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, 1998 Commission File No. 33-95538 SALTON SEA FUNDING CORPORATION (Exact name of registrant as specified in its charter) Delaware 47-0790493 (State of (IRS Employer Incorporation) Identification No.) Salton Sea Brine Processing L.P. California 33-0601721 Salton Sea Power Generation L.P. California 33-0567411 Fish Lake Power LLC Delaware 33-0453364 Vulcan Power Company Nevada 95-3992087 CalEnergy Operating Corporation Delaware 33-0268085 Salton Sea Royalty LLC Delaware 47-0790492 VPC Geothermal LLC Delaware 91-1244270 San Felipe Energy Company California 33-0315787 Conejo Energy Company California 33-0268500 Niguel Energy Company California 33-0268502 Vulcan/BN Geothermal Power Company Nevada 33-3992087 Leathers, L.P. California 33-0305342 Del Ranch, L.P. California 33-0278290 Elmore, L.P. California 33-0278294 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) 231-1644 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 contained, 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 held by Magma Power Company. 100 shares of Common Stock were outstanding on March 30,1999. Documents incorporated by reference: N/A TABLE OF CONTENTS PART I 2 ITEM 1. Business 2 The Projects 3 Salton Sea Projects 4 Partnership Projects 5 Zinc Recovery Project 6 Royalty Projects 6 Terms of the Securities 7 The Securities 7 Structure of and Collateral for the Securities 8 Priority of Payments 12 Debt Service Reserve Fund 13 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 Indenture Covenants 15 Equity Commitment 15 The Project Notes 15 Principal Credit Agreement Covenants 16 Considerations Regarding Limitation on Remedies 16 Reliance on Single Utility Customer 17 Power Price and Sales Uncertainty 17 Zinc Price and Sales Uncertainty 17 Construction Uncertainty 18 Uncertainties Relating to Exploration and Development of Geothermal Energy Resources 18 Insurance 19 Regulatory and Environmental Matters 19 Employees 19 ITEM 2: Properties 19 ITEM 3: Legal Proceedings 19 ITEM 4: Submission of Matters to a Vote of Security Holders 20 PART II 21 ITEM 5: Market for Registrant's Common Equity and Related Stockholder's Matters 21 ITEM 6: Selected Financial Data 21 Salton Sea Funding Corporation 21 Salton Sea Guarantors 22 Partnership Guarantors 23 Royalty Guarantor 24 ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Factors Affecting Results of Operations 25 Power Purchase Agreements 25 Capacity Utilizations 26 Results of Operations for the Years Ended December 31, 1998, 1997 and 1996 27 Revenues 27 Operating Expenses 27 Depreciation and Amortization 27 Interest Expense 28 Income Tax Provision 28 Net Income 28 Capital Resources and Liquidity 29 ITEM 7A: Qualitative and Quantitative Disclosures About Market Risk 31 ITEM 8: Financial Statements and Supplementary Data 32 Index to Financial Statements - Salton Sea Funding Corporation 32 Index to Financial Statements - Salton Sea Guarantors 32 Index to Financial Statements - Partnership Guarantors 33 Index to Financial Statements - Salton Sea Royalty Company 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76 PART III 77 ITEM 10. Directors and Executive Officers of the Registrant 77 ITEM 11. Executive Compensation 78 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 78 Description of Capital Stock 78 Principal Holders 78 ITEM 13. Certain Relationships and Related Transactions 78 Other Relationships and Related Transactions 78 Relationship of the Funding Corporation and the Guarantors to Magma and MidAmerican 78 PART IV 80 ITEM 14. Exhibits, Financial Statements Schedule and Reports on Form 8-K 80 Signatures 81 Index to Exhibits 96 PART 1 ITEM 1. Business Salton Sea Funding Corporation ("Funding Corporation") is a special purpose Delaware corporation, an indirect wholly-owned subsidiary of CE Generation, LLC ("CE Generation") and 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) 231-1644. CE Generation owns all of the capital stock of Magma Power Company ("Magma") which in turn owns all of the outstanding capital stock of Funding Corporation. Through its subsidiaries, CE Generation is primarily engaged in the development, ownership and operation of environmentally responsible independent power production facilities in the United States utilizing geothermal and natural gas resources. CE Generation has an aggregate net ownership interest of 821 MW of electrical generating capacity in power plants in operation or under construction in the United States, which have an aggregate net capacity of 897 MW (including its interests in the Salton Sea Projects and the Partnership Projects as defined below). All of the outstanding stock of Magma was contributed by MidAmerican Energy Holdings Company, the successor of CalEnergy Company, Inc. ("MidAmerican") to CE Generation in February 1999. Magma had been acquired by MidAmerican in 1995 (the "Magma Acquisition"). In March 1999, MidAmerican sold a 50% interest in CE Generation to an affiliate of El Paso Energy Corporation ("El Paso"). Prior to the formation of Funding Corporation, Magma owned or controlled substantially all of the assets of the Salton Sea Guarantors, Partnership Guarantors and Salton Sea Royalty LLC (as defined below and collectively the "Guarantors"), including the three Salton Sea Projects then in operation and 50% partnership interests in each of the four Partnership Projects then operating. At the time of the Magma Acquisition, Magma's interests in the Guarantors generated substantially all of Magma's earnings. 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 MidAmerican acquired all of the stock of VPC Geothermal LLC (formerly BN Geothermal, Inc.) ("VPCG"), 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 then operating. As a result of such acquisition (the "Partnership Interest Acquisition"), CE Generation affiliates 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, except for Minerals LLC. CalEnergy Operating Corporation ("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 CE Generation, except for Minerals LLC. Salton Sea Brine Processing L.P. ("SSBP"), Salton Sea Power Generation L.P. ("SSPG") and Fish Lake Power LLC (formerly Fish Lake Power Company) ("Fish Lake") (collectively, the "Initial Salton Sea Guarantors") own four operating geothermal power plants located in Imperial Valley, California known as Salton Sea I, Salton Sea II, Salton Sea III and Salton Sea IV. Salton Sea Power L.L.C. ("Power LLC" together with the Initial Salton Sea Guarantors, the "Salton Sea Guarantors") is constructing a geothermal power plant in the Imperial Valley, California known as Salton Sea V (such project together with Salton Sea I, II, III and IV, 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") owns an operating 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 (together with the CE Turbo Project and the Zinc Recovery Project, the "Partnership Projects"). CE Turbo LLC ("Turbo LLC") is constructing a geothermal power plant in the Imperial Valley, California. CalEnergy Minerals LLC ("Minerals LLC") is constructing the Zinc Recovery Project described below (Minerals LLC together with CE Turbo, Vulcan, Del Ranch, Leathers, Elmore, CEOC, VPC, San Felipe, Niguel, Conejo and VPCG, the "Partnership Guarantors"). As is more fully described below, the other Partnership Guarantors 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 VPCG, collectively own 100% of the partnership interests in Vulcan. CEOC and 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 Projects and Magma's special distributions equal to 4.5% of total energy revenues from the Leathers Project. Salton Sea Royalty LLC, formerly 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. 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, Suites 400-B, 400-D, 400-E, 400-K and 400-N, Omaha, Nebraska 68131. The principal executive offices of the Partnership Guarantors is 302 South 36th Street, Suite 400-F, 400-G, 400-I, 400-J, 400-L, 400-M, 400-N, 400-O, 400- P, 400-Q, 400-R, 400-S, 400-T, and 400-U, Omaha, Nebraska 68131. The principal executive office of the Royalty Guarantor is 302 South 36th Street, Suite 400-H, Omaha, Nebraska 68131. The Salton Sea Guarantors, Partnership Guarantors and the Royalty Guarantor are sometimes referred to collectively herein as the "Guarantors". 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 Initial Salton Sea Projects and Vulcan, Elmore, Leathers and Del Ranch Projects are located in the Imperial Valley, California and sell power to Southern California Edison Company ("Edison"). DATE OF PROJECT FACILITY COMMERICAL CONTRACT CONTRACT POWER CAPACITY (1)(2) OPERATION EXPIRATION TYPE PURCHASERS(3) Salton Sea Projects Salton Sea I 10.0 7/1987 6/2017 Negotiated Edison Salton Sea II 20.0 4/1990 4/2020 SO4 Edison Salton Sea III 49.8 2/1989 2/29/19 SO4 Edison Salton Sea IV 39.6 6/1996 5/2026 Negotiated Edison Salton Sea V 49.0 Mid-2000 N/A N/A Px/Zinc Recovery Project Subtotal 168.4 Partnership Projects Vulcan 34.0 2/1986 2/2016 SO4 Edison Elmore 38.0 1/1989 12/2018 SO4 Edison Leathers 38.0 1/1990 12/2019 SO4 Edison Del Ranch 38.0 1/1989 12/2018 SO4 Edison CE Turbo 10.0 Mid-2000 N/A N/A Px Subtotal 158.0 Total Power Projects 326.4 Zinc Recovery Project 30,000 Mid-2000 N/A N/A N/A (1)Power capacity is a nominal number that varies with operating and reservoir conditions. (2) Power Capacities are measured in MW; zinc recovery capacity is measured in tons per year. (3) Edison is Southern California Edison Company and Px is the California Power Exchange. Salton Sea Projects The Salton Sea Guarantors collectively own the four operating Salton Sea Projects and the Salton Sea V project under construction with an aggregate net generating capacity of approximately 168.4 MW. Each of the four operating Salton Sea Projects has an executed long term power purchase agreement, providing for the sale of capacity and energy to Edison. Salton Sea II and Salton Sea 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 period expired on February 13, 1999 for Salton Sea III and expires on April 4, 2000 for Salton Sea II. Salton Sea I and Salton Sea IV have negotiated contracts with Edison. The Salton Sea 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 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 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 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. Salton Sea V is being constructed as a 49 MW geothermal power plant which will extract unutilized geothermal energy from geothermal brine that has previously passed through the other Salton Sea projects. Salton Sea V has a negotiated power sale contract with the Zinc Recovery Project entity for a portion of its output and will sell the remainder into the California Power Exchange ("PX") or such other markets as may develop. Salton Sea V is being constructed pursuant to a date certain, fixed price, turn-key engineering, procurement and construction contract (the "Salton Sea V EPC Contract") by Stone & Webster Engineering Corporation ("SWEC"). SWEC is one of the world's leading engineering and construction firms for the construction of electric power plants and, in particular, geothermal power plants. SWEC provided the engineering for the construction of Salton Sea III and has completed engineering, procurement, construction or other related work on twenty-seven other geothermal power plants over the past few years. SWEC's obligations under the Salton Sea V EPC Contracts, including provisions for liquidated damages of up to 20% of the contract price for certain delays or failures to meet performance guarantees, are guaranteed by SWEC's parent, Stone & Webster, Incorporated. Salton Sea V is scheduled to commence Commercial Operation in mid-2000. The Salton Sea I through IV operated at a combined facility capacity factor of 90.4% in 1996, 95.6% in 1997 and 94.2% in 1998. Partnership Projects The Partnership Projects have an aggregate facility generating capacity of 158 MW. The Partnership Guarantors own 100% of the Vulcan Project, the CE Turbo Project, the Zinc Recovery 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. All of the Partnership Projects except the CE Turbo Project and the Zinc Recovery Project 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 fixed 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 fixed price energy period for the Vulcan Project expired on February 9, 1996, and for each of the Del Ranch and Elmore Projects on December 31, 1998, and will expire on December 31, 1999 for the Leathers Project. Turbo LLC, one of the Partnership Guarantors, is constructing the CE Turbo Project (the "CE Turbo Project"), which will have a capacity of 10 net MW. The net output of the CE Turbo Project will be sold to the Zinc Recovery Project (if Salton Sea V is not delivering power) or sold through the PX. The Partnership Guarantors are upgrading the geothermal brine processing facilities at the Vulcan and Del Ranch Projects with the Region 2 Brine Facilities Construction (the "Region 2 Brine Facilities Construction"). In addition to incorporating the pH modification process, which has reduced operating costs at the Salton Sea Projects, the new facilities will achieve economies of scale through improved brine processing systems and the utilization of more modern equipment. The CE Turbo Project and the Region 2 Brine Facilities Construction are being constructed by SWEC pursuant to a date certain, fixed-price, turnkey engineering, procurement and construction contract (the "Region 2 Upgrade EPC Contract"). The obligations of SWEC will be guaranteed by Stone & Webster, Incorporated. The CE Turbo Project is scheduled to commence initial operations in mid-2000 and the Region 2 Brine Facilities Construction is scheduled to be completed in early-2000. The existing Partnership Projects operated at a combined facility capacity factor of 104.8% in 1996, 102.2% in 1997 and 101.3% in 1998. Zinc Recovery Project Minerals LLC, one of the Partnership Guarantors, is constructing the Zinc Recovery Project which will recover zinc from the geothermal brine (the "Zinc Recovery Project"). Four facilities will be installed near Existing Project sites to extract a zinc chloride solution from the brine through an ion exchange process. This solution will be transported to a central processing plant where zinc ingots will be produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 tons per year and is scheduled to commence commercial operation in mid-2000. The zinc produced by the Zinc Recovery Project is expected to be sold primarily to U.S. West Coast customers such as steel companies, alloyers and galvanizers. The Zinc Recovery Project is being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procurement and construction contract (the "Zinc Recovery Project EPC Contract"). Kvaerner is a wholly- owned indirect subsidiary of Kvaener ASA, an internationally recognized engineering and construction firm experienced in the metals, mining and processing industries. The payment obligations of Kvaerner, including payment of liquidated damages of up to 20% of the contract price for certain delays or failures to meet performance guarantees, are secured by a letter of credit issued by Union Europeenne de CIC (or another financial institution rated "A" or better by S&P or "A2" or better by Moody's and otherwise acceptable to Minerals LLC) in an initial aggregate amount equal to $29.6 million. The Zinc Recovery Project is scheduled to commence initial operations in mid-2000. Royalty Projects The Royalty Guarantor has received an assignment from Magma of certain payments ("Royalties") received from the Leathers, Del Ranch and Elmore Projects in exchange for the provision to those projects of the rights to use certain geothermal resources. 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 Guarantors 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 Total 148 (1) CEOC is also entitled to receive Royalties as described herein. Such Royalties are payable from revenues that will constitute Partnership collateral. Terms of the Securities The Securities In 1995, 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. 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 1998, Funding Corporation issued $285,000,000 aggregate principal amount of its Senior Secured Series F Bonds ("Series F Securities"). Funding Corporation is required to use reasonable best efforts to register the Series F Securities in a comparable manner and expects to do so pursuant to the terms of the Indenture. 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 offers of New Securities for the Old Securities are sometimes referred to herein as the "Exchange Offers". 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 all the 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 for failure to be so registered. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Indenture, as amended, between Chase Manhattan Bank and Trust Company, National Association and Funding Corporation. The Funding Corporation received no proceeds from the exchange pursuant to the Exchange Offers and will not receive proceeds from the expected exchange offer in respect to the Series F Securities. The net proceeds received by the Funding Corporation from the issuance of the Old Securities and Series F Securities to the Initial Purchasers in the three separate offerings (after deduction of certain transaction costs) were approximately $889 million and were loaned to the Guarantors in return for the issuance of certain notes (the "Project Notes"), and were used for the following purposes: (a) approximately $253 million to repay certain non-recourse indebtedness of MidAmerican 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 IV 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, (f) approximately $23 million to fund a portion of the purchase price payable by the Initial Partnership Guarantors for the Acquired Partnership Companies, and (g) $285 million to fund in part construction of the Zinc Recovery Project, CE Turbo Project and Salton Sea V Project, as well as associated capital improvements and finance costs . There is no existing trading market for the New Securities and the Series F Securities and there can be no assurance regarding the future development of such a market for the New Securities and the Series F Securities or the ability of holders of the New Securities and the Series F Securities to sell their Securities or the price at which such holders may be able to sell their New Securities and the Series F 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 Securities on any securities exchange or stock market. Structure of and Collateral for the Securities The New Securities and the Series F 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 and 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 and a pledge of the equity interests in the Salton Sea Guarantors; (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. 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 until payment in full of the New Securities, whereupon the Debt Service Fund Requirement Balance may be reduced to the maximum remaining semiannual principal and interest on the Securities for the remaining term if the Rating Agencies confirm that a rating downgrade will not occur as a result thereof. 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 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 except the guarantee by MidAmerican for the direct and indirect owners of the Zinc Recovery Project of a specified portion of the scheduled debt service on the Series F Securities including the current principal amount of $140.52 million and associated interest. 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 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. The New Securities and the Series F Securities are rated "Baa2" 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 initial average life of the Series F Securities was 15.50 years. The $232,750,000 initial principal amount of the 6.69% Series A Securities due May 30, 2000 is 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 initial principal amount of the 7.37% Series B Securities due May 30, 2005 is 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 initial principal amount of the 7.84% Series C Securities due May 30, 2010 is 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 initial principal amount of the 7.02% Series D Securities due May 30, 2000 is 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 initial principal amount of the 8.30% Series E Securities due May 30, 2011 is 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% The $285,000,000 initial principal amount of the 7.475% Series F Securities due November 30, 2018 is payable in semiannual installments, commencing May 30, 2001 as follows: PAYMENT DATE PERCENTAGE OF PRINCIPAL AMOUNT PAYABLE May 30, 2001 0.225% November 30, 2001 0.225% May 30, 2002 0.750% November 30, 2002 0.750% May 30, 2003 0.500% November 30, 2003 0.500% May 30, 2004 0.625% November 30, 2004 0.625% May 30, 2005 0.625% November 30, 2005 0.625% May 30, 2006 0.650% November 30, 2006 0.650% May 30, 2007 0.375% November 30, 2007 0.375% May 30, 2008 0.875% November 30, 2008 0.875% May 30, 2009 0.375% November 30, 2009 0.375% May 30, 2010 1.250% November 30, 2010 1.250% May 30, 2011 3.000% November 30, 2011 3.000% May 30, 2012 5.750% November 30, 2012 5.750% May 30, 2013 5.075% November 30, 2013 5.075% May 30, 2014 6.000% November 30, 2014 6.000% May 30, 2015 6.550% November 30, 2015 6.550% May 30, 2016 7.050% November 30, 2016 7.050% May 30, 2017 6.875% November 30, 2017 6.875% May 30, 2018 3.450% November 30, 2018 3.450% Priority of Payments All revenues received by the Salton Sea Guarantors from the Salton Sea Projects, all revenues received by the Partnership Guarantors and all Royalties received by the Royalty Guarantor shall be paid into a Revenue Fund maintained by a Depository. 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 from time to time equal (a) on or prior to December 31, 1999, the maximum semiannual scheduled principal and interest payments on the Securities, (b) after December 31, 1999 through payment in full of the New Securities, the maximum annual principal and interest payments on the Securities for the remaining term, and (c) after payment in full of the New Securities, (i) the maximum annual principal and interest payments on the Series F Securities for the remaining term or (ii) if the rating agencies confirm that no Rating Downgrade will occur as a result thereof, the maximum semiannual principal and interest payments on the Series F Securities for the remaining term. 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 resulting from drawings on such Debt Service Reserve Letter of Credit. Optional Redemption The Series B Securities, Series C Securities, Series E Securities and Series F 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) in certain circumstances if any New Project fails to achieve Substantial Completion by the applicable Guaranteed Substantial Completion Date or receives certain net performance liquidated damages under the construction contract for such Project or (e) 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 each New Project shall have occurred on or prior to such New Project's Guaranteed Substantial Completion Date unless the required amount of Securities shall have been redeemed as described above under "Mandatory Redemption" or (ii) the Rating Agencies shall have confirmed that no Rating Downgrade would result from such delay; provided that such condition will apply to a New Project only (x) after such New Project's Guaranteed Substantial Completion Date or (y) if such New Project has been abandoned. Ranking and Security for the Securities The Securities are 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 MidAmerican 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 except the guarantee by MidAmerican for the direct and indirect owners of the Zinc Recovery Project of a specified portion of the scheduled debt service on the Series F Securities including the current principal amount of $140.52 million and associated interest. 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; and (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. All Permitted Debt incurred by the Funding Corporation shall be loaned to the Guarantors and guaranteed by the Guarantors. Principal Indenture 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. Equity Commitment Pursuant to the Equity Commitment Agreement executed by MidAmerican in favor of the Guarantors and the Collateral Agent, MidAmerican agreed to contribute cash equity to the Guarantors in an amount of up to $122,513,000 to fund a portion of the budgeted costs for construction of the New Projects and Additional Capital Improvements. The Project Notes The Salton Sea Guarantors jointly and severally issued a Project Note in an initial principal amount of $325,000,000 and an additional project note in the amount of $83,272,000; the Partnership Guarantors jointly and severally issued a Project Note in an initial principal amount of $75,000,000, and additional project notes in amounts of $135,000,000 and $201,728,000, respectively, 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 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 Credit Agreement 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 were distributed to MidAmerican to repay certain non-recourse indebtedness incurred by MidAmerican 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. Reliance on Single Utility Customer Each of the operating Existing 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 operating Existing Project since its inception, and may 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. Power Price and Sales Uncertainty The Power Purchase Agreements pursuant to which all of the Existing Projects (other than Salton Sea I and Salton Sea IV) sell electricity to SCE 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 "Fixed Price Period"). Thereafter, the required energy payment converts to SCE's Avoided Cost of Energy, as determined by a methodology approved by, and subject to change by, the California Public Utility Commission ("CPUC"). The Fixed Price Period expired in February 1996 for Vulcan, in December 1998 for Del Ranch and Elmore; and in February 1999 for Salton Sea III and will expire in December 1999 for Leathers and in April 2000 for Salton Sea II. For the year ended December 1998 and 1997, Edison's average Avoided Cost of Energy was 3.0 cents and 3.3 cents per kWh, respectively, which is substantially below the contract energy prices earned for the year ended December 31, 1998. 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 and the modified SO4 Agreements at the expiration of the Fixed Price Periods. The revenues generated by each of the Projects operating under SO4 Agreements will likely decline significantly after the expiration of the relevant Fixed Price Periods. Although approximately one-third of the net electrical output of Salton Sea V is expected to be sold for use by the Zinc Recovery Project, neither Salton Sea V nor the CE Turbo Project currently has any power sales agreements for the rest of the capacity of such Projects. The strategy for Salton Sea V and the CE Turbo Project is to sell output not needed by the Zinc Recovery Project in short term transactions through the PX or in such other transactions from time to time as may be found to be more advantageous than those conducted through the PX. The PX was recently created to establish markets for the sale of power on a daily and an hourly basis. Thus, PX prices are expected to have the characteristics of short term spot prices and to fluctuate from time to time in a manner that cannot be predicted with accuracy and is not within the control of the Funding Corporation, the Guarantors or any other person. Zinc Price and Sales Uncertainty Because most of the Zinc Recovery Project's revenues will be derived from the sale of zinc, earnings will be directly related to the price of zinc in the domestic and world markets. However, zinc prices fluctuate and are affected by numerous factors, including expectations of inflation, speculative activities, currency exchange rates, interest rates, global and regional demand and production, political and economic conditions, discovery of new deposits, and production costs in major producing regions. The aggregate effect of these factors, all of which are beyond the control of the Funding Corporation or the Guarantors, is impossible for the Funding Corporation to predict. Construction Uncertainty Although the eight Existing Projects have been operating for a number of years, the three New Projects have commenced construction pursuant to fixed price, date certain turnkey engineering, procurement and construction contracts and are subject to customary risks associated with the construction of power and metals processing plants including risks of delays in completion, cost overruns and failures to perform in accordance with contract terms. In addition, while each of the individual process steps to be utilized in the Zinc Recovery Project (including ion exchange, solvent extraction and electrowinning) has been in operation for more than twenty years and the demonstration plant at the SSKGRA has successfully recovered zinc through this integrated process, the integrated process for the production of zinc from geothermal brine has not been attempted in a large scale commercial facility. Any material unremedied delay in or unsatisfactory completion of the New Projects could have an adverse effect on the applicable Guarantors' results of operations. 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 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, 1998, CEOC employed 166 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 Guarantors are provided pursuant to the administrative services agreements described below. MidAmerican 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 MidAmerican's offices in Omaha, Nebraska. (See page 4 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 Year Ended Year Ended From June 20, 1995 December 31, December 31, December 31, (Inception Date) 1998(1) 1997 1996(2) through December 31, 1995(3) Total revenues $39,329 $40,674 $40,567 $17,577 Net income 1,783 1,461 1,821 1,507 December 31, December 31, December 31, December 31, 1998(1) 1997 1996(2) 1995(3) Total assets $659,337 $474,289 $575,989 $522,521 Senior secured notes and bonds 626,816 448,754 538,982 452,088 Total liabilities 647,399 464,134 567,295 515,571 Total stockholder's equity 11,938 10,155 8,694 6,950 (1)On October 13, 1998 Funding Corporation issued additional securities of $285,000 of Salton Sea Notes and Bonds Series F. (2) On June 20, 1996 Funding Corporation issued additional securities of $135,000 of Salton Sea Notes and Bonds Series D and E. (3)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. 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. Year Ended December 31, 1998 1997 1996(1) 1995(2) 1994 Sales of electricity $106,274 $106,252 $90,982 $71,605 $74,576 Total revenues 107,091 106,425 91,123 71,605 74,998 Net income 45,939 42,816 35,031 17,955 31,943 Total assets 628,515 556,353 565,934 500,400 232,914 Loans payable -- -- -- -- 114,308 Senior secured project note 310,030 266,208 299,840 321,500 -- Total liabilities 348,388 322,165 374,562 330,801 114,936 (1) In June 1996, Salton Sea 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. 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, 1998 1997 1996(1) 1995(2) 1994 Sales of electricity $165,779 $158,125 $132,212 $76,909 $70,692 Total revenues 172,565 162,315 140,226 87,483 76,050 Net income 37,134 33,637 25,759 14,637 17,138 Total assets 945,576 736,783 742,183 602,172 180,443 Loans payable - - - 43,766 52,340 Senior secured project note 293,576 143,610 182,204 62,706 - Total liabilities 446,743 275,084 314,121 228,440 74,048 (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, 1998(2) 1997 1996 1995(3) 1994(4) Total revenues(1) $51,703 $32,231 $30,143 $28,383 $29,410 Net income(1) 19,497 8,661 4,769 3,510 8,657 Total assets 107,561 86,009 91,073 117,341 Senior secured project note 23,210 38,934 56,936 67,882 Total liabilities 69,563 67,508 81,233 89,290 (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)In 1998, the Royalty Guarantor received $25,000 in a settlement related to the GEO East Mesa royalties. (3)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. (4)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 senior secured notes and bonds. On October 13, 1998, June 20, 1996 and July 21, 1995, the Funding Corporation issued $285,000, $135,000 and $475,000, respectively, of senior secured notes and bonds (the "Securities"). The Securities are payable from payments made of principal and interest on the Project Notes by the Guarantors, to the Funding Corporation. The Securities are guaranteed on a joint and several basis by the Guarantors. The guarantees of the Partnership Guarantors and 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 The Imperial Valley Project consists of the Partnership Project and the Salton Sea Project located in the Imperial Valley in California. The operating Partnership Project consists of the Vulcan, Hoch (Del Ranch), Elmore, and Leathers Partnerships. The operating Salton Sea Project consist of Salton Sea I, Salton Sea II, Salton Sea III and Salton Sea IV. 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 energy payments, capacity payments and capacity bonus payments. Edison makes fixed annual capacity payments and capacity bonus payments to the projects to the extent that capacity factors exceed certain benchmarks. The price for capacity is fixed for the life of the SO4 Agreements and are significantly higher in the months of June through September. Energy payments are at increasing fixed rates for the first ten years after firm operation 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, December 1998 for the Del Ranch and Elmore Partnerships and extend until December 1999 for the Leathers Partnerships. The SO4 Agreements for Leathers provides for energy rates of 15.6 cents per kWh in 1999. Salton Sea I sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement, as amended (the "Salton Sea I PPA"), which provides for capacity and energy payments. The energy payment is calculated using a Base Price which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Salton Sea I was 5.4 cents per kWh during 1998. As the Salton Sea I PPA is not an SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy. The capacity payment is approximately $1,100 per annum. Salton Sea II and Salton Sea III 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 through September 30, 2004. The annual capacity and bonus payments for Salton Sea II and Salton Sea III are approximately $3,300 and $9,700, respectively. Salton Sea IV 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, 1998 and 1997, Edison's average Avoided Cost of Energy was 3.0 cents and 3.3 cents per kWh, respectively, which is substantially below the contract energy prices earned for the year ended December 31, 1998. Estimates of Edison's future Avoided Cost of Energy vary substantially from year to year. The Company cannot predict the likely level of Avoided Cost of Energy prices under the SO4 Agreements and the modified SO4 Agreements at the expiration of the scheduled payment periods. The revenues generated by each of the projects operating under SO4 Agreements will likely 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 and 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 operating data represents the aggregate capacity and electricity production of Salton Sea I and II, Salton Sea III and Salton Sea IV: Years Ended December 31, 1998 1997 1996 Overall capacity factor 94.2% 95.6% 90.4% Capacity NMW (average) 119.4 119.4 103.0* Kwh produced (in thousands) 985,500 999,400 817,400 * Weighted average for the commencement of operations at Salton Sea IV in 1996. The following operating data represents the aggregate capacity and electricity production of Vulcan, Del Ranch, Elmore and Leathers: Years Ended December 31, 1998 1997 1996 Operating capacity factor 101.3% 102.2% 104.8% Capacity NMW (average) 148.0 148.0 148.0 Kwh produced (in thousands) 1,313,900 1,324,400 1,361,800 Results of Operations for the Years Ended December 31, 1998, 1997 and 1996 Revenues The Salton Sea Guarantors' sales of electricity increased marginally to $106,274 for the year ended December 31, 1998 from $106,252 for the same period in 1997. The Salton Sea Guarantors' sales of electricity increased to $106,252 for the year ended December 31, 1997 from $90,982 for the same period in 1996, a 16.8% increase. This increase was due primarily to the addition of Salton Sea IV which commenced operations in June 1996 and increased electricity production at the other plants. The Partnership Guarantors' sales of electricity increased to $165,779 for the year ended December 31, 1998 from $158,125 for the same period in 1997, a 4.8% increase. The Partnership Guarantors' sales of electricity increased to $158,125 for the year ended December 31, 1997 from $132,212 for the same period in 1996, a 19.6% increase. This increase was due primarily to the acquisition of the remaining 50% interest of the Partnerships owned by Edison Mission Energy (the "Partnership Interest Acquisition") in April 1996. Interest and other income for the Partnership Guarantors increased to $6,786 for the year ended December 31, 1998 from $4,190 for the same period in 1997. The increase in 1998 was due to interest income on the restricted cash. Interest and other income for the Partnership Guarantors decreased to $4,190 for the year ended December 31, 1997 from $8,014 for the same period in 1996. The decrease was attributable to lower cash balances and the fact that the Partnership Guarantor is no longer recognizing management fee income because of the Partnership Interest Acquisition in April 1996. The Royalty Guarantor revenue increased to $51,703 for the year ended December 31, 1998 from $32,231 for the same period in 1997 and $30,143 for the same period in 1996. The increases in royalty revenue were primarily due to an increase in East Mesa royalty income related to a royalty settlement agreement and the result of the higher energy sales at the Partnership Projects resulting in higher royalties. Operating Expenses The Salton Sea Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, decreased to $30,306, or 3.08 cents per kWh, for the year ended December 31, 1998, from $30,865 or 3.09 cents per kWh for the same period in 1997 and $27,175 or 3.32 cents per kWh for the same period in 1996. The increase in expenses from 1996 to 1997 was due primarily to the addition of Salton Sea IV which began operations in June 1996. The Partnership Guarantors' operating expenses, which include royalty, operating, and general and administrative expenses, decreased to $63,717, or 5.26 cents per kWh, for the year ended December 31, 1998, from $64,103 or 5.25 cents per kWh for the same period in 1997 and $58,945 or 5.36 cents per kWh for the same period in 1996. The increase in costs from 1996 to 1997 was due primarily to the Partnership Interest Acquisition and the increase in royalty expense due to higher revenue. The Royalty Guarantor's operating expenses increased to $8,120 for the year ended December 31, 1998 from $7,769 for the same period of 1997 and $7,288 for the same period of 1996. These increases were due to scheduled increases 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 $14,857 for the year ended December 31, 1998 from $14,689 for the year ended December 31, 1997 and $14,272 for the year ended December 31, 1996. The increase in 1997 was primarily due to the commencement of operations at Salton Sea IV which commenced operations in June 1996. The Partnership Guarantors' depreciation and amortization increased to $48,615 for the year ended December 31, 1998 from $38,771 for the same period in 1997 and $33,974 for the same period in 1996. The 1998 increase was due to an acceleration in the step up depreciation related to the acquisition of Magma. The 1997 increase was due to a full year of depreciation related to the Partnership interest acquisition in April 1996. The Royalty Guarantor's amortization was $9,794 for the years ended December 31, 1998 and 1997 compared with $10,280 for the year ended December 31, 1996. The decrease in 1997 is consistent with the 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 $15,989 for the year ended December 31, 1998 from $18,055 for the same period in 1997. The decrease was due primarily to the repayment of debt. The Salton Sea Guarantors' interest expense, net of capitalized amounts, increased to $18,055 for the year ended December 31, 1997 from $14,645 for the same period in 1996. The increase was due primarily to the capitalization of interest related to the Salton Sea IV expansion during the construction period and the mineral extraction project and the repayment of debt. The Partnership Guarantors' interest expense, net of capitalized amounts, decreased to $3,570 for the year ended December 31, 1998 from $4,430 for the same period in 1997 and $4,848 for the same period in 1996. The decreases are a result of repayment of debt and capitalization of interest on the mineral extraction project, partially offset by the issuance of $135,000 and $201,768 of senior secured project notes in June 1996 and October 1998. The Royalty Guarantors' interest expense decreased to $2,784 for the year ended December 31, 1998 from $4,179 for the same period in 1997 and $5,246 for the same period in 1996. These decreases are due to the repayment of debt. 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 decreased to $19,529 for the year ended December 31, 1998 from $21,374 for the same period in 1997 and $16,700 for the same period in 1996. Income taxes will be paid by the parent of the Guarantors from distributions to the parent company by the Guarantors which occur after payment of operating expenses and debt service. The Royalty Guarantor's income tax provision increased to $11,508 for the year ended December 31, 1998 from $1,828 for the same period in 1997. The increase in the provision can be attributed to higher revenues. The Royalty Guarantor's income tax provision decreased to $1,828 for the year ended December 31, 1997 from $2,560 for the same period in 1996. The decrease in the provision can be attributed to lower royalty stream income. Tax obligations of the Royalty Guarantor will be remitted to the parent company only to the extent of cash flows available after operating expenses and debt service. Net Income The Funding Corporation's net income was $1,783 for the year ended December 31, 1998 compared to $1,461 for the year ended December 31, 1997 and $1,821 for the period ended December 31, 1996, 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 $45,939 for the year ended December 31, 1998, compared to $42,816 for the year ended December 31, 1997 and $35,031 for the year ended December 31, 1996. The Partnership Guarantors' net income increased to $37,134 for the year ended December 31, 1998, compared to $33,637 for the year ended December 31, 1997 and $25,759 for the year ended December 31, 1996. The Royalty Guarantor's net income increased to $19,497 for the year ended December 31, 1998, compared to $8,661 for the year ended December 31, 1997 and $4,769 for the year ended December 31, 1996. Capital Resources and Liquidity Minerals LLC, a Partnership Guarantor ("Minerals LLC") developed and owns the rights to proprietary processes for the extraction of zinc from elements in solution in the geothermal brine and fluids utilized at its Imperial Valley plants (the "Zinc Recovery Project") as well as the production of power to be used in the extraction process. A pilot plant has successfully produced commercial quality zinc at the Company's Imperial Valley Project. Minerals LLC is constructing the Zinc Recovery Project which will recover zinc from the geothermal brine (the "Zinc Recovery Project"). Four facilities will be installed near Imperial Valley Project sites to extract a zinc chloride solution from the brine through an ion exchange process. This solution will be transported to a central processing plant where zinc ingots will be produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tonnes per year and is scheduled to commence commercial operation in mid-2000. The zinc produced by the Zinc Recovery Project is expected to be sold primarily to U.S. West Coast customers such as steel companies, alloyers and galvanizers. The Zinc Recovery Project is being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procurement and construction contract (the "Zinc Recovery Project EPC Contract"). Kvaerner is a wholly- owned indirect subsidiary of Kvaerner ASA, an internationally recognized engineering and construction firm experienced in the metals, mining and processing industries. Total project costs of the Zinc Recovery Project are expected to be approximately $200,900 million. The Company has incurred $24,200 of such costs through December 31, 1998. Power LLC, a Salton Sea Guarantor, is constructing Salton Sea V. Salton Sea V will be a 49 net MW geothermal power plant which will sell approximately one-third of its net output to the Zinc Recovery Project. The remainder will be sold through the California Power Exchange ("PX"). Salton Sea V is being constructed pursuant to a date certain, fixed price, turn-key engineering, procurement and construction contract (the "Salton Sea V EPC Contract") by Stone & Webster Engineering Corporation ("SWEC"). SWEC is one of the world's leading engineering and construction firms for the construction of electric power plants and, in particular, geothermal power plants. Salton Sea V is scheduled to commence commercial operation in mid-2000. Total project costs of Salton Sea V are expected to be approximately $119,100. Turbo LLC, a Partnership Guarantor, is constructing the CE Turbo Project. The CE Turbo Project will have a capacity of 10 net MW. The net output of the CE Turbo Project will be sold to the Zinc Recovery Project or sold through the PX. The Partnership Projects are upgrading the geothermal brine processing facilities at the Vulcan and Del Ranch Projects with the Region 2 Brine Facilities Construction. In addition to incorporating the pH modification process, which has reduced operating costs at the Salton Sea Projects, the new, more efficient facilities will achieve economies through improved brine processing systems and the utilization of more modern equipment. The Partnership Projects expect these improvements to reduce brine-handling operating costs at the Vulcan Project and the Del Ranch Project. The CE Turbo Project and the Region 2 Brine Facilities Construction are being constructed by SWEC pursuant to a date certain, fixed price, turnkey engineering, procurement and construction contract (the "Region 2 Upgrade EPC Contract"). The obligations of SWEC will be guaranteed by Stone & Webster, Incorporated. The CE Turbo Project is scheduled to commence initial operations in mid-2000 and the Region 2 Brine Facilities Construction is scheduled to be completed in early-2000. Total project costs for both the CE Turbo Project and the Region 2 Brine Facilities Construction are expected to be approximately $63,700. On October 13,1998, the Funding Corporation completed a sale to institutional investors of $285,000 aggregate amount of 7.475% Senior Secured Series F Bonds due November 30, 2018. The proceeds from the offering will be used to fund construction of the Zinc Recovery Project, Salton Sea V, the CE Turbo Project, the Region 2 Brine Facilities Construction, additional capital improvements and financing costs. Total equity funding for these projects is expected to be approximately $122,500. The operating 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 operating Partnership Guarantors' primary source of revenue is payments received pursuant to long term power sales agreements with Edison. The Royalty Guarantor's only source of revenue is Royalties received pursuant to resource lease agreements with the Partnership Projects and the East Mesa Project. These payments, for each of the Guarantors, are expected to be sufficient to fund operating and maintenance expenses, payments of interest and principal on the Securities, projected capital expenditures and debt service reserve fund requirements. What is generally known as the year 2000 ("Y2K") computer issue arose because many existing computer programs and embedded systems use only the last two digits to refer to a year. Therefore, those computer programs do not properly distinguish between a year that begins with "20" instead of "19". If not corrected, many computer applications could fail or create erroneous results. The failure to correct a material Y2K item could result in an interruption in, or a failure of, certain normal business activities or operations including the generation, distribution, and supply of electricity. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Y2K issue creates uncertainty for the Company from potential issues with its own computer systems and from third parties with whom the Company deals on transactions worldwide. The Company's operations utilize systems and equipment provided by other organizations. As a result, Y2K readiness of suppliers, vendors, service providers or customers could impact the Company's operations. The Company is assessing the readiness of such constituent entities and the impacts on those entities that rely upon the Company's services. The Company is unable to determine at this time whether the consequences of Y2K failures of third parties will have a material impact on the Company's results of operations, liquidity or financial condition. The Company has commenced, for all of its information systems, a Y2K date conversion project to address all necessary code changes, testing and implementation in order to resolve the Y2K issue. The Company created a Y2K project team to identify, assess and correct all of its information technology (IT) and non- IT systems, as well as, identify and assess third party systems. The Company has identified and assessed substantially all of its IT and non-IT systems and is currently in the process of repairing or replacing those systems which it believes are not year 2000 compliant. Through December 31, 1998, the Company is approximately 93% complete in repairing or replacing those systems. The Company expects to be 100% complete of correcting, testing, and compliance of those systems by June, 1999. Total Y2K expenditures, for both repairing or replacing non- compliant systems, are expected to total approximately $100. The Company is not aware of any additional material costs needed to be incurred to bring all of its systems into compliance; however, there is no assurance that additional costs will not be incurred. Although management believes that the Y2K project will be substantially complete before January 1, 2000, any unforeseen failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. Accordingly, the Company is developing a formal contingency plan that is expected to be completed by mid year 1999 to mitigate any potential business interruption. 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 7A. Qualitative and Quantitative Disclosures About Market Risk The following discussion of the Company's exposure to various market risks contains "forward-looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in the circumstances and in light of information currently available to the Company. Actual results could differ materially from those projected in the forward-looking information. Interest Rate Risk At December 31, 1998, the Funding Corporation had fixed-rate long-term debt of $626,816 in principal amount and having a fair value of $646,397. These instruments are fixed-rate and therefore do not expose the Company to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease by approximately $34,800 if interest rates were to increase by 10% from their levels at December 31, 1998. In general, such a decrease in fair value would impact earnings and cash flows only if the Company were to reacquire all or a portion of these instruments prior to their maturity. Certain information included in this report contains forward- looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of the Company to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Reform Act, the Company has identified important factors that could cause actual results to differ materially from such expectations, including development uncertainty, operating uncertainty, acquisition uncertainty, uncertainties relating to doing business outside of the United States, uncertainties relating to geothermal resources, uncertainties relating to domestic and international economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, industry deregulation and competition. Reference is made to all of the Company's SEC filings incorporated herein by reference. The Company assumes no responsibility to update forward-looking information contained herein. 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 34 Balance sheets as of December 31, 1998 and 1997 35 Statements of operations for the three years ended December 31,1998 36 Statements of stockholder's equity for the three years ended December 31, 1998 37 Statements of cash flows for the three years ended December 31,1998 38 Notes to financial statements 39 SALTON SEA GUARANTORS Independent auditors' report--Deloitte & Touche LLP 41 Combined balance sheets as of December 31, 1998 and 1997 42 Combined statements of operations for the three years ended December 31, 1998 43 Combined statements of Guarantors' equity for the three years ended December 31, 1998 44 Combined statements of cash flows for the three years ended December 31, 1998 45 Notes to combined financial statements 46 PARTNERSHIP GUARANTORS Independent auditors' report--Deloitte & Touche LLP 51 Combined balance sheets as of December 31, 1998 and 1997 52 Combined statements of operations for the three years ended December 31, 1998 53 Combined statements of Guarantors' equity for the three years ended December 31, 1998 54 Combined statements of cash flows for the three years ended December 31, 1998 55 Notes to combined financial statements 56 SALTON SEA ROYALTY COMPANY Independent auditors' report--Deloitte & Touche LLP 67 Balance sheets as of December 31, 1998 and 1997 68 Statements of operations for the three years ended December 31, 1998 69 Statements of equity for the three years ended December 31, 1998 70 Statements of cash flows for the three years ended December 31, 1998 71 Notes to financial statements 72 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, 1998 and 1997 and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 28, 1999 (March 3, 1999 as to Note 4) SALTON SEA FUNDING CORPORATION BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) December 31, 1998 1997 ASSETS Cash $ 17,629 $ 15,568 Prepaid expenses and other assets 6,768 2,823 Secured project notes from Guarantors 626,816 448,754 Investment in 1% of net assets of Guarantors 8,124 7,144 ----------- ----------- $ 659,337 $474,289 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accrued liabilities $ 3,971 $ 2,782 Due to affiliates 16,612 12,598 Senior secured notes and bonds 626,816 448,754 ----------- ----------- Total liabilities 647,399 464,134 Stockholder's equity: Common stock--authorized 1,000 shares, par value $.01 per share; issued and outstanding 100 shares - - Additional paid-in capital 5,366 5,366 Retained earnings 6,572 4,789 ----------- ----------- Total stockholder's equity 11,938 10,155 ----------- ----------- $659,337 $474,289 ======= ======= The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF OPERATIONS (Dollars in Thousands) For the Year Ended December 31, 1998 1997 1996 Revenues: Interest income $38,349 $39,823 $39,911 Equity in earnings of Guarantors 980 851 656 ----------- ---------- --------- 39,329 40,674 40,567 Expenses: General and administrative expenses 804 748 712 Interest expense 35,495 37,443 36,761 ---------- ---------- -------- Total expenses 36,299 38,191 37,473 ---------- ---------- --------- Income before income taxes 3,030 2,483 3,094 Provision for income taxes 1,247 1,022 1,273 ---------- ---------- --------- Net income $ 1,783 $ 1,461 $ 1,821 ====== ====== ====== The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in Thousands) Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity --------- ----------- ----------- ----------- ------- 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 Net income - - - 1,461 1,461 -------- -------- -------- -------- -------- Balance, December 31, 1997 100 - 5,366 4,789 10,155 Net income - - - 1,783 1,783 -------- -------- -------- -------- -------- Balance, December 31, 1998 100 $ - $ 5,366 $ 6,572 $11,938 ===== ===== ===== ===== ===== The accompanying notes are an integral part of the financial statements. SALTON SEA FUNDING CORPORATION STATEMENTS OF CASH FLOWS (Dollars in Thousands) For the Years Ended December 31, 1998 1997 1996 Cash flows from operating activities: Net income $ 1,783 $ 1,461 $ 1,821 Adjustments to reconcile net income to net cash flows from operating activities: Equity in earnings of guarantors (980) (851) (656) Changes in assets and liabilities: Prepaid expenses and other assets (3,945) 629 (382) Accrued liabilities 1,189 (509) (598) -------- ---------- -------- Net cash flows from operating activities (1,953) 730 185 -------- ---------- -------- Cash flows from investing activities: Decrease (increase) in restricted cash --- 14,044 43,212 Secured project notes from Guarantors (285,000) --- (135,000) Principal repayments of secured project notes from Guarantors 106,938 90,228 48,106 --------- ---------- --------- Net cash flows from investing activities (178,062) 104,272 (43,682) --------- ---------- --------- Cash flows from financing activities: Proceeds from offering of senior secured notes and bonds 285,000 --- 135,000 Repayment of senior secured notes and bonds (106,938) (90,228) (48,106) Due to affiliates 4,014 (12,424) (34,572) ---------- --------- --------- Net cash flows from financing activities 182,076 (102,652) 52,322 ---------- --------- --------- Net change in cash 2,061 2,350 8,825 Cash at the beginning of period 15,568 13,218 4,393 ---------- --------- --------- Cash at the end of period $ 17,629 $ 15,568 $ 13,218 ======== ======= ======= Non-cash investing and financing activities: Adjustments resulting from capital transactions of Guarantors $ --- $ --- $ (77) ======== ======= ======= 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 was wholly-owned by MidAmerican Energy Holdings Company, the successor to CalEnergy Company, Inc. ("MidAme rican"). See Note 4. The Funding Corporation was organized for the sole purpose of acting as issuer of senior secured notes and bonds. On October 31, 1998, July 21, 1995 and June 20, 1996, the Funding Corporation issued $285,000, $475,000 and $135,000, respectively, 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 Secured Project Notes from the Guarantors to the Funding Corporation. The Securities are also 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. 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 The Funding Corporation's debt securities (the "Notes and Bonds") are as follows: Senior Final Maturity December 31, December 31, Secured Series Date Rate 1998 1997 July 21, 1995 A Notes May 30, 2000 6.69% $48,436 $97,354 July 21, 1995 B Bonds May 30, 2005 7.37% 106,980 133,000 July 21, 1995 C Bonds May 30, 2010 7.84% 109,250 109,250 June 20, 1996 D Notes May 30, 2000 7.02% 12,150 44,150 June 20, 1996 E Bonds May 30, 2011 8.30% 65,000 65,000 October 13, 1998 F Bonds November 30, 2018 7.475% 285,000 - $626,816 $448,754 Principal and interest payments are made in semi-annual installments. Principal maturities of the Senior Secured Notes and Bonds are as follows: 1999 $ 57,836 2000 25,072 2001 23,658 2002 28,572 2003 28,086 Thereafter 463,592 ----------- $626,816 ======= On October 13, 1998 the Funding Corporation completed a sale to institutional investors of $285,000 aggregate amount of 7.475% Senior Secured Series F Bonds due November 30, 2018. The proceeds from the offering will be used to fund construction of two new geothermal power projects, a related zinc recovery project, certain upgrades for brine processing facilities and other capital improvements and financing costs. Pursuant to a depository agreement, Funding Corporation established a debt service reserve fund in the form of a letter of credit in the amount of $42,457 from which scheduled interest and principal payments can be made. The estimated fair values of the Senior Secured Notes and Bonds at December 31, 1998 and 1997 were $646,397 and $463,720, respectively. 4. SUBSEQUENT EVENTS On February 8, 1999, MidAmerican created a new subsidiary, CE Generation LLC ("CE Generation") and subsequently transferred its interest in the Company's power generation assets in the Imperial Valley to CE Generation. On March 3, 1999, MidAmerican closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation. 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, 1998 and 1997, and the related combined statements of operations, Guarantors' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 28, 1999 (March 3, 1999 as to Note 6) SALTON SEA GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) December 31, 1998 1997 Restricted cash $ 71,673 $ --- Accounts receivable 15,957 15,823 Prepaid expenses and other assets 12,410 13,043 Property, plant, contracts and equipment, net 480,293 478,001 Excess of cost over fair value of net assets acquired, net 48,182 49,486 ---------- --------- $628,515 $556,353 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 504 $ 390 Accrued liabilities 7,166 7,826 Due to affiliates 30,688 47,741 Senior secured project note 310,030 266,208 ----------- ---------- Total liabilities 348,388 322,165 Commitments and contingencies (Notes 4 and 5) Total Guarantors' equity 280,127 234,188 ----------- ----------- $628,515 $556,353 ======= ======= 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, 1998 1997 1996 Revenues: Sales of electricity $106,274 $106,252 $90,982 Interest and other income 817 173 141 ------ -------- -------- Total Revenues 107,091 106,425 91,123 ------- -------- -------- Expenses: Operating, general and administrative expenses 30,306 30,865 27,175 Depreciation and amortization 14,857 14,689 14,272 Interest expense 21,730 23,004 24,866 Less capitalized interest (5,741) (4,949) (10,221) -------- -------- -------- Total expenses 61,152 63,609 56,092 --------- -------- -------- Net income $45,939 $42,816 $35,031 ====== ====== ====== 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, 1998 (Dollars in Thousands) Balance, December 31, 1995 $ 169,599 Distributions (13,258) Net income 35,031 ------------ Balance, December 31, 1996 191,372 Net income 42,816 ------------ Balance, December 31, 1997 234,188 Net income 45,939 ------------ Balance, December 31, 1998 $ 280,127 ======== The accompanying notes are an integral part of the combined financial statements. SALTON SEA GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Years Ended December 31, 1998 1997 1996 Cash flows from operating activities: Net income $ 45,939 $ 42,816 $ 35,031 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,857 14,689 14,272 Changes in assets and liabilities: Accounts receivable (134) (869) (4,518) Prepaid expenses and other assets 633 2,965 4,121 Accounts payable and accrued liabilities (546) (2,415) 5,649 ------------ ----------- ------------ Net cash flows from operating activities 60,749 57,186 54,555 ------------ ----------- ------------ Cash flows from investing activities: Capital expenditures (15,845) (7,204) (79,863) Increase in restricted cash (71,673) - - ------------ ----------- ------------ Net cash flows from investing activities (87,518) (7,204) (79,863) ------------ ----------- ------------ Cash flows from financing activities: Repayments of senior secured project note (39,450) (33,632) (21,660) Proceeds from offering of senior secured project note 83,272 - - Distributions to parent - - (13,258) Due to (from) affiliates (17,053) (16,350) 59,772 ------------ ---------- ------------ Net cash flows from financing activities 26,769 (49,982) 24,854 ------------ ---------- ------------ Net change in cash - - (454) Cash at beginning of period - - 454 ------------ ---------- ------------ Cash at end of period $ - $ - $ - ============ ========== ============ 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 four operating geothermal electric power generating plants (Salton Sea I, II, III and IV) and a fifth plant (Salton Sea V or the Salton Sea Expansion) which is currently under construction (collectively, the "Salton Sea Projects"). All five plants are located in the Imperial Valley of California. The Salton Sea Projects guarantee loans from Salton Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned subsidiary of Magma Power Company ("Magma") which in turn was wholly-owned by MidAmerican Energy Holdings Company, the successor of CalEnergy Company, Inc. ("MidAmerican"). See Note 6. The financial statements consist of the combination of (1) Salton Sea Brine Processing, L.P., a California limited partnership between 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, (3) assets and liabilities attributable to Salton Sea IV which are held 59% by Salton Sea Power Generation, L.P. and 41% by Fish Lake Power Company ("FLPC") and (4) Salton Sea Power L.L.C., a Delaware limited liability company. 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 and indirect subsidiaries of MidAmerican. 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 financial statements reflect the acquisition of Magma and the resulting push down to the Guarantors of the accounting as a purchase business combination. 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 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 III and 2000 for Salton Sea II), the energy payment per kWh throughout the remainder of the contract period will be at Edison's Avoided Cost of Energy. Salton Sea I sells electricity to Edison pursuant to a 30-year negotiated power purchase agreement, as amended (the "Salton Sea I PPA"), which provides for capacity and energy payments. The energy payment is calculated using a Base Price which is subject to quarterly adjustments based on a basket of indices. The time period weighted average energy payment for Salton Sea I was 5.4 cents per kWh during 1998. As the Salton Sea I PPA is not an SO4 Agreement, the energy payments do not revert to Edison's Avoided Cost of Energy. The capacity payment is approximately $1,100 per annum. Salton Sea II and Salton Sea III 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 through September 30, 2004. The annual capacity and bonus payments for Salton Sea II and Salton Sea III are approximately $3,300 and $9,700, respectively. Salton Sea IV sells electricity to Edison pursuant to a modified SO4 agreement which provides for contract capacity payments on 34 MW of capacity at two different rates based on the respective contract capacities deemed attributable to the original Salton Sea PPA option (20 MW) and to the original Fish Lake PPA (14 MW). The capacity payment price for the 20 MW portion adjusts quarterly based upon specified indices and the capacity payment price for the 14 MW portion is a fixed levelized rate. The energy payment (for deliveries up to a rate of 39.6 MW) is at a fixed price for 55.6% of the total energy delivered by Salton Sea IV and is based on an energy payment schedule for 44.4% of the total energy delivered by Salton Sea IV. The contract has a 30- year term but Edison is not required to purchase the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA option after September 30, 2017, the original termination date of the Salton Sea I PPA. For the year ended December 31, 1998 and 1997, Edison's average Avoided Cost of Energy was 3.0 cents and 3.3 cents per kWh, respectively, which is substantially below the contract energy prices earned in 1998. 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 will likely decline significantly after the expiration of the relevant scheduled payment periods. Restricted Cash The restricted cash balance primarily included commercial paper, money market securities and mortgage backed securities and was composed of amounts deposited in restricted accounts which the Guarantors will use to fund capital expenditures. 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. 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 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 fixed 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. The Salton Sea reservoir contains commercial quantities of extractable minerals. The carrying value of the mineral reserves will be amortized 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, 1998 and 1997, accumulated amortization of the excess of cost over fair value was $5,089 and $3,785, 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, 1998, 1997 and 1996 was $21,434, $21,591 and $23,301, 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 The Guarantors review long-lived assets and certain identifiable intangibles for impairments whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized wherever evidence exists that the carrying value is not recoverable. 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. PROPERTY, PLANT, CONTRACTS AND EQUIPMENT Property, plant, contracts and equipment consisted of the following: December 31, 1998 1997 ----------- ---------- Plant and equipment $331,230 $330,306 Power sale agreements 64,609 64,609 Mineral reserves 77,521 71,780 Wells and resource development 43,549 43,627 ----------- ---------- 516,909 510,322 Less accumulated depreciation and amortization (45,874) (32,321) ----------- ---------- 471,035 478,001 Construction in progress: Salton Sea V 9,258 - ----------- ---------- $480,293 $478,001 ======= ======= 4. SENIOR SECURED PROJECT NOTE The Guarantors have a project note payable to Salton Sea Funding Corporation with interest rates ranging from 6.69% to 7.84%. They have also guaranteed, along with other guarantors, the debt of Salton Sea Funding Corporation, which amounted to $626,816 at December 31, 1998. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of the equity interests in the Guarantors. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets. On October 13, 1998, the Salton Sea Funding Corporation issued an additional investment grade offering for $285,000. In connection with this offering the Guarantors issued an additional project note in the amount of $83,272 with an interest rate of 7.475% with a final maturity of November 30, 2018. Principal maturities of the senior secured project note are as follows: 1999 $ 16,076 2000 9,737 2001 17,319 2002 20,487 2003 22,765 Thereafter 223,646 ------------ $310,030 ======= The estimated fair values of the senior secured projects notes at December 31, 1998 and 1997 were $323,122 and $275,079, respectively. 5. 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, 1998, 1997 and 1996 was $4,938, $4,944 and $4,215, respectively. * Administrative Services Agreement dated April 1, 1993 with Magma, whereby Magma will provide to the Guarantors, excluding Salton Sea IV, administrative and management services. Fees payable to Magma amount to 3% of total electricity revenues. The amount expensed for the years ended December 31, 1998, 1997 and 1996 was $2,287, $2,307 and $2,202, respectively. * Operating and Maintenance Agreement dated April 1, 1993 with CalEnergy Operating Corporation ("CEOC"), 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 1998, 1997 and 1996, the Guarantors reimbursed CEOC for expenses of $6,348, $7,467 and $9,854, respectively. 6. SUBSEQUENT EVENTS On February 8, 1999, MidAmerican created a new subsidiary, CE Generation LLC ("CE Generation") and subsequently transferred its interest in the Company's power generation assets in the Imperial Valley to CE Generation. On March 3, 1999, MidAmerican closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation. 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, 1998 and 1997, and the related combined statements of operations, Guarantors' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 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, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 28, 1999 (March 3, 1999 as to Note 10) PARTNERSHIP GUARANTORS COMBINED BALANCE SHEETS (Dollars in Thousands) December 31, 1998 1997 ASSETS Restricted cash $164,983 $ - Accounts receivable 33,404 23,481 Prepaid expenses and other assets 23,088 13,121 Due from affiliates 121,130 124,311 Property, plant, contracts and equipment, net 399,817 370,666 Management fee 71,596 70,082 Excess of fair value over net assets acquired, net 131,558 135,122 ------------ ---------- $945,576 $736,783 ======= ======= LIABILITIES AND GUARANTORS' EQUITY Liabilities: Accounts payable $ 1,879 $ 1,338 Accrued liabilities 53,647 23,285 Senior secured project note 293,576 143,610 Deferred income taxes 97,641 106,851 ----------- --------- Total liabilities 446,743 275,084 Commitments and contingencies (Notes 5, 6 and 7) Guarantors' equity: Common stock 3 3 Additional paid-in capital 387,663 387,663 Retained earnings 111,167 74,033 ----------- --------- Total Guarantors' equity 498,833 461,699 ---------------------- $945,576 $736,783 ======= ======= The accompanying notes are an integral part of the combined financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF OPERATIONS (Dollars in Thousands) Years Ended December 31, 1998 1997 1996 Revenues: Sales of electricity $165,779 $158,125 $132,212 Interest and other income 6,786 4,190 8,014 ---------- --------- --------- Total revenues 172,565 162,315 140,226 Costs and expenses: Operating, general and administrative costs 63,717 64,103 58,945 Depreciation and amortization 48,615 38,771 33,974 Interest expense 13,836 13,753 13,697 Less capitalized interest (10,266) (9,323) (8,849) ---------- ---------- -------- Total expenses 115,902 107,304 97,767 ---------- ---------- -------- Income before income taxes 56,663 55,011 42,459 Provision for income taxes 19,529 21,374 16,700 ---------- ---------- -------- Net income $ 37,134 $ 33,637 $ 25,759 ======= ====== ====== 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, 1998 (Dollars in Thousands) Additional Common Stock Paid-in Retained Total Shares Amount Capital Earnings Equity ------------------------------------------------------------ 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 Net income - - - 33,637 33,637 --------------- --------- ------------- ---------- ---------- Balance, December 31, 1997 3 3 387,663 74,033 461,699 Net income - - - 37,134 37,134 --------------- --------- ------------- ---------- ---------- Balance, December 31, 1998 3 $ 3 $387,663 $111,167 $498,833 ===== ====== ======= ======= ======= The accompanying notes are an integral part of the combined financial statements. PARTNERSHIP GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Years Ended December 31, 1998 1997 1996 Cash flows from operating activities: Net income $37,134 $ 33,637 $ 25,759 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 48,615 38,771 33,974 Deferred income taxes (9,210) (1,426) 321 Changes in assets and liabilities: Accounts receivable (9,923) (715) 3,552 Prepaid expenses and other assets (9,967) 5,962 (615) Accounts payable and accrued liabilities 30,903 983 3,278 -------- --------- -------- Net cash flows from operating activities 87,552 77,212 66,269 -------- --------- -------- Cash flows from investing activities: Capital expenditures (74,202) (39,556) (18,483) Decrease (increase) in restricted cash (164,983) - 23,085 Management fee (1,514) (4,029) (4,736) -------- ---------- -------- Net cash flows from investing activities (240,699) (43,585) (134) -------- ---------- -------- Cash flows from financing activities: Repayments of senior secured project notes (51,762) (38,594) (107,560) Proceeds of offering from senior secured project notes 201,728 - 135,000 Distributions to parent - - (42,429) Decrease (increase) in amounts due from affiliates 3,181 4,967 (62,292) --------- ---------- -------- Net cash flows from financing activities 153,147 (33,627) (77,281) --------- ---------- -------- Net change in cash - - (11,146) Cash at beginning of period - - 11,146 --------- ---------- -------- Cash at the end of period $ - $ - $ - ======== ======== ======= 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"), CalEnergy Operating Corporation ("CEOC"), both 99% owned by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation (the "Funding Corporation"), CE Turbo LLC, indirectly wholly-owned by Magma, and CalEnergy Minerals LLC, a Delaware limited liability company ("Minerals LLC"), formerly indirectly owned by Magma and currently owned indirectly by MidAmerican Energy Holdings Company, the successor of CalEnergy Company, Inc. ("MidAmerican"). 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 have guaranteed the loans to such partnerships from Funding Corporation, an indirect wholly-owned subsidiary of Magma, which in turn was wholly-owned by MidAmerican. See Note 9. VPC and its subsidiary hold a 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. Turbo LLC is constructing the CE Turbo Project. The CE Turbo Project will have a capacity of 10 net MW. The net output of the CE Turbo Project will be sold to the Zinc Recovery Project or sold through the California Power Exchange. Minerals LLC is constructing the Zinc Recovery Project which will recover zinc from the geothermal brine (the "Zinc Recovery Project"). Four facilities will be installed near Imperial Valley Project sites to extract a zinc chloride solution from the brine through an ion exchange process. This solution will be transported to a central processing plant where zinc ingots will be produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tonnes per year and is scheduled to commence commercial operation in mid-2000. The zinc produced by the Zinc Recovery Project is expected to be sold primarily to U.S. West Coast customers such as steel companies, alloyers and galvanizers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements of the Guarantors present the accounts of CEOC, VPC, CE Turbo LLC and Minerals LLC 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 financial statements reflect the acquisition of Magma and the resulting push down to the Guarantors of the accounting as a purchase business combination. 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 fixed energy price periods of the Partnership Project SO4 Agreements extended until February 1996 for Vulcan, December 1998 for Hoch (Del Ranch) and Elmore and extend until December 1999 for the Leathers Partnership. For 1999, Vulcan, Hoch and Elmore are receiving Edison's Avoided Cost of Energy pursuant to their respective SO4 Agreements. The SO4 Agreement for Leathers provides for energy rates of 15.6 cents per kWh in 1999. The weighted average energy rate for the Partnership Project was 11.7 cents per kWh in 1998. For the year ended December 31, 1998 and 1997, Edison's average Avoided Cost of Energy was 3.0 cents and 3.3 cents per kWh, respectively, which is substantially below the contract energy prices earned in 1997. 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 will likely decline significantly after the expiration of the relevant scheduled payment periods. Restricted Cash The restricted cash balance primarily included commercial paper, money market securities and mortgage backed securities and was composed of amounts deposited in restricted accounts which the Guarantors will use to fund capital expenditures. 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. 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 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 fixed 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 carrying value of the mineral reserves will be amortized upon commencement of commercial production. The process license represents the economic benefits expected to be realized from the installation of the license and related technology at the Imperial Valley. The carrying value of 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, 1998 and 1997 accumulated amortization of the excess of cost over fair value of net assets acquired was $13,929 and $10,365, 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 1998, 1997 and 1996 was $13,361, $13,165 and $10,314, 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 The Guarantors review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized whenever evidence exists that the carrying value is not recoverable. 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. ACQUISITION Edison Mission Energy's Partnership Interest On April 17, 1996, MidAmerican 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. 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 acquisition had occurred on January 1, 1996 after giving effect to certain pro forma adjustments related to the acquisition, were $158,912 and $26,852, respectively. 4. PROPERTY, PLANT, CONTRACTS AND EQUIPMENT Property, plant, contracts and equipment consisted of the following: December 31, 1998 1997 Plant and equipment $ 92,920 $ 73,830 Power sale agreements 123,588 123,588 Process license 46,290 46,290 Mineral reserves 140,790 130,522 Wells and resource development 91,990 75,978 ----------- ----------- 495,578 450,208 Less accumulated depreciation and amortization (121,980) (79,542) ----------- ----------- 373,598 370,666 Construction in progress: Zinc recovery project 23,507 - Region 2 brine plant upgrade 2,712 - $399,817 $370,666 ======= ======= 5. SENIOR SECURED PROJECT NOTE The Guarantors have a project note payable to Salton Sea Funding Corporation with interest rates ranging from 6.69% to 8.30%. They have also guaranteed, along with other guarantors, the debt of Salton Sea Funding Corporation, which amounted to $626,816 at December 31, 1998. The guarantee is collateralized by a lien on the available cash flow of and a pledge of stock in the Guarantors. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets. On October 13, 1998 the Salton Sea Funding Corporation issued an additional investment grade offering for $285,000. In connection with this offering, the Guarantors issued an additional project note in the amount of $201,728 with an interest rate of 7.475% with a final maturity on November 30, 2018. Principal maturities of the senior secured project note are as follows: 1999 $ 32,364 2000 10,562 2001 1,907 2002 4,625 2003 5,017 Thereafter 239,101 ----------- $293,576 ======= The estimated fair values of the senior secured project note at December 31, 1998 and 1997 were $299,737 and $148,390, respectively. 6. 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 $363 and $416, respectively, for the year ended December 31, 1998, $403 and $456, respectively, for the year ended December 31, 1997, and $370 and $425, respectively, for the year ended December 31, 1996. 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 1998, 1997 and 1996 were $22,594, $21,108 and $16,980, 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 for 1998, 1997 and 1996 were $70, $70 and $60, respectively. * 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 1998, 1997 and 1996 amounted to $4,543, $4,290 and $3,545, 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 1998, 1997 and 1996 reimbursed CEOC for expenses of $8,945, $8,956 and $8,547, respectively, and accrued a guaranteed capacity payment of $4,695, $4,492 and $3,888 at December 31, 1998, 1997 and 1996, respectively. 7. CONTINGENCIES On February 26, 1998, Del Ranch and Elmore initiated an action against Edison in Imperial County Superior Court for payment for energy delivered to Edison pursuant to long term power sale agreements at the escalated rate of 14.6 cents for 1998. For the Elmore and Del Ranch partnerships, Edison has asserted that prices should not be escalated for 1998 and is currently making payments for energy deliveries at 13.6 cents per kWh. That action is in the early discovery stages and the Del Ranch and Elmore partnerships intend to vigorously prosecute all available claims. 8. CONDENSED FINANCIAL INFORMATION Condensed balance sheet information of the Guarantors' pro rata interest in the respective entities as of December 31, 1998 and 1997 is as follows: Vulcan Power CEOC Elmore Del Ranch ----------- --------- --------- ----------- December 31, 1998 Assets: Restricted cash $ - $ - $ - $ - Accounts receivable and other assets - 15,695 12,648 12,655 Due from affiliates 849 23,634 17,042 22,294 Property, plant, contracts and equipment, net 179 17,326 64,680 59,194 Management fee and goodwill, net - - - - Investments in partnerships 86,524 268,449 - - ---------- --------- --------- ----------- $ 87,552 $ 325,104 $ 94,370 $ 94,143 ====== ====== ====== ====== Liabilities and Equity: Accounts payable, accrued liabilities and deferred taxes $ 51 $ 7,869 $ 1,229 $ 2,109 Senior secured project note - - - - ---------- --------- --------- ----------- Total liabilities 51 7,869 1,229 2,109 Guarantors' equity 87,501 317,235 93,141 92,034 ---------- --------- --------- ----------- $ 87,552 $ 325,104 $ 94,370 $ 94,143 ======= ======= ======= ====== 8. CONDENSED FINANCIAL INFORMATION (Continued) Condensed balance sheet information of the Guarantors' pro rata interest in the respective entities as of December 31, 1998 and 1997 is as follows: Vulcan Adjustments/ Combined Leathers BNG Eliminations Total ------------ ------- ------------ ---------- December 31, 1998 Assets: Restricted cash $ - $ - $ 164,983 $ 164,983 Accounts receivable and other assets 12,571 3,356 (433) 56,492 Due from affiliates 3,116 22,934 31,261 121,130 Property, plant, contracts and equipment, net 69,084 57,320 132,034 399,817 Management fee and goodwill, net - - 203,154 203,154 Investments in partnerships - - (354,973) - --------- --------- ------------ ----------- $ 84,771 $ 83,610 $ 176,026 $ 945,576 ====== ====== ======= ======= Liabilities and Equity: Accounts payable, accrued liabilities and deferred taxes $ 1,497 $ 1,582 $ 138,830 $ 153,167 Senior secured project note - - 293,576 293,576 --------- --------- ----------- ------------ Total liabilities 1,497 1,582 432,406 446,743 Guarantors' equity 83,274 82,028 (256,380) 498,833 --------- --------- ------------ ---------- $ 84,771 $ 83,610 $ 176,026 $ 945,576 ====== ====== ======= ======= 8. CONDENSED FINANCIAL INFORMATION (Continued) Vulcan Power CEOC Elmore Del Ranch --------- -------- --------- ----------- December 31, 1997 Assets: Accounts receivable and other assets $ - $ 8,802 $ 8,381 $ 9,972 Due from affiliates 424 22,631 14,286 14,002 Property, plant, contracts and equipment, net 204 15,027 60,828 55,481 Management fee and goodwill, net - - - - Investments in partnerships 76,877 231,311 - - ------- --------- --------- --------- $77,505 $ 277,771 $ 83,495 $ 79,455 ====== ====== ====== ====== Liabilities and Equity: Accounts payable, accrued liabilities and deferred taxes $ 40 $ 7,541 $ 982 $ 1,663 Due to affiliates - - - - Senior secured project note - - - - ------- --------- --------- -------- Total liabilities 40 7,541 982 1,663 Guarantors' equity 77,465 270,230 82,513 77,792 ------- --------- --------- -------- $77,505 $277,771 $83,495 $79,455 ======= ======= ======= ====== 8. CONDENSED FINANCIAL INFORMATION (Continued) Vulcan Adjustments/ Combined Leathers BNG Eliminations Total ----------- ------- ------------ -------- December 31, 1997 Assets: Accounts receivable and other assets $ 8,204 $ 4,391 $ (3,148) $ 36,602 Due from affiliates - 21,262 51,706 124,311 Property, plant, contracts and equipment, net 70,500 51,749 116,877 370,666 Management fee and goodwill, net - - 205,204 205,204 Investments in partnerships - - (308,188) - --------- --------- ----------- --------- $78,704 $77,402 $62,451 $736,783 ====== ====== ======= ======= Liabilities and Equity: Accounts payable, accrued liabilities and deferred taxes $ 1,522 $ 525 $ 119,201 $ 131,474 Due to affiliates 6,176 - (6,176) - Senior secured project note - - 143,610 143,610 --------- -------- ------------ --------- Total liabilities 7,698 525 256,635 275,084 Guarantors' equity 71,006 76,877 (194,184) 461,699 --------- -------- ------------ --------- $ 78,704 $ 77,402 $ 62,451 $ 736,783 ====== ====== ======= ======= 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, 1998, 1997 and 1996 is as follows: Vulcan Power CEOC Elmore Del Ranch ----------- -------- -------- ---------- December 31, 1998 Revenues $ 772 $ 47,009 $ 49,212 $ 52,241 Expenses 383 - 38,583 37,998 ----------- -------- -------- ---------- Net income $ 389 $ 47,009 $ 10,629 $ 14,243 ====== ====== ====== ====== December 31, 1997 Revenues $ 859 $ 45,533 $ 48,114 $ 47,068 Expenses 436 - 35,484 33,139 ---------- --------- -------- --------- Net income $ 423 $ 45,533 $ 12,630 $ 13,929 ====== ====== ====== ====== December 31, 1996 Revenues $ 3,157 $ 49,399 $ 39,627 $ 40,235 Expenses 431 - 25,762 25,382 ---------- --------- -------- -------- Net income $ 2,726 $ 49,399 $ 13,865 $ 14,853 ====== ====== ====== ====== 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, 1998, 1997 and 1996 is as follows: Vulcan Adjustments/ Combined Leathers BNG Eliminations Total ----------------------------------------------- December 31, 1998 Revenues $50,436 $14,608 $(41,713) $172,565 Expenses 38,166 9,458 10,843 135,431 -------- -------- ------------ ---------- Net income $12,270 $ 5,150 $(52,556) $37,134 ====== ====== ======= ===== December 31, 1997 Revenues $47,899 $15,208 $(42,366) $162,315 Expenses 38,209 8,903 12,507 128,678 -------- -------- ------------ ---------- Net income $ 9,690 $ 6,305 $(54,873) $ 33,637 ====== ====== ======= ====== December 31, 1996 Revenues $39,126 $ 14,271 $(45,589) $140,226 Expenses 27,055 12,102 23,735 114,467 --------- ------- ----------- ----------- Net income $12,071 $ 2,169 $(69,324) $ 25,759 ====== ====== ======= ====== 9. INCOME TAXES The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 consisted of the following: Current Deferred Total --------- --------- -------- 1998 - -------------------- Federal $22,021 $(7,212) $14,809 State 6,718 (1,998) 4,720 --------- ------------------- Total $28,739 $(9,210) $19,529 ===== ===== ====== 1997 - -------------------- Federal $17,563 $(1,222) $16,341 State 5,237 (204) 5,033 --------- ------------------- Total $22,800 $(1,426) $21,374 ===== ===== ====== 1996 - -------------------- Federal $10,945 $ 1,976 $12,921 State 5,434 (1,655) 3,779 --------- ------------------- Total $16,379 $ 321 $16,700 ====== ====== ====== Deferred tax liabilities at December 31, 1998 and 1997 consisted of differences between book and tax methods relating to depreciation and amortization. The effective tax rate differs from the federal statutory tax rate due primarily to percentage depletion in excess of cost depletion and goodwill amortization. 10. SUBSEQUENT EVENTS On February 8, 1999, MidAmerican created a new subsidiary, CE Generation, LLC ("CE Generation") and subsequently transferred its interest in the Company's power generation assets in the Imperial Valley to CE Generation. On March 3, 1999, MidAmerican closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation. 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, 1998 and 1997 and the related statements of operations, equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska January 28, 1999 (March 3, 1999 as to Note 5) SALTON SEA ROYALTY COMPANY BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) December 31, 1998 1997 ASSETS Due from affiliates $ 50,928 $ 19,114 Royalty stream, net 22,932 31,818 Excess of cost over fair value of net assets acquired, net 33,188 34,096 Prepaid expenses and other assets 513 981 ----------- ----------- $107,561 $ 86,009 ======= ======= LIABILITIES AND EQUITY Liabilities: Accrued liabilities $ 39,584 $ 21,306 Senior secured project note 23,210 38,934 Deferred income taxes 6,769 7,268 ----------- ---------- Total liabilities 69,563 67,508 Commitments and contingencies (Note 3) Equity: Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding - - Additional paid-in capital 1,561 1,561 Retained earnings 36,437 16,940 ----------- --------- Total equity 37,998 18,501 ----------- --------- $107,561 $ 86,009 ======= ======= 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, 1998 1997 1996 Revenues: Royalty income $51,703 $32,231 $30,143 Expenses: Operating, general and administrative expenses 8,120 7,769 7,288 Amortization of royalty stream and goodwill 9,794 9,794 10,280 Interest expense 2,784 4,179 5,246 -------- --------- --------- Total expenses 20,698 21,742 22,814 -------- --------- --------- Income before income taxes 31,005 10,489 7,329 Provision for income taxes 11,508 1,828 2,560 -------- --------- --------- Net income $19,497 $ 8,661 $ 4,769 ======= ======= ======= The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (Dollars in Thousands) Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total ------------------------------------------------------- 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 Net income - - - 8,661 8,661 ------- -------- --------- --------- ----------- Balance, December 31, 1997 100 - 1,561 16,940 18,501 Net income - - - 19,497 19,497 ------- -------- --------- --------- ----------- Balance, December 31, 1998 100 $ - $ 1,561 $36,437 $37,998 ===== ======= ======= ====== ====== The accompanying notes are an integral part of the financial statements. SALTON SEA ROYALTY COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year End December 31, 1998 1997 1996 Cash flow from operating activities: Net income $ 19,497 $ 8,661 $ 4,769 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of royalty stream and goodwill 9,794 9,794 10,280 Deferred income taxes (499) (4,959) (3,233) Changes in assets and liabilities: Prepaid expenses and other assets 468 4,376 886 Accrued liabilities 18,280 9,236 6,122 ---------- ---------- ---------- Net cash flows from operating activities 47,540 27,108 18,824 ---------- ---------- ---------- Net cash flows from financing activities: Decrease (increase) in due from affiliates (31,814) (9,106) 15,102 Distribution to parent - - (22,980) Repayment of senior secured project note (15,726) (18,002) (10,946) ---------- ---------- ---------- Net cash flows from financing activities (47,540) (27,108) (18,824) ---------- ---------- ---------- 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"). Magma was a wholly-owned subsidiary of MidAmerican Energy Holdings Company, the successor of CalEnergy Company, Inc. ("MidAmerican"). See Note 5. 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, MidAmerican 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 East Mesa Project has entered into a Termination Agreement, to which Magma consented, which will terminate its SO4 Agreement upon CPUC approval becoming final. The Partnership 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), 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, 1998 and 1997, Edison's average Avoided Cost of Energy was 3.0 cents and 3.3 cents per kWh, respectively, which is substantially below the contract energy prices earned in 1998. 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 will likely 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, guarantee loans from the Funding Corporation, a wholly-owned subsidiary of Magma. The financial statements reflect the acquisition of Magma and the resulting push down to the Royalty Company of the accounting as a purchase business combination. Royalty Stream 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 fixed 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. At December 31, 1998 and 1997, accumulated amortization was $37,555 and $28,669, respectively. 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, 1998 and 1997, accumulated amortization of the excess of cost over fair value was $3,553 and $2,645, 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 The Royalty Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized whenever evidence exists that the carrying value is not recoverable. 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 PROJECT NOTE The Royalty Company has a project note payable to Salton Sea Funding Corporation at interest rates ranging from 6.69% to 7.37%. They have also guaranteed, along with other guarantors, the debt of Salton Sea Funding Corporation, which amounted to $626,816 at December 31, 1998. The guarantee issued is collateralized by a lien on substantially all the assets of and a pledge of stock in the Guarantor. The structure has been designed to cross collateralize cash flows from each guarantor without cross collateralizing all of the guarantors' assets. Principal maturities of the senior secured project note are as follows: 1999 $ 9,396 2000 4,773 2001 4,434 2002 3,460 2003 304 Thereafter 843 ---------- $23,210 ====== The estimated fair values of the senior secured project note at December 31, 1998 and 1997 were $23,537 and $40,251, respectively. 4. INCOME TAXES The provision for income taxes for the year ended December 31, 1998, 1997 and 1996, consisted of the following: Current Deferred Total --------- ----------- -------- 1998 Federal $ 9,267 $ (294) $ 8,973 State 2,740 (205) 2,535 --------- ----------- -------- Total $12,007 $ (499) $11,508 ===== ====== ===== 1997 Federal $5,292 $(4,159) $1,133 State 1,495 (800) 695 --------- ----------- -------- Total $6,787 $(4,959) $1,828 ===== ====== ===== 1996 Federal $4,517 $(2,390) $2,127 State 1,276 (843) 433 --------- ----------- -------- Total $5,793 $(3,233) $2,560 ===== ====== ===== 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 (assets) at December 31, 1998 and 1997 consisted of the following: 1998 1997 Deferred liabilities: Depreciation and amortization $9,368 $12,568 Deferred assets: Jr. SO4 royalty receivable - (5,300) Deferred income (2,599) - ----------- --------- Net deferred tax liability $6,769 $ 7,268 ======= ====== 5. SUBSEQUENT EVENTS On February 8, 1999, MidAmerican created a new subsidiary, CE Generation, LLC ("CE Generation") and subsequently transferred its interest in the Company's power generation assets in the Imperial Valley to CE Generation. On March 3, 1999, MidAmerican closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation. 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; Director Gregory E. Abel President and Chief Operating Officer, Director Steven A. McArthur Senior Vice President, General Counsel and Secretary; Director Alan L. Wells Senior Vice President and Chief Financial Officer Frederick L. Manuel Senior Vice President, Operations Patrick J. Goodman Senior Vice President and Chief Accounting Officer DAVID L. SOKOL, 42, Chairman of the Board and Chief Executive Officer. Mr. Sokol has been Chief Executive Officer since April 19, 1993 and served as President of MidAmerican from April 19, 1993 until January 21, 1995. He has been Chairman of the Board of Directors since May 1994 and a director of MidAmerican since March 1991. Formerly, among other positions held in the independent power industry, Mr. Sokol served as President and Chief Executive Officer of Kiewit Energy Company, which at that time was a wholly owned subsidiary of PKS, and Ogden Projects, Inc. GREGORY E. ABEL, 36, President and Chief Operating Officer. Mr. Abel joined MidAmerican 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. STEVEN A. McARTHUR, 41, Senior Vice President, General Counsel and Secretary. Mr. McArthur joined MidAmerican 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. ALAN L. WELLS, 39, Senior Vice President and Chief Financial Officer. Mr. Wells served as Vice President of MidAmerican Energy from November 1, 1996 to October 31, 1997 and held various executive and management positions with MidAmerican Energy and Iowa-Illinois from 1993 to October 31, 1996. FREDERICK L. MANUEL, 40, Senior Vice President - Operations. Prior to joining MidAmerican, he was employed by Chevron Corporation with responsibilities including land and offshore drilling, reservoir and production engineering, project management and technical research. PATRICK J. GOODMAN, 32, Senior Vice President and Chief Accounting Officer. Mr. Goodman joined MidAmerican in June 1995, and served as Manager of Consolidation Accounting until September 1996 when he was promoted to Controller. Prior to joining MidAmerican, Mr. Goodman was a financial manager for National Indemnity Company and a senior associate at Coopers & Lybrand. 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, 1998, 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, 1998, 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. 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 MidAmerican 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, SSPG, Elmore, Leathers, Del Ranch and Vulcan, the general partners thereof) have been organized and are operated as legal entities separate and apart from MidAmerican, Magma and any other Affiliates of MidAmerican or Magma, and, accordingly, the assets of the Funding Corporation and the Guarantors (and, in the case of SSBP, SSPG, Elmore, Leathers, Del Ranch and Vulcan, the general partners thereof) will not be generally available to satisfy the obligations of MidAmerican, Magma or any other Affiliates of MidAmerican 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 MidAmerican, 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 The Company filed a Current Report on Form 8-K dated October 13, 1998 reporting the completion of the institutional placement of $285 million principal amount of its 7.475% Senior Secured Series F Bonds due November 30, 2018. (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 30, 1999. SALTON SEA FUNDING CORPORATION By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. 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 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. 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 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. FISH LAKE POWER COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. VULCAN POWER COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. CALENERGY OPERATING CORPORATION By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. SALTON SEA ROYALTY COMPANY By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. LEATHERS, L.P., a California limited partnership By: CalEnergy Operating Corporation, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. ELMORE L.P., a California limited partnership By: CalEnergy Operating Corporation, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. DEL RANCH L.P., a California limited partnership By: CalEnergy Operating Corporation, a Delaware corporation, its general partner By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. BN GEOTHERMAL INC., a Delaware corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. NIGUEL ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. CONEJO ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. SAN FELIPE ENERGY COMPANY, a California corporation By:/s/ David L. Sokol* David L. Sokol Director, Chairman of the Board 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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 30, 1999. 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 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 30, 1999 David L. Sokol Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Gregory E. Abel * March 30, 1999 Gregory E. Abel Director, President and Chief Operating Officer /s/ Steven A. McArthur March 30, 1999 Steven A. McArthur Director, Senior Vice President and Secretary /s/ Alan L. Wells* March 30, 1999 Alan L. Wells Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Patrick J. Goodman* March 30, 1999 Patrick J. Goodman Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) * 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). 3.10 By-laws of CEOC (incorporated by reference to Exhibit 3.10 to the Funding Corporation Form S-4). 3.11 Articles of Incorporation of the Royalty Guarantor (incorporated by reference to Exhibit 3.11 to the Funding Corporation Form S-4). 3.12 By-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). 4.1(e) Fourth Supplemental Indenture between Chemical Trust Company of California and the Funding Corporation. * 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). 4.3(c) Second Amended and Restated Partnership Secured Limited Guarantee, dated as of October 13, 1998 by by CEOC, and VPC, Conejo, Niguel, Sal Felipe, BNG, Del Ranch, Elmore, Leathers and Vulcan in favor of Chemical Trust Company of California. * 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). 4.6(c) Second Amendment to the Collateral Agency and Intercreditor Agreement, dated as of October 13, 1998, by and among Credit Suisse, Chemical Trust Company of California, the Funding Corporation and the Guarantors. * 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). 4.8(c) Purchase Agreement, dated October 13, 1998 by and among CS First Boston Corporation, the Guarantors and the Funding Corporation. * 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). 4.10 Debt 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). 4.10(a) Amendment to Notes and to Amended Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated October 13, 1998, by and among the Funding Corporation, certain banks and Credit Suisse, as agent. * 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). 4.12 Salton 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). 4.13 Salton 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). 4.13(a) Salton Sea Project Note (SSI), dated October 13, 1998, by SSBP, SSPG and Fish Lake in favor of the Funding Corporation. * 4.13(b) Salton Sea Project Note (SSIII), dated October 13, 1998, by SSBP, SSPG and Fish Lake in favor of the Funding. * 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). 4.14(c) Amended and Restated Deposit and Disbursement Agreement, dated as of October 13, 1998, by and among the Funding Corporation, Chemical Trust Company of California and the Guarantors. * 4.15 Partnership 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). 4.16 Partnership 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). 4.17 Stock 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). 4.18 Cost Overrun Commitment, dated as of July 21, 1995, between MidAmerican, 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). 4.19(c) Second Amended and Restated Partnership Guarantors Credit Agreement, dated October 13, 1998, by and among the Partnership Guarantors and the Funding Corporation. * 4.20 Partnership 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). 4.21 Stock 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). 4.22 Stock 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). 4.23 Royalty 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). 4.24 Royalty 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). 4.25 Royalty 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). 4.26 Royalty 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). 4.27 Stock 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). 4.28 Collateral 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). 4.29 Collateral 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). 4.30 Debt 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). 4.31 Partnership Project Note, dated July 21, 1995, by VPC and CEOC in favor of the Funding Corporation. 4.31(a) Partnership Project Note (SSI), dated October 13, 1998, by VPC and CEOC in favor of the Funding Corporation. * 4.31(b) Partnership Project Note (SSII), dated October 13, 1998, by VPC and CEOC in favor of the Funding Corporation. * 4.31(c) Partnership Project Note (SSIII), dated October 13, 1998, by VPC and CEOC in favor of the Funding Corporation. * 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). 4.37(a) First Amendment to Deed of Trust, dated October 13, 1998 by Vulcan to Chicago Title Company for the use and benefit of Chemical Trust Company of California. * 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). 4.38(a) First Amendment to Deed of Trust, dated October 13, 1998, by Elmore to Chicago Title Company for the use and benefit of Chemical Trust Company of California. * 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). 4.39(a) First Amendment to Deed of Trust, dated October 13, 1998, by Leathers to Chicago Title Company for the use and benefit of Chemical Trust Company of California. * 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). 4.40(a) First Amendment to Deed of Trust, dated October 13, 1998, by Del Ranch to Chicago Title Company for the use and benefit of Chemical Trust Company of California. * 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). 10.1(c) Second Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixed Filing, dated as of October 13, 1998, by SSBP, SSPG and Fish Lake to Chicago Title Company for the use and benefit of Chemical Trust Company of California. * 10.2 Collateral 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). 10.3 Contract 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). 10.4 Amendment 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). 10.5 Amendment 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). 10.6 Contract 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). 10.7 Amendment 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). 10.8 Power 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). 10.9 Power 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. * Denotes documents to be filed with an amendment to this Form 10-K.