals. In addition, regulatory compliance for the construction of new facilities is a costly and time-consuming process, and intricate and rapidly changing environmental regulations may require major expenditures for permitting and create the risk of expensive delays or material impairment of project value if projects cannot function as planned due to changing regulatory requirements or local opposition. The Guarantors and the Projects also remain subject to a varied and complex body of environmental and energy regulations that both public officials and private individuals may seek to enforce. There can be no assurance that existing regulations will not be revised or that new regulations will not be adopted or become applicable to the Guarantors and the Projects which could have an adverse impact on their operations. In particular, the independent power market in the United States is dependent on the existing energy regulatory structure, including the Public Utility Regulatory Policies Act ("PURPA") and its implementation by utility commissions in the various states. The structure of such federal and state energy regulations has in the past, and may in the future, be the subject of various challenges and restructuring proposals by utilities and other industry participants. The implementation of regulatory changes in response to such challenges or restructuring proposals, or otherwise imposing more comprehensive or stringent requirements on the Guarantors and Projects, which would result in increased compliance costs could have a material adverse effect on the Guarantors' and the Projects' results of operations. Employees Employees necessary for the operation of the Salton Sea Projects and the Partnership Projects are provided by CEOC, under the operation and maintenance agreements described below. As of December 31, 1996, CEOC employed approximately 209 people at the Salton Sea Projects and the Partnership Projects, collectively. CEOC employees are not covered by any collective bargaining agreement. The Funding Corporation believes that CEOC's employee relations are good. CEOC maintains a qualified technical staff covering a broad range of disciplines including geology, geophysics, geochemistry, hydrology, volcanology, drilling technology, reservoir engineering, plant engineering, construction management, maintenance services, production management and electric power operation. Administrative services for the Salton Sea Guarantors and the Partnership Project Companies are provided pursuant to the administrative services agreements described below. CalEnergy employees provide corporate level managerial, financial, accounting, technical and other administrative services and CEOC employees provide certain accounting, purchasing and payroll services. Item 2. Properties The Funding Corporation does not separately own or lease office space but has arranged for a separate suite at CalEnergy's offices in Omaha, Nebraska. (See page 6 for a schedule of the Guarantors facilities.) Item 3. Legal Proceedings The Funding Corporation is not a party to any material legal proceedings. Item 4.Submission of Matters to a Vote of Security Holders. Not applicable. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters Not applicable. Item 6. Selected Financial Data (Dollars in thousands) Salton Sea Funding Corporation The following tables set forth selected historical financial and operating data of the Funding Corporation. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. Year Ended December 31, From June 20, 1995 (Inception Date) 1996 (2) through December 31, 1995 (1) ---------------- ----------------------------------- Total revenues $40,567 $17,577 Interest expense 36,761 15,022 Provision for income taxes 1,273 1,048 Total expenses 38,746 16,070 Net income 1,821 1,507 December 31, December 31, 1996(2) 1995 ------------------- ------------------ Notes receivables from affiliates $538,982 $452,088 Total assets 575,989 522,521 Senior secured notes and bonds 538,982 452,088 Total liabilities 567,295 515,571 Stockholder's equity 8,694 6,950 (1) Funding Corporation was formed on June 20, 1995 for the sole purpose of acting as issuer of senior notes and bonds and issued $475,000 of senior secured notes and bonds. (2) On June 20, 1996 Funding Corporation issued additional securities of $135,000 of Salton Sea Notes and Bonds Series D and E. Salton Sea Guarantors The following tables set forth selected historical combined financial and operating data of the Salton Sea Guarantors. The information contained therein was extracted from certain historical information of Magma Power Company and certain of its affiliates. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. Nine Months Ended Year Ended December 31, December 31 1996(1) 1995(2) 1994 1993(3) Sales of electricity $ 90,982$ 71,605 $ 74,576 $ 60,158 Total revenues 91,123 71,605 74,998 60,158 Operating expenses 27,175 26,096 24,766 19,336 Depreciation and amortization 14,272 10,556 10,049 7,425 Interest expense, net of capitalized interest 14,645 15,605 8,240 4,267 Total expenses 56,092 52,257 43,055 31,027 Net income 35,031 17,955 31,943 29,131 Property, plant, contracts and equipment, net 484,182 417,287 204,329 211,409 Total assets 565,934 500,400 232,914 223,066 Loans payable -- -- 114,308 140,000 Senior secured project note 299,840 321,500 -- -- Total liabilities 374,562 330,801 114,936 140,566 Guarantors' equity 191,372 169,599 117,978 82,500 (1) In June 1996, Salton Sea Unit IV commenced operations. (2) Information as of December 31, 1995 and for the year then ended reflects adjustments which have been made to the net assets of the Salton Sea Guarantors to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Salton Sea Guarantors. (3) On March 31, 1993, the Salton Sea Corporations completed their acquisition of Salton Sea Units I, II and III. Partnership Guarantors The following tables set forth selected historical combined financial and operating data of the Partnership Guarantors. The information contained therein was extracted from certain historical information of Magma Power Company and certain of its affiliates. The data should be read in conjunction with the financial statements and related notes, and other financial information appearing elsewhere in this Form 10-K. Year Ended December 31, 1996(1) 1995(2) 1994 1993 1992 Sales of electricity $132,212 $76,909 $70,692 $65,579 $60,979 Total revenues 140,226 87,483 76,050 70,057 65,523 Operating expenses 58,945 32,143 35,306 35,597 34,357 Depreciation and amortization 33,974 18,958 9,037 9,249 8,597 Interest expense, net of capitalized interest 4,848 8,826 3,285 3,712 4,782 Total expenses 97,767 59,927 47,628 48,558 47,736 Provision for income taxes 16,700 11,492 11,284 8,405 6,973 Net income 25,759 14,637 17,138 13,094 6,620 Property, plant, contracts and equipment, net 364,849 298,956 137,265 138,664 145,060 Total assets 742,183 602,172 180,443 178,894 183,899 Loans payable - 43,766 52,340 60,119 67,365 Senior secured project note 182,204 62,706 - - - Total liabilities 314,121 228,440 74,048 75,507 78,192 Guarantors' equity 428,062 373,732 106,395 103,387 105,707 (1) On April 17, 1996 the remaining 50% interest of the Partnership Projects was acquired from Edison Mission Energy. (2)Information as of December 31, 1995 and for the year then ended reflects adjustments which have been made to the net assets of the Partnership Guarantors to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Partnership Guarantors. Royalty Guarantor The following tables set forth selected historical financial and operating data of the Royalty Guarantor. The information contained therein was extracted from certain historical information of Magma and certain of its affiliates. The data should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. Year Ended December 31, 1996 1995 (2) 1994 (3) 1993 1992 Total revenues(1) $30,143 $28,383 $29,410 $26,942 $29,355 Operating expenses 7,288 6,822 20,753 5,710 5,203 Depreciation and amortization 10,280 11,239 - - - Interest expense 5,246 4,757 - - - Provision for income taxes 2,560 963 N/A N/A N/A Total expenses(1) (3) 25,374 24,873 20,753 5,710 5,203 Net income(1) 4,769 3,510 8,657 21,232 24,152 Royalty stream, net 44,372 53,744 Total assets 91,073 117,341 Senior secured project note 56,936 67,882 Total liabilities 81,233 89,290 Guarantor's equity 9,840 28,051 (1)The historical summaries of revenues and related expenses for periods prior to 1995, which were prepared on the basis described in the financial statements appearing elsewhere herein, are not intended to be complete presentation of the predecessor's revenues and expenses. (2)Information as of December 31, 1995 and for the year then ended reflects adjustments which have been made to the net assets of the Royalty Guarantor to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Royalty Guarantor. (3)During 1994, the Royalty Guarantor charged off is entire outstanding accrued Junior SO4 royalty receivable from GEO East Mesa. The charge amounted to $14,502 and is included in operating expenses. Excluding the one time charge, operating expenses would have been $6,251 and net income would have been $23,159. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands) Factors Affecting Results of Operations Funding Corporation was organized for the sole purpose of acting as issuer of the Securities. The Securities are payable from the proceeds of payments made of principal and interest on the Senior Secured Notes and Bonds 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 Royalty Guarantor are limited to available cash flow. The Funding Corporation does not conduct any operations apart from issuing the Securities. The periodic results of operations for the Guarantors are influenced to varying degrees by a number of factors, principally the level of revenues received under the power purchase agreements, project capacity utilization, the level of operating expenses and capital expenditures. Power Purchase Agreements Each of the Projects sells electricity to Edison pursuant to a separate SO4 Agreement or a negotiated power purchase agreement. Each power purchase agreement is independent of the others, and performance requirements specified within one such agreement apply only to the Project which is subject to that agreement. The power purchase agreements provide for three basic types of payments: energy payments, capacity payments and, in certain cases, capacity bonus 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 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 Partnership Projects sell all electricity generated by the respective plants pursuant to four long-term SO4 Agreements between the project and 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. 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 scheduled energy price periods of the Partnership Projects' SO4 Agreements extended until February 1996 for the Vulcan Partnership and extend until December 1998, December 1998, and December 1999 for each of the Del Ranch, Elmore and Leathers Partnerships, respectively. Excluding Vulcan, which is receiving Edison's Avoided Cost of Energy, the Parthership Projects' SO4 Agreements provide for energy rates ranging from 12.6 cents per kWh in 1996 to 15.6 cents per kWh in 1999. The Salton Sea I Project sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement, as amended (the "Salton Sea I PPA"), which provides for capacity and energy payments. The 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 I was 5.1 cents per kWh during 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 capacity payment is approximately $1,100 per annum. 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 period expires in April 2000 and February 1999, 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 annual capacity and bonus payments for Salton Sea II and Salton Sea III are approximately $3,300 and $9,700, respectively. The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4 agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The energy payment (for deliveries up to a rate of 39.6 MW) is at a fixed price for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. The contract has a 30 year term but Edision 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 year ended December 31, 1996, Edison's average Avoided Cost of Energy was 2.5 cents per kWh which is substantially below the contract energy prices earned for the year ended December 31, 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 revenues generated by each of the projects operating under SO4 Agreements could decline significantly after the expiration of the respective scheduled payment periods. Capacity Utilizations For purposes of consistency in financial presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Elmore, Leathers plants are based on nominal capacity amounts of 34, 38, 38, and 38 net MW respectively, and for Salton Sea I, Salton Sea II, Salton Sea III and Salton Sea IV plants, are based on nominal capacity amounts of 10, 20, 49.8 and 39.6 net MW, respectively. Each plant possesses an operating margin which allows for production in excess of the amount listed above. Utilization of this operating margin is based upon a variety of factors and can be expected to vary throughout the year under normal operating conditions. The following data represents the aggregate capacity and electricity production of Salton Sea Units I and II, Salton Sea Unit III and Salton Sea Unit IV: Year Ended December 31, 1996 1995 1994 Overall capacity factor 90.4% 86.5% 90.8% Capacity NMW (average) 103.0 79.8 79.8 Kwh produced (in thousands) 817,400 604,300 634,890 The following data represents the aggregate capacity and electricity production of Vulcan, Del Ranch, Elmore and Leathers: Year Ended December 31, 1996 1995 1994 Operating capacity factor 104.8% 105.9% 103.8% Capacity NMW (average) 148.0 148.0 148.0 Kwh produced (in thousands) 1,361,800 1,373,310 1,346,000 Results of Operations for the Years Ended December 31, 1996 and 1995 Revenues The Salton Sea Guarantors' sales of electricity increased to $90,982 for the year ended December 31, 1996 from $71,605 for the same period last year, a 27.1% increase. This increase was due primarily to the addition of Salton Sea IV which commenced operations in June 1996 and increased electric production at the other plants. The Partnership Guarantors' sales of electricity increased to $132,212 for the year ended December 31, 1996 from $76,909 for the same period in 1995, a 71.9% increase. This increase was due primarily to the Partnership Interest Acquisition in April 1996. This increase was offset by a decline in revenue from Vulcan which reached the end of its scheduled price period and started receiving revenue at avoided cost rates in February 1996. The Royalty Guarantor revenue increased to $30,143 for the year ended December 31, 1996 from $28,383 for the same period last year. The increase in royalty revenue is the result of the higher energy sales at the Partnership Projects compared to the prior year resulting in higher royalties. Interest and other income for the Partnership Guarantors decreased to $8,014 for the year ended December 31, 1996 from $10,574 for the same period in 1995. The decrease was attributable to lower cash balances. Operating Expenses The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $27,175, or 3.32 cents per kWh, for the year ended December 31, 1996, from $26,096 or 4.32 cents per kWh for the same period in 1995. The increase in expenses was due primarily to the addition of Salton Sea Unit IV which began operations in June 1996. The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $58,945, or 4.90 cents per kWh, for the year ended December 31, 1996, from $32,143 or 5.52 cents per kWh for the same period in 1995. The 83.4% increase in costs was due primarily to the Partnership Interest Acquisition. The Royalty Guarantor's operating expenses increased to $7,288 for the year ended December 31, 1996 from $6,822 for the same period of 1995, a 6.8% increase. This increase was due to a scheduled increase in third party lessor royalties related to the increases in the Partnership Projects' sales of electricity. Depreciation and Amortization The Salton Sea Guarantors' depreciation and amortization increased to $14,272 for the year ended December 31, 1996 from $10,556 for the year ended December 31, 1995, an increase of 35.2%. This increase was primarily due to the commencement of operations at Salton Sea Unit IV. Depreciation and amortization for the year ended December 31, 1996 was 1.75 cents per kWh compared to 1.75 cents per kWh in the year ended December 31, 1995. The Partnership Guarantors' depreciation and amortization increased to $33,974 for the year ended December 31, 1996 from $18,958 for the same period in 1995, a 79.2% increase. This increase was primarily due to the Partnership Interest Acquisition in April 1996. The Royalty Guarantor's amortization was $10,280 for the year ended December 31, 1996 compared with $11,239 for the year ended December 31, 1995. This decrease is consistent with Company's scheduled amortization of the royalty stream and the excess of cost over fair value related to the Magma acquisition. Interest Expense The Salton Sea Guarantors' interest expense, net of capitalized amounts, decreased to $14,645 for the year ended December 31, 1996 from $15,605 for the same period in 1995. This decrease is due primarily to the capitalization of interest related to the Salton Sea Unit IV expansion during the construction period and the mineral extraction 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, decreased to $4,848 for the year ended December 31, 1996 from $8,826 for the same period in 1995. The decrease is a result of scheduled debt repayments and capitalization of interest on the mineral extraction project, partially offset by the issuance of $135,000 of senior secured project notes in June of 1996. The Royalty Guarantors' interest expense increased to $5,246 for the year ended December 31, 1996 from $4,757 for the same period in 1995. This increase can be attributed to the related debt being outstanding for a full year in 1996. Income Tax Provision The Salton Sea Guarantors are substantially comprised of partnerships. Income taxes are the responsibility of the partners and Salton Sea Guarantors have no obligation to provide funds to the partners for payment of any tax liabilities. Accordingly, the Salton Sea Guarantors have no tax obligations. The Partnership Guarantors' income tax provision increased to $16,700 for the year ended December 31, 1996 from $11,492 for the same period in 1995. The increase in the provision is a result of the additional income from the Partnership Interest 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 increased to $2,560 for the year ended December 31, 1996 from $963 for the same period in 1995. The increase in the provision can be attributed to an increase in current year earnings. 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 Funding Corporation's net income was $1,821 for the year ended December 31, 1996 compared to $1,507 for the period June 20, 1995 (inception date) to December 31, 1995, which represented interest income and expense, net of applicable tax, and the Funding Corporation's 1% equity in earnings of the Guarantors. The Salton Sea Guarantors' net income increased to $35,031 for the year ended December 31, 1996, compared to $17,955 for the year ended December 31, 1995 due primarily to increased earnings resulting from the addition of Salton Sea Unit IV. The Partnership Guarantors' net income increased to $25,759 for the year ended December 31, 1996, compared to $14,637 for the year ended December 31, 1995 due primarily to increased earnings from the Partnership Interest Acquisition. The Royalty Guarantor's net income increased to $4,769 for the year ended December 31, 1996, compared to $3,510 for the year ended December 31, 1995 due primarily to increased royalty revenue. Results of Operations for the Years Ended December 31, 1995 and 1994 Revenues The Salton Sea Guarantors' sales of electricity decreased to $71,605 for the year ended December 31, 1995 from $74,576 for the same period last year, a 4.0% decrease. This was due to a 4.8% decrease in electric kWh sales to 604.3 million kWh from 634.9 million kWh, which was a result of the scheduled overhauls at Salton Sea Units I, II and III, partially offset by an increase in the energy price for Salton Sea Unit I. The Partnership Guarantors' sales of electricity increased to $76,909 for the year ended December 31, 1995 from $70,692 for the same period in 1994, an 8.8% increase. This was due to a 2.0% increase in electric kWh sales to 1,373.3 million kwh from 1,346.0 million kWh and an increased price per kWh in accordance with the SO4 Agreements. The Royalty Guarantor revenue decreased to $28,383 for the year ended December 31, 1995 from $29,410 for the same period last year. The decrease in royalty revenue is the result of the Royalty Guarantor no longer recording the earned but unpaid East Mesa Junior Royalties, which is a result of the uncertainty related to the East Mesa Project obtaining the long-term financing which is a prerequisite to the payment of these royalties. Interest and other income for the Partnership Guarantors increased to $10,574 for the year ended December 31, 1995 from $5,358 for the same period in 1994. The increase was attributable to higher cash balances and the Magma Services Agreement which went into effect on July 20, 1995. Fee income related to the Magma Services Agreement for the year ended December 31, 1995 was $4,457. Operating Expenses The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, increased to $26,096, or 4.32 cents per kWh, for the year ended December 31, 1995, from $24,766 or 3.90 cents per kWh for the same period in 1994. The increase in expenses was due to scheduled overhauls at Salton Sea Units I, II and III. The Partnership Guarantor' operating expenses, which include royalty, operating, and general and administrative expenses, decreased to $32,143, or 5.52 cents per kWh, for the year ended December 31, 1995, from $35,306 or 6.21 cents per kWh for the same period in 1994. The 9.0% decrease in costs was primarily due to the implementation of certain cost savings measures at the partnership level, including a reduction in labor costs at the time of the Magma acquisition. The Royalty Guarantor's operating expenses increased to $6,822 for the year ended December 31, 1995 from $6,251 for the same period of 1994, a 9.1% increase. This increase was due to a scheduled increase in third party lessor royalties related to the increases in the Partnership Projects' sales of electricity. Depreciation and Amortization The Salton Sea Guarantors' depreciation and amortization increased to $10,556 for the year ended December 31, 1995 from $10,049 for the year ended December 31, 1994, an increase of 5.0%. Depreciation and amortization for the year ended December 31, 1995 was 1.75 cents per kWh compared to 1.58 cents per kWh in the year ended December 31, 1994. The Partnership Guarantors' depreciation and amortization increased to $18,958 for the year ended December 31, 1995 from $9,037 for the same period in 1994, a 109.8% increase. This increase was due to the Magma Acquisition purchase accounting effect which results in the allocation of goodwill, including amortization, and the additional depreciation due to the excess of fair market value assigned to assets over the previous book value. The Royalty Guarantor's amortization totaled $11,239 for the year ended December 31, 1995 and represented amortization of the royalty stream and goodwill. Interest Expense The Salton Sea Guarantors' interest expense, net of capitalized amounts, increased to $15,605 for the year ended December 31, 1995 from $8,240 for the same period in 1994. The increase is a result of increased indebtedness from the issuance of the Senior Secured Project Notes and the purchase accounting allocation of the indebtedness incurred in conjunction with the Magma Acquisition. The Partnership Guarantors' interest expense, net of capitalized amounts, increased to $8,826 for the year ended December 31, 1995 from $3,285 for the same period in 1994. The increase is a result of increased indebtedness from the issuance of the Senior Secured Project Notes and the purchase accounting allocation of the indebtedness incurred in conjunction with the Magma Acquisition. The Royalty Guarantors' interest expense for the year ended December 31, 1995 was $4,757 which related to the issuance of the Senior Secured Project Notes and the aforementioned allocation of indebtedness incurred in conjunction with the Magma acquisition. Income Tax Provision 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 Guarantor income tax provision increased to $11,492 for the year ended December 31, 1995 from $11,284 for the same period in 1994. 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 $963 for the year ended December 31, 1995. 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 Funding Corporation's net income for the period June 20, 1995 (inception date) to December 31, 1995 was $1,507 which represented interest income and expense, net of applicable tax, and the Funding Corporation's 1% equity in earnings of the Guarantors. The Salton Sea Guarantors' net income decreased to $17,955 for the year ended December 31, 1995, compared to $31,943 for the year ended December 31, 1994 due primarily to increased interest expense and depreciation and amortization resulting from the Magma Acquisition. The Partnership Guarantors' net income decreased to $14,637 for the year ended December 31, 1995, compared to $17,138 for the year ended December 31, 1994 due primarily to increased interest expense and depreciation and amortization resulting from the Magma Acquisition. The Royalty Guarantor's net income decreased to $3,510 for the year ended December 31, 1995, compared to $8,657 for the year ended December 31, 1994 due primarily to increased interest expense and amortization resulting from the Magma Acquisition. Capital Resources and Liquidity 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 Royalties from the Partnership Projects. The Royalty Guarantor's only source of revenue is Royalties received pursuant to resource lease agreements with the Partnership Projects and the East Mesa Project. These payments, for each of the Guarantors, are expected to be sufficient to fund operating and maintenance expenses, payments of interest and principal on the Securities, projected capital expenditures and debt service reserve fund requirements. On April 17, 1996 CalEnergy completed the indirect acquisition of Edison Mission Energy's partnership interests (the "Partnership Interest Acquisition") in four geothermal operating facilities in California for a cash purchase price of $71,000 including acquisition costs and transferred these interests to Vulcan Power Company and CalEnergy Operating Company. The four projects, Vulcan, Hoch (Del Ranch), Leathers and Elmore are located in the Imperial Valley of California. Prior to this transaction, Magma was a 50% owner of these facilities. CalEnergy had acquired all of the outstanding equity interest in Magma in a two-step transaction accounted for as a purchase according to the terms of a merger agreement whereby on January 10, 1995, CalEnergy acquired approximately 51% of the outstanding shares of Magma common stock (the "Magma Common Stock") through a cash tender offer (the "Magma Tender Offer") and on February 24, 1995 CalEnergy acquired the remaining 49% of Magma Common Stock not owned by CalEnergy through a merger (the "Merger"). In July 1995 CalEnergy recapitalized Magma and the debt required to complete the Magma Acquisition ("the Merger Facilities") from proceeds received through the issuance of notes and bonds as described below. On July 21,1995 CalEnergy issued $200,000 of 9 7/8% Limited Recourse Senior Secured Notes Due 2003 (the "Notes"). The Notes are secured by an assignment and pledge of 100% of the outstanding capital stock of Magma. On or prior to June 30, 1998, CalEnergy may, at its option, redeem up to an aggregate of 35% of the principal amount of the Notes originally issued at a redemption price equal to 109.875% of the principal amount thereof plus accrued interest to the redemption date. The Notes are redeemable at the option of CalEnergy, in whole or in part, at the redemption prices of 104.9375%, 102.46875% and 100%, on or after June 30, 2000, 2001 and 2002, respectively, plus accrued interest to the date of redemption. On June 20, 1996 and July 21, 1995, the Funding Corporation completed sales to institutional investors of $135,000 and $475,000, respectively, of Salton Sea Notes and Bonds (the "Notes and Bonds"). The Funding Corporation debt securities were offered as follows: Senior Secured Series Due Rate Amount July 21, 1995 A Notes May 30, 2000 6.69% $232,750 July 21, 1995 B Bonds May 30, 2005 7.37% 133,000 July 21, 1995 C Bonds May 30, 2010 7.84% 109,250 June 20, 1996 D Notes May 30, 2000 7.02% 70,000 June 20, 1996 E Bonds May 30, 2011 8.30% 65,000 The Salton Sea Notes and Bonds are secured by the Company's four existing Salton Sea plants as well as an assignment of the right to receive various royalties payable to Magma in connection with its Imperial Valley properties and distributions from the Partnership Project. Changing Prices and the Effect of Inflation Inflation has not had a significant impact on the Guarantors' operating revenue and costs; energy payments for the Guarantors (excluding Vulcan) will continue to be based on scheduled rates and are not adjusted for inflation through the initial ten-year period of each power purchase agreement. Item 8. Financial Statements and Supplementary Data. SALTON SEA FUNDING CORPORATION INDEX TO FINANCIAL STATEMENTS SALTON SEA FUNDING CORPORATION Independent auditors' report--Deloitte & Touche LLP 33 Balance sheets as of December 31, 1996 and 1995 34 Statements of operations for the year ended December 31, 1996 and for the period from June 20, 1995 (inception date) through December 31, 1995 35 Statements of stockholder's equity for the year ended December 31, 1996 and for the period from June 20, 1995 (inception date) through December 31, 1995 36 Statements of cash flows for the year ended December 31, 1996 and for the period from June 20, 1995 (inception date) through December 31, 1995 37 Notes to financial statements 38 SALTON SEA GUARANTORS Independent auditors' report--Deloitte & Touche LLP 40 Reports of independent accountants--Coopers & Lybrand L.L.P. 41 Combined balance sheets as of December 31, 1996 and 1995 42 Combined statements of operations for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 43 Combined statements of Guarantors' equity for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 44 Combined statements of cash flows for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 45 Notes to combined financial statements 46 PARTNERSHIP GUARANTORS Independent auditors' report--Deloitte & Touche LLP 52 Reports of independent accountants--Coopers & Lybrand L.L.P. 53 Combined balance sheets as of December 31, 1996 and 1995 54 Combined statements of operations for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 55 Combined statements of Guarantors' equity for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 56 Combined statements of cash flows for the years ended December 31, 1996 and 1995 (Successor) and 1994 (Predecessor) 57 Notes to combined financial statements 58 SALTON SEA ROYALTY COMPANY Independent auditors' report--Deloitte & Touche LLP 69 Balance sheets as of December 31, 1996 and 1995 70 Statements of operations for the years ended December 31, 1996 and 1995 71 Statements of equity for the years ended December 31, 1996 and 1995 72 Statements of cash flows for the years ended December 31, 1996 and 1995 73 Notes to financial statements 74 SALTON SEA ROYALTY COMPANY--PREDECESSOR Report of independent accountants--Coopers & Lybrand L.L.P. 78 Predecessor summary of revenues and related expenses for the year ended December 31, 1994 79 Notes to predecessor summary of revenues and related expenses 80 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Salton Sea Funding Corporation Omaha, Nebraska We have audited the accompanying balance sheets of Salton Sea Funding Corporation as of December 31, 1996 and 1995 and the related statements of operations, stockholder's equity and cash flows for the year ended December 31, 1996 and for the period from June 20, 1995 (inception date) through December 31, 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 audits. We conducted our audits 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Salton Sea Funding Corporation as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the year ended December 31, 1996 and for the period from June 20, 1995 (inception date) through December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 1997 SALTON SEA FUNDING CORPORATION BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) December 31, 1996 1995 ASSETS Cash $ 13,218 $ 4,393 Restricted cash 14,044 57,256 Prepaid expenses and other assets 3,452 3,070 Secured project notes from Guarantors 538,982 452,088 Investment in 1% of net assets of Guarantors 6,293 5,714 ----------- ----------- $575,989 $522,521 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accrued liabilities $ 3,291 $ 3,889 Due to affiliates 25,022 59,594 Senior secured notes and bonds 538,982 452,088 ----------- ----------- Total liabilities 567,295 515,571 Stockholder's equity: Common stock--authorized 1,000 shares, par value $.01 per share; issued and outstanding 100 shares - - Additional paid-in capital 5,366 5,443 Retained earnings 3,328 1,507 ----------- ----------- Total stockholder's equity 8,694 6,950 ----------- ----------- $575,989 $522,521 ======= ======= The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF OPERATIONS (Dollars in Thousands) For the Period From June 20, 1995 For the Year (inception date) Ended through December 31, 1996 December 31, 1995 Revenues: Interest income $39,911 $17,306 Equity in earnings of Guarantors 656 271 --------- --------- 40,567 17,577 Expenses: General and administrative expenses 712 --- Interest expense 36,761 15,022 --------- --------- Total expenses 37,473 15,022 --------- --------- Income before income taxes 3,094 2,555 Provision for income taxes 1,273 1,048 -------- --------- Net income $ 1,821 $ 1,507 ===== ===== The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JUNE 20, 1995 (INCEPTION DATE) THROUGH DECEMBER 31, 1995 (Dollars in Thousands) Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity -------------------------------------------------- Issuance share of common stock 100 $ - $ - $ - $ - Investment in 1% of net assets of Guarantors at inception - - 3,267 - 3,267 -------------------------------------------------- Balance, June 20, 1995 (inception date) 100 - 3,267 - 3,267 Adjustments resulting from capital transactions of Guarantors - - 2,176 - 2,176 Net income - - - 1,507 1,507 -------------------------------------------------- Balance, December 31, 1995 100 - 5,443 1,507 6,950 Adjustments resulting from capital transactions of Guarantors - - (77) - (77) Net income - - - 1,821 1,821 -------- -------- -------- ---------- -------- Balance, December 31, 1996 100 $ - $5,366 $3,328 $8,694 ===== ===== ===== ========== ======== The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS (Dollars in Thousands) For the Period For the From June 20, 1995 Year Ended (Inception Date) through December 31, 1996 December 31, 1995 Cash flows from operating activities: Net income $ 1,821 $ 1,507 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of guarantors (656) (271) Changes in assets and liabilities: Prepaid expenses and other assets (382) (3,070) Accrued liabilities (598) 3,889 ----------- ------------ Net cash flows from operating activities 185 2,055 ----------- ------------ Cash flows from investing activities: Decrease (increase) in restricted cash 43,212 (57,256) Secured project notes of Guarantors (135,000) (475,000) Principal repayments of secured project notes of Guarantors 48,106 22,912 ------------ ------------ Net cash flows from investing activities (43,682) (509,344) ------------ ------------ Cash flows from financing activities: Proceeds from offering of senior secured notes and bonds 135,000 475,000 Repayment of senior secured project notes and bonds (48,106) (22,912) Due to affiliates (34,572) 59,594 ----------- ------------ Net cash flows from financing activities 52,322 511,682 ----------- ------------ Net change in cash 8,825 4,393 Cash at the beginning of period 4,393 - ---------- ------------ Cash at the end of period $ 13,218 $ 4,393 ======= ======= Non-cash investing and financing activities: Adjustments resulting from capital transactions of Guarantors $ (77) $ 2,176 ======= ======= The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands) 1. THE PURPOSE AND BUSINESS OF SALTON SEA FUNDING CORPORATION Salton Sea Funding Corporation (the "Funding Corporation"), which was formed on June 20, 1995, is a special purpose Delaware corporation and a wholly-owned, subsidiary of Magma Power Company, which in turn is wholly-owned by CalEnergy Company, Inc. (" CalEnergy"). The Funding Corporation was organized for the sole purpose of acting as issuer of senior secured notes and bonds. On June 20, 1996 and July 21, 1995, the Funding Corporation issued $135,000 and $475,000 of Senior Secured Notes and Bonds (collectively, the "Securities"). The Securities are payable from the proceeds of payments made of principal and interest on the Senior Secured Notes and Bonds by the Guarantors, as defined, to the Funding Corporation. The Securities are guaranteed on a joint and several basis by the Salton Sea Guarantors, the Partnership Guarantors and Salton Sea Royalty Company (collectively 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 issuing the Securities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investment in Guarantors Since the Funding Corporation has the ability to assert significant influence over the operations of the Guarantors, it accounts for its one percent investment in the Guarantors using the equity method of accounting. Restricted Cash The restricted cash balance primarily includes commercial paper, money market securities and mortgage backed securities and is composed of amounts deposited in restricted accounts from which the Funding Corporation will source its debt service requirements for the Securities. Income Taxes The Funding Corporation is included in the consolidated income tax returns with its parent and affiliates. Income taxes are provided on a separate return basis, however, tax obligations of the Funding Corporation will be remitted to the parent only to the extent of cash flows available after operating expenses and debt service. Fair Values of Financial Instruments Fair values have been estimated based on quoted market prices for debt issues listed on exchanges. Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. SENIOR SECURED NOTES AND BONDS On June 20, 1996 and July 21, 1995, the Funding Corporation completed sales to institutional investors of $135,000 and $475,000, respectively, of Salton Sea Notes and Bonds (the "Notes and Bonds"). The Funding Corporation's debt securities were offered as follows: Senior Secured Series Due Rate Amount July 21, 1995 A Notes May 30, 2000 6.69% $232,750 July 21, 1995 B Bonds May 30, 2005 7.37% 133,000 July 21, 1995 C Bonds May 30, 2010 7.84% 109,250 June 20, 1996 D Notes May 30, 2000 7.02% 70,000 June 20, 1996 E Bonds May 30, 2011 8.30% 65,000 Principal maturities of the Senior Secured Notes and Bonds are as follows: 1997 $ 90,228 1998 106,938 1999 57,836 2000 25,072 2001 22,376 Thereafter 236,532 ----------- $538,982 ======= The carrying amounts and estimated fair values of the Senior Secured Notes and Bonds at December 31, 1996 and 1995 were $538,982 and $531,807 and $452,088 and $459,629, respectively. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have audited the accompanying combined balance sheets of the Salton Sea Guarantors as of December 31, 1996 and 1995, and the related combined successor statements of operations, Guarantors' equity and cash flows for the years then ended. These financial statements are the responsibility of the Salton Sea Guarantors' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Salton Sea Guarantors as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 1997 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have audited the accompanying combined predecessor statements of operations, Guarantors' equity and cash flows of Salton Sea Guarantors for the year ended December 31, 1994. These financial statements are the responsibility of the Salton Sea Guarantors' 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 presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined predecessor financial statements referred to above present fairly, in all material respects, the historical combined results of operations and cash flows of the Salton Sea Guarantors for the year ended December 31, 1994 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Diego, California June 19, 1995, SALTON SEA GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) December 31, 1996 1995 Cash $ - $ 454 Accounts receivable 14,954 10,436 Prepaid expenses and other assets 16,008 20,129 Property, plant, contracts and equipment, net4 84,182 417,287 Excess of cost over fair value of net assets acquired, net 50,790 52,094 ------------------------ $565,934 $500,400 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 642 $ 939 Accrued liabilities 9,989 4,043 Due to affiliates 64,091 4,319 Senior secured project note 299,840 321,500 ------------------------ Total liabilities 374,562 330,801 Commitments and contingencies (Notes 2,5 and 6) Total Guarantors' equity 191,372 169,599 ------------------------ $565,934 $500,400 ======= ======= The accompanying notes are an integral part of the combined financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) Year Ended December 31, 1996 1995 1994 Successor Predecessor Revenues: Sales of electricity $90,982 $71,605 $74,576 Interest and other income 141 - 422 ------------------------------ Total Revenues 91,123 71,605 74,998 ------------------------------ Expenses: Operating, general and administrative expenses 27,175 26,096 24,766 Depreciation and amortization 14,272 10,556 10,049 Interest expense 24,866 24,783 8,240 Less capitalized interest (10,221) (9,178) - --------------------- ---------- Total expenses 56,092 52,257 43,055 ------------------------------ Income before minority interest 35,031 19,348 31,943 Minority interest - 1,393 - ------------------------------ Net income $35,031 $17,955 $31,943 ====== ====== ====== The accompanying notes are an integral part of the combined financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF GUARANTORS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (Dollars in Thousands) Predecessor: Balance, January 1, 1994 $ 82,500 Contributions 12,285 Distributions (8,750) Net income 31,943 ------------ Balance, December 31, 1994 117,978 Net income in 1995 prior to acquisition 1,393 Successor: Contributions 10,606 Distributions (5,000) Purchase accounting push-down adjustment, net 26,667 Net income 17,955 ------------ Balance, December 31, 1995 169,599 Distributions (13,258) Net income 35,031 ------------ Balance, December 31, 1996 $ 191,372 ======== The accompanying notes are an integral part of the combined financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year Ended December 31, 1996 1995 1994 Successor Predecessor Cash flows from operating activities: Net income $ 35,031 $ 17,955 $31,943 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,393 - Depreciation and amortization 14,272 10,556 10,049 Changes in assets and liabilities: Accounts receivable (4,518) 169 (993) Prepaid expenses and other assets 4,121 (19,236) (869) Accounts payable and accrued liabilities 5,649 4,354 62 Other - (583) ------------------------------------ Net cash flows from operating activities 54,555 15,191 39,609 ------------------------------------ Cash flows from investing activities: Purchase of Guarantors by CalEnergy, net of cash acquired - (171,964) - Capital expenditures (79,863) (68,677) (4,493) Net decrease (increase) in marketable securities - 4,988 (4,945) Decrease (Increase) restricted cash - 3,400 (3,400) ------------------------------------ Net cash flows from investing activities (79,863) (232,253) (12,838) ------------------------------------ Cash flows from financing activities: Repayments of senior secured project note (21,660) (302,172) (155,692) Loan proceeds - 509,364 130,000 Contributions from parent - 10,606 12,285 Distributions to parent (13,258) (5,000) (8,750) Due to (from) affiliates 59,772 4,718 (399) ------------------------------------ Net cash flows from financing activities 24,854 217,516 (22,556) ------------------------------------ Net change in cash (454) 454 4,215 Cash at beginning of period 454 - - ------------------------------------ Cash at end of period $ - $ 454 $ 4,215 ======= ======= ======= The accompanying notes are an integral part of the combined financial statements. SALTON SEA GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Thousands) 1. ORGANIZATION AND OPERATIONS Salton Sea Guarantors (the "Guarantors") (not a legal entity) is comprised of 100% interests in three geothermal electric power generating plants (Salton Sea Units I, II and III) and a fourth plant (Salton Sea Unit IV or the Salton Sea Expansion) which became operational in June 1996 (collectively, the "Salton Sea Projects"). Salton Sea Unit IV was created upon combining and consolidating the Salton Sea Unit I power purchase agreement and the Fish Lake modified SO4. All four plants are located in the Imperial Valley of California. The Salton Sea Projects will serve to guarantee loans from Salton Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned subsidiary of CalEnergy Company, Inc. ("CalEnergy"). The financial statements consist of the combination of (1) Salton Sea Brine Processing, L.P., a California limited partnership between Magma Power Company ("Magma"), as a 99% limited partner and Salton Sea Power Company ("SSPC"), a wholly-owned subsidiary of Magma, as a 1% general partner, (2) Salton Sea Power Generation, L.P., a California limited partnership between Salton Sea Brine Processing, L.P., as a 99% limited partner, and Salton Sea Power Company, as a 1% general partner and (3) assets and liabilities attributable to Salton Sea Unit IV which are held 59% by Salton Sea Power Generation, L.P. and 41% by Fish Lake Power Company ("FLPC"). Effective in June of 1995, 1% interests in SSPC and FLPC were transferred to Funding Corporation. All of the entities in the combination are affiliates of Magma. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements present the combined accounts of the Salton Sea Projects described above. All significant intercompany transactions and accounts have been eliminated. The December 31, 1995 successor financial statements reflect the acquisition of Magma (see Note 3), the resulting push down to the Guarantors of the accounting as a purchase business combination and minority interest for the non-owned periods consisting of 100% for the period January 1-9, 1995 and 49% for the period January 10, 1995-February 23, 1995. Revenue Recognition The Guarantors recognize revenues and related accounts receivable with respect to their four operating facilities from sales of electricity to Southern California Edison Company ("Edison") on an accrual basis. Edison is the sole customer of the Guarantors. 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 5.1 cents per kWh during 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 capacity payment is approximately $1,100 per annum. 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 period expires in April 2000 and February 1999 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 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 annual capacity and bonus payments for Salton Sea II and Salton Sea III are approximately $3,300 and $9,700, respectively. The Salton Sea IV Project sells electricity to Edison pursuant to a modified SO4 agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The energy payment (for deliveries up to a rate of 39.6 MW) is at a fixed price for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. The contract has a 30-year term but Edison is not required to purchase the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA option after September 30, 2017, the original termination date of the Salton Sea I PPA. The Guarantors earn energy payments based on kilowatt hours ("kWhs") of energy provided to Edison. During the first 10 years, the Guarantors earn payments for energy as scheduled in their SO4 Agreements. After the 10-year scheduled payment period has expired (in 1999 for Salton Sea Unit III and 2000 for Salton Sea Unit II), the energy payment per kWh throughout the remainder of the contract period will be at Edison's Avoided Cost of Energy. For the year ended December 31, 1996, Edison's average Avoided Cost of Energy was 2.5 cents per kWh which is substantially below the contract energy prices earned in 1996. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Guarantors cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements at the expiration of the scheduled payment periods. The revenues generated by each of the units operating under SO4 Agreements could decline significantly after the expiration of the relevant scheduled payment period. Under the negotiated contract, the energy payment is calculated using a base price, as defined, which is subject to quarterly adjustments based on a basket of indices for the term of the agreement. Property, Plant, Contracts and Equipment Property, plant, contracts and equipment are carried at cost less accumulated depreciation. The Guarantors follow the full cost method of accounting for costs incurred in connection with the exploration and development of geothermal resources. The Guarantors provide depreciation and amortization of property, plants, contracts and equipment upon the commencement of revenue production over the estimated useful life of the assets. Depreciable lives for the periods through 1994 were as follows: Plant and plant equipment 20 years Office furniture and equipment 5-10 years Other equipment 7-10 years Exploration and development costs 20 years Power purchase contracts were amortized on the straight line method over 20 years which is the lesser of the remaining life of the contract or the remaining useful life of plant and plant equipment. As a result of the purchase business combination, the assets and liabilities were adjusted to fair value and are depreciated over the remaining useful lives. See "Purchase Accounting" below and Note 4, "Property, Plant, Contracts and Equipment." Purchase Accounting As a result of the purchase business combination accounted for on a push down basis by the Guarantors during the year ended December 31, 1995, all identifiable assets and liabilities are stated at fair value (see Note 3). Depreciation of the operating power plant costs, net of salvage value, is computed on the straight line method over the estimated useful lives, between 10 and 30 years. Depreciation of furniture, fixtures and equipment, which are recorded at cost, is computed on the straight line method over the estimated useful lives of the related assets, which range from three to ten years. Power sale agreements have been assigned values separately for each of (1) the remaining portion of the scheduled price periods of the power sales agreements and (2) the 20 year avoided cost periods of the power sales agreements and are being amortized separately over such periods using the straight line method; and (3) the 163 net MW BRPU Award for which the related plants will either be constructed or the contract rights will be bought out; amortization of such values has been deferred until the plants have been constructed and production commences or the buyout proceeds have been applied against such values. The Salton Sea reservoir contains commercial quantities of extractable minerals. The fair value allocated to mineral extraction was based on the estimated net cash flows generated from producing such minerals. The fair value assigned to the mineral reserves will be amortized on the units of production method upon commencement of commercial production. Excess of Cost over Fair Value Total acquisition costs in excess of the fair values assigned to the net assets acquired are amortized over a 40 year period using the straight line method. At December 31, 1996 and 1995, accumulated amortization of the excess of cost over fair value was $2,481 and $1,177, respectively. Income Taxes The Guarantors are comprised substantially of partnership interests. The income or loss of each partnership for income tax purposes, along with any associated tax credits, is the responsibility of the individual partners. Accordingly, no recognition has been given to federal or state income taxes in the accompanying combined financial statements. Statements of Cash Flows For purposes of the statements of cash flows, the Guarantors consider only demand deposits at banks to be cash. Cash paid for interest during the years ended December 31, 1996 , 1995 and 1994 was $23,301, $4,716 and $7,163, respectively. Fair Values of Financial Instruments Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values. Impairment of Long-Lived Assets On January 1, 1996, the Guarantor adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires that long-lived assets and certain identifiable intangibles be reviewed for impairments whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have a material effect on the Guarantors' financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PURCHASE OF MAGMA POWER COMPANY On January 10, 1995, CalEnergy acquired approximately 51% of the outstanding shares of common stock of Magma (the "Magma Common Stock") through a cash tender offer (the "Magma 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 CalEnergy through a merger. The transaction was accounted for as a purchase business combination. All identifiable assets acquired and liabilities assumed were assigned a portion of the cost of acquiring Magma, equal to their fair values at the date of the acquisition. The adjustments which have been made to the net assets of the Guarantors to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Guarantors are as follows: Property, plant, contracts and equipment $ 153,660 Goodwill 53,271 Deferred financing cost 6,412 Severance, relocation and litigation reserve (2,312) Debt (184,364) ------------ Net increase in assets $ 26,667 ============ Unaudited pro forma combined revenue and net income of the Guarantors on a purchase, push down basis of accounting, for the year ended December 31, 1995, as if the acquisition had occurred on January 1, 1994 after giving effect to certain pro forma adjustments related to the acquisition, were $71,605 and $18,465, respectively. 4. PROPERTY, PLANT, CONTRACTS AND EQUIPMENT Property, plant, contracts and equipment consisted of the following: December 31, 1996 1995 -------------------------- Plant and equipment $329,458 $173,509 Salton Sea Unit IV construction in progress - 108,632 Power sale agreements 64,609 64,609 Mineral extraction 66,831 60,577 Exploration and development costs 42,220 17,793 ----------------------- 503,118 425,120 Less accumulated depreciation and amortization (18,936) (7,833) ----------------------- $484,182 $417,287 ======= ======= 5. SENIOR SECURED PROJECT NOTE The Guarantors assumed their proportionate share of the secured bank financing incurred in connection with the purchase of Magma (see Note 3). On July 21, 1995, CalEnergy recapitalized Magma and the related Merger Facilities from proceeds received through a $200,000 high yield offering and a $475,000 investment grade offering of the Salton Sea Funding Corporation. Proceeds from the offering of Salton Sea Funding Corporation investment grade securities were used to repay certain loans of the Guarantors. The Guarantors issued a project note in the amount of $325,000 payable to Salton Sea Funding Corporation with interest rates ranging from 6.69% to 7.84%, and guaranteed the investment grade securities. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of the equity interests in the Guarantors. Principal maturities of the senior secured project note are as follows: 1997 $ 33,632 1998 39,450 1999 16,076 2000 9,737 2001 16,944 Thereafter 184,001 ------------ $299,840 ======= The carrying amounts and estimated fair values of the senior secured projects notes at December 31, 1996 and 1995 were $299,840 and $295,849 and $321,500 and $326,337, respectively. 6. RELATED PARTY TRANSACTIONS The Guarantors have entered into the following agreements: Easement Grant Deed and Agreement Regarding Rights for Geothermal Development dated April 1, 1993, whereby the Guarantors acquired from Magma Land I, a wholly-owned subsidiary of Magma, rights to extract geothermal brine from the geothermal lease rights property which is necessary to operate the Salton Sea Power Generation, L.P. facilities in return for 5% of all electricity revenues received by the Guarantors. The amount expensed for the years ended December 31, 1996, 1995 and 1994 was $4,215, $3,579 and $3,732, respectively. Administrative Services Agreement dated April 1, 1993 with Magma, whereby Magma will provide to the Guarantors adminis trative and management services. Fees payable to Magma amount to 3% of total electricity revenues per month. The amount expensed for the years ended December 31, 1996, 1995 and 1994 was $2,202, $2,153 and $2,239, respectively. Operating and Maintenance Agreement dated April 1, 1993 with CalEnergy Operating Company ("CEOC") (formerly Magma Operating Co.), whereby the Guarantors retain CEOC to operate the Salton Sea facilities for a period of 32 years. Payment is made to CEOC in the form of reimbursements of expenses incurred. During 1996, 1995 and 1994, the Guarantors reimbursed CEOC for expenses of $9,854, $6,939 and $5,973, respectively. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have audited the accompanying combined balance sheets of the Partnership Guarantors as of December 31, 1996 and 1995, and the related combined successor statements of operations, Guarantors' equity and cash flows for the years then ended. These financial statements are the responsibility of the Guarantors' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Partnership Guarantors as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 1997 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have audited the accompanying Partnership Guarantors (the "Guarantors") combined predecessor statements of operations, Guarantors' equity and cash flows for the year ended December 31, 1994. These financial statements are the responsibility of the Partnership Guarantors' 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 presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined predecessor financial statements referred to above present fairly, in all material respects, the historical combined results of operations and cash flows of the Partnership Guarantors for the year ended December 31, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Diego, California June 19, 1995, PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) December 31, 1996 1995 ASSETS Cash $ - $ 11,146 Restricted cash - 9,859 Accounts receivable 22,766 11,841 Prepaid expenses and other assets 19,083 9,651 Due from affiliates 129,278 54,949 Property, plant, contracts and equipment, net 364,849 298,956 Management fee 67,521 63,520 Excess of fair value over net assets acquired, net 138,686 142,250 ---------------------- $742,183 $602,172 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 663 $ 3,566 Accrued liabilities 22,977 19,995 Loans payable - 43,766 Senior secured project note 182,204 62,706 Deferred income taxes 108,277 98,407 ---------------------- Total liabilities 314,121 228,440 Commitments and contingencies (Notes 2, 6 and 7) Guarantors' equity: Common stock 3 3 Additional paid-in capital 387,663 359,092 Retained earnings 40,396 14,637 ---------------------- Total Guarantors' equity 428,062 373,732 ---------------------- $742,183 $602,172 ======= ======= The accompanying notes are an integral part of the combined financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) Year Ended December 31, 1996 1995 1994 Successor Predecessor Revenues: Sales of electricity $132,212 $76,909 $70,692 Interest and other income 8,014 10,574 5,358 -------------------------------- Total revenues 140,226 87,483 76,050 Costs and expenses: Operating, general and administrative costs 58,945 32,143 35,306 Depreciation and amortization 33,974 18,958 9,037 Interest expense 13,697 16,726 3,285 Less capitalized interest (8,849) (7,900) --- -------------------------------- Total expenses 97,767 59,927 47,628 -------------------------------- Income before income taxes 42,459 27,556 28,422 Provision for income taxes 16,700 11,492 11,284 -------------------------------- Income before minority interest 25,759 16,064 17,138 Minority interest - 1,427 - -------------------------------- Net income 25,759 14,637 17,138 Pro forma adjustment to reflect fee payable from affiliates, net of income taxes N/A N/A 1,956 ------------------------------- Pro forma net income N/A N/A $19,094 ======= ====== ======= The accompanying notes are an integral part of the combined financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF GUARANTORS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (Dollars in Thousands) Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity -------------------------------------------------------- Predecessor: Balance, January 1, 1994 3 $ 3 $103,384 $ - $ 103,387 Cash distributions to Magma - - (1,062) (17,138) (18,200) Other distributions - - (3,315) - (3,315) Contribution for income taxes - - 7,385 - 7,385 Net income - - - 17,138 17,138 ---------------------------------------------------- Balance, December 31, 1994 3 3 106,392 - 106,395 Net income in 1995 prior to acquisition - - - 1,427 1,427 Successor: Purchase accounting push-down adjustment, net - - 68,617 (1,427) 67,190 Distributions - - (13,860) - (13,860) Contributions - - 197,943 - 197,943 Net income - - - 14,637 14,637 ---------------------------------------------------- Balance, December 31, 1995 3 3 359,092 14,637 373,732 Distributions - - (42,429) - (42,429) Contribution of partnership interest - - 71,000 - 71,000 Net income - - - 25,759 25,759 ---------------------------------------------------- Balance, December 31, 1996 3 $ 3 $387,663 $40,396 $428,062 ===== ====== ======= ====== ======= The accompanying notes are an integral part of the combined financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year Ended December31, 1996 1995 1994 (Successor) (Predecessor) Cash flows from operating activities: Net income $ 25,759 $ 14,637 $ 17,138 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,427 - Depreciation and amortization 33,974 18,958 9,037 Deferred taxes 321 1,011 3,899 Changes in assets and liabilities: Accounts receivable 3,552 (993) (3,103) Prepaid expenses and other assets (615) (5,779) 178 Accounts payable and accrued liabilities 3,278 12,047 2,421 Other, net - - 8,251 -------------------------------- Net cash flows from operating activities 66,269 41,308 37,821 -------------------------------- Cash flows from investing activities: Capital expenditures (18,483) (4,066) (10,495) Purchase of Guarantors by CalEnergy, net of cash acquired - (197,810) - Net (increase) decrease in marketable securities - 7,457 (4,826) Decrease (increase) in restricted cash 23,085 (1,206) (3,058) Management fee (4,736) (30,485) - -------------------------------- Net cash flow from investing activities (134) (226,110) (18,379) -------------------------------- Cash flows from financing activities: Loan repayments (107,560) (225,479) (7,779) Loan proceeds 135,000 288,185 - Contributions from parent - 197,943 - Distributions to parent (42,429) (13,860) (18,200) Decrease (increase) in amounts due from affiliates (62,292) (50,841) 4,077 -------------------------------- Net cash flows from financing activities (77,281) 195,948 (21,902) -------------------------------- Net increase (decrease) in cash (11,146) 11,146 (2,460) Cash at beginning of period 11,146 - 8,121 -------------------------------- Cash at the end of period $ - $ 11,146 $ 5,661 ======= ====== ====== During 1996, CalEnergy Company, Inc. contributed $71,000 of net assets acquired from Edison Mission Energy, of which $12,956 was cash, to the Partnership Guarantors (see Note 3). The accompanying notes are an integral part of these combined financial statements. PARTNERSHIP GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Thousands) 1. ORGANIZATION AND OPERATIONS Partnership Guarantors (the "Guarantors") (not a legal entity) consists of the combination of Vulcan Power Company ("VPC") and CalEnergy Operating Company ("CEOC"), both 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation"). VPC's and CEOC's principal assets are interests in certain partnerships which are engaged in the operation of geothermal power plants in the Imperial Valley of California. The Guarantors will serve to guarantee loans to such partnerships from Funding Corporation, a wholly-owned subsidiary of CalEnergy Company, Inc. ("CalEnergy"). VPC and its subsidiary holda 100% interest in Vulcan/BN Geothermal Power Company, a Nevada general partnership, and CEOC and its subsidiaries hold a 90% general partner interest in Leathers, L.P., a California limited partnership, Del Ranch, L.P., a California limited partnership and Elmore, L.P. a California limited partnership (collectively, the "Partnerships"). Magma owns a 10% limited partnership interest in each of Leathers L.P., Elmore L.P. and Del Ranch L.P. and has entered into an agreement to pay to the Guarantors the distributions it receives related to such 10% interests, in addition to a special distribution equal to 4.5% of total energy sales from the Leathers Project. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements of the Guarantors present the accounts of CEOC, VPC and their proportionate share of the Partnerships in which they have an undivided interest in the assets and are proportionately liable for their share of the liabilities. All significant intercompany balances and transactions have been eliminated. The December 31, 1995 successor financial statements reflect the acquisition of Magma (see Note 3), the resulting push down to the Guarantors of the accounting as a purchase business combination and minority interest for the non-owned periods consisting of 100% for the period January 1-9, 1995 and 49% for the period January 10, 1995--February 23, 1995. Revenue Recognition The Guarantors recognize revenues and related accounts receivable from sales of electricity on an accrual basis using stated contract prices. All of the Guarantors sales of electricity are to Southern California Edison Company ("Edison") and are under long-term power purchase contracts. The Partnership Projects sell all electricity generated by the respective plants pursuant to four long-term power purchase agreements ("SO4 Agreements") between the projects and 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. 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 scheduled energy price periods of the Partnership Projects' SO4 Agreements extended until February 1996 for the Vulcan Partnership and extend until December 1998, December 1998, and December 1999 for each of the Del Ranch, Elmore and Leathers Partnerships, respectively. Excluding Vulcan, which is receiving Edison's Avoided Cost of Energy, the Partnership Projects' SO4 Agreements provide for energy rates ranging from 12.6 cents per kWh in 1996 to 15.6 cents per kWh in 1999. The weighted average energy rate for all of the Partnership Projects' SO4 Agreements was 9.7 cents per kWh in 1996. The Guarantors earn energy payments based on kilowatt hours ("kWhs") of energy provided to Edison. During the first 10 years, the Guarantors earn payments for energy as scheduled in their SO4 Agreements. After the 10-year scheduled payment period has expired (in 1996 for Vulcan, 1998 for Del Ranch and Elmore and 1999 for Leathers), the energy payment per kWh throughout the remainder of the contract period will be at Edison's Avoided Cost of Energy. For the year ended December 31, 1996, Edison's average Avoided Cost of Energy was 2.5 cents per kWh which is substantially below the contract energy prices earned in 1996. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Guarantors cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements at the expiration of the scheduled payment periods. The revenues generated by each of the projects operating under SO4 Agreements could decline significantly after the expiration of the relevant scheduled payment periods. Property, Plant, Contracts and Equipment Property, plant, contracts and equipment are carried at cost less accumulated depreciation. The Guarantors follow the full cost method of accounting for costs incurred in connection with the exploration and development of geothermal resources. The Guarantors provide depreciation and amortization of property, plants, contracts and equipment upon the commencement of revenue production over the estimated useful life of the assets. Depreciable lives for the periods through 1994 were as follows: Plant and plant equipment 20 years Office furniture and equipment 5-10 years Other equipment 7-10 years Exploration and development costs 20 years Power purchase contracts were amortized on the straight line method over 20 years which is the lesser of the remaining life of the contract or the remaining useful life of plant and plant equipment. As a result of the purchase of Magma, the assets and liabilities were adjusted to fair value and are depreciated over the remaining useful lives. See "Purchase Accounting" below and Note 4, "Property, Plant, Contracts and Equipment". Purchase Accounting Depreciation of the operating power plant costs, net of salvage value, is computed on the straight line method over the estimated useful lives, between 10 and 30 years. Depreciation of furniture, fixtures and equipment, which are recorded at cost, is computed on the straight line method over the estimated useful lives of the related assets, which range from three to ten years. Power sale agreements have been assigned values separately for each of (1) the remaining portion of the scheduled price periods of the power sales agreements and (2) the 20 year avoided cost periods of the power sales agreements and are amortized separately over such periods using the straight line method. The Salton Sea reservoir contains commercial quantities of extractable minerals. The fair value allocated to mineral extraction was based on the estimated net cash flows generated from such production. The fair value assigned to the mineral reserves will be amortized using the units of production method upon commencement of commercial production. A process license was allocated fair value which represents the economic benefits expected to be realized from the installation of the license and related technology at the Imperial Valley. The fair value assigned to the process license is amortized using the straight line method over the remaining estimated useful life of the license. Excess of Cost over Fair Value Total acquisition costs in excess of the fair values assigned to the net assets acquired are amortized over a 40 year period using the straight line method. At December 31, 1996 and 1995 accumulated amortization of the excess of cost over fair value of net assets acquired was $6,801 and $3,237, respectively. Income Taxes The entities comprising the Guarantors are included in consolidated income tax returns with their parent and affiliates; however, income taxes are provided on a separate return basis. Tax obligations of the Guarantors will be remitted to the parent only to the extent of cash flows available after operating expenses and debt service. Management Fee Pursuant to the Magma Services Agreement, Magma has agreed to pay CEOC all equity cash flows and certain royalties payable by the Guarantors in exchange for providing data and services to Magma. As security for the obligations of Magma under the Magma Services Agreement, Magma has collaterally assigned to CEOC its rights to such equity cash flows and certain royalties. Statements of Cash Flows For purposes of the statement of cash flows, the Guarantors consider only demand deposits at banks to be cash. Cash paid for interest during 1996, 1995 and 1994 was $10,314, $3,235 and $2,949, respectively. Fair Values of Financial Instruments Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values. Pro Forma Adjustments (Unaudited) The accompanying combined predecessor statements of operations contain a proforma adjustment to reflect a fee for data and services management to CEOC from Magma under an agreement entered into in June 1995, equal to distributions to Magma from its 10% interest in Leathers, Del Ranch and Elmore and 4.5% of total energy sales from the Leathers Project as if such agreement were in effect during all periods presented. (See Note 7). Impairment of Long-Lived Assets On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have a material effect on the Guarantors' financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS Magma Power Company On January 10, 1995, CalEnergy acquired approximately 51% of the outstanding shares of common stock of Magma (the "Magma Common Stock") through a cash tender offer (the "Magma 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 CalEnergy through a merger. The transaction was accounted for as a purchase business combination. All identifiable assets acquired and liabilities assumed were assigned a portion of the cost of acquiring Magma, equal to their fair values at the date of acquisition. The adjustments which have been made to the net assets of the Guarantors to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Guarantors are as follows: Property, plant, contracts and equipment $ 214,513 Goodwill 145,487 Deferred financing cost 9,714 Other assets (2,137) Severance, relocation and litigation reserve (3,313) Deferred income taxes (83,889) Debt (213,185) ------------ Net increase in assets $ 67,190 ============ Edison Mission Energy's Partnership Interest On April 17, 1996, CalEnergy completed the indirect acquisition of the remaining 50% interest of the Partnerships owned by Edison Mission Energy (the "Partnership Interest Acquisition") for a cash purchase price of $71,000 including acquisition costs and transferred these interests to VPC and CEOC. The Partnership Interest Acquisition has been accounted for as a purchase business combination. All identifiable assets acquired and liabilities assumed were assigned a portion of the cost of acquiring the Partnership Interest, equal to their fair values at the date of the acquisition. The adjustments which have been made to the net assets of the Guarantors to reflect the effect of the Partnership Interest Acquisition accounted for as a purchase business combination are as follows: Cash $ 12,956 Restricted cash 13,226 Power sales agreements 78,036 Other assets 20,254 Project loans (48,161) Liabilities (5,311) $ 71,000 Unaudited pro forma combined revenue and net income of the Guarantors on a purchase, push down basis of accounting, for the year ended December 31, 1996, as if the acquisitions had occurred on January 1, 1994 after giving effect to certain pro forma adjustments related to the acquisition, were $158,912 and $26,852, respectively, compared to $179,103 and $28,869, respectively, for the year ended December 31, 1995. 4. PROPERTY, PLANT, CONTRACTS AND EQUIPMENT Property, plant, contracts and equipment consisted of the following: December 31, 1996 1995 Plant and equipment $ 60,272 $ 58,532 Power sale agreements 123,588 44,966 Process license 46,290 46,290 Mineral reserves 121,199 112,350 Exploration and development costs 59,303 53,449 ----------- ----------- 410,652 315,587 Less accumulated depreciation and amortization (45,803) (16,631) ----------- ----------- $364,849 $298,956 ======= ======= 5. LOANS PAYABLE Loans payable at December 31, 1995 included the Guarantors' pro rata share of the debt of the Del Ranch, Elmore and Leathers partnerships which were repaid in 1996. 6. SENIOR SECURED PROJECT NOTES The Guarantors assumed their proportionate share of the secured bank financing incurred in connection with the purchase of Magma (see Note 3). On July 21, 1995, CalEnergy recapitalized Magma and the related Merger Facilities from proceeds received through a $200,000 high yield offering and a $475,000 investment grade offering of Salton Sea Funding Corporation. The Guarantors issued a project note in the amount of $75,000 payable to Salton Sea Funding Corporation at an interest rate of 6.69%, and guaranteed, to the extent of available cash flow, the investment grade securities. The guarantee is collateralized by a lien on the available cash flow of and a pledge of stock in the Guarantors. On June 20, 1996, the Salton Sea Funding Corporation issued an additional investment grade offering for $135,000. In connection with this offering, the Guarantors issued an additional project note in the amount of $135,000 with interest rates ranging between 7.02% and 8.30%. Principal maturities of the senior secured project notes are as follows: 1997 $38,594 1998 51,762 1999 32,364 2000 10,562 2001 1,000 Thereafter 47,922 ----------- $182,204 ======= The carrying amounts and estimated fair values of the Senior Secured Project Notes at December 31, 1996 and 1995 were $182,204 and $179,779 and $62,706 and $64,348, respectively. 7. RELATED PARTY TRANSACTIONS The Guarantors are party to a 30-year brine supply agreement through the Vulcan/BN Geothermal Power Company partnership and a technology license agreement for the rights to use the technology necessary for the construction and operation of the Vulcan Plant. Under the brine supply agreement, the Guarantors will pay VPC 4.167% of the contract energy component of the price of electricity provided by the Vulcan Plant. In addition, VPC has been designated as operator of the Vulcan Plant and receives agreed-upon compensation for such services. Charges to the Guarantors related to the brine supply agreement and operator's fees on a pro rata basis amounted to $370 and $425, respectively, for the year ended December 31, 1996, $745 and $620, respectively, for the year ended December 31, 1995, and $516 and $438, respectively, for the year ended December 31, 1994. In addition, the Guarantors entered into the following agreements: Easement Grant Deed and Agreement Regarding Rights for Geothermal Development, whereby the Guarantors acquired from Magma rights to extract geothermal brine from the geothermal lease rights property which is necessary to operate the Leathers, Del Ranch and Elmore Plants in return for 17.333%, on a pro rata basis, of all energy revenues received by each plant. The Guarantors' share of amounts expensed under this agreement for 1996, 1995 and 1994 were $16,980, $8,115 and $7,488, respectively. Ground Leases dated March 15 and August 15, 1988 with Magma whereby the Guarantors lease from Magma for 32 years the surface of the land as described in the Imperial County Assessor's official records. Amounts expensed under the ground leases were $60 in 1996 and $30 in each of 1995 and 1994. Administrative Services Agreements whereby CEOC will provide to the Partnerships administrative and management services for a period of 32 years through 2020. Fees payable to CEOC amount to the greater of 3% of total electricity revenues or $60 per month. The minimum monthly payments for years subsequent to 1989 are increased based on the consumer price index of the Bureau of Labor and Statistics. Amounts expensed related to these agreements for 1996, 1995 and 1994 amounted to $3,545, $1,687, and $1,573, respectively. Operating and Maintenance Agreements whereby the Guarantors retain CEOC to operate the plants for a period of 32 years through 2020. Payment is made to CEOC in the form of reimbursements of expenses incurred and a guaranteed capacity payment ranging from 10% to 25% of energy revenues over stated amounts. The Guarantors in 1996, 1995 and 1994 reimbursed CEOC for expenses of $8,547, $4,471, and $2,391, respectively, and accrued a guaranteed capacity payment of $3,888, $1,731 and $1,548 at December 31, 1996, 1995 and 1994, respectively. 8. CONDENSED FINANCIAL INFORMATION Condensed balance sheet information of the Guarantors' pro rata interest in the respective entities as of December 31, 1996 and 1995 is as follows: Vulcan Vulcan Adjustments/ Combined Power CEOC Elmore Del Ranch Leathers BNG Eliminations Total ---------------------------------------------------------------------------------- December 31, 1996 Assets: Accounts receivable and other $ - $11,773 $ 9,479 $ 9,198 $10,130 $ 3,214 $(1,945) $ 41,849 Due from affiliates - 17,219 2,678 2,707 - 14,579 92,095 129,278 Property, plant, contracts and equipment, net 230 6,940 58,540 53,635 70,850 53,310 121,344 364,849 Management fee and goodwill, net - - - - - - 206,207 206,207 Investments in partnerships 70,571 195,061 - - - - (265,632) - --------------------------------------------------------------------------------- $70,801 $230,993 $70,697 $65,540 $80,980 $71,103 $152,069 $742,183 ====== ======= ====== ====== ====== ====== ======= ======= Liabilities and equity: Accounts payable and accrued liabilities $ 65 6,296$ 815$ 1,678$ 1,282$ 532 $121,249 $131,917 Due to affiliate - - - - 18,382 - (18,382) - Senior secured project note - - - - - - 182,204 182,204 ---------------------------------------------------------------------------------- Total liabilities 65 6,296 815 1,678 19,664 532 285,071 314,121 Guarantors' equity 70,736 224,697 69,882 63,862 61,316 70,571 (133,002) 428,062 -------------------------------------------------------------------------------- $70,801 $230,993 $70,697 $65,540 $80,980 $71,103 $152,069 $742,183 ====== ======= ====== ======= ====== ====== ====== ======= 8. CONDENSED FINANCIAL INFORMATION (Continued) Vulcan Vulcan Adjustments/ Combined Power CEOC Elmore Del Ranch Leathers BNG Eliminations Total ----------------------------------------------------------------------------------------- December 31, 1995 Assets: Cash and investments $ - $ - $ 7,060 $ 6,896 $ 6,772 $ 277 $ - $ 21,005 Accounts receivable and other - 792 4,899 4,951 5,631 6,826 (1,607) 21,492 Due from affiliates (232) 71,976 (988) (763) (1,066) 116 (14,094) 54,949 Property, plant, contracts and equipment, net 265 1,294 27,744 25,508 32,466 29,224 182,455 298,956 Management fee - - - - - - 63,520 63,520 Goodwill, net - - - - - - 142,250 142,250 Investments in partnerships 36,074 73,455 - - - - (109,529) - ------------------------------------------------------------------------------- $36,107 $147,517 $38,715 $36,592 $43,803 $36,443 $262,995 $602,172 ====== ======= ====== ====== ====== ====== ======= ======= Liabilities and Equity: Accounts payable and accrued liabilities $ 369 $ 8,557 $ 443 $ 794 $ 652 $ 369 $110,784 $121,968 Loans payable - - 11,450 10,930 21,386 - - 43,766 Senior secured project note - - - - - - 62,706 62,706 ------------------------------------------------------------------------------- Total liabilities 369 8,557 11,893 11,724 22,038 369 173,490 228,440 Guarantors' equity 35,738 138,960 26,822 24,868 21,765 36,074 89,505 373,732 ------------------------------------------------------------------------------- $36,107 $147,517 $38,715 $36,592 $43,803 $36,443 $262,995 $602,172 ====== ======= ====== ===== ====== ====== ======= ======= 8. CONDENSED FINANCIAL INFORMATION (Continued) Condensed combining statements of operations including information of the Guarantors' pro rata interest in the respective entities for the years ended December 31, 1996, 1995 and 1994 is as follows: Vulcan Vulcan Adjustments/ Combined Power CEOC Elmore Del Ranch Leathers BNG Eliminations Total --------------------------------------------------------------------------------- SUCCESSOR: December 31, 1996 Revenues $ 3,157 $49,399 $39,627 $40,235 $39,126 $14,271 $(45,589) $140,226 Expenses 431 - 25,762 25,382 27,055 12,102 23,735 114,467 ----------------------------------------------------------------------------------- Net income $ 2,726 $49,399 $13,865 $14,853 $12,071$ 2,169 $(69,324) $25,759 ====== ====== ====== ====== ====== ====== ======= ====== December 31, 1995 Revenues $15,634 $24,121 $19,336 $18,941 $19,101 $20,878 $(30,528) $87,483 Expenses 1,547 - 12,866 12,523 14,161 7,974 23,775 72,846 --------------------------------------------------------------------------------- Net income $14,087 $24,121$ 6,470 $ 6,418 $ 4,940 $12,904 $(54,303) $14,637 ====== ====== ====== ====== ====== ====== ======= ===== PREDECESSOR: December 31, 1994 Revenues $10,423 $19,290 $17,611 $18,116 $17,538 $18,430 $(25,358) $76,050 Expenses 4,901 7,674 12,973 12,908 14,241 10,395 (4,180) 58,912 --------------------------------------------------------------------------------- Net income $ 5,522 $11,616 $4,638 $ 5,208 $ 3,297 $ 8,035 $(21,178) $17,138 ====== ====== ====== ====== ====== ====== ======= ===== 9. INCOME TAXES The provision for income taxes for the years ended December 31, 1996, 1995 and 1994 consisted of the following: Current Deferred Total --------- -------------------- Successor: 1996 - - -------------------- Federal $10,945 $ 1,976 $12,921 State 5,434 (1,655) 3,779 --------- ------------------- Total $16,379 $ 321 $16,700 ====== ====== ====== 1995 - - -------------------- Federal $ 6,697 $ 2,264 $ 8,961 State 3,784 (1,253) 2,531 --------- ------------------- Total $10,481 $ 1,011 $11,492 ===== ===== ====== Predecessor: 1994 - - -------------------- Federal $ 6,277 $ 3,314 $ 9,591 State 1,108 585 1,693 --------- ------------------- Total $ 7,385 $ 3,899 $11,284 ===== ===== ====== Deferred tax liabilities and assets at December 31, 1996 and 1995 consisted of the following: 1996 1995 ------------ ----------- Deferred liabilities: Depreciation and amortization $108,277 $106,238 Deferred assets: Tax credits --- 7,831 ------------ ----------- Net deferred tax liability $108,277 $ 98,407 ======= ====== The effective tax rate differs from the federal statutory tax rate due primarily to percentage depletion in excess of cost depletion, goodwill amortization and the realization for income tax purposes of certain tax credits. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Magma Power Company Omaha, Nebraska We have audited the accompanying balance sheets of the Salton Sea Royalty Company as of December 31, 1996 and 1995 and the related statements of operations, equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on those financial statements based on our audits. We conducted our audits 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Salton Sea Royalty Company as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 1997 SALTON SEA ROYALTY COMPANY BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) December 31, 1996 1995 ASSETS Due from affiliates $ 10,008 $ 25,110 Royalty stream, net 44,372 53,744 Excess of cost over fair value of net assets acquired, net 35,004 35,912 Prepaid expenses and other assets 1,689 2,575 ---------------------- $ 91,073 $117,341 ======= ======= LIABILITIES AND EQUITY Liabilities: Accrued liabilities $12,070 $ 5,948 Senior secured project note 56,936 67,882 Deferred income taxes 12,227 15,460 ---------------------- Total liabilities 81,233 89,290 Commitments and contingencies (Notes 2 and 4) Equity: Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding - - Additional paid-in capital 1,561 24,541 Retained earnings 8,279 3,510 ---------------------- Total equity 9,840 28,051 ---------------------- $91,073 $117,341 ======= ======= The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF OPERATIONS (Dollars in Thousands) Year ended December 31, 1996 1995 Revenues: Royalty income $30,143 $28,383 Expenses: Operating, general and administrative expenses 7,288 6,822 Amortization of royalty stream and goodwill 10,280 11,239 Interest expense 5,246 4,757 -------------------- Total expenses 22,814 22,818 ---------- ---------- Income before income taxes 7,329 5,565 Provision for income taxes 2,560 963 ---------- ---------- Income before minority interest 4,769 4,602 Minority interest - 1,092 ---------- ---------- Net income $ 4,769 $ 3,510 ====== ====== The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Dollars in Thousands) Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total ------------------------------------------------------- Balance, January 1, 1995 - $ - $ 5,300 $ - $ 5,300 Net income in 1995 prior to acquisition - - - 1,092 1,092 Purchase accounting push-down adjustment, net - - 38,043 (1,092) 36,951 Distributions - - (20,501) - (20,501) Contributions - - 1,699 - 1,699 Issuance of common stock 100 - - - - Net income - - - 3,510 3,510 --------------------------------------------------- Balance, December 31, 1995 100 - 24,541 3,510 28,051 Distributions - - (22,980) - (22,980) Net income - - - 4,769 4,769 --------------------------------------------------- Balance, December 31, 1996 100 $ - $ 1,561 $ 8,279 $ 9,840 ===== ======= ======= ====== ====== The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year Ended December 31, 1996 1995 Cash flow from operating activities: Net income $ 4,769 $ 3,510 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest - 1,092 Amortization of royalty stream and goodwill 10,280 11,239 Deferred income taxes (3,233) (4,581) Changes in assets and liabilities: Prepaid expenses and other assets 886 (2,575) Accrued liabilities 6,122 5,948 -------------------- Net cash flows from operating activities 18,824 14,633 -------------------- Net cash flow from investing activities: Purchase of Company by CalEnergy, net of cash acquired - (38,603) -------------------- Net cash flows from investing activities - (38,603) -------------------- Net cash flows from financing activities: Proceeds from issuance of debt - 115,446 (Increase) decrease in due from affiliates 15,102 (25,110) Contributions from parent - 1,699 Distribution to parent (22,980) (20,501) Loan repayments (10,946) (47,564) -------------------- Net cash flows from financing activities (18,824) 23,970 -------------------- Net change in cash - - Cash at beginning of period - - -------------------- Cash at end of period $ - $ - ====== ====== The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands) 1. ORGANIZATION Salton Sea Royalty Company (the " Royalty Company") is a single-purpose entity, 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation"). Effective February 24, 1995, Magma became a wholly-owned subsidiary of CalEnergy Company, Inc. ("CalEnergy") (see Note 3). In June 1995, the Royalty Company received an assignment of royalties and certain fees paid by three partnership projects, Del Ranch, Elmore and Leathers (collectively, the "Partnership Projects"). On April 17, 1996, CalEnergy acquired the remaining 50% interest in the Partnership Projects. Prior to this transaction, Magma and its affiliates had a 50% interest in the Partnership Projects. In addition, the Royalty Company has received an assignment of certain resource-related royalties and contract assignment royalties payable by the geothermal power plant located in Imperial Valley, California which is owned by an unaffiliated third party (East Mesa, together with the Partnership Projects, the "Projects"). All of the Projects are engaged in the operation of geothermal power plants in the Imperial Valley in Southern California. Substantially all of the assigned royalties are based on a percentage of energy and capacity revenues of the Projects. With the exception of royalties from East Mesa, the royalties are senior to debt service and are pari passu with other operating and maintenance expenses of the Projects. All of the Projects have executed long-term power purchase agreements ("SO4 Agreements") providing for capacity and energy sales to Southern California Edison Company ("Edison"). Each of these agreements provides for fixed price capacity payments for the life of the contract. The Projects earn energy payments based on kilowatt hours (kWhs) of energy provided to Edison. During the first 10 years of the agreement, the Projects earn payments for energy as scheduled in the SO4 Agreements. After the 10-year scheduled payment period has expired (1998 for Del Ranch and Elmore; 1999 for Leathers and East Mesa), the energy payment per kWh throughout the remainder of the contract period will be at Edison's Avoided Cost of Energy. For the year ended December 31, 1996, Edison's average Avoided Cost of Energy was 2.5 cents per kWh which is substantially below the contract energy prices earned in 1996. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Royalty Company cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements at the expiration of the scheduled payment periods. The revenues generated by each of the units operating under SO4 Agreements could decline significantly after the expiration of the relevant scheduled payment period which would have a direct effect on the related royalty streams. As discussed above, all revenues except those derived from East Mesa are from, and all operating expenses are paid by, related parties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying statement of operations presents revenues and expenses which have been assigned to the Royalty Company under the arrangements described above on the accrual method of accounting. This presentation is a "carve out" of information from Magma and certain of its affiliates. Such revenues, net of related expenses, will serve to guarantee loans from the Funding Corporation, a wholly-owned subsidiary of CalEnergy. The December 31, 1995 financial statements reflect the acquisition of Magma (see Note 3), the resulting push down to the Royalty Company of the accounting as a purchase business combination and minority interest for the non-owned periods consisting of 100% for the period January 1-9, 1995 and 49% for the period January 10, 1995--February 23, 1995. Purchase Accounting As a result of the purchase business combination accounted for on a push down basis by the Royalty Company during the year ended December 31, 1995, all identifiable assets and liabilities are stated at fair value (see Note 3). The Royalty Company's policy is to provide amortization expense beginning upon the commencement of revenue production over the estimated remaining useful life of the identifiable assets. The royalty streams have been assigned values separately for each of (1) the remaining portion of the scheduled price periods of the Projects' power sales agreements and (2) the 20 year avoided cost periods of the Projects' power sales agreements and are amortized separately over such periods using the straight line method. Excess of Cost over Fair Value Total acquisition costs in excess of the fair values assigned to the net assets acquired are amortized over a 40 year period using the straight line method. At December 31, 1996 and 1995, accumulated amortization of the excess of cost over fair value was $1,737 and $829, respectively. Income Taxes The Royalty Company is included in consolidated income tax returns with its parent and affiliates. Income taxes are provided on a separate return basis, however, tax obligations of the Royalty Company will be remitted to the parent only to the extent of cash flows available after operating expenses and debt service. Fair Values of Financial Instruments Fair values of financial instruments that are not actively traded are based on market prices of similar instruments and/or valuation techniques using market assumptions. Unless otherwise noted, the estimated fair value amounts do not differ significantly from recorded values. Impairment of Long-Lived Assets On January 1, 1996, the Royalty Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have a material effect on the Royalty Company's financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PURCHASE OF MAGMA POWER COMPANY On January 10, 1995, CalEnergy acquired approximately 51% of the outstanding shares of common stock of Magma (the "Magma Common Stock") through a cash tender offer (the "Magma 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 CalEnergy through a merger. The transaction was accounted for as a purchase business combination. All identifiable assets acquired and liabilities assumed were assigned a portion of the cost of acquiring Magma, equal to their fair values at the date of the acquisition. The adjustments which have been made to the net assets of the Royalty Company to reflect the effect of the acquisition of Magma accounted for as a purchase business combination pushed down to the Royalty Company are as follows: Royalty stream $64,155 Goodwill 36,740 Deferred financing costs 1,843 Deferred income taxes (25,341) Debt (40,446) ---------- Net increase in assets $36,951 ====== Unaudited pro forma combined revenue and net income of the Royalty Company on a purchase, push down basis of accounting, for the year ended December 31, 1995, as if the acquisition had occurred on January 1, 1994 after giving effect to certain pro forma adjustments related to the acquisition, were $28,383 and $3,753, respectively. 4. SENIOR SECURED PROJECT NOTE The Royalty Company assumed its proportionate share of the secured bank financing incurred in connection with the purchase of Magma (see Note 3). On July 21, 1995, CalEnergy recapitalized Magma and the related Merger Facilities from proceeds received through a $200,000 high yield offering and a $475,000 investment grade offering of the Salton Sea Funding Corporation. The Royalty Company issued a project note in the amount of $75,000 payable to Salton Sea Funding Corporation at interest rates ranging from 6.69% to 7.37%, and guaranteed to the extent of available cash flow, the investment grade securities. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of stock in the Guarantor. Principal maturities of the senior secured project note are as follows: 1997 $18,001 1998 15,726 1999 9,396 2000 4,773 2001 4,434 Thereafter 4,606 ---------- $56,936 ====== The carrying amounts and estimated fair values of the senior secured project note at December 31, 1996 and 1995 were $56,936 and $56,178 and $67,882 and $68,944, respectively. 5. Income Taxes The provision for income taxes for the year ended December 31, 1996 and 1995, consisted of the following: Current Deferred Total --------- ----------- -------- 1996 Federal $4,517 $(2,390) $2,127 State 1,276 (843) 433 --------- ----------- -------- Total $5,793 $(3,233) $2,560 ===== ====== ===== 1995 Federal $4,323 $(3,644) $679 State 1,221 (937) 284 --------- ----------- -------- Total $5,544 $(4,581) $963 ===== ====== ===== The Royalty Company's effective tax rate differs from the statutory federal income tax rate due primarily to percentage depletion in excess of cost depletion and goodwill amortization. Deferred tax liabilities and assets at December 31, 1996 and 1995, consisted of the following: 1996 1995 Deferred liabilities: Depreciation and amortization $17,527 $20,760 Deferred assets: Jr. SO4 royalty receivable 5,300 5,300 ----------- ---------- Net deferred tax liability $12,227 $15,460 ====== ====== REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholder Magma Power Company Omaha, Nebraska We have audited the accompanying Predecessor Summary of Revenues and Related Expenses (the "Predecessor Summary") of Salton Sea Royalty Company (the "Company") for the year ended December 31, 1994. The Predecessor Summary is the responsibility of the Company's management. Our responsibility is to express an opinion on the Predecessor Summary 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 Predecessor Summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Predecessor Summary. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Predecessor Summary. We believe that our audit provides a reasonable basis for our opinion. The accompanying Predecessor Summary was prepared for inclusion in the Prospectus of Salton Sea Funding Corporation on the basis of presentation as described in Note 2, and is not intended to be a complete presentation of the Company's assets, liabilities, revenues and expenses. In our opinion, the Predecessor Summary referred to above presents fairly, in all material respects, the revenues and related expenses described in Notes 1 and 2 of the Company for the year ended December 31, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Diego, California June 19, 1995, SALTON SEA ROYALTY COMPANY PREDECESSOR SUMMARY OF REVENUES AND RELATED EXPENSES (Dollars in Thousands) Year Ended December 31, 1994 --------- Royalty income $29,410 Operating expenses 20,753 --------- Excess of revenues over expenses $ 8,657 ====== The accompanying notes are an integral part of the summary. SALTON SEA ROYALTY COMPANY NOTES TO PREDECESSOR SUMMARY OF REVENUES AND RELATED EXPENSES (Dollars in Thousands) 1. ORGANIZATION Salton Sea Royalty Company (the "Royalty Company") is a single-purpose entity, 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation"). Effective February 24, 1995, Magma became a wholly-owned subsidiary of CalEnergy Company, Inc. ("CalEnergy") (see Note 3). In June 1995, the Royalty Company received an assignment of royalties and certain fees paid by three partnership projects, Del Ranch, Elmore and Leathers (collectively, the "Partnership Projects"). Magma and its affiliates have a 50% interest in the Partnership Projects. In addition, the Royalty Company has received an assignment of certain resource-related royalties and contract assignment royalties payable by the geothermal power plant located in Imperial Valley, California which is owned by an unaffiliated third party (East Mesa, together with the Partnership Projects, the "Projects"). All of the Projects are engaged in the operation of geothermal power plants in the Imperial Valley in Southern California. Substantially all of the assigned royalties are based on a percentage of energy and capacity revenues of the Projects. With the exception of royalties from East Mesa (Note 2), the royalties are senior to debt service and are pari passu with other operating and maintenance expenses of the Projects. All of the Projects have executed long-term Interim Standard Offer No. 4 power purchase agreements ("ISO4s") providing for capacity and energy sales to Southern California Edison Company ("Edison"). Each of these agreements provides for fixed price capacity payments for the life of the contract. The Projects earn energy payments based on kilowatt hours (kWhs) of energy provided to Edison. During the first 10 years of the agreement, the Projects earn payments for energy as scheduled in their ISO4s. After the 10-year scheduled payment period has expired (1998 for Del Ranch and Elmore; 1999 for Leathers and East Mesa), the energy payment per kWh throughout the remainder of the contract period will be at Edison's Avoided Cost of Energy. For the year ended December 31, 1994, Edison's average Avoided Cost of Energy was 2.5 cents per kWh which is substantially below the contract energy prices earned in 1994. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Royalty Company cannot predict the likely level of Avoided Cost of Energy prices under the ISO4s at the expiration of the scheduled payment periods. The revenues generated by each of the units operating under ISO4s could decline significantly after the expiration of the relevant scheduled payment period. As discussed above, all revenues except those derived from East Mesa are from or through related parties. 2. BASIS OF PRESENTATION The accompanying Predecessor Summary of Revenues and Related Expenses present predecessor revenues and expenses for the period indicated which have been assigned to the Royalty Company under the arrangements described above on the accrual method of accounting. This presentation is a "carve out" of historical information from Magma and certain of its affiliates. The basis of presentation described herein is not intended to be a complete presentation of the Royalty Company's assets, liabilities, revenues and expenses. Such revenues, net of related expenses, will serve to guarantee loans from Funding Corporation, a wholly-owned subsidiary of CalEnergy (see Note 4). During 1994, the entire $14,502 balance due from junior royalties from East Mesa was written off due to uncertainty as to their collectibility. The write-off was considered necessary due to the inability of the East Mesa plant to convert its construction loans to term loans as had been expected during 1994. The timing of such conversion, which is a prerequisite to the collection of the junior royalties, is uncertain. Revenues related to the East Mesa junior royalties for the year ended December 31, 1994 were $3,412. 3. PURCHASE OF MAGMA POWER COMPANY On January 10, 1995, CalEnergy acquired approximately 51% of the outstanding shares of common stock of Magma (the "Magma Common Stock") through a cash tender offer (the "Magma 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 CalEnergy through a merger. The transaction was accounted for as a purchase business combination. 4. SENIOR SECURED PROJECT NOTE The Royalty Company assumed its proportionate share of the secured bank financing incurred in connection with the purchase of Magma (see Note 3). On July 21, 1995, CalEnergy recapitalized Magma and the related Merger Facilities from proceeds received through a $200,000 high yield offering and a $475,000 investment grade offering by Funding Corporation. The Royalty Company issued a project note in the amount of $75,000 payable to Funding Corporation with maturities of $7,118, $10,946, $18,001, $15,725, $9,396, and $13,814 in 1995, 1996, 1997, 1998, 1999 and thereafter, respectively, at interest rates ranging from 6.69% to 7.37% and guaranteed, to the extent of available cash flow, the investment grade securities. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of stock in the Guarantor. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Set forth below are the current executive officers of the Funding Corporation and the Guarantors and their positions with the Funding Corporation and each of the Guarantors (or general partner thereof): EXECUTIVE OFFICER POSITION David L. Sokol Chairman of the Board and Chief Executive Officer Thomas R. Mason President and Chief Operating Officer, CalEnergy Americas Gregory E. Abel President and Chief Operating Officer, CalEnergy Europe and Chief Accounting Officer, CalEnergy Edward F. Bazemore Vice President, Human Resources Steven A. McArthur Senior Vice President, General Counsel and Secretary John G. Sylvia Senior Vice President and Chief Financial Officer DAVID L. SOKOL, 40, Chairman of the Board of Directors and Chief Executive Officer. Mr. Sokol has been Chief Executive Officer since April 19, 1993 and served as President of CalEnergy from April 19, 1993 until January 21, 1995. He has been Chairman of the Board of Directors since May 1994. Mr. Sokol has been a director of CalEnergy since March 1991. Formerly, Mr. Sokol was Chairman, President and Chief Executive Officer of CalEnergy from February 1991 until January 1992. Mr. Sokol was the President and Chief Operating Officer of, and a director of, JWP, Inc., from January 27, 1992 to October 1, 1992. From November 1990 until February 1991, Mr. Sokol was the President and Chief Executive Officer of Kiewit Energy Company, the largest stockholder of CalEnergy and a wholly owned subsidiary of PKS. THOMAS R. MASON, 53, President and Chief Operating Officer, CalEnergy Americas. Mr. Mason joined CalEnergy in March 1991. From October 1989 to March 1991, Mr. Mason was Vice President and General Manager of Kiewit Energy Company. Prior to that, Mr. Mason was Director of Marketing for Energy Factors, Inc. (now Sithe Energies U.S.A., Inc.), a non-utility developer of power facilities. Prior to that Mr. Mason was a worldwide Market Manager of power generation for Caterpillar's Solar Gas Turbines, a gas turbine manufacturer. GREGORY E. ABEL, 34, President and Chief Operating Officer, CalEnergy Europe and Chief Accounting Officer, CalEnergy. Mr. Abel joined CalEnergy in 1992. Mr. Abel is a Chartered Accountant and from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the San Francisco office of Price Waterhouse, he was responsible for clients in the energy industry. EDWARD F. BAZEMORE, 60, Vice President, Human Resources. Mr. Bazemore joined CalEnergy in July 1991. From 1989 to 1991, he was Vice President, Human Resources, at Ogden Projects, Inc. in New Jersey. Prior to that, Mr. Bazemore was Director of Human Resources for Ricoh Corporation, also in New Jersey. Previously, he was Director of Industrial Relations for Scripto, Inc. in Atlanta, Georgia. STEVEN A. McARTHUR, 39, Senior Vice President, General Counsel and Secretary. Mr. McArthur joined CalEnergy in February 1991. From 1988 to 1991 he was an attorney in the Corporate Finance Group at Shearman & Sterling in San Francisco. From 1984 to 1988 he was an attorney in the Corporate Finance Group at Winthrop, Stimson, Putnam & Roberts in New York. JOHN G. SYLVIA, 38, Senior Vice President and Chief Financial Officer. Mr. Sylvia joined CalEnergy in 1988. From 1985 to 1988, Mr. Sylvia was a Vice President of an international financial institution with responsibility for global corporate and capital markets banking. From 1986 to 1990, Mr. Sylvia served as an Adjunct Professor of Applied Economics at the University of San Francisco. From 1982 to 1985, Mr. Sylvia held various corporate finance positions with investment and financial firms. Item 11. Executive Compensation The Funding Corporation's and the Guarantors' directors and executive officers receive no remuneration for serving in such capacities. Item 12. Security Ownership of Certain Beneficial Owners and Management Description of Capital Stock As of December 31, 1996, the authorized capital stock of the Funding Corporation consisted of 1,000 shares of common stock, par value $.01 per share (the "Common Stock"), of which 100 shares were outstanding. There is no public trading market for the Common Stock. As of December 31, 1996, there was one holder of record of the Common Stock. Holders of Common Stock are entitled to one vote per share on any matter coming before the stockholders for a vote. The Funding Corporation does not expect in the foreseeable future to pay any dividends on the Common Stock. The Indenture contains certain restrictions on the payment of dividends with respect to the Common Stock. Principal Holders Since the formation of the Funding Corporation in June 1995, all of the outstanding shares of Common Stock have been owned by Magma. Magma directly or indirectly owns all of the capital stock of or partnership interests in the Funding Corporation and the Guarantors. CalEnergy owns all of the capital stock of Magma. CalEnergy's common stock is publicly traded on the New York, Pacific and London Stock Exchanges. Item 13. Certain Relationships and Related Transactions Other Relationships and Related Transactions The Salton Sea Projects' and the Partnership Projects' geothermal power plants are owned, administered and operated by Magma or subsidiaries of Magma. Geothermal fluid supplying these facilities is provided from Magma's (or a subsidiary's) geothermal resource holdings in the SSKGRA. In providing rights to geothermal resources and/or geothermal fluids, administering and operating the geothermal power plants, and disposing of solids from these facilities, Magma (directly and through subsidiaries) receives certain royalties, cost reimbursements and fees for its services and the rights it provides. See the financial statements attached hereto. The Funding Corporation believes that the transactions with related parties described above, taking into consideration all of the respective terms and conditions of each of the relevant contracts and agreements, are at least as favorable to the Guarantors as those which could have been obtained from unrelated parties in arms' length negotiations. Relationship of the Funding Corporation and the Guarantors to Magma and CalEnergy The Funding Corporation is a wholly owned direct subsidiary of Magma organized for the sole purpose of acting as issuer of the Securities. The Funding Corporation is restricted, pursuant to the terms of the Indenture, to acting as issuer of the Securities and other indebtedness as permitted under the Indenture, making loans to the Guarantors pursuant to the Credit Agreements, and transactions related thereto. The Funding Corporation and each of the Guarantors (and, in the case of SSBP and SSPG, the general partners thereof) have been organized and are operated as legal entities separate and apart from CalEnergy, Magma and any other Affiliates of CalEnergy or Magma, and, accordingly, the assets of the Funding Corporation and the Guarantors (and, in the case of SSBP and SSPG, the general partners thereof) will not be generally available to satisfy the obligations of CalEnergy, Magma or any other Affiliates of CalEnergy or Magma; provided, however, that unrestricted cash of the Funding Corporation and the Guarantors or other assets which are available for distribution may, subject to applicable law and the terms of financing arrangements of such parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to CalEnergy, Magma or Affiliates thereof. PART IV Item 14. Exhibits, Financial Statements Schedule and Reports on Form 8-K (a) Financial Statements and Schedules (i) Financial Statements Financial Statements are included in Part II of this Form 10-K (ii) Financial Statement Schedules Financial Statement Schedules are not included because they are not required or the information required is included in Part II of this Form 10-K. (b) Reports on Form 8-K None. (c) Exhibits The exhibits listed on the accompanying Exhibit Index are filed as part of this Annual Report. For the purposes of complying with the amendments to the rules governing Form S-4 effective July 13, 1990 under the Securities Act of 1933, the undersigned hereby undertakes as follows, which undertaking shall be incorporated by reference into the Funding Corporation's currently effective Registration Statements on Form S-4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) Financial statements required by Regulations S-X, which are excluded from the Annual Report by Rule 14a-3(b). Not Applicable Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. SALTON SEA FUNDING CORPORATION By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. SALTON SEA BRINE PROCESSING, L.P. a California limited partnership By: Salton Sea Power Company, a California corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. SALTON SEA POWER GENERATION, L.P., a California limited partnership By: Salton Sea Power Company, a California corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By:/s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. FISH LAKE POWER COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. VULCAN POWER COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McAthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. CALENERGY OPERATING COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. SALTON SEA ROYALTY COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. LEATHERS, L.P., a California limited partnership By: CalEnergy Operating Company, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. ELMORE L.P., a California limited partnership By: CalEnergy Operating Company, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. DEL RANCH L.P., a California limited partnership By: CalEnergy Operating Company, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. BN GEOTHERMAL INC., a Delaware corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. NIGUEL ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. CONEJO ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. SAN FELIPE ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact Signatures Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Omaha, State of Nebraska, on March 27, 1997. VULCAN/BN GEOTHERMAL POWER COMPANY, a Nevada general partnership By: VULCAN POWER COMPANY, a Nevada corporation, Partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, each thereunto duly authorized in the City of Omaha, State of Nebraska, on the dates indicated. Signature Date /s/ David L. Sokol* March 27, 1997 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ John G. Sylvia* March 27, 1997 John G. Sylvia, Director, Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Gregory E. Abel* March 27, 1997 Gregory E. Abel Chief Accounting Officer and President and Chief Operating Officer, CalEnergy Europe, (Principal Accounting Officer) /s/ Thomas R. Mason* March 27, 1997 Director, President and Chief Operating Officer, CalEnergy Americas /s/ Steven A. McArthur March 27, 1997 Steven A. McArthur Director, Senior Vice President, General Counsel and Secretary *By: /s/ Steven A. McArthur Steven A. McArthur Attorney-in-fact INDEX TO EXHIBITS Exhibit No. Description of Exhibit 3.1 Articles of Incorporation of the Funding Corporation (incorporated by reference to Exhibit 3.1 to the Funding Corporation Registration Statement on Form S-4 dated August 9, 1995, 33-95538 ("Form S-4")). 3.2 By-laws of the Funding Corporation (incorporated by reference to Exhibit 3.2 to the Funding Corporation Form S- 4). 3.3 Limited Partnership Agreement of SSBP (incorporated by reference to Exhibit 3.3 to the Funding Corporation Form S- 4). 3.4 Limited Partnership Agreement of SSPG (incorporated by reference to Exhibit 3.4 to the Funding Corporation Form S- 4). 3.5 Articles of Incorporation of Fish Lake (incorporated by reference to Exhibit 3.5 to the Funding Corporation Form S- 4). 3.6 By-laws of Fish Lake (incorporated by reference to Exhibit 3.6 to the Funding Corporation Form S-4). 3.7 Articles of Incorporation of VPC (incorporated by reference to Exhibit 3.7 to the Funding Corporation Form S-4). 3.8 By-laws of VPC (incorporated by reference to Exhibit 3.8 to the Funding Corporation Form S-4). 3.9 Articles of Incorporation of CEOC (incorporated by reference to Exhibit 3.9 to the Funding Corporation Form S-4). 3.10By-laws of CEOC (incorporated by reference to Exhibit 3.10 to the Funding Corporation Form S-4). 3.11Articles of Incorporation of the Royalty Guarantor (incorporated by reference to Exhibit 3.11 to the Funding Corporation Form S-4). 3.12By-laws of the Royalty Guarantor (incorporated by reference to Exhibit 3.12 to the Funding Corporation Form S-4). 3.13 Certificate of Amendment of Certificate of Incorporation dated as of March 26, 1996 3.14 Articles of Incorporation of BNG (incorporated by reference to Exhibit 3.13 to the Funding Corporation Registration Statement on Form S-4 dated July 2, 1996, 333-07527 ("Funding Corporation II Form S-4")). 3.15 By-laws of BNG (incorporated by reference to Exhibit 3.14 to the Funding Corporation II Form S-4). 3.16 Articles of Incorporation of San Felipe (incorporated by reference to Exhibit 3.15 to the Funding Corporation II Form S-4). 3.17 By-laws of San Felipe (incorporated by reference to Exhibit 3.16 to the Funding Corporation II Form S-4). 3.18 Articles of Incorporation of Conejo (incorporated by reference to Exhibit 3.17 to the Funding Corporation II Form S-4). 3.19 By-laws of Conejo (incorporated by reference to Exhibit 3.18 to the Funding Corporation II Form S-4). 3.20 Articles of Incorporation of Niguel (incorporated by reference to Exhibit 3.19 to the Funding Corporation II Form S-4). 3.21 By-laws of Niguel (incorporated by reference to Exhibit 3.20 to the Funding Corporation II Form S-4). 3.22 General Partnership Agreement of Vulcan (incorporated by reference to Exhibit 3.21 to the Funding Corporation II Form S-4). 3.23 Limited Partnership Agreement of Leathers (incorporated by reference to Exhibit 3.22 to the Funding Corporation II Form S-4). 3.24 Amended and Restated Limited Partnership Agreement of Del Ranch (incorporated by reference to Exhibit 3.23 to the Funding Corporation II Form S-4). 3.25 Amended and Restated Limited Partnership Agreement of Elmore (incorporated by reference to Exhibit 3.24 to the Funding Corporation II Form S-4). 4.1(a) Indenture, dated as of July 21, 1995, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(a) to the Funding Corporation Form S-4). 4.1(b) First Supplemental Indenture, dated as of October 18, 1995, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(b) to the Funding Corporation Form S-4). 4.1(c) Second Supplemental Indenture, dated as of June 20, 1996, between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(c) to the Funding Corporation II Form S-4). 4.1(d) Third Supplemental Indenture between Chemical Trust Company of California and the Funding Corporation (incorporated by reference to Exhibit 4.1(d) to the Funding Corporation II Form S-4). 4.2 Salton Sea Secured Guarantee, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.2 to the Funding Corporation Form S-4). 4.3(a) Partnership Guarantors Secured Limited Guarantee, dated as of July 21, 1995, by CEOC and VPC in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.3 to the Funding Corporation Form S-4). 4.3(b) Amended and Restated Partnership Guarantors Secured Limited Guarantee, dated as of June 20, 1996 by CEOC, and VPC, Conejo, Niguel, Sal Felipe, BNG, Del Ranch, Elmore, Leathers and Vulcan in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.3 to the Funding Corporation II Form S-4). 4.4 Royalty Guarantor Secured Limited Guarantee, dated as of July 21, 1995, by the Royalty Guarantor in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.4 to the Funding Corporation Form S-4). 4.5(a) Exchange and Registration Rights Agreement, dated July 21, 1995, by and among CS First Boston Corporation, Lehman Brothers Inc. and the Funding Corporation (incorporated by reference to Exhibit 4.5 to the Funding Corporation Form S- 4). 4.5(b) Exchange and Registration Rights Agreement, dated June 20, 1996, by and between CS First Boston Corporation and the Funding Corporation (incorporated by reference to Exhibit 4.5 to the Funding Corporation II Form S-4). 4.6(a) Collateral Agency and Intercreditor Agreement, dated as of July 21, 1995, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.6 to the Funding Corporation Form S-4). 4.6(b) First Amendment to the Collateral Agency and Intercreditor Agreement, dated as of June 20, 1996, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.6(b) to the Funding Corporation II Form S- 4). 4.7 Stock Pledge Agreement, dated as of July 21, 1995, by Magma Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.7 to the Funding Corporation Form S-4). 4.8(a) Purchase Agreement, dated July 18, 1995, by and among CS First Boston Corporation, Lehman Brothers Inc., the Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.8 to the Funding Corporation Form S- 4). 4.8(b) Purchase Agreement, dated June 17, 1996, by and among CS First Boston Corporation, the Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.8 to the Funding Corporation II Form S-4). 4.9 Support Letter, dated as of July 21, 1995, by and among Magma Power Company, the Funding Corporation and the Guarantors (incorporated by reference to Exhibit 4.9 to the Funding Corporation Form S-4). 4.10Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated as of July 21, 1995, by and among the Funding Corporation, certain banks and Credit Suisse, as agent (incorporated by reference to Exhibit 4.10 to the Funding Corporation Form S-4). 4.11 Revolving Credit Agreement, dated as of July 21, 1995, by and among Credit Suisse and the Funding Corporation (incorporated by reference to Exhibit 4.11 to the Funding Corporation Form S-4). 4.12Salton Sea Credit Agreement, dated July 21, 1995, by and among SSBP, SSPG and Fish Lake (incorporated by reference to Exhibit 4.12 to the Funding Corporation Form S-4). 4.13Salton Sea Project Note, dated July 21, 1995, by SSBP, SSPG and Fish Lake in favor of the Funding Corporation (incorporated by reference to Exhibit 4.13 to the Funding Corporation Form S-4). 4.14(a) Deposit and Disbursement Agreement, dated as of July 21, 1995, by and among the Funding Corporation, Chemical Trust Company of California and the Guarantors (incorporated by reference to Exhibit 4.14 to the Funding Corporation Form S-4). 4.14(b) Amendment No. 1 to Deposit and Disbursement Agreement, dated as of June 20, 1996, by and among the Funding Corporation, Chemical Trust Company of California and the Guarantors (incorporated by reference to Exhibit 4.14(b) to the Funding Corporation II Form S-4). 4.15Partnership Interest Pledge Agreement, dated as of July 21, 1995, by Magma Power Company and Salton Sea Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.15 to the Funding Corporation Form S-4). 4.16Partnership Interest Pledge Agreement, dated as of July 21, 1995, by SSBP and Salton Sea Power Company in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.16 to the Funding Corporation Form S- 4). 4.17Stock Pledge Agreement (Pledge of Stock of Fish Lake by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.17 to the Funding Corporation Form S-4). 4.18Cost Overrun Commitment, dated as of July 21, 1995, between CalEnergy, SSPG, SSBP and Fish Lake (incorporated by reference to Exhibit 4.18 to the Funding Corporation Form S- 4). 4.19(a) Partnership Guarantors Credit Agreement, dated July 21, 1995, by and among CEOC, VPC and the Funding Corporation (incorporated by reference to Exhibit 4.19 to the Funding Corporation Form S-4). 4.19(b) Amended and Restated Partnership Guarantors Credit Agreement, dated June 20, 1996, by and among the Partnership Guarantors and the Funding Corporation (incorporated by reference to Exhibit 4.19 to the Funding Corporation II Form S-4). 4.20Partnership Guarantors Security Agreement and Assignment of Rights, dated as of July 21, 1995, by CEOC and VPC in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.20 to the Funding Corporation Form S- 4). 4.21Stock Pledge Agreement (Pledge of Stock of CEOC by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.21 to the Funding Corporation Form S-4). 4.22Stock Pledge Agreement (Pledge of Stock of VPC by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.22 to the Funding Corporation Form S-4). 4.23Royalty Guarantor Credit Agreement, among the Royalty Guarantor and the Funding Corporation, dated as of July 21, 1995 (incorporated by reference to Exhibit 4.23 to the Funding Corporation Form S-4). 4.24Royalty Project Note, dated as of July 21, 1995, by the Royalty Guarantor in favor of the Funding Corporation (incorporated by reference to Exhibit 4.24 to the Funding Corporation Form S-4). 4.25Royalty Security Agreement and Assignment of Revenues, dated as of July 21, 1995, by the Royalty Guarantor in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.25 to the Funding Corporation Form S- 4). 4.26Royalty Deed of Trust, dated as of July 21, 1995, by the Royalty Guarantor to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.26 to the Funding Corporation Form S-4). 4.27Stock Pledge Agreement (Pledge of Stock of Royalty Guarantor by Magma Power Company and the Funding Corporation), dated as of July 21, 1995, by Magma Power Company and the Funding Corporation in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.27 to the Funding Corporation Form S-4). 4.28Collateral Assignment of the Imperial Irrigation District Agreements, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.28 to the Funding Corporation Form S-4). 4.29Collateral Assignments of Certain Salton Sea Agreements, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.29 to the Funding Corporation Form S-4). 4.30Debt Service Reserve Letter of Credit by Credit Suisse in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.30 to the Funding Corporation Form S-4). 4.31Partnership Project Note, dated July 21, 1995, by VPC and CEOC in favor of the Funding Corporation (incorporated by reference to Exhibit 4.31 to the Funding Corporation Form S- 4). 4.32 Collateral Assignment of the Imperial Irrigation District Agreements, dated as of June 20, 1996, by Vulcan, Elmore, Leathers, VPC and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.29 to the Funding Corporation II Form S-4). 4.33 Collateral Assignments of Certain Partnership Agreements, dated as of June 20, 1996, by Vulcan Elmore, Leathers and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.31 to the Funding Corporation II Form S-4). 4.34 Debt Service Reserve Letter of Credit by Credit Suisse in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 4.32 to the Funding Corporation II Form S- 4). 4.35 Partnership Project Note, dated June 20, 1996, by the Partnership Guarantors in favor of the Funding Corporation in the principal amount of $54,956,000 (incorporated by reference to Exhibit 4.33 to the Funding Corporation II Form S-4). 4.36 Partnership Project Note, dated June 20, 1996, by the Partnership Guarantors in favor of the Funding Corporation in the principal amount of $135,000,000 (incorporated by reference to Exhibit 4.34 to the Funding Corporation II Form S-4). 4.37 Deed of Trust, dated as of June 20, 1996, by Vulcan to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.35 to the Funding Corporation II Form S-4). 4.38 Deed of Trust, dated as of June 20, 1996, by Elmore to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.36 to the Funding Corporation II Form S-4). 4.39 Deed of Trust, dated as of June 20, 1996, by Leathers to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.37 to the Funding Corporation II Form S-4). 4.40 Deed of Trust, dated as of June 20, 1996, by Del Ranch to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 4.38 to the Funding Corporation II Form S-4). 4.41 Stock Pledge Agreement, Dated as of June 20, 1996, by CEOC, pledging the stock of Conejo, Niguel and San Felipe in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.39 to the Funding Corporation II Form S- 4). 4.42 Stock Pledge Agreement, dated as of June 20, 1996, by VPC, pledging the stock of BNG in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.40 to the Funding Corporation II Form S-4). 4.43 Partnership Interest Pledge Agreement, dated as of June 20, 1996, by VPC and BNG, pledging the partnership interests in Vulcan in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.41 to the Funding Corporation II Form S-4). 4.44 Partnership Interest Pledge Agreement, dated as of June 20, 1996, by Magma, CEOC and each of Conejo, Niguel, San Felipe, respectively, pledging the partnership interests in Del Ranch, Elmore and Leathers, respectively, in favor of Chemical Trust Company of California for the benefit of the Secured Parties and the Funding Corporation (incorporated by reference to Exhibit 4.42 to the Funding Corporation II Form S-4). 4.45 Agreement regarding Security Documents, dated as of June 20, 1996, by and among the Initial Guarantors, Magma, SSPC, the Funding Corporation and Chemical Trust Company of California (incorporated by reference to Exhibit 4.43 to the Funding Corporation II Form S-4). 10.1(a) Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 10.1 to the Funding Corporation Form S-4) . 10.1(b) First Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixed Filing, dated as of June 20, 1996, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California (incorporated by reference to Exhibit 10.2 to the Funding Corporation II Form S-4). 10.2Collateral Assignment of Southern California Edison Company Agreements, dated as of July 21, 1995, by SSPG and Fish Lake in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 10.2 to the Funding Corporation Form S-4). 10.3Contract for the Purchase and Sale of Electric Power from the Salton Sea Geothermal Facility, dated May 9, 1987 (the "Unit 1 Power Purchase Agreement"), between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.3 to the Funding Corporation Form S-4). 10.4Amendment No. 1 to the Unit 1 Power Purchase Agreement, dated as of March 30, 1993, between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.4 to the Funding Corporation Form S- 4). 10.5Amendment No. 2 to Unit 1 Power Purchase Agreement, dated November 29, 1994, between Southern California Edison Company and SSPG (incorporated by reference to Exhibit 10.5 to the Funding Corporation Form S-4). 10.6Contract for the Purchase and Sale of Electric Power, dated April 16, 1985 (the "Unit 2 Power Purchase Agreement"), between Southern California Edison Company and Westmoreland Geothermal Associates (incorporated by reference to Exhibit 10.6 to the Funding Corporation Form S-4). 10.7Amendment No. 1 to Unit 2 Power Purchase Agreement, dated as of December 18, 1987, between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.7 to the Funding Corporation Form S-4). 10.8Power Purchase Contract, dated April 16, 1985 (the "Unit 3 Power Purchase Agreement"), between Southern California Edison Company and Union Oil Company of California (incorporated by reference to Exhibit 10.8 to the Funding Corporation Form S-4). 10.9Power Purchase Contract (the "Unit 4 Power Purchase Agreement"), dated November 29, 1994, between Southern California Edison Company, SSPG and Fish Lake (incorporated by reference to Exhibit 10.9 to the Funding Corporation Form S-4). 10.10 Plant Connection Agreement (Unit 2), dated October 3, 1989, between the Imperial Irrigation District and Earth Energy, Inc. (incorporated by reference to Exhibit 10.10 to the Funding Corporation Form S-4). 10.11 Plant Connection Agreement, dated August 2, 1988 (Unit 3), between the Imperial Irrigation District and Desert Power Company (incorporated by reference to Exhibit 10.11 to the Funding Corporation Form S-4). 10.12 Imperial Irrigation District Funding and Construction Agreements as amended (Units 2 and 3), dated as of June 29, 1987, among the Imperial Irrigation District, Earth Energy, Inc., Chevron Geothermal Company of California, Geo East Mesa No. 3, Inc., Magma Power Company, Desert Power Company, Geo East Mesa No. 2, Inc., Heber Geothermal Company, Ormesa Geothermal, Ormesa Geothermal II, Vulcan/BN Geothermal Power Company, Union Oil Company of California, Del Ranch L.P., Elmore L.P., Leathers L.P., Geo East Mesa Limited Partnership and Imperial Resource Recovery Associates, L.P. (incorporated by reference to Exhibit 10.12 to the Funding Corporation Form S-4). 10.13 Transmission Service Agreement, dated as of October 3, 1989 (Unit 2), between the Imperial Irrigation District and Earth Energy, Inc. (incorporated by reference to Exhibit 10.13 to the Funding Corporation Form S-4). 10.14 Transmission Service Agreement, dated as of August 2, 1988 (Unit 3), between the Imperial Irrigation District and Desert Power Company (incorporated by reference to Exhibit 10.14 to the Funding Corporation Form S-4). 10.15 Plant Connection Agreement (Unit 4), dated as of July 14, 1995, by and between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.15 to the Funding Corporation Form S-4). 10.16 Letter Agreement, dated February 2, 1995, between Magma Power Company and the Imperial Irrigation District (incorporated by reference to Exhibit 10.16 to the Funding Corporation Form S-4). 10.17 Transmission Service Agreement (Unit 4), dated as of July 14, 1995, by and between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.17 to the Funding Corporation Form S-4). 10.18 Transmission Line Construction Agreement (Unit 4), dated July 14, 1995, between the Imperial Irrigation District, SSPG and Fish Lake (incorporated by reference to Exhibit 10.18 to the Funding Corporation Form S-4). 10.19 Funding Agreement, dated June 15, 1988 (Unit 2), between Southern California Edison Company and Earth Energy, Inc. (incorporated by reference to Exhibit 10.19 to the Funding Corporation Form S-4). 10.20 Second Amended and Restated Administrative Services Agreement, by and among CEOC, SSBP, SSPG and Fish Lake, dated as of July 15, 1995 (incorporated by reference to Exhibit 10.20 to the Funding Corporation Form S-4). 10.21 Second Amended and Restated Operating and Maintenance Agreement, dated as of July 15, 1995, by and among Magma Power Company, SSBP, SSPG and Fish Lake (incorporated by reference to Exhibit 10.21 to the Funding Corporation Form S- 4). 10.22 Intentionally Omitted. 10.23 Collateral Assignment of Southern California Edison Company Agreements, dated as of June 20, 1996, by Vulcan, Elmore, Leathers and Del Ranch in favor of Chemical Trust Company of California (incorporated by reference to Exhibit 10.23 to the Funding Corporation II Form S-4). 10.24 Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Vulcan (incorporated by reference to Exhibit 10.24 to the Funding Corporation II Form S-4). 10.25 Amended and Restated Construction, Operating and Accounting Agreement, dated as of June 17, 1996, between VPC and Vulcan (incorporated by reference to Exhibit 10.25 to the Funding Corporation II Form S-4). 10.26 Long Term Power Purchase Contract, dated March 1, 1984, as amended, between SCE and Vulcan, as successor to Magma Electric Company (incorporated by reference to Exhibit 10.26 to the Funding Corporation II Form S-4). 10.27 Transmission Service Agreement, dated December 1, 1988, between VPC and IID (incorporated by reference to Exhibit 10.27 to the Funding Corporation II Form S-4). 10.28 Plant Connection Agreement, dated as of December 1, 1988, between VPC and IID (incorporated by reference to Exhibit 10.28 to the Funding Corporation II Form S-4). 10.29 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996 between CEOC and Elmore (incorporated by reference to Exhibit 10.29 to the Funding Corporation II Form S-4). 10.30 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Elmore (incorporated by reference to Exhibit 10.30 to the Funding Corporation II Form S-4). 10.31 Long Term Power Purchase Contract, dated June 15, 1984, as amended, between SCE and Elmore, as successor to Magma Electric Company (incorporated by reference to Exhibit 10.31 to the Funding Corporation II Form S-4). 10.32 Transmission Service Agreement, dated as of August 2, 1988, as amended, between Elmore and IID (incorporated by reference to Exhibit 10.32 to the Funding Corporation II Form S- 4). 10.33 Plant Connection Agreement, dated as of August 2, 1988, between Elmore and IID (incorporated by reference to Exhibit 10.33 to the Funding Corporation II Form S-4). 10.34 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Leathers (incorporated by reference to Exhibit 10.34 to the Funding Corporation II Form S-4). 10.35 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Leathers (incorporated by reference to Exhibit 10.35 to the Funding Corporation II Form S-4). 10.36 Long Term Power Purchase Contract, dated August 16, 1985, as amended, between SCE and Leathers, as successor to Imperial Energy Corporation (incorporated by reference to Exhibit 10.36 to the Funding Corporation II Form S-4). 10.37 Transmission Service Agreement, dated as of October 3, 1989, as amended, between Leathers and IID (incorporated by reference to Exhibit 10.37 to the Funding Corporation II Form S-4). 10.38 Plant Connection Agreement, dated as of October 3, 1989, between Leathers and IID (incorporated by reference to Exhibit 10.38 to the Funding Corporation II Form S-4). 10.39 Amended and Restated Administrative Services Agreement, dated as of June 17, 1996, between CEOC and Del Ranch (incorporated by reference to Exhibit 10.39 to the Funding Corporation II Form S-4). 10.40 Amended and Restated Operating and Maintenance Agreement, dated as of June 17, 1996, between CEOC and Del Ranch (incorporated by reference to Exhibit 10.40 to the Funding Corporation II Form S-4). 10.41 Long Term Power Purchase Contract, dated February 22, 1984, as amended, between SCE and Del Ranch, as successor to Magma (incorporated by reference to Exhibit 10.41 to the Funding Corporation II Form S-4). 10.42 Transmission Service Agreement, dated as of August 2, 1988, as amended, between Del Ranch and IID (incorporated by reference to Exhibit 10.42 to the Funding Corporation II Form S- 4). 10.43 Plant Connection Agreement, dated as of August 2, 1988, between Del Ranch and IID (incorporated by reference to Exhibit 10.43 to the Funding Corporation II Form S-4). 10.44 Funding Agreement, dated May 18, 1990, between SCE and Del Ranch (incorporated by reference to Exhibit 10.44 to the Funding Corporation II Form S-4). 10.45 Funding Agreement, dated May 18, 1990, between SCE and Elmore (incorporated by reference to Exhibit 10.45 to the Funding Corporation II Form S-4). 10.46 Funding Agreement, dated June 15, 1990, between SCE and Leathers (incorporated by reference to Exhibit 10.46 to the Funding Corporation II Form S-4). 10.47 Funding Agreement, dated May 18, 1990, between SCE and Leathers (incorporated by reference to Exhibit 10.47 to the Funding Corporation II Form S-4). 10.48 Funding Agreement, dated May 18, 1990, between SCE and Vulcan (incorporated by reference to Exhibit 10.48 to the Funding Corporation II Form S-4). 24. Power of Attorney 27. Financial Data Schedule.