**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-Q**
 
 **[
X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934**
 
 For the
quarterly period ended March 31, 2005
 
 **OR**
 
 **[
] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934**
 
 For the
transition period from ____ to ____
 
 Commission
File No. 33-95538
 
 **SALTON
SEA FUNDING CORPORATION**
 (Exact
name of registrant as specified in its charter)
 
 Delaware
    
    47-0790493(State
      of Incorporation)
    
    (IRS
      Employer Identification No.)Salton
      Sea Brine Processing, L.P.
    
    California
    
    33-0601721Salton
      Sea Power Generation L.P.
    
    California
    
    33-0567411Fish
      Lake Power LLC
    
    Delaware
    
    33-0453364Vulcan
      Power Company
    
    Nevada
    
    95-2636765CalEnergy
      Operating Corporation
    
    Delaware
    
    33-0268085Salton
      Sea Royalty LLC
    
    Delaware
    
    47-0790492VPC
      Geothermal LLC
    
    Delaware
    
    91-1244270San
      Felipe Energy Company
    
    California
    
    33-0315787Conejo
      Energy Company
    
    California
    
    33-0268500Niguel
      Energy Company
    
    California
    
    33-0268502Vulcan/BN
      Geothermal Power Company
    
    Nevada
    
    95-3992087Leathers,
      L.P.
    
    California
    
    33-0305342Del
      Ranch, L.P.
    
    California
    
    33-0278290Elmore,
      L.P.
    
    California
    
    33-0278294Salton
      Sea Power L.L.C.
    
    Delaware
    
    47-0810713CalEnergy
      Minerals LLC
    
    Delaware
    
    47-0810718CE
      Turbo LLC
    
    Delaware
    
    47-0812159CE
      Salton Sea Inc.
    
    Delaware
    
    47-0810711Salton
      Sea Minerals Corp.
    
    Delaware
    
    47-0811261
 
 302
      S. 36thStreet, Suite 400, Omaha, Nebraska
    
    68131(Address
      of principal executive offices of
    
    (Zip
      Code of Salton Sea Funding Corporation)Salton
      Sea Funding Corporation)(402)
      341-4500Salton
      Sea Funding Corporation's telephone number, including area
      code:(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 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 T No £
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
 
 All
common stock of Salton Sea Funding Corporation is indirectly held by Magma Power
Company. As of April 30, 2005, 100 shares of common stock were
outstanding.
  
  
 **TABLE
OF CONTENTS**
 
 **PART
      I - FINANCIAL INFORMATION**Item 1.
    Financial Statements
    3Item 2.
    Management's Discussion and Analysis of Financial Condition
      and Results of Operations
    34Item 3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    42Item 4.
    Controls and Procedures
    42**PART
      II - OTHER INFORMATION**Item 1.
    Legal Proceedings
    43Item 2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    43Item 3.
    Defaults Upon Senior Securities
    43Item 4.
    Submission of Matters to a Vote of Security
      Holders
    43Item 5.
    Other Information
    43Item 6.
    Exhibits
    43Signatures
    
    44Exhibit Index
    
    45
 
  2
  
 **PART
I - FINANCIAL INFORMATION**
 
 **Item
      1.**
    **Financial
Statements.**
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors and Stockholder
 Salton
Sea Funding Corporation
 Omaha,
Nebraska
 
 We have
reviewed the accompanying balance sheet of Salton Sea Funding Corporation (the
“Company”) as of March 31, 2005, and the related statements of operations
and cash flows for the three-month periods ended March 31, 2005 and 2004.
These interim financial statements are the responsibility of the Company's
management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to such interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheet of Salton Sea
Funding Corporation as of December 31, 2004, and the related statements of
operations, stockholder's equity and cash flows for the year then ended (not
presented herein); and in our report dated February 25, 2005, we expressed
an unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying balance sheet as of December 31,
2004 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
 
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 May 5,
2005
 
 
 
  3
  
 **SALTON
SEA FUNDING CORPORATION**
 **BALANCE
SHEETS**
 (Amounts
in thousands, except share data)
 
 
 **As
      of****March 31,**
    
    **December 31,****2005**
    
    **2004****(Unaudited)****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    24,531
    
    $
    14,524Short-term
      investments
    
    
    10,000
    
    
    5,000Accrued
      interest receivable and other current assets
    
    
    7,697
    
    
    1,927Current
      portion secured project notes from Guarantors
    
    
    28,620
    
    
    28,620Total
      current assets
    
    
    70,848
    
    
    50,071Secured
      project notes from Guarantors
    
    
    269,757
    
    
    269,757Investment
      in 1% of net assets of Guarantors
    
    
    4,344
    
    
    6,675**Total
      assets**
    
    $
    344,949
    
    $
    326,503**LIABILITIES
      AND STOCKHOLDER’S EQUITY**Current
      liabilities:Accrued
      interest
    
    $
    7,657
    
    $
    1,914Current
      portion of long-term debt
    
    
    28,620
    
    
    28,620Total
      current liabilities
    
    
    36,277
    
    
    30,534Due
      to affiliates
    
    
    -
    
    
    15,073Senior
      secured notes and bonds
    
    
    269,757
    
    
    269,757Total
      liabilities
    
    
    306,034
    
    
    315,364Commitments
      and contingencies (Note 2)Stockholder's
      equity:Common
      stock authorized - 1,000 shares, par value $.01 per share; issued and
      outstanding 100 shares
    
    
    -
    
    
    -Additional
      paid-in capital
    
    
    36,041
    
    
    8,302Retained
      earnings
    
    
    2,874
    
    
    2,837Total
      stockholder's equity
    
    
    38,915
    
    
    11,139**Total
      liabilities and stockholder's equity**
    
    $
    344,949
    
    $
    326,503
 
 The
accompanying notes are an integral part of these financial
statements.
  4
  **SALTON
SEA FUNDING CORPORATION**
 **STATEMENTS
OF OPERATIONS**
 (Amounts
in thousands)
 
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Revenue:**Interest
      income
    
    $
    5,905
    
    $
    8,032Equity
      in loss of Guarantors
    
    
    (22
    )
    
    (85
    )Total
      revenue
    
    
    5,883
    
    
    7,947**Costs
      and expenses:**General
      and administrative expenses
    
    
    74
    
    
    13Interest
      expense
    
    
    5,743
    
    
    7,985Total
      costs and expenses
    
    
    5,817
    
    
    7,998**Income
      (loss) before income taxes**
    
    
    66
    
    
    (51
    )Provision
      (benefit) for income taxes
    
    
    29
    
    
    (21
    )**Net
      income (loss)**
    
    $
    37
    
    $
    (30
    )
 
 The
accompanying notes are an integral part of these financial
statements.
  5
  
 **SALTON
SEA FUNDING CORPORATION**
 **STATEMENTS
OF STOCKHOLDER'S EQUITY**
 **FOR
THE THREE MONTHS ENDED MARCH 31, 2005**
 (Amounts
in thousands, except share amounts)
 
 
 **Additional****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **Earnings**
    
    **Equity****Balance,
      January 1, 2005**
    
    
    100
    
    $
    -
    
    $
    8,302
    
    $
    2,837
    
    $
    11,139Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    37
    
    
    37Adjustments
      resulting from capital transactions of Guarantors
    
    
    -
    
    
    -
    
    
    (2,309
    )
    
    -
    
    
    (2,309
    )Equity
      distributions received
    
    
    -
    
    
    -
    
    
    267,607
    
    
    -
    
    
    267,607Equity
      distributions made
    
    
    
    
    
    
    
    
    (234,685
    )
    
    (2,874
    )
    
    (237,559
    )**Balance,
      March 31, 2005**
    
    
    100
    
    $
    -
    
    $
    38,915
    
    $
    -
    
    $
    38,915
 
 The
accompanying notes are an integral part of these financial
statements.
  6
  **SALTON
SEA FUNDING CORPORATION**
 **STATEMENTS
OF CASH FLOWS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Cash
      flows from operating activities:**Net
      income (loss)
    
    $
    37
    
    $
    (30
    )Adjustments
      to reconcile net income (loss) to net cash flows from operating
      activities:Equity
      in loss of Guarantors
    
    
    22
    
    
    85Changes
      in assets and liabilities:Accrued
      interest receivable and other current assets
    
    
    (5,770
    )
    
    (5,442
    )Accrued
      interest payable
    
    
    5,743
    
    
    5,437Net
      cash flows from operating activities
    
    
    32
    
    
    50**Cash
      flows from investing activities:**Purchases
      of available-for-sale securities
    
    
    (30,000
    )
    
    (78,050
    )Proceeds
      from sale of available-for-sale securities
    
    
    25,000
    
    
    74,550Principal
      repayments of secured project notes from Guarantors
    
    
    -
    
    
    136,383Net
      cash flows from investing activities
    
    
    (5,000
    )
    
    132,883**Cash
      flows from financing activities:**Repayment
      of senior secured notes and bonds
    
    
    -
    
    
    (136,383
    )Due
      to affiliates, net
    
    
    14,975
    
    
    16,144Net
      cash flows from financing activities
    
    
    14,975
    
    
    (120,239
    )**Net
      change in cash and cash equivalents**
    
    
    10,007
    
    
    12,694**Cash
      and cash equivalents at the beginning of period**
    
    
    14,524
    
    
    10,491**Cash
      and cash equivalents at the end of period**
    
    $
    24,531
    
    $
    23,185**Supplemental
      disclosure:**Income
      taxes paid (received)
    
    $
    29
    
    $
    (21
    )
 
 The
accompanying notes are an integral part of these financial
statements.
  7
  **SALTON
SEA FUNDING CORPORATION**
 **NOTES
TO FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.**
    **General**
 
 In the
opinion of the management of Salton Sea Funding Corporation (“Funding
Corporation”), the accompanying unaudited financial statements of Funding
Corporation and of Salton Sea Brine Processing, L.P., Salton Sea Power
Generation L.P. (“SSPG”), Salton Sea Power L.L.C. (“Salton Sea Power”) and Fish
Lake Power LLC (“Fish Lake”) (collectively, with CE Salton Sea Inc., the “Salton
Sea Guarantors”), Vulcan/BN Geothermal Power Company, Elmore, L.P., Leathers,
L.P., Del Ranch, L.P., CE Turbo LLC (“CE Turbo”), CalEnergy Minerals LLC
(“CalEnergy Minerals”), Salton Sea Minerals Corp., CalEnergy Operating
Corporation, Vulcan Power Company, San Felipe Energy Company, Conejo Energy
Company, Niguel Energy Company, and VPC Geothermal LLC, (collectively, with CE
Salton Sea Inc., the “Partnership Guarantors”), and Salton Sea Royalty LLC (the
“Royalty Guarantor”, together with the Salton Sea Guarantors and the Partnership
Guarantors, the “Guarantors”) contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 2005, and the results of operations and cash flows for the
three-month periods ended March 31, 2005 and 2004. The results of
operations for the three-month periods ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year.
 
 The
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in Funding Corporation's Annual Report on
Form 10-K for the year ended December 31, 2004. In particular, Funding
Corporation’s significant accounting policies are presented in Note 2 to the
financial statements included therein.
 
 Certain
amounts in the prior period combined financial statements and supporting note
disclosures have been reclassified to conform to the current period
presentation, including the reclassification of auction rate securities. Such
reclassifications did not impact previously reported net income or retained
earnings.
 
 The
accompanying combined balance sheet as of December 31, 2004, reflects a
reclassification of instruments used in Funding Corporation’s cash management
program from cash and cash equivalents to short-term investments of
$5.0 million. This reclassification is to present certain auction rate
securities as short-term investments rather than as cash equivalents due to the
stated maturities of these investments. These instruments are classified as
available-for-sale securities as management does not intend to hold them to
maturity nor are they bought and sold with the objective of generating profits
on short-term differences in price. The carrying value of these instruments
approximates their fair value. Additionally, in the accompanying combined
statements of cash flows, cash and cash equivalents were reduced by
$5.0 million, $7.3 million and $3.9 million at December 31,
2004, March 31, 2004 and December 31, 2003, respectively, to reflect
the reclassification of these instruments from cash and cash equivalents to
short-term investments .
 
 **2.**
    **Commitments
      and Contingencies**
 
 Southern
California Edison (“Edison”) and the California Power Exchange
 
 On
July 10, 2003, the Salton Sea IV Project’s 40 megawatt turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea IV Project’s turbine returned to service, on
September 17, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea IV power purchase agreement totaling $2.5 million. SSPG, with
Fish Lake, owner of the Salton Sea IV Project, served notices of error on Edison
for such unpaid amounts. As a result, the Salton Sea Guarantors had established
an allowance for doubtful accounts of $1.7 million for capacity payments as
of December 31, 2003. In December 2004, as a result of a settlement agreement
dated December 7, 2004 resolving the dispute, which settlement is contingent
upon approval by the California Public Utilities Commission, the allowance was
released and the associated receivable was written off.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo had not received payment for power sold to El Paso
Merchant Energy Company under certain transaction agreements during December
2000 and January 2001 of $3.8 million (the “PX Receivable”). Salton Sea
Power and CE Turbo had established an allowance for doubtful accounts for this
balance as of December 31, 2003. On September 29, 2004, Salton Sea
Power and CE Turbo entered into separate Transfer of Claims Agreements with
TransAlta USA, Inc (“TransAlta”) and MidAmerican Energy Holdings Company
(“MEHC”) (the “Transfer of Claims Agreements”), pursuant to which Salton Sea
Power and CE Turbo received an aggregate of $3.7 million in exchange for
transferring the rights to receive payment on the PX Receivable to TransAlta and
MEHC. As a result of the transaction, Salton Sea Power and CE Turbo wrote-off
the PX Receivable and the related allowance for doubtful accounts and recorded a
$3.8 million current liability to reflect the collection risk retained
under the Transfer of Claims Agreements. Pursuant to the Transfer of Claims
Agreements, to the extent that the PX Receivable becomes uncollectible, Salton
Sea Power and CE Turbo can be required to pay the PX Receivable, plus interest,
to MEHC and TransAlta. As of March 31, 2005, the California Power Exchange has
not made any payments.
   8
  **3.**
    **Related
      Party Transactions**
 
 Funding
Corporation received $267.6 million of amounts due to affiliates as equity
distributions and made equity distributions of $237.6 million of amounts due
from affiliates during the three-month period ended March 31, 2005. The amounts
due to affiliates include amounts due to the Partnership Guarantors and Royalty
Guarantor of $208.3 million and $59.3 million, respectively, which represent the
Partnership Guarantors’ and Royalty Guarantor’s excess operating profits
previously held in the revenue account of Funding Corporation and subsequently
transferred from the distribution account of Funding Corporation pursuant to the
terms and conditions of the debt of Funding Corporation. The amounts due from
affiliates include amounts due from the Salton Sea Guarantors of $36.7 million,
which represent the Salton Sea Guarantors’ operating losses and capital
expenditures previously funded by amounts held in the revenue account of Funding
Corporation and amounts due from Magma Power Company of $200.9 million, which
represent amounts previously transferred to Magma Power Company pursuant to the
terms and conditions of the debt of Funding Corporation.
  9
  **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors and Stockholder
 Magma
Power Company
 Omaha,
Nebraska
 
 We have
reviewed the accompanying combined balance sheet of the Salton Sea Guarantors as
of March 31, 2005, and the related combined statements of operations and
cash flows for the three-month periods ended March 31, 2005 and 2004. These
interim financial statements are the responsibility of the Salton Sea
Guarantors' management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to such combined interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the combined balance sheet of the
Salton Sea Guarantors as of December 31, 2004, and the related combined
statements of operations, Guarantors' equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 25, 2005, we
expressed an unqualified opinion on those combined financial statements. In our
opinion, the information set forth in the accompanying combined balance sheet as
of December 31, 2004 is fairly stated, in all material respects, in
relation to the combined balance sheet from which it has been
derived.
 
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 May 5,
2005
 
  10
  
 **SALTON
SEA GUARANTORS**
 **COMBINED
BALANCE SHEETS**
 (Amounts
in thousands)
 
 **As
      of****March
      31,**
    
    **December 31,****2005**
    
    **2004****(Unaudited)****ASSETS**Current
      assets:Trade
      accounts receivable
    
    $
    11,268
    
    $
    14,872Trade
      accounts receivable from affiliates
    
    
    1,291
    
    
    932Prepaid
      expenses and other current assets
    
    
    4,777
    
    
    4,032Total
      current assets
    
    
    17,336
    
    
    19,836Properties,
      plants and equipment, net
    
    
    370,014
    
    
    372,986Intangible
      assets, net
    
    
    22,093
    
    
    22,379**Total
      assets**
    
    $
    409,443
    
    $
    415,201**LIABILITIES
      AND GUARANTORS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    856
    
    $
    256Accrued
      interest
    
    
    5,077
    
    
    1,269Other
      accrued liabilities
    
    
    5,447
    
    
    4,282Current
      portion of long-term debt
    
    
    23,918
    
    
    23,918Total
      current liabilities
    
    
    35,298
    
    
    29,725Due
      to affiliates
    
    
    -
    
    
    44,085Senior
      secured project note
    
    
    175,320
    
    
    175,320Total
      liabilities
    
    
    210,618
    
    
    249,130Commitments
      and contingencies (Note 7)Guarantors'
      equity
    
    
    198,825
    
    
    166,071**Total
      liabilities and guarantors' equity**
    
    $
    409,443
    
    $
    415,201
 
 The
accompanying notes are an integral part of these financial
statements.
  11
  **SALTON
SEA GUARANTORS**
 **COMBINED
STATEMENTS OF OPERATIONS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Operating
      revenue**
    
    $
    21,838
    
    $
    22,179**Costs
      and expenses:**Royalty,
      operating, general and administrative expense
    
    
    13,816
    
    
    12,293Depreciation
      and amortization
    
    
    8,078
    
    
    5,577Total
      costs and expenses
    
    
    21,894
    
    
    17,870**Operating
      income (loss)**
    
    
    (56
    )
    
    4,309**Other
      income (expense):**Interest
      expense
    
    
    (3,922
    )
    
    (4,396
    )Interest
      and other income
    
    
    2
    
    
    170Total
      other income (expense)
    
    
    (3,920
    )
    
    (4,226
    )**Income
      (loss) from continuing operations**
    
    
    (3,976
    )
    
    83Loss
      from discontinued operations (Note 3)
    
    
    -
    
    
    (113
    )**Net
      loss**
    
    $
    (3,976
    )
    $
    (30
    )
 
 The
accompanying notes are an integral part of these financial
statements.
  12
  
 **SALTON
SEA GUARANTORS**
 **COMBINED
STATEMENTS OF GUARANTORS' EQUITY**
 **FOR
THE THREE MONTHS ENDED MARCH 31, 2005**
 (Amounts
in thousands)
 
 **Amount****Balance,
      January 1, 2005**
    
    $
    166,071Net
      loss
    
    
    (3,976
    )Equity
      contribution
    
    
    36,730**Balance,
      March 31, 2005**
    
    $
    198,825
 
 The
accompanying notes are an integral part of these financial
statements.
  13
  **SALTON
SEA GUARANTORS**
 **COMBINED
STATEMENTS OF CASH FLOWS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Cash
      flows from operating activities:**Income
      (loss) from continuing operations
    
    $
    (3,976
    )
    $
    83Adjustments
      to reconcile income (loss) from continuing operations to net cash flows
      from continuing operations:Depreciation
      and amortization
    
    
    8,078
    
    
    5,577Changes
      in other items:Trade
      accounts receivable, net
    
    
    3,245
    
    
    (1,208
    )Prepaid
      expenses and other current assets
    
    
    (745
    )
    
    (551
    )Accounts
      payable and accrued liabilities
    
    
    5,573
    
    
    2,068Net
      cash flows from continuing operating activities
    
    
    12,175
    
    
    5,969**Cash
      flows from investing activities:**Capital
      expenditures
    
    
    (4,820
    )
    
    (436
    )**Cash
      flows from financing activities:**Decrease
      in due to affiliates
    
    
    (7,355
    )
    
    (5,533
    )**Net
      change in cash**
    
    
    -
    
    
    -**Cash
      at the beginning of period**
    
    
    -
    
    
    -**Cash
      at the end of period**
    
    $
    -
    
    $
    -
 
 The
accompanying notes are an integral part of these financial
statements.
 
  14
  **SALTON
SEA GUARANTORS**
 **NOTES
TO COMBINED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.**
    **General**
 
 In the
opinion of the management of Salton Sea Brine Processing, L.P., Salton Sea Power
Generation L.P. (“SSPG”), Salton Sea Power L.L.C. (“Salton Sea Power”), CE
Salton Sea Inc. and Fish Lake Power LLC (“Fish Lake”) (collectively the “Salton
Sea Guarantors”), the accompanying unaudited combined financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly the financial position as of March 31, 2005, and the results
of operations and cash flows for the three-month periods ended March 31,
2005 and 2004. The results of operations for the three-month period ended
March 31, 2005 are not necessarily indicative of the results to be expected
for the full year.
 
 The
unaudited combined financial statements should be read in conjunction with the
combined financial statements and notes thereto included in the Salton Sea
Guarantors' Annual Report on Form 10-K for the year ended December 31,
2004. In particular, the Salton Sea Guarantors’ significant accounting policies
are presented in Note 2 to the combined financial statements included
therein.
 
 Certain
amounts in the prior period combined financial statements and supporting note
disclosures have been reclassified to conform to the current period
presentation, including the reclassification of activity as discontinued
operations (see Note 3). Such reclassifications did not impact previously
reported net losses or guarantors’ equity.
 
 **2.**
    **New
      Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Salton Sea Guarantors are required to adopt the provisions of FIN 47 by December
2005. Adoption of FIN 47 is not expected to have a material effect on the Salton
Sea Guarantors’ financial position, results of operations or cash
flows.
 
 **3.**
    **Discontinued
      Operations - Mineral Reserves and Zinc Recovery
      Project**
 
 The
Salton Sea Guarantors' long-lived assets included rights to commercial
quantities of extractable minerals (“Mineral Reserves”) from the elements in
solution in the geothermal brine and fluids utilized at certain geothermal
energy generation facilities located in the Imperial Valley of California.
CalEnergy Minerals, LLC (“CalEnergy Minerals”) installed facilities near the
geothermal generation facilities intended to recover zinc from the geothermal
brine through an ion exchange, solvent extraction, electrowinning and casting
process (“Zinc Recovery Project”).
 
 On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. Based on this decision, a non-cash impairment charge was
recorded in September 2004 to write-off the Mineral Reserves. The activity
related to the Mineral Reserves is classified separately as discontinued
operations in the accompanying combined statements of operations and consists of
depreciation and amortization of $0.1 million for the three-month period ended
March 31, 2004.
 
  15
  **4.**
    **Properties,
      Plants and Equipment, Net**
 
 Properties,
plants and equipment as of March 31, 2005 and December 31, 2004 are as follows,
respectively (in thousands):
 
 **Estimated
      Useful Lives**
    
    **March
      31, 2005**
    
    **December
      31, 2004**Power
      plant and equipment
    
    
    2
      to 30 years
    
    $
    455,923
    
    $
    454,762Wells
      and resource development
    
    
    2
      to 20 years
    
    
    68,682
    
    
    67,511Total
      operating assets
    
    
    
    
    
    524,605
    
    
    522,273Accumulated
      depreciation and amortization
    
    
    
    
    
    (154,591
    )
    
    (149,287
    )Property,
      plant and equipment, net
    
    
    
    
    $
    370,014
    
    $
    372,986
 
 During
the three-month period ended March 31, 2005, the Salton
Sea Guarantors made a
decision to replace certain pipe with a remaining net book value of $1.8
million, which was charged to depreciation expense in the accompanying combined
statement of operations.
 
 **5.**
    **Intangible
      Assets, Net**
 
 The
Salton Sea Guarantors' acquired intangible assets consist of power purchase
agreements with a cost of $33.4 million and accumulated amortization of $11.4
million and $11.1 million at March 31, 2005 and December 31, 2004,
respectively. Amortization expense on the power purchase agreements was $0.3
million for each of the three-month periods ended March 31, 2005 and 2004. The
Salton Sea Guarantors expect amortization expense on the power purchase
agreements to be $0.9 million for the remaining nine months in 2005 and $1.2
million for each of the four succeeding fiscal years.
 
 **6.**
    **Related
      Party Transactions**
 
 The
Salton Sea Guarantors recognized $36.7 million of amounts due to affiliates as
an equity contribution during the three-month period ended March 31, 2005. The
amounts due to affiliates represented Salton Sea Guarantor operating losses and
capital expenditures previously funded by amounts held in the revenue account of
Funding Corporation.
 
 Pursuant
to the Amended and Restated Easement Grant Deed and Agreement Regarding Rights
for Geothermal Development dated February 23, 1994, as amended, the Salton
Sea Guarantors acquired from Magma Land I, a wholly owned subsidiary of Magma
Power Company (“Magma”), rights to extract geothermal brine from the geothermal
lease rights property which is necessary to operate the Salton Sea Guarantors’
power generation facilities in return for 5% of all electricity revenue received
by the Salton Sea Guarantors. The amount expensed for each of the three-month
periods ended March 31, 2005 and 2004 was $1.1 million.
 
 Pursuant
to the Administrative Services Agreement dated April 1, 1993 with Magma,
Magma will provide administrative and management services to the Salton Sea
Guarantors, excluding the Salton Sea IV and Salton Sea V Projects. Fees payable
to Magma amount to 3% of all electricity revenue. The amount expensed for each
of the three-month periods ended March 31, 2005 and 2004 was $0.3
million.
 
 Pursuant
to the Operating and Maintenance Agreement dated April 1, 1993 between
CalEnergy Operating Corporation (“CEOC”) and the Salton Sea Guarantors, the
Salton Sea Guarantors have retained CEOC to operate the Salton Sea Projects for
a period of 32 years. Payments are made to CEOC in the form of reimbursements of
expenses incurred. During the three-month periods ended March 31, 2005 and 2004,
the Salton Sea Guarantors reimbursed CEOC for expenses of $3.8 million and $3.9
million, respectively.
 
 Pursuant
to a transaction agreement dated January 29, 2003 (the “TransAlta
Transaction Agreement”), Salton Sea Power began selling available power from the
Salton Sea V Project to TransAlta USA Inc. (“TransAlta”) on February 12,
2003, at prices based on percentages of the Dow Jones SP-15 Index. The TransAlta
Transaction Agreement shall continue until the earlier of (a) 30 days following
a written notice of termination or (b) any other termination date mutually
agreed to by the parties. No such notice of termination has been given by either
party. Pursuant to this agreement, sales to TransAlta totaled $2.0 million and
$1.4 million during the three-month periods March 31, 2005 and 2004,
respectively. As of March 31, 2005 and December 31, 2004, accounts
receivable balances from TransAlta were $1.1 million and $0.9 million,
respectively.
  16
  On
January 21, 2004, Salton Sea Power and CE Turbo LLC (“CE Turbo”) entered
into a Green Energy Tag Purchase and Sale agreement to sell the non-power
attributes (the non-power attributes made available by one megawatt hour (“MWh”)
of generation, a “Green Tag”) associated with up to 931,800 MWh of available
generation at the Salton Sea V Project and CE Turbo Project through
December 31, 2008 to TransAlta Energy Marketing (US) Inc. (“TransAlta
Marketing”) at a market price per Green Tag. Pursuant to this agreement, sales
to TransAlta Marketing from Salton Sea Power commenced in July 2004 and totaled
$0.5 million for the three-month period ended March 31, 2005. As of March 31,
2005 and December 31, 2004, accounts receivable balances from TransAlta
Marketing were $0.2 million and $- million, respectively.
 
 Pursuant
to November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea
Power provided CalEnergy Minerals with its Zinc Recovery Project’s electrical
energy requirements at the market rates available to Salton Sea Power, less
wheeling costs. Pursuant to these agreements, sales to CalEnergy Minerals from
Salton Sea Power totaled $- million and $0.4 million for the three-month periods
ended March 31, 2005 and 2004, respectively. On September 10, 2004, CalEnergy
Minerals ceased operations of its Zinc Recovery Project. Accordingly, except for
sales during the dismantling and decommissioning phases of the Zinc Recovery
Project, no further sales to CalEnergy Minerals are expected. There were no
material accounts receivable balances as of March 31, 2005 and December 31,
2004, respectively.
 
 **7.**
    **Commitments
      and Contingencies**
 
 Southern
California Edison (“Edison”) and the California Power Exchange
 
 On
July 10, 2003, the Salton Sea IV Project’s 40 megawatt turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea IV Project’s turbine returned to service, on
September 17, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea IV power purchase agreement totaling $2.5 million. SSPG, with
Fish Lake, owner of the Salton Sea IV Project, served notices of error on Edison
for such unpaid amounts. As a result, the Salton Sea Guarantors had established
an allowance for doubtful accounts of $1.7 million for capacity payments as
of December 31, 2003. In December 2004, as a result of a settlement
agreement dated December 7, 2004 resolving the dispute, which settlement is
contingent upon approval by the California Public Utility Commission, the
allowance for doubtful accounts was released and the associated receivable was
written off.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power had not received payment for power sold to El Paso Merchant
Energy Company under certain transaction agreements during December 2000 and
January 2001 of $3.0 million (the “PX Receivable”). Salton Sea Power had
established an allowance for doubtful accounts for this balance as of
December 31, 2003. On September 29, 2004, Salton Sea Power entered
into separate Transfer of Claims Agreements with TransAlta and MidAmerican
Energy Holdings Company (“MEHC”) (the “Transfer of Claims Agreements”), pursuant
to which Salton Sea Power received $2.9 million in exchange for
transferring the rights to receive payment on the PX Receivable to TransAlta and
MEHC. As a result of the transaction, Salton Sea Power wrote-off the PX
Receivable and the related allowance for doubtful accounts and recorded a
$3.0 million current liability to reflect the collection risk retained
under the Transfer of Claims Agreements. Pursuant to the Transfer of Claims
Agreements, to the extent that the PX Receivable becomes uncollectible, Salton
Sea Power can be required to pay the PX Receivable, plus interest, to MEHC and
TransAlta.
   17
 
 Environmental
Liabilities
 
 The
Salton Sea Guarantors are subject to numerous legislative and regulatory
environmental protection requirements involving air and water pollution, waste
management, hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Salton Sea Guarantors'
existing facilities, (iv) increasing the risk of delay on construction projects,
(v) increasing the Salton Sea Guarantors' cost of waste disposal and (vi)
reducing the reliability of service provided by the Salton Sea Guarantors and
the amount of energy available from the Salton Sea Guarantors' facilities. Any
of such items could have a substantial impact on amounts required to be expended
by the Salton Sea Guarantors in the future. Expenditures for ongoing compliance
with environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments indicate that remediation efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology and presently enacted laws and regulations
taking into consideration the likely effects of inflation and other social and
economic factors, and include estimates of associated legal costs. These amounts
also consider prior experience in remediation of sites, other companies'
clean-up experience and data released by the Environmental Protection Agency or
other organizations. These estimated liabilities are subject to revision in
future periods based on actual costs or new circumstances, and are included in
the accompanying combined balance sheets at their undiscounted amounts. As of
March 31, 2005 and December 31, 2004, the environmental liabilities
recorded on the combined balance sheets were not material.
 
  18
  
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors and Stockholder
 Magma
Power Company
 Omaha,
Nebraska
 
 We have
reviewed the accompanying combined balance sheet of the Partnership Guarantors
as of March 31, 2005, and the related combined statements of operations and
cash flows for the three-month periods ended March 31, 2005 and 2004. These
interim financial statements are the responsibility of the Partnership
Guarantors' management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to such combined interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the combined balance sheet of the
Partnership Guarantors as of December 31, 2004, and the related combined
statements of operations, Guarantors' equity and cash flows for the year then
ended (not presented herein); and in our report dated February 25, 2005, we
expressed an unqualified opinion on those combined financial statements. In our
opinion, the information set forth in the accompanying combined balance sheet as
of December 31, 2004 is fairly stated, in all material respects, in
relation to the combined balance sheet from which it has been
derived.
 
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 May 5,
2005
 
  19
  
 **PARTNERSHIP
GUARANTORS**
 **COMBINED
BALANCE SHEETS**
 (Amounts
in thousands)
 
 **As
      of****March 31,**
    
    **December 31,****2005**
    
    **2004****(Unaudited)****ASSETS**Current
      assets:Cash
    
    $
    774
    
    $
    -Trade
      accounts receivable
    
    
    14,129
    
    
    13,841Trade
      accounts receivable from affiliate
    
    
    577
    
    
    353Inventory
    
    
    22,309
    
    
    18,513Prepaid
      expenses and other current assets
    
    
    2,151
    
    
    1,649Total
      current assets
    
    
    39,940
    
    
    34,356Restricted
      cash
    
    
    780
    
    
    965Properties,
      plants and equipment, net
    
    
    203,143
    
    
    204,985Intangible
      assets, net
    
    
    49,143
    
    
    50,017Management
      fee
    
    
    60,022
    
    
    61,544Due
      from affiliates
    
    
    -
    
    
    205,386Goodwill
    
    
    56,528
    
    
    56,528**Total
      assets**
    
    $
    409,556
    
    $
    613,781**LIABILITES
      AND GUARANTORS’ EQUITY**Current
      liabilities:Accounts
      payable
    
    $
    3,829
    
    $
    1,771Accrued
      interest
    
    
    2,570
    
    
    642Other
      accrued liabilities
    
    
    14,402
    
    
    14,605Current
      portion of long-term debt
    
    
    4,265
    
    
    4,265Total
      current liabilities
    
    
    25,066
    
    
    21,283Senior
      secured project note
    
    
    94,437
    
    
    94,437Deferred
      income taxes
    
    
    96,089
    
    
    95,371Total
      liabilities
    
    
    215,592
    
    
    211,091Commitments
      and contingencies (Note 7)Guarantors’
      equity:Common
      stock
    
    
    3
    
    
    3Additional
      paid-in capital
    
    
    472,998
    
    
    681,297Accumulated
      deficit
    
    
    (279,037
    )
    
    (278,610
    )Total
      guarantors’ equity
    
    
    193,964
    
    
    402,690**Total
      liabilities and guarantors’ equity**
    
    $
    409,556
    
    $
    613,781
 
 The
accompanying notes are an integral part of these financial
statements.
  20
  **PARTNERSHIP
GUARANTORS**
 **COMBINED
STATEMENTS OF OPERATIONS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Operating
      revenue**
    
    $
    20,140
    
    $
    18,425**Costs
      and expenses:**Royalty,
      operating, general and administrative costs
    
    
    11,638
    
    
    15,397Depreciation
      and amortization
    
    
    8,437
    
    
    6,074Total
      costs and expenses
    
    
    20,075
    
    
    21,471**Operating
      income (loss)**
    
    
    65
    
    
    (3,046
    )**Other
      income (expense):**Interest
      expense
    
    
    (1,948
    )
    
    (2,019
    )Other
      income (loss)
    
    
    (145
    )
    
    (613
    )Total
      other income (expense)
    
    
    (2,093
    )
    
    (2,632
    )**Loss
      from continuing operations before income taxes**
    
    
    (2,028
    )
    
    (5,678
    )Provision
      (benefit) for income taxes
    
    
    73
    
    
    (3,850
    )**Loss
      from continuing operations**
    
    
    (2,101
    )
    
    (1,828
    )Income
      (loss) from discontinued operations, net of tax (Note 3)
    
    
    1,674
    
    
    (8,384
    )**Net
      loss**
    
    $
    (427
    )
    $
    (10,212
    )
 
 The
accompanying notes are an integral part of these financial
statements.
  21
  **PARTNERSHIP
GUARANTORS**
 **COMBINED
STATEMENTS OF GUARANTORS' EQUITY**
 **FOR
THE THREE MONTHS ENDED MARCH 31, 2005**
 (Amounts
in thousands, except share amounts)
 
 **Additional****Common
      Stock**
    
    **Paid-in**
    
    **Accumulated**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **Deficit**
    
    **Equity****Balance,
      January 1, 2005**
    
    
    3
    
    $
    3
    
    $
    681,297
    
    $
    (278,610
    )
    $
    402,690Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (427
    )
    
    (427
    )Equity
      distribution
    
    
    -
    
    
    -
    
    
    (208,299
    )
    
    -
    
    
    (208,299
    )**Balance,
      March 31, 2005**
    
    
    3
    
    $
    3
    
    $
    472,998
    
    $
    (279,037
    )
    $
    193,964
 
 The
accompanying notes are an integral part of these financial
statements.
  22
  **PARTNERSHIP
GUARANTORS**
 **COMBINED
STATEMENTS OF CASH FLOWS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Cash
      flows from operating activities:**Loss
      from continuing operations
    
    $
    (2,101
    )
    $
    (1,828
    )Adjustments
      to reconcile loss from continuing operations to net cash flows from
      continuing operations:Depreciation
      and amortization
    
    
    8,437
    
    
    6,074Deferred
      income taxes
    
    
    718
    
    
    1,233Changes
      in other items:Trade
      accounts receivable
    
    
    (872
    )
    
    1,806Inventory,
      prepaid expenses and other current assets
    
    
    (4,305
    )
    
    (2,656
    )Accounts
      payable and accrued liabilities
    
    
    4,345
    
    
    7,098Net
      cash flows from continuing operations
    
    
    6,222
    
    
    11,727Net
      cash flows from discontinued operations
    
    
    (1,332
    )
    
    (12,742
    )Net
      cash flows from operating activities
    
    
    4,890
    
    
    (1,015
    )**Cash
      flows from investing activities:**Capital
      expenditures related to operating projects
    
    
    (4,490
    )
    
    (3,014
    )Decrease
      in restricted cash
    
    
    (1
    )
    
    (2
    )Other
    
    
    291
    
    
    646Net
      cash flows from continuing operations
    
    
    (4,200
    )
    
    (2,370
    )Net
      cash flows from discontinued operations
    
    
    2,810
    
    
    (709
    )Net
      cash flows from investing activities
    
    
    (1,390
    )
    
    (3,079
    )**Cash
      flows from financing activities:**Increase
      in due from affiliates
    
    
    (2,022
    )
    
    (9,357
    )Net
      cash flows from continuing operations
    
    
    (2,022
    )
    
    (9,357
    )Net
      cash flows from discontinued operations
    
    
    (704
    )
    
    13,476Net
      cash flows from financing activities
    
    
    (2,726
    )
    
    4,119**Net
      change in cash**
    
    
    774
    
    
    25**Cash
      at beginning of period**
    
    
    -
    
    
    -**Cash
      at the end of period**
    
    $
    774
    
    $
    25**Supplemental
      disclosure:**Income
      taxes paid (received)
    
    $
    645
    
    $
    (2,617
    )
 
 The
accompanying notes are an integral part of these financial
statements.
 
 23
  **PARTNERSHIP
GUARANTORS**
 **NOTES
TO COMBINED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.**
    **General**
 
 In the
opinion of the management of Vulcan/BN Geothermal Power Company, Elmore, L.P.,
Leathers, L.P., Del Ranch, L.P., CE Turbo LLC (“CE Turbo”), CalEnergy Minerals
LLC (“CalEnergy Minerals”), Salton Sea Minerals Corp., CE Salton Sea Inc,
CalEnergy Operating Corporation, Vulcan Power Company, San Felipe Energy
Company, Conejo Energy Company, Niguel Energy Company, and VPC Geothermal LLC,
(collectively, the “Partnership Guarantors”), the accompanying unaudited
combined financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 2005, and the results of operations and cash flows for the
three-month periods ended March 31, 2005 and 2004. The results of
operations for the three-month period ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year.
 
 The
unaudited combined financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Partnership
Guarantors' Annual Report on Form 10-K for the year ended December 31,
2004. In particular, the Partnership Guarantors’ significant accounting policies
are presented in Note 2 to the combined financial statements included
therein.
 
 Certain
amounts in the prior period combined financial statements and supporting note
disclosures have been reclassified to conform to the current period
presentation, including the reclassification of activity as discontinued
operations (see Note 3). Such reclassifications did not impact previously
reported net losses or guarantors’ equity.
 
 **2.**
    **New
      Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Partnership Guarantors are required to adopt the provisions of FIN 47 by
December 2005. Adoption of FIN 47 is not expected to have a material effect on
the Partnership Guarantors’ financial position, results of operations or cash
flows.
 
 **3.**
    **Discontinued
      Operations - Mineral Assets and Zinc Recovery
    Project**
 
 The
Partnership Guarantors' long-lived assets included rights to commercial
quantities of extractable minerals from the elements in solution in the
geothermal brine and fluids utilized at certain geothermal energy generation
facilities located in the Imperial Valley of California and facilities installed
by CalEnergy Minerals near the geothermal energy generation facilities owned by
certain Partnership Guarantors that were intended to recover zinc from the
geothermal brine through an ion exchange, solvent extraction, electrowinning and
casting process (the “Zinc Recovery Project”).
 
 On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. Based on this decision, a non-cash impairment charge was
recorded in September 2004 to write-off the Zinc Recovery Project, rights to
quantities of extractable minerals, and allocated goodwill (collectively the
“Mineral Assets”).
 
  24
  The
activity of the Mineral Assets is classified separately as discontinued
operations in the accompanying combined statements of operations and includes
the following (in thousands):
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004**Operating
      revenue
    
    $
    -
    
    $
    721Loss
      from discontinued operations
    
    
    -
    
    
    (14,151
    )Proceeds
      from disposal activities, net
    
    
    2,835
    
    
    -Income
      tax (provision) benefit
    
    
    (1,161
    )
    
    5,767Income
      (loss) from discontinued operations, net of tax
    
    $
    1,674
    
    $
    (8,384
    )
 
 A
decommissioning plan, which began in September 2004, continued into 2005.
Substantially all costs incurred have related to disposal activities and have
been offset by proceeds from sales of the Zinc Recovery Project’s assets. Costs
are recognized in the period in which the related liability is incurred. Salvage
proceeds are recognized in the period earned. CalEnergy Minerals expects to make
additional cash expenditures consisting of pre-tax disposal costs and property
taxes of approximately $1.3 million. The costs of disposal activities for the
three-month period ended March 31, 2005 are as follows (in
thousands):
 
 Accrued
      disposal costs at December 31, 2004
    
    $
    430Costs
      of disposal activities
    
    
    643Payments
      of disposal costs
    
    
    (462
    )Accrued
      disposal costs at March 31, 2005
    
    $
    611
 
 On
December 13, 2004, CalEnergy Minerals entered into a project decommissioning
contract (the “Decommissioning Contract”) and an equipment purchase agreement
(the “Equipment Purchase Agreement”) with a third party contractor. Under the
terms of the Decommissioning Contract, the contractor has agreed to dismantle
and remove certain Zinc Recovery Project equipment and other assets on a
turnkey, date certain basis. Under the terms of the Equipment Purchase Agreement
the contractor has purchased certain Zinc Recovery Project equipment for a
guaranteed purchase price of approximately $4.1 million, which was paid in
full as of April 19, 2005. Additionally, any gross proceeds the contractor
receives from the sale of such equipment and other assets over approximately
$5.7 million will be shared equally with CalEnergy Minerals. CalEnergy
Minerals has retained ownership of the remaining Zinc Recovery Project equipment
and other assets for potential direct sale to third parties. Under the terms of
the Equipment Purchase Agreement and the Decommissioning Contract, CalEnergy
Minerals has an option, exercisable no later than October 1, 2005, to sell this
retained equipment and other assets to the contractor for approximately
$0.1 million and have it removed by the contractor no later than December
31, 2005. Total asset sales proceeds to date, including the $4.1 million from
the third party contractor, are $4.8 million.
  **4.**
    **Properties,
      Plants and Equipment, Net**
 
 Properties,
plants and equipment as of March 31, 2005 and December 31, 2004 are as follows,
respectively (in thousands):
 
 **Estimated
      Useful Lives**
    
    **March
      31, 2005**
    
    **December
      31, 2004**Cost:Power
      plant and equipment
    
    
    2
      to 30 years
    
    $
    235,929
    
    $
    234,865Wells
      and resource development
    
    
    2
      to 20 years
    
    
    108,946
    
    
    108,396Total
      operating assets
    
    
    
    
    
    344,875
    
    
    343,261Accumulated
      depreciation and amortization
    
    
    
    
    
    (141,732
    )
    
    (138,276
    )Property,
      plant and equipment, net
    
    
    
    
    $
    203,143
    
    $
    204,985
 
 During
the three-month period ended March 31, 2005, the Partnership Guarantors made a
decision to replace certain pipe with a remaining net book value of $1.5
million, which was charged to depreciation expense in the accompanying combined
statement of operations.
  25
  **5.**
    **Intangible
      Assets, Net**
 
 The
following table summarizes the acquired intangible assets as of March 31,
2005 and December 31, 2004, respectively (in thousands):
 
 **March 31,
      2005**
    
    **December 31,
      2004****Gross
      Carrying**
    
    **Accumulated**
    
    **Gross
      Carrying**
    
    **Accumulated****Amount**
    
    **Amortization**
    
    **Amount**
    
    **Amortization**Power
      Purchase Contracts
    
    $
    123,002
    
    $
    100,424
    
    $
    123,002
    
    $
    100,032Patented
      Technology
    
    
    46,290
    
    
    19,725
    
    
    46,290
    
    
    19,243Total
    
    $
    169,292
    
    $
    120,149
    
    $
    169,292
    
    $
    119,275
 
 Amortization
expense on acquired intangible assets was $0.9 million for each of the
three-month periods ended March 31, 2005 and 2004. The Partnership
Guarantors expect amortization expense on acquired intangible assets to be $2.6
million for the remaining nine months in 2005 and $3.5 million each of the four
succeeding fiscal years.
 
 **6.**
    **Related
      Party Transactions**
 
 The
Partnership Guarantors declared $208.3 million of amounts due from affiliates as
an equity distribution during the three-month period ended March 31, 2005. The
$208.3 million represented the Partnership Guarantors’ excess operating profits
previously held in the revenue account of Funding Corporation and subsequently
transferred from the distribution account of Funding Corporation pursuant to the
terms and conditions of the debt of Funding Corporation.
 
 MidAmerican
Energy Holdings Company (“MEHC”) contributed equity to the Partnership
Guarantors to fund the Zinc Recovery Project’s operating losses, capital
expenditures and debt service through September 10, 2004, which was the date the
Zinc Recovery Project’s operations were ceased. The 2004 equity contributions
were $149.7 million and are included in the accompanying combined statement of
cash flows as part of net financing activity cash flows from discontinued
operations, and include MEHC's $136.4 million funding of its guarantee of the
7.475% Senior Secured Series F Bonds due November 30, 2018 (“Series F Bonds”)
issued by Salton Sea Funding Corporation (“Funding Corporation”) which were
redeemed on March 1, 2004 and MEHC’s $13.3 million funding of the Zinc
Recovery Project’s operating losses.
 
 Pursuant
to the Easement Grant Deed and Agreement Regarding Rights for Geothermal
Development, the Partnership Guarantors acquired from Magma Power Company rights
to extract geothermal brine from the geothermal lease rights property which is
necessary to operate the Leathers, Del Ranch and Elmore Projects in return for
17.333%, on a pro rata basis, of all energy revenue received by each project.
The amounts expensed were $2.1 million and $1.9 million for the three-month
periods ended March 31, 2005 and 2004, respectively.
 
 Pursuant
to a transaction agreement dated January 29, 2003 (the “TransAlta Transaction
Agreement”), CE Turbo began selling available power from the CE Turbo Project to
TransAlta USA, Inc. (“TransAlta”) on February 12, 2003, based on percentages of
the Dow Jones SP-15 Index. The TransAlta Transaction Agreement shall continue
until the earlier of (a) 30 days following a written notice of termination or
(b) any other termination date mutually agreed to by the parties. No such notice
of termination has been given by either party. Pursuant to this agreement, sales
to TransAlta totaled $0.9 million and $0.7 million during the three-month
periods ended March 31, 2005 and 2004, respectively. As of March 31, 2005 and
December 31, 2004, accounts receivable balances from TransAlta were $0.6
million and $0.4 million, respectively.
 
 On
January 21, 2004, CE Turbo and Salton Sea Power LLC entered into a Green
Energy Tag Purchase and Sale Agreement to sell the non-power attributes (the
non-power attributes made available by one megawatt hour (“MWh”) of generation,
a “Green Tag”) associated with up to 931,800 MWh of available generation at the
CE Turbo Project and Salton Sea V Project through December 31, 2008 to
TransAlta Energy Marketing (US) Inc. at a market price per Green Tag. There were
no sales by CE Turbo under this agreement for the three-month periods ending
March 31, 2005 and 2004.
  26
  **7.**
    **Commitments
      and Contingencies**
 
 The
California Power Exchange
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result, CE
Turbo has not received payment for power sold to El Paso Merchant Energy Company
under certain transaction agreements during December 2000 and January 2001 of
$0.8 million (the “PX Receivable”). CE Turbo had established an allowance
for doubtful accounts for this balance as of December 31, 2003. On
September 29, 2004, CE Turbo entered into separate Transfer of Claims
Agreements with TransAlta and MEHC (the “Transfer of Claims Agreements”),
pursuant to which CE Turbo received $0.7 million in exchange for
transferring the rights to receive payment on the PX Receivable to TransAlta and
MEHC. As a result of the transaction, CE Turbo wrote-off the PX Receivable and
the related allowance for doubtful accounts and recorded a $0.8 million
current liability to reflect the collection risk retained under the Transfer of
Claims Agreements. Pursuant to the Transfer of Claims Agreements, to the extent
that the PX Receivable becomes uncollectible, the CE Turbo can be required to
pay the PX Receivable, plus interest, to MEHC and TransAlta.
 
 Minerals
 
 On May
25, 2001, CalEnergy Minerals and AMEC E&C Services Inc. (“AMEC”) entered
into a services agreement for engineering, procurement and construction
management services (the “AMEC Agreement”) in connection with the resolution of
numerous problems that affected the timely completion of CalEnergy Minerals’
Zinc Recovery Project. Under the AMEC Agreement, AMEC represented that it had
certain licenses required for its services which CalEnergy Minerals ultimately
determined to be false. AMEC submitted $2.8 million of invoices to
CalEnergy Minerals that AMEC claims are due and payable under the AMEC
Agreement. CalEnergy Minerals filed a lawsuit against AMEC on June 13, 2003 for
declaratory judgment that would (1) prevent collection by AMEC of the
$2.8 million it claimed to be due and payable and, (2) recover payments
made by CalEnergy Minerals to AMEC based on AMEC’s lack of a contractor’s
license in California. The lawsuit also included claims by CalEnergy Minerals
against AMEC for breach of contract and breach of duty of fiduciary
responsibility. AMEC filed a motion to compel arbitration of the dispute. The
court ruled against the motion to compel arbitration and AMEC has appealed this
decision. Pending receipt of the appellate decision, CalEnergy Minerals intends
to vigorously pursue its claims against AMEC and prevent collection by AMEC of
any amount from CalEnergy Minerals.
 
 Environmental
Liabilities
 
 The
Partnership Guarantors are subject to numerous legislative and regulatory
environmental protection requirements involving air and water pollution, waste
management, hazardous chemical use, noise abatement, and land use aesthetics.
State and federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Partnership Guarantors'
existing facilities, (iv) increasing the risk of delay on construction projects,
(v) increasing the Partnership Guarantors' cost of waste disposal and (vi)
reducing the reliability of service provided by the Partnership Guarantors and
the amount of energy available from the Partnership Guarantors' facilities. Any
of such items could have a substantial impact on amounts required to be expended
by the Partnership Guarantors in the future. Expenditures for ongoing compliance
with environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments indicate that remediation efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology and presently enacted laws and regulations
taking into consideration the likely effects of inflation and other social and
economic factors, and include estimates of associated legal costs. These amounts
also consider prior experience in remediation of sites, other companies'
clean-up experience and data released by the Environmental Protection Agency or
other organizations. These estimated liabilities are subject to revision in
future periods based on actual costs or new circumstances, and are included in
the accompanying combined balance sheets at their undiscounted amounts. As of
March 31, 2005 and December 31, 2004, the environmental liabilities
recorded on the combined balance sheets were not material.
 
  27
  **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To the
Board of Directors and Stockholder
 Magma
Power Company
 Omaha,
Nebraska
 
 We have
reviewed the accompanying balance sheet of Salton Sea Royalty LLC (the
“Company”) as of March 31, 2005, and the related statements of operations and
cash flows for the three-month periods ended March 31, 2005 and 2004. These
interim financial statements are the responsibility of the Company’s
management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to such interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheet of Salton Sea
Royalty LLC as of December 31, 2004, and the related statements of
operations, members' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 25, 2005, we expressed
an unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying balance sheet as of December 31,
2004 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
 
 
 /s/
Deloitte & Touche LLP
 
 Omaha,
Nebraska
 May 5,
2005
  28
  
 **SALTON
SEA ROYALTY LLC**
 **BALANCE
SHEETS**
 (Amounts
in thousands, except share data)
 
 **As
      of****March 31,**
    
    **December 31,****2005**
    
    **2004****(Unaudited)****ASSETS**Royalty
      stream, net
    
    $
    11,641
    
    $
    11,913Goodwill
    
    
    30,464
    
    
    30,464Due
      from affiliates
    
    
    -
    
    
    56,852**Total
      assets**
    
    $
    42,105
    
    $
    99,229**LIABILITIES
      AND MEMBERS’ EQUITY**Current
      liabilities:Accrued
      interest
    
    $
    11
    
    $
    3Current
      portion of long-term debt
    
    
    437
    
    
    437Total
      current liabilities
    
    
    448
    
    
    440Commitments
      and contingenciesMembers'
      equity:Common
      stock, par value $.01 per share; 100 shares authorized, issued and
      outstanding
    
    
    -
    
    
    -Additional
      paid-in capital
    
    
    1,561
    
    
    1,561Retained
      earnings
    
    
    40,096
    
    
    97,228Total
      members' equity
    
    
    41,657
    
    
    98,789**Total
      liabilities and members' equity**
    
    $
    42,105
    
    $
    99,229
 
 The
accompanying notes are an integral part of these financial
statements.
  29
  **SALTON
SEA ROYALTY LLC**
 **STATEMENTS
OF OPERATIONS**
 (Amounts
in thousands)
 
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Operating
      revenue**
    
    $
    3,205
    
    $
    2,766**Costs
      and expenses:**Royalty,
      operating, general and administrative expenses
    
    
    749
    
    
    711Amortization
      of royalty stream
    
    
    272
    
    
    272Total
      costs and expenses
    
    
    1,021
    
    
    983**Operating
      income**
    
    
    2,184
    
    
    1,783Interest
      expense
    
    
    (8
    )
    
    (18
    )**Net
      income**
    
    $
    2,176
    
    $
    1,765
 
 The
accompanying notes are an integral part of these financial
statements.
  30
  **SALTON
SEA ROYALTY LLC**
 **STATEMENTS
OF MEMBERS' EQUITY**
 **FOR
THE THREE MONTHS ENDED MARCH 31, 2005**
 (Amounts
in thousands, except share amounts)
 
 **Additional****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **Earnings**
    
    **Equity****Balance,
      January 1, 2005**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    97,228
    
    $
    98,789Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    2,176
    
    
    2,176Equity
      distribution
    
    
    -
    
    
    -
    
    
    -
    
    
    (59,308
    )
    
    (59,308
    )**Balance,
      December 31, 2005**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    40,096
    
    $
    41,657
 
 The
accompanying notes are an integral part of these financial
statements.
  31
  **SALTON
SEA ROYALTY LLC**
 **STATEMENTS
OF CASH FLOWS**
 (Amounts
in thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    **2004****(Unaudited)****Cash
      flows from operating activities:**Net
      income
    
    $
    2,176
    
    $
    1,765Adjustments
      to reconcile net income to net cash flows from operating
      activities:Amortization
      of royalty stream
    
    
    272
    
    
    272Changes
      in other items:Prepaid
      expenses and other current assets
    
    
    -
    
    
    2Accrued
      interest
    
    
    8
    
    
    16Net
      cash flows from operating activities
    
    
    2,456
    
    
    2,055**Net
      cash flows from financing activities:**Change
      in due from affiliates
    
    
    (2,456
    )
    
    (2,055
    )**Net
      change in cash**
    
    
    -
    
    
    -**Cash
      at beginning of period**
    
    
    -
    
    
    -**Cash
      at the end of period**
    
    $
    -
    
    $
    -
 
 The
accompanying notes are an integral part of these financial
statements.
  32
  **SALTON
SEA ROYALTY LLC**
 **NOTES
TO FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.**
    **General**
 
 In the
opinion of the management of Salton Sea Royalty LLC (the “Company”), the
accompanying unaudited financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial position
as of March 31, 2005, and the results of operations and cash flows for the
three-month periods ended March 31, 2005 and 2004. The results of
operations for the three-month period ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full
year.
 
 The
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. In particular, the Company’s
significant accounting policies are presented in Note 2 to the financial
statements included therein.
 
 **2.**
    **Royalty
      Stream**
 
 The
royalty stream has a cost of $60.5 million and accumulated amortization of $48.9
million and $48.6 million as of March 31, 2005 and December 31, 2004,
respectively. Royalty stream amortization expense was $0.3 million for each of
the three-month periods ended March 31, 2005 and 2004. Royalty stream
amortization expense is expected to be $0.8 million for the remaining nine
months in 2005 and $1.1 million for each of the four succeeding fiscal years.
 
 **3.**
    **Related
      Party Transactions**
 
 The
Company declared $59.3 million of amounts due from affiliates as an equity
distribution during the three-month period ended March 31, 2005. The $59.3
million represented the Company’s excess operating profits previously held in
the revenue account of Funding Corporation and subsequently transferred from the
distribution account of Funding Corporation pursuant to the terms and conditions
of the debt of Funding Corporation.
  33
  **Item
      2.**
    **Management's Discussion and Analysis of Financial Condition and
      Results of Operations.**
 
 The
following is management's discussion and analysis of certain significant factors
which have affected the financial condition and results of operations of Salton
Sea Funding Corporation (“Funding Corporation”) and Salton Sea Brine Processing,
L.P., Salton Sea Power Generation L.P. (“SSPG”), Salton Sea Power L.L.C.
(“Salton Sea Power”), and Fish Lake Power LLC (“Fish Lake”), which own five
operating geothermal power plants in Imperial Valley, California known as Salton
Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea IV
Project and Salton Sea V Project (collectively, the “Salton Sea Projects”), and
CE Salton Sea Inc. (together with the owners of the Salton Sea Projects, the
“Salton Sea Guarantors”),Vulcan/BN Geothermal Power Company, Elmore, L.P.,
Leathers, L.P., Del Ranch, L.P., CE Turbo LLC (“CE Turbo”), each of which owns
an operating geothermal power plant located in Imperial Valley, California known
as the Vulcan Project, the Elmore Project, the Leathers Project, the Del Ranch
Project and the CE Turbo Project, (collectively, the “Partnership Projects” and
together with the Salton Sea Projects, the “Imperial Valley Projects”),
CalEnergy Minerals LLC (“CalEnergy Minerals”), Salton Sea Minerals Corp., CE
Salton Sea Inc., CalEnergy Operating Corporation (“CEOC”), Vulcan Power Company,
San Felipe Energy Company, Conejo Energy Company, Niguel Energy Company, and VPC
Geothermal LLC, (collectively, the “Partnership Guarantors”), and Salton Sea
Royalty LLC (the “Royalty Guarantor”, together with the Salton Sea Guarantors
and the Partnership Guarantors, the “Guarantors”), during the periods included
in the accompanying statements of operations. This discussion should be read in
conjunction with Funding Corporation's and the Guarantors' historical financial
statements and the notes to those statements. Actual results in the future could
differ significantly from the historical results.
 
 **Forward-Looking
Statements**
 
 From time
to time, Funding Corporation and the Guarantors may make forward-looking
statements within the meaning of the federal securities laws that involve
judgments, assumptions and other uncertainties beyond their control. These
forward-looking statements may include, among others, statements concerning
revenue and cost trends, cost recovery, cost reduction strategies and
anticipated outcomes, pricing strategies, changes in the utility industry,
planned capital expenditures, financing needs and availability, statements of
Funding Corporation's or the Guarantors' expectations, beliefs, future plans and
strategies, anticipated events or trends and similar comments concerning matters
that are not historical facts. These types of forward-looking 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 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 Private Securities Litigation Reform Act of 1995, Funding
Corporation and the Guarantors have identified important factors that could
cause actual results to differ materially from those expectations, including
weather effects on revenues and other operating uncertainties, uncertainties
relating to economic and political conditions and uncertainties regarding the
impact of regulations, changes in government policy and competition. Neither
Funding Corporation nor the Guarantors assume any responsibility to update
forward-looking information contained herein.
 
 **Executive
Summary**
 
 The
following significant events and changes, as discussed in more detail herein,
highlight some factors that affect the comparability of our financial results
for the three-month periods ended March 31, 2005 and 2004:
 
 ·
    On
      September 10, 2004, management made the decision to cease operations
      of the facilities installed near the geothermal energy generation
      facilities located in the Imperial Valley of California that were intended
      to recover zinc from the geothermal brine through an ion exchange, solvent
      extraction, electrowinning and casting process (“the Zinc Recovery
      Project”). Based on this decision, the Partnership Guarantors and Salton
      Sea Guarantors recognized an impairment charge to write-off the Zinc
      Recovery Project, rights to quantities of extractable minerals (the
      “Mineral Reserves”) and allocated goodwill (collectively, the “Mineral
      Assets”).
 
 ·
    On
      March 1, 2004, Funding Corporation completed the redemption of $136.4
      million of its 7.475% Senior Secured Series F Bonds (“Series F Bonds”) due
      on November 30, 2018. Funding Corporation made a demand on
      MidAmerican Energy Holdings Company (“MEHC”) and MEHC performed under that
      demand in order to fund the
redemption.
  34
  ·
    During
      the three-month period ended March 31, 2005, Funding Corporation and the
      Guarantors declared and received equity distributions and contributions
      related to affiliate balances.
  The
capacity factor for a particular project is determined by dividing the total
quantity of electricity sold by the product of the project's capacity and the
total hours in the period. At March 31, 2005, the capacity factors for the
Salton Sea I Project, Salton Sea II Project, Salton Sea III Project, Salton Sea
IV Project, and Salton Sea V Project plants are based on capacity amounts of
approximately 10, 20, 50, 40, and 49 net megawatt (“MW”), respectively. At March
31, 2005, the capacity factors for the Vulcan Project, Elmore Project, Leathers
Project, Del Ranch Project, and CE Turbo Project plants are based on capacity
amounts of approximately 34, 38, 38, 38 and 10 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 amount of revenues received by these projects is
affected by the extent to which they are able to operate and generate
electricity. Accordingly, the capacity and capacity factor figures provide
information on operating performance that has affected the revenues received by
these projects.
 
 The
following operating data represents the aggregate capacity and electricity
production of the Salton Sea Projects:
 
 **Three
      Months**
      **Ended
      March 31,****2005**
    
    **2004**Overall
      capacity factor
    
    
    78.4
    %
    
    88.3
    %Megawatt
      hour (“MWh”) produced
    
    
    285,200
    
    
    324,900Capacity
      (net MW) (weighted average)
    
    
    168.4
    
    
    168.4
 
 The
overall capacity factor and production for the Salton Sea Guarantors decreased
for the three-month period ended March 31, 2005 as compared to the same
period in 2004 primarily due to the timing of scheduled maintenance outages,
partially offset by reduced length of scheduled outages in 2005.
 
 The
following operating data represents the aggregate capacity and electricity
production of the Partnership Projects:
 
 **Three
      Months**
      **Ended
      March 31,****2005**
    
    **2004**Overall
      capacity factor
    
    
    103.9
    %
    
    94.0
    %MWh
      produced
    
    
    354,500
    
    
    324,500Capacity
      (net MW) (weighted average)
    
    
    158.0
    
    
    158.0
 
 The
overall capacity factor and production for the Partnership Guarantors increased
for the three-month period ended March 31, 2005 as compared to the same
period in 2004 primarily due the timing and reduced length of scheduled
maintenance outages in 2005.
 
 **Results
of Operations for the Three-Month Periods Ended March 31, 2005 and
2004**
 
 Funding
Corporation's net income (loss) was not significant for the three-month periods
ended March 31, 2005 and 2004. The net income (loss) represents interest
income and expense and Funding Corporation’s 1% equity in loss of the
Guarantors, net of applicable tax.
 
 The
Salton Sea Guarantors' operating revenue decreased $0.4 million, or 1.8%, to
$21.8 million for the three-month period ended March 31, 2005, from $22.2
million for the same period in 2004. The decrease was due to reduced production
as a result of the timing scheduled maintenance outages, partially offset by the
reduced length of scheduled maintenance outages and favorable energy pricing of
$1.8 million in 2005.
  35
  The
Salton Sea Guarantors' royalty, operating, general and administrative expenses
increased $1.5 million, or 12.2%, to $13.8 million for three-month period ended
March 31, 2005, from $12.3 million for the same period in 2004. The
increase was due to the timing of scheduled maintenance outages.
 
 The
Salton Sea Guarantors' depreciation and amortization increased $2.5 million to
$8.1 million for the three-month period ended March 31, 2005, from $5.6
million for the same period in 2004. The increase was due to the disposal of
certain replaced pipe in 2005 with a remaining net book value of $1.8
million.
 
 The
Salton Sea Guarantors' interest expense decreased $0.5 million to $3.9 million
for the three-month period ended March 31, 2005, from $4.4 million for the
same period in 2004. The decrease was due to lower outstanding debt balances.
 
 The
Salton Sea Guarantors are comprised of partnerships or limited liability
companies. Income taxes are the responsibility of the partners or members and
the Salton Sea Guarantors have no obligation to provide funds to the partners or
members for payment of any tax liabilities. Accordingly, the Salton Sea
Guarantors have no tax obligations.
 
 The
Salton Sea Guarantors’ loss from discontinued operations for the three-months
ended March 31, 2004 was $0.1 million, which represents depreciation of the
Mineral Reserves.
 
 The
Partnership Guarantors' operating revenue increased $1.7 million, or 9.2%, to
$20.1 million for the three-month period ended March 31, 2005, from $18.4
million for the same period in 2004. The increase was due to increased
production in 2005 as the result of the timing and reduced length of scheduled
maintenance outages.
 
 The
Partnership Guarantors' royalty, operating, general and administrative expenses
decreased $2.9 million, or 20.0%, to $11.6 million for three-month period ended
March 31, 2005, from $14.5 million for the same period in 2004 due to the
timing of scheduled maintenance outages and less extensive scheduled maintenance
in 2005.
 
 The
Partnership Guarantors' depreciation and amortization increased $2.3 million to
$8.4 million for the three-month period ended March 31, 2005, from $6.1
million for the same period in 2004. The increase was due to the disposal of
certain replaced pipe in 2005 with a remaining net book value of $1.5
million.
  The
Partnership Guarantors' interest expense decreased $0.1 million to $1.9 million
for the three-month period ended March 31, 2005, from $2.0 million for the
same period in 2004. The decrease was due to lower outstanding debt
balances.
 
 The
Partnership Guarantors' income tax provision was $0.1 million for the
three-month period ended March 31, 2005, as compared to a benefit of $3.9
million for the same period in 2004. Changes in the effective rate are due
primarily to the generation of energy tax credits and changes to depletion
deductions. Income taxes will be paid by the parent of the Partnership
Guarantors from distributions made to the parent by the Partnership Guarantors,
which occur after payment of operating expenses and debt service.
 
 The
Partnership Guarantors’ income from discontinued operations was $1.7 million for
the three-month period ended March 31, 2005, compared to a loss of $8.4
million for the same period in 2004. CalEnergy Minerals ceased operations of and
began decommissioning its Zinc Recovery Project during September 2004. The
change is due to operating losses in 2004 and the gain on sales of assets in
2005.
 
 The
Royalty Guarantor's net income was $2.2 million for the three-month period ended
March 31, 2005, as compared to $1.8 million for the same period in
2004.
 
  36
  **Liquidity
and Capital Resources**
 
 The
Salton Sea Guarantors' only source of revenue is payments received pursuant to
long term power sales agreements with Southern California Edison Company
(“Edison”), other than Salton Sea V Project revenue and interest earned on funds
on deposit. The Partnership Guarantors' primary source of revenue is payments
received pursuant to long term power sales agreements with Edison, other than CE
Turbo Project revenue and interest earned on funds on deposit. The Royalty
Guarantor's only source of revenue is royalties received pursuant to resource
lease agreements with the Partnership Projects. Because of the Guarantor's
dependence on Edison, if Edison fails to fulfill its obligations to the Imperial
Valley Projects, it could significantly impair the ability of the Guarantors to
fund operating and maintenance expenses, payments of interest and principal on
the debt securities, projected capital expenditures and debt service reserve
fund requirements.
 
 The
Salton Sea Guarantors generated cash flows from operations of $12.2 million for
the three-month period ended March 31, 2005, compared with $6.0 million for
the same period in 2004. The increase was primarily due to changes in working
capital.
 
 The
Salton Sea Guarantors’ cash flow used in investing was $4.8 million for the
three-month period ended March 31, 2005, compared to $0.4 million for the same
period in 2004. Capital expenditures are the primary component of investing
activities and increased in 2005 due to purchases of pipe.
 
 The
Salton Sea Guarantors’ cash flow used in financing activities was $7.4 million
for the three-month period ended March 31, 2005, compared with cash used of $5.5
million for the same period in 2004. The increase in cash used in financing
activities was due to higher cash available from operations net of investing
activities.
 
 The
Partnership Guarantors generated cash flows from continuing operations of $6.2
million for the three-month period ended March 31, 2005, compared with $11.7
million for the same period in 2004. The decrease was largely due to changes in
working capital. The Partnership Guarantors’ cash flows used in discontinued
operations was $1.3 million for the three-month period ended March 31, 2005,
compared with $12.7 million for the same period in 2004. The decrease in cash
used in discontinued operations relates to decreased operating expenditures in
2005.
 
 The
Partnership Guarantors' cash flows used in continuing investing activities
increased to $4.2 million for the three-month period ended March 31, 2005,
compared with $2.4 million for the same period in 2004. Capital expenditures are
the primary component of investing activities which increased in 2005 due to the
purchase of pipe. The Partnership Guarantors' cash flows from discontinued
investing activities was $2.8 million for the three-month period ended March 31,
2005, compared with cash flows used of $0.7 million for the same period in 2004.
The increase is due to proceeds received from asset sales in 2005.
 
 The
Partnership Guarantors' cash flows used in continuing financing activities was
$2.0 million for the three-month period ended March 31, 2005, compared with $9.4
million for the same period in 2004. Cash flows used in financing activities
from continuing operations reflect changes in amounts due from affiliates. The
Partnership Guarantors generated cash flows from discontinued financing
activities of $0.7 million for the three-month period ended March 31, 2005,
compared with $13.5 million for the same period in 2004. Cash flows generated
from financing activities from discontinued operations in 2004 reflect MEHC's
equity contributions to fund the Zinc Recovery Project’s operating losses and
capital expenditures, and MEHC's funding of its guarantee of the Series F Bonds
which were redeemed on March 1, 2004.
 
 The
Royalty Guarantors generated cash flows from operations of $2.5 million for the
three-month period ended March 31, 2005, compared with $2.1 million for the same
period in 2004. The Royalty Guarantor's cash flows used in financing activities
was $2.5 million for the three-month period ended March 31, 2005 compared with
$2.1 million for the same period in 2004.
 
  37
  Zinc
Recovery Project and Minerals Assets
 
 On May
25, 2001, CalEnergy Minerals entered into a services agreement for engineering,
procurement and construction management services (the “AMEC Agreement”) with
AMEC E&C Services, Inc. (“AMEC”) in connection with the resolution of
numerous problems that affected the construction of CalEnergy Minerals’ Zinc
Recovery Project. Under the AMEC Agreement, AMEC represented that it had certain
licenses required for its services, which CalEnergy Minerals ultimately
determined to be false. AMEC submitted $2.8 million of invoices to
CalEnergy Minerals that AMEC claims are due and payable under the AMEC
Agreement. Calenergy Minerals filed a lawsuit against AMEC on June 13, 2003 for
a declaratory judgment that would (1) prevent collection by AMEC of the
$2.8 million it claimed to be due and payable and, (2) recover payments
made by CalEnergy Minerals to AMEC based on AMEC’s lack of a contractor’s
license in California. The lawsuit also included claims by CalEnergy Minerals
against AMEC for breach of contract, professional negligence and breach of duty
of fiduciary responsibility. AMEC filed a motion to compel arbitration of the
dispute. The court ruled against the motion to compel arbitration and AMEC has
appealed that decision. Pending receipt of the appellate decision, CalEnergy
Minerals intends to vigorously pursue its claims against AMEC and prevent
collection by AMEC of any amount from CalEnergy Minerals.
 
 On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. Based on this decision, a non-cash impairment charge was
recorded in September 2004 to write-off the Zinc Recovery Project, rights to
quantities of extractable minerals, and allocated goodwill (collectively, the
“Minerals Assets”). A decommissioning plan, which began in September 2004, has
continued into 2005. Substantially all costs incurred have related to disposal
activities and have been offset by proceeds from sales of the Zinc Recovery
Project’s assets. Costs are recognized in the period in which the related
liability is incurred. Salvage proceeds are recognized in the period earned.
CalEnergy Minerals expects to make additional cash expenditures consisting of
pre-tax disposal costs and property taxes of approximately $1.3 million. The
related activity of the Minerals Assets is classified separately as discontinued
operations in the combined statements of operation and cash flows for the
Partnership Guarantors.
 
 On
December 13, 2004, CalEnergy Minerals entered into a project decommissioning
contract (the “Decommissioning Contract”) and an equipment purchase agreement
(the “Equipment Purchase Agreement”) with a third party contractor. Under the
terms of the Decommissioning Contract, the contractor has agreed to dismantle
and remove certain Zinc Recovery Project equipment and other assets on a
turnkey, date certain basis. Under the terms of the Equipment Purchase Agreement
the contractor has purchased certain Zinc Recovery Project equipment for a
guaranteed purchase price of approximately $4.1 million, which was paid in
full as of April 19, 2005. Additionally, any gross proceeds the contractor
receives from the sale of such equipment and other assets over approximately
$5.7 million will be shared equally with CalEnergy Minerals. CalEnergy
Minerals has retained ownership of the remaining Zinc Recovery Project equipment
and other assets for potential direct sale to third parties. Under the terms of
the Equipment Purchase Agreement and the Decommissioning Contract, CalEnergy
Minerals has an option, exercisable no later than October 1, 2005, to sell this
retained equipment and other assets to the contractor for approximately
$0.1 million and have it removed by the contractor no later than December
31, 2005. Total asset sales proceeds to date, including the $4.1 million from
the third party contractor, are $4.8 million.
 
 Environmental
Liabilities
 
 The
Guarantors are subject to numerous legislative and regulatory environmental
protection requirements involving air and water pollution, waste management,
hazardous chemical use, noise abatement, and land use aesthetics. State and
federal environmental laws and regulations currently have, and future
modifications may have, the effect of (i) increasing the lead time for the
construction of new facilities, (ii) significantly increasing the total cost of
new facilities, (iii) requiring modification of the Guarantors' existing
facilities, (iv) increasing the risk of delay on construction projects, (v)
increasing the Guarantors' cost of waste disposal and (vi) reducing the
reliability of service provided by the Guarantors and the amount of energy
available from the Guarantors' facilities. Any of such items could have a
substantial impact on amounts required to be expended by the Guarantors in the
future. Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other social and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediation of sites, other companies' clean-up experience and
data released by the Environmental Protection Agency or other organizations.
These estimated liabilities are subject to revision in future periods based on
actual costs or new circumstances, and are included in the accompanying combined
balance sheets at their undiscounted amounts. As of March 31, 2005 and
December 31, 2004, the environmental liabilities recorded on the combined
balance sheets were not material.
   38
 ****
 **Related
Party Transactions**
 
 Pursuant
to the Amended and Restated Easement Grant Deed and Agreement Regarding Rights
for Geothermal Development dated February 23, 1994, as amended, the Salton
Sea Guarantors acquired from Magma Land I, a wholly owned subsidiary of Magma
Power Company (“Magma”), rights to extract geothermal brine from the geothermal
lease rights property which is necessary to operate the Salton Sea Guarantors’
power generation facilities in return for 5% of all electricity revenue received
by the Salton Sea Guarantors. The amount expensed for each of the three-month
periods ended March 31, 2005 and 2004 was $1.1 million.
 
 Pursuant
to the Administrative Services Agreement dated April 1, 1993 with Magma,
Magma will provide administrative and management services to the Salton Sea
Guarantors, excluding the Salton Sea IV and Salton Sea V Projects. Fees payable
to Magma amount to 3% of all electricity revenue. The amount expensed for each
of the three-month periods ended March 31, 2005 and 2004 was $0.3
million.
 
 Pursuant
to the Operating and Maintenance Agreement dated April 1, 1993 between CEOC
and the Salton Sea Guarantors, the Salton Sea Guarantors have retained CEOC to
operate the Salton Sea Projects for a period of 32 years. Payments are made to
CEOC in the form of reimbursements of expenses incurred. During the three-month
periods ended March 31, 2005 and 2004, the Salton Sea Guarantors reimbursed CEOC
for expenses of $3.8 million and $3.9 million, respectively.
 
 Pursuant
to the Easement Grant Deed and Agreement Regarding Rights for Geothermal
Development, the Partnership 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 Projects in return for 17.333%, on a
pro rata basis, of all energy revenue received by each project. The amounts
expensed were $2.1 million and $1.9 million for the three-month periods ended
March 31, 2005 and 2004, respectively.
 
 Pursuant
to a transaction agreement dated January 29, 2003 (the “TransAlta
Transaction Agreement”), Salton Sea Power and CE Turbo began selling available
power from the Salton Sea V Project and the CE Turbo Project to TransAlta USA,
Inc. (“TransAlta”) on February 12, 2003 at prices based on percentages of
the Dow Jones SP-15 Index. The TransAlta Transaction Agreement shall continue
until the earlier of (a) 30 days following a written notice of termination or
(b) any other termination date mutually agreed to by the parties. No such notice
of termination has been given by either party. Pursuant to this agreement, sales
to TransAlta totaled $3.0 million and $2.1 million during the three-month
periods March 31, 2005 and 2004, respectively. As of March 31, 2005 and
December 31, 2004, accounts receivable balances from TransAlta were $1.7
million and $1.3 million, respectively.
 
 On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale agreement to sell the non-power attributes (the non-power
attributes made available by one MWh of generation, a “Green Tag”) associated
with up to 931,800 MWh of available generation at the Salton Sea V Project and
CE Turbo Project through December 31, 2008 to TransAlta Energy Marketing
(U.S.) Inc. (“TransAlta Marketing”) at a market price per Green Tag. Pursuant to
this agreement, sales from Salton Sea Power to TransAlta Marketing commenced in
July 2004 and totaled $0.5 million for the three-month periods ended March 31,
2005. As of March 31, 2005 and December 31, 2004, accounts receivable balances
from TransAlta Marketing were $0.2 million and $- million,
respectively.
 
 In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea Power and CE Turbo have not received payment for power sold to El
Paso Merchant Energy Company under certain transaction agreements during
December 2000 and January 2001 of $3.8 million (the “PX Receivable”).
Salton Sea Power and CE Turbo had established an allowance for doubtful accounts
for this balance as of December 31, 2003. On September 29, 2004,
Salton Sea Power and CE Turbo entered into separate Transfer of Claims
Agreements with TransAlta and MEHC (the “Transfer of Claims Agreements”),
pursuant to which Salton Sea Power and CE Turbo received an aggregate of
$3.7 million in exchange for transferring the rights to receive payment on
the PX Receivable to TransAlta and MEHC. As a result of the transaction, Salton
Sea Power and CE Turbo wrote-off the PX Receivable and the related allowance for
doubtful accounts and recorded a $3.8 million current liability to reflect
the collection risk retained under the Transfer of Claims Agreements. Pursuant
to the Transfer of Claims Agreements, to the extent that the PX Receivable
becomes uncollectible, Salton Sea Power and CE Turbo can be required to pay the
PX Receivable, plus interest, to MEHC and TransAlta.
   39
 
 Pursuant
to November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea
Power and CE Turbo may provide CalEnergy Minerals its Zinc Recover Project’s
electrical energy requirements at the market rates available to them, less
wheeling costs. Pursuant to these agreements, sales to CalEnergy Minerals from
Salton Sea Power totaled $- million and $0.4 million for the three-month periods
ended March 31, 2005 and 2004, respectively, and there were no sales to
CalEnergy Minerals from CE Turbo for the three-month periods ended March 31,
2005 and 2004. On September 10, 2004, CalEnergy Minerals ceased operations
of its Zinc Recovery Project. Accordingly, except for sales during the
dismantling and decommissioning phases of the Zinc Recovery Project, no further
sales to CalEnergy Minerals are expected. There were no material accounts
receivable balances at March 31, 2005 and December 31, 2004 from CalEnergy
Minerals.
 
 The
Funding Corporation received $267.6 million of amounts due to affiliates as
equity distributions and made equity distributions of $237.6 million of amounts
due from affiliates during the three-month period ended March 31, 2005. The
amounts due to affiliates include amounts due to the Partnership Guarantors and
the Royalty Guarantor of $208.3 million and $59.3 million, respectively, which
represent the Partnership Guarantors’ and Royalty Guarantor’s excess operating
profits previously held in the revenue account of Funding Corporation and
subsequently transferred from the distribution account of Funding Corporation
pursuant to terms and conditions of the debt of Funding Corporation. The amounts
due from affiliates include amounts due from the Salton Sea Guarantors of $36.7
million, which represent the Salton Sea Guarantors’ operating losses and capital
expenditures previously funded by amounts held in the revenue account of Funding
Corporation and amounts due from Magma Power Company of $200.9 million, which
represent amounts previously transferred to Magma pursuant to the terms and
conditions of the debt of Funding Corporation.
 
 As
described above, the Partnership Guarantors and the Royalty Guarantor declared
$208.3 million and $59.3 million, respectively, of amounts due from affiliates
as equity distributions during the three-month period ended March 31, 2005, and
the Salton Sea Guarantors recognized $36.7 million of amounts due to affiliates
as an equity contribution during the three-month period ended March 31, 2005.
 
 MEHC
contributed equity to the Partnership Guarantors to fund the Zinc Recovery
Project’s operating losses, capital expenditures and debt service through
September 10, 2004, which was the date the Zinc Recovery Project’s operations
were ceased. The 2004 equity contributions were $149.7 million and are included
in the accompanying combined statement of cash flows as part of net financing
activity cash flows from discontinued operations, and include MEHC's $136.4
million funding of its guarantee of the Series F Bonds which were redeemed on
March 1, 2004 and MEHC’s $13.3 million funding of the Zinc Recovery
Project’s operating losses.
 
 **Contractual
Obligations and Commercial Commitments**
 
 There
were no material changes in the contractual obligations and commercial
commitments from the information provided in Item 7 of Funding Corporation's and
the Guarantors’ Annual Report on Form 10-K for the year ended December 31,
2004 other than as discussed in the “Liquidity and Capital Resources”
section.
 
 **New
Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations”, refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Guarantors are required to adopt the provisions of FIN 47 by December 2005.
Adoption of FIN 47 is not expected to have a material effect on the Guarantors’
financial position, results of operations or cash flows.
 
 40
 ****
 **Critical
Accounting Policies**
 
 The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial Statements and accompanying notes. Note 2 to
Funding Corporation's and the Guarantors' financial statements included in
Funding Corporation’s and the Guarantors’ Annual Report on Form 10-K for the
year ended December 31, 2004 describes the significant accounting policies
and methods used in the preparation of the financial statements. Estimates are
used for, but not limited to, the accounting for the allowance for doubtful
accounts, impairment of long-lived assets, contingent liabilities and income
taxes. Actual results could differ from these estimates.
 
 For
additional discussion of Funding Corporation's and the Guarantors' critical
accounting policies, see “Management's Discussion and Analysis of Financial
Condition and Results of Operations” included in Funding Corporation's and the
Guarantors' Annual Report on Form 10-K for the year ended December 31,
2004. There were no material changes to Funding Corporation or the Guarantors’
critical accounting policies during the three-month period ended March 31,
2005.
  41
  **Item
      3.**
    **Quantitative and Qualitative Disclosures About Market
      Risk.**
 
 For
quantitative and qualitative disclosures about market risk affecting Funding
Corporation and the Guarantors, see Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk” of Funding Corporation's and the Guarantors’
Annual Report on Form 10-K for the year ended December 31, 2004. During the
three months ended March 31, 2005, there were no material changes to Funding
Corporation’s or the Guarantors’ market risk.
 
 **Item
      4.**
    **Controls and
Procedures.**
 
 An
evaluation was performed under the supervision and with the participation of
Funding Corporation's and the Gurantors’ management, including the chief
executive officer and chief accounting officer, regarding the effectiveness of
the design and operation of Funding Corporation's disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended) as of March 31, 2005. Based on that
evaluation, Funding Corporation's and the Guarantors’ management, including the
chief executive officer and chief accounting officer, concluded that Funding
Corporation's and the Guarantors’ disclosure controls and procedures were
effective. There have been no changes during the quarter covered by this report
in Funding Corporation’s and the Guarantors’ internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, Funding Corporation’s and the Guarantors’ internal control over
financial reporting.
 
 
  42
  **PART
II - OTHER INFORMATION**
 
 **Item
      1.**
    **Legal Proceedings.**
 
 For a
description of certain legal proceedings, please review the notes to the Interim
Financial Statements and Item 3, “Legal Proceedings” in Funding Corporation's
Annual Report on Form 10-K for the year ended December 31, 2004. None of
the proceedings that were disclosed in Item 3 of the Form 10-K were terminated
or had material developments during the three-month period ended March 31,
2005.
 
 **Item
      2.**
    **Unregistered Sales of Equity Securities and Use of
      Proceeds.**
 
 Not
applicable.
 
 **Item
      3.**
    **Defaults Upon Senior
Securities.**
 
 Not
applicable.
 
 **Item
      4.**
    **Submission of Matters to a Vote of Security
      Holders.**
 
 Not
applicable.
 
 **Item
      5.**
    **Other Information.**
 
 Not
applicable.
 
 **Item
      6.**
    **Exhibits.**
 
 The
exhibits listed on the accompanying Exhibit Index are filed as part of this
Quarterly Report.
 
  43
  
 **SIGNATURES**
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 Salton
      Sea Funding Corporation(Registrant)Date:
      May 6, 2005
    
    /s/
      Wayne F. IrmiterWayne
      F. IrmiterVice
      President and Controller
 
  44
  **EXHIBIT INDEX**
 
 
 Exhibit
      No.31.1
    
    Chief
      Executive Officer's Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    
    Chief
      Accounting Officer's Certificate Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
    
    Chief
      Executive Officer's Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
    
    Chief
      Accounting Officer's Certificate Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 
  45