**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


Washington,
D.C. 20549





**FORM
10-K**





**Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934**


For the
fiscal year ended December 31, 2004





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 ofSalton
      Sea Funding Corporation)
    
    Salton
      Sea Funding Corporation)





(402)
      341-4500Salton
      Sea Funding Corporation's telephone number, including area
      code:








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).


Yes o No x





All
common stock of Salton Sea Funding Corporation is indirectly held by Magma Power
Company. 100 shares of common stock were outstanding on February 25,
2005.











**TABLE
OF CONTENTS**





**PART
      I**Item 1.
    Business
    4Item 2.
    Properties
    9Item 3.
    Legal Proceedings
    10Item 4.
    Submission of Matters to a Vote of Security
      Holders
    10**PART
      II**Item 5.
    Market for Registrant's Common Equity and Related
      Stockholder Matters
    11Item 6.
    Selected Financial Data
    11Item 7.
    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
    14Item 7A.
    Quantitative and Qualitative Disclosures About Market
      Risk
    23Item 8.
    Financial Statements and Supplementary
    Data
    24Item 9.
    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
    72Item 9A.
    Controls and Procedures
    72Item 9B.
    Other Information
    72**PART
      III**Item 10.
    Directors and Executive Officers of the
      Registrant
    73Item 11.
    Executive Compensation
    74Item 12.
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
    74Item 13.
    Certain Relationships and Related
      Transactions
    74Item 14.
    Principal Accountant Fees and
    Services
    75**PART
      IV**Item 15.
    Exhibits and Financial Statement Schedules
    76Signatures
    78Exhibit Index
    98















2





**PART
I**





**Disclosure
Regarding Forward-Looking Statements**





This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may," "could," "project," "believe," "anticipate," "expect,"
"estimate," "continue," "potential," "plan," "forecast," and similar terms.
These statements represent Salton Sea Funding Corporation’s intentions, plans,
expectations and beliefs and are subject to risks, uncertainties and other
factors. Many of these factors are outside Salton Sea Funding Corporation’s
control and could cause actual results to differ materially from such
forward-looking statements. These factors include, among others:





·
    general
      economic and business conditions in the jurisdictions in which Salton Sea
      Funding Corporation’s facilities are
located;


·
    the
      financial condition and creditworthiness of our significant customers and
      suppliers;


·
    governmental,
      statutory, regulatory or administrative initiatives or ratemaking actions
      affecting Salton Sea Funding Corporation or the power generation
      industries;


·
    weather
      effects on sales and revenue;


·
    general
      industry trends;


·
    increased
      competition in the power generation
industry;


·
    fuel
      and power prices and availability;


·
    changes
      in business strategy, development plans or customer or vendor
      relationships;


·
    availability
      of qualified personnel;


·
    unscheduled
      outages or repairs;


·
    financial
      or regulatory accounting principles or policies imposed by the Public
      Company Accounting Oversight Board, the Financial Accounting Standards
      Board (“FASB"), the Securities and Exchange Commission (‘‘SEC’’) and
      similar entities with regulatory oversight;


·
    other
      risks or unforeseen events, including wars, the effects of terrorism,
      embargos and other catastrophic events; and


·
    other
      business or investment considerations that may be disclosed from time to
      time in SEC filings or in other publicly disseminated written
      documents.





Salton
Sea Funding Corporation undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors should not be construed as
exclusive.





In this
Annual Report references to kW means kilowatts, MW means megawatts, kWh means
kilowatt hours, MWh means megawatt hours, and NMW means net
megawatts.


****


3


**Item
1.** **Business.**





**General**





Salton
Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned
subsidiary of CE Generation, LLC ("CE Generation"), is a Delaware corporation
formed for the sole purpose of issuing securities in its individual capacity as
principal and as agent acting on behalf of the Guarantors (as defined below).
The principal executive office of the Funding Corporation is located at 302
South 36th Street, Suite 400A, Omaha, Nebraska 68131 and its telephone number is
(402) 341-4500.





CE
Generation owns all of the capital stock of Magma Power Company ("Magma"), which
owns all of the outstanding capital stock of Funding Corporation. Through its
subsidiaries, CE Generation is primarily engaged in the development, ownership
and operation of environmentally responsible independent power production
facilities in the United States of America utilizing geothermal and natural gas
resources. CE Generation has an aggregate net ownership interest of 769 MW of
electrical generating capacity in power plants in operation in the United States
of America, which have an aggregate net capacity of 829 MW (including its
interests in the Salton Sea Projects and the Partnership Projects as defined
below).





All of
the outstanding stock of Magma was contributed by MidAmerican Energy Holdings
Company ("MEHC") to CE Generation in February 1999. In March 1999, MEHC sold a
50% interest in CE Generation to El Paso CE Generation Holding Company ("El
Paso"). On January 29, 2003, El Paso sold all its interest in CE Generation
to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.





Magma
directly or indirectly owns all of the capital stock of or partnership interests
in the Funding Corporation and the Guarantors, except for CalEnergy Minerals LLC
("CalEnergy Minerals") and Salton Sea Minerals Corp., which are owned by MEHC.
The Guarantors are comprised of the Salton Sea Guarantors, the Partnership
Guarantors, and the Royalty Guarantor (collectively, the
"Guarantors").





The
Salton Sea Guarantors consist 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"), which own five operating geothermal power
plants located 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 Salton Sea Projects, the "Salton Sea
Guarantors").





The
Partnership Guarantors consist of the Vulcan/BN Geothermal Power Company
("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"), Del Ranch,
L.P. ("Del Ranch"), and 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 CE Turbo Project, (collectively, the "Partnership Projects" and,
together with the Salton Sea Projects, the "Imperial Valley Projects");
CalEnergy Minerals, which installed facilities near the Imperial Valley Projects
that were intended to recover zinc from the geothermal brine through and ion
exchange, solvent extraction, electrowinning and casting process (the "Zinc
Recovery Project"); CalEnergy Operating Corporation ("CEOC"), Vulcan Power
Company ("VPC"), San Felipe Energy Company ("San Felipe"), Conejo Energy Company
("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC ("VPCG") Salton
Sea Minerals Corp. and CE Salton Sea Inc. (collectively, the "Partnership
Guarantors"). VPC and VPCG, collectively own 100% of the partnership interests
in Vulcan. CEOC and Niguel, San Felipe and Conejo, collectively own 90%
partnership interests in Elmore, Leathers and Del Ranch, respectively. Salton
Sea Minerals Corp. owns CalEnergy Minerals.





Magma
owns the remaining 10% interest in each of Elmore, Leathers and Del Ranch. CEOC
is entitled to receive from Magma, as payment for certain data and services
provided by CEOC, all of the partnership distributions Magma receives with
respect to its 10% ownership interests in each of the Elmore, Leathers and Del
Ranch Projects and Magma’s special distributions equal to 4.5% of total energy
revenue from the Leathers Project.





Salton
Sea Royalty LLC (the "Royalty Company") is the Royalty Guarantor. The Royalty
Company received an assignment of certain fees and royalties ("Royalties") paid
by three Partnership Projects: the Elmore, Leathers, and Del Ranch
Projects.





CEOC
currently operates the Imperial Valley Projects. Affiliates of Magma control,
through a variety of fee, leasehold, and royalty interests, rights to geothermal
resources for power production in the Salton Sea Known Geothermal Resource Area
("SSKGRA"). Funding Corporation believes that such resources will be sufficient
to operate the Imperial Valley Projects at contract capacity under their
respective power purchase agreements through the final maturity date of the
securities.





4


The
principal executive offices of the Salton Sea Guarantors are located at 302
South 36th Street, Suites 400-B, 400-D, 400-E, 400-K and 400-N, Omaha, Nebraska
68131. The principal executive offices of the Partnership Guarantors is 302
South 36th Street, Suite 400-F, 400-G, 400-I, 400-J, 400-L, 400-M, 400-N, 400-O,
400-P, 400-Q, 400-R, 400-S, 400-T, and 400-U, Omaha, Nebraska 68131. The
principal executive office of the Royalty Guarantor is 302 South 36th Street,
Suite 400-H, Omaha, Nebraska 68131.





**The
Projects**





Set forth
below is a table describing certain characteristics of the Imperial Valley
Projects, and the Guarantors' collective interests therein. All the projects are
located in the Imperial Valley, California.





**Facility****Net
      Capacity**
    
    **Net
      MW**
    
    **Commercial**
    
    **Agreement**
    
    **Power****Power
      Project**
    
    **(MW)****(1)**
    
    **Owned**
    
    **Operation**
    
    **Expiration**
    
    **Purchaser****(2)**Salton
      Sea Projects:Salton
      Sea I
    
    10
    
    10
    
    1987
    
    2017
    
    EdisonSalton
      Sea II
    
    20
    
    20
    
    1990
    
    2020
    
    EdisonSalton
      Sea III
    
    50
    
    50
    
    1989
    
    2019
    
    EdisonSalton
      Sea IV
    
    40
    
    40
    
    1996
    
    2026
    
    EdisonSalton
      Sea V
    
    49
    
    49
    
    2000
    
    Varies
    
    VariousTotal
      Salton Sea Projects
    
    169
    
    169Partnership
      Projects:Vulcan
    
    34
    
    34
    
    1986
    
    2016
    
    EdisonElmore
    
    38
    
    34
    
    1989
    
    2018
    
    EdisonLeathers
    
    38
    
    34
    
    1990
    
    2019
    
    EdisonDel
      Ranch
    
    38
    
    34
    
    1989
    
    2019
    
    EdisonCE
      Turbo
    
    10
    
    10
    
    2000
    
    Varies
    
    VariousTotal
      Partnership Projects
    
    158
    
    146Total
      Imperial Valley Projects
    
    327
    
    315




(1)
    Actual
      MW may vary depending on operating and reservoir conditions and plant
      design. Facility Net Capacity (in MW) represents facility gross capacity
      less parasitic load. Parasitic load is electrical output used by the
      facility and not made available for sale to utilities or other outside
      purchasers. Net MW Owned indicates current legal
  ownership.(2)
    The
      Imperial Valley Projects, excluding the Salton Sea V and CE Turbo
      Projects, sell electricity to Southern California Edison Company
      ("Edison").Pursuant
      to a transaction agreement dated January 29, 2003 (the "TransAlta
      Transaction Agreement"), Salton Sea Power which owns the Salton Sea V
      Project, and CE Turbo, which owns the CE Turbo Project, began selling
      available power to 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.Additionally,
      the Salton Sea V and CE Turbo Projects have 33-year contracts, which
      commenced in July 2000, to sell electricity to CalEnergy Minerals and the
      Salton Sea V Project has a 10-year contract, which commenced in May 2003,
      to sell up to 20 MW to the City of Riverside, California
      ("Riverside").Effective
      July 1, 2004, Salton Sea Power and CE Turbo began selling the
      environmental attributes associated with up to 931,800 MWh to TransAlta
      Marketing (US) Inc. ("TransAlta Marketing") through December 31,
      2008.




Each of
the Imperial Valley Projects, excluding the Salton Sea V and the CE Turbo
Projects, sells electricity to Edison pursuant to either a separate Standard
Offer No. 4 Agreement ("SO4 Agreement") or a negotiated power purchase
agreement. Each power purchase agreement is independent of the others, and the
performance requirements specified within one such agreement apply only to the
project subject to the agreement. The power purchase agreements provide capacity
payments, capacity bonus payments and energy payments. Edison makes fixed annual
capacity payments and capacity bonus payments to the applicable projects to the
extent that capacity factors exceed certain benchmarks. Except as described, the
price for capacity is fixed for the life of the SO4 Agreements and is
significantly higher in the months of June through September.





5


Energy
payments under the SO4 Agreements, excluding the Salton Sea IV Project, are
based on the cost that Edison avoids by purchasing energy from the project
instead of obtaining the energy from other sources ("Edison’s Avoided Cost of
Energy"). In June and November 2001, the Imperial Valley Projects, which receive
Edison’s Avoided Cost of Energy entered into agreements that provide for amended
energy payments under the SO4 Agreements. The amendments provide for fixed
energy payments per kWh in lieu of Edison’s Avoided Cost of Energy. The fixed
energy payment was 3.25 cents per kWh from December 1, 2001 through April 30,
2002 and is 5.37 cents per kWh commencing May 1, 2002 for a five-year period.
Following the five-year period, the energy payments revert back to Edison’s
Avoided Cost of Energy.





For the
years ended December 31, 2004, 2003 and 2002, Edison’s Avoided Cost of Energy
was 5.9 cents, 5.4 cents and 3.5 cents per kWh, respectively. Estimates of
Edison’s Avoided Cost of Energy in the future vary substantially from
year-to-year, primarily based on the estimated future cost of gas.





The
Imperial Valley Projects, other than the Salton Sea I Project, receive
transmission service from the Imperial Irrigation District ("IID"), to deliver
electricity to Edison near Mirage, California. These projects pay a rate based
on the IID’s cost of service, which was $1.66 per month per kW of service
provided for 2004 and recalculated annually. The transmission service and
interconnection agreements expire in 2015 for the Partnership Projects,
excluding the CE Turbo Project, 2019 for the Salton Sea III Project, 2020 for
the Salton Sea II Project and 2026 for the Salton Sea IV Project. The Salton Sea
V Project and the CE Turbo Project have entered into agreements with similar
terms with the IID, which expire in 2030. The Salton Sea I Project delivers
energy to Edison at the project site and has no transmission service agreement
with the IID.





**Salton
Sea Projects**





The
Salton Sea I Project has contracted to sell electricity to Edison pursuant to a
30-year negotiated power purchase agreement, which commenced on July 1, 1987
(the "Salton Sea I PPA"). The contract capacity and contract nameplate are each
10 MW. The capacity payment is based on the firm capacity price, which adjusts
quarterly based on specified indices for the term of the Salton Sea I PPA and is
currently $174.53 per kW-year. The capacity payment was approximately
$1.5 million, $1.5 million and $1.1 million in 2004, 2003 and
2002, respectively. The energy payment is calculated using a Base Price (defined
as the initial value of the energy payment (4.7 cents per kWh for the second
quarter of 1992)), which is subject to quarterly adjustments based on specified
indices. The time period weighted average energy payment for Salton Sea I was
6.3 cents per kWh during 2004.





The
Salton Sea II Project has contracted to sell electricity to Edison pursuant to a
30-year modified SO4 Agreement that commenced on April 5, 1990. The contract
capacity and contract nameplate are 15 MW (16.5 MW during on-peak periods) and
20 MW, respectively. The price for contract capacity and contract capacity bonus
payments is fixed for the life of the modified SO4 Agreement. Pursuant to the
modified SO4 Agreement, the maximum annual capacity and bonus payments are
approximately $3.3 million. Edison was entitled to receive, at no cost, 5%
of all energy delivered in excess of 80% of contract capacity through March 31,
2004.





The
Salton Sea III Project has contracted to sell electricity to Edison pursuant to
a 30-year modified SO4 Agreement that commenced on February 13, 1989 (the
"Salton Sea III PPA"). The contract capacity and contract nameplate are 47.5 MW
and 49.8 MW, respectively. The price for contract capacity payments and capacity
bonus payments is fixed at $175 per kW per year. Pursuant to the modified SO4
Agreement, the maximum annual contracted capacity and bonus payments are
approximately $9.7 million.





The
Salton Sea IV Project has contracted to sell electricity to Edison pursuant to a
modified SO4 Agreement which provides for contract capacity payments on 34 MW of
capacity at two different rates based on the respective contract capacities
deemed attributable to the original Salton Sea I PPA option (20 MW) and to the
original Salton Sea IV SO4 Agreement (14 MW) (the "Salton Sea IV PPA"). The
capacity payment price for the 20 MW portion adjusts quarterly based upon
specified indices and the capacity payment price for the 14 MW portion is a
fixed levelized rate. The capacity and bonus payments in 2004, 2003 and 2002
were approximately $5.5 million, $3.9 million and $5.5 million,
respectively. For deliveries up to 39.6 MW the energy payment is at a base
price, adjusted quarterly based on specified indices, for 55.6% of the total
energy delivered by the Salton Sea IV Project and is based on an energy payment
schedule for 44.4% of the total energy delivered by the Salton Sea IV Project.
For deliveries over 39.6 MW, the energy payment is at Edison’s Avoided Cost of
Energy. The contract has a 30-year term, but Edison is not required to purchase
the 20 MW of capacity and energy originally attributable to the Salton Sea I PPA
option after September 30, 2017, the original termination date of the Salton Sea
I PPA.





6


On May
20, 2003, Salton Sea Power entered into a power sales agreement with Riverside.
Under the terms of the agreement, Salton Sea Power sells up to 20 MW of energy
generated from the Salton Sea V Project to Riverside at 6.1 cents per kWh. Sales
under the agreement commenced June 1, 2003 and will terminate May 31, 2013.
Pursuant to a 33-year power sales agreement, the Salton Sea V Project sells a
portion of its net output to CalEnergy Minerals for the Zinc Recovery Project’s
full electrical energy requirements. The agreement provides for energy payments
based on the market rates available to the Salton Sea V Project, adjusted for
wheeling costs. On September 10, 2004, CalEnergy Minerals ceased operations of
the 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. The Salton Sea V Project sells its remaining
output to TransAlta under the TransAlta Transaction Agreement.





Commencing
March 27, 2001, Salton Sea Power and CE Turbo entered into a series of
transaction agreements to sell available power from the Salton Sea V Project and
CE Turbo Project to El Paso Merchant Energy Company ("EPME") based on
percentages of the Dow Jones SP-15 Index. On February 11, 2003, Salton Sea Power
and CE Turbo ceased selling power to EPME. Pursuant to the TransAlta Transaction
Agreement, Salton Sea Power and CE Turbo began selling available power from the
Salton Sea V Project and CE Turbo Project to 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 termination has been given by either party.





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 and CE Turbo
Projects through December 31, 2008 to TransAlta Marketing at a market price
per Green Tag. Sales under this agreement commenced in July 2004.





**Partnership
Projects**





The
Vulcan Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on February 10, 1986. The Vulcan Project has a contract
capacity and contract nameplate of 29.5 MW and 34 MW, respectively. Pursuant to
the SO4 Agreement, the maximum annual capacity and bonus payments are
approximately $5.5 million.





The
Elmore Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 1, 1989. The contract capacity and
contract nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4
Agreement, the maximum annual capacity and bonus payments are approximately
$7.9 million.





The
Leathers Project has contracted to sell electricity to Edison pursuant to a
30-year SO4 Agreement that commenced on January 1, 1990. The contract
capacity and contract nameplate are 34 MW and 38 MW, respectively. Pursuant to
the SO4 Agreement, the maximum annual capacity and bonus payments are
approximately $7.5 million.





The Del
Ranch Project has contracted to sell electricity to Edison under a 30-year SO4
Agreement that commenced on January 2, 1989. The contract capacity and contract
nameplate are 34 MW and 38 MW, respectively. Pursuant to the SO4 Agreement, the
maximum annual capacity and bonus payments are approximately
$7.9 million.





The CE
Turbo Project sells its available power under the TransAlta Transaction
Agreement.





**Zinc
Recovery Project and Minerals Assets**





The
Guarantors' long-lived assets include rights to commercial quantities of
extractable minerals ("Mineral Reserves") from elements in solution in the
geothermal brine and fluids utilized at certain geothermal energy generation
facilities located in the Imperial Valley of California and the Zinc Recovery
Project.





The Zinc
Recovery Project began limited production during December 2002 and continued
limited production until September 10, 2004. Efforts to increase production had
continued since the Zinc Recovery Project was placed in service with an emphasis
on process modification. Management had been assessing the long-term economic
viability of the Zinc Recovery Project in light of continuing cash flow and
operating losses and the efforts to increase production, and had continued to
evaluate the expected impact of the planned improvements to the extraction
process during the third quarter of 2004. Furthermore, management had been
exploring other operating alternatives, such as establishing strategic
partnerships and consideration of ceasing operations of the Zinc Recovery
Project.





7


On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. In connection with ceasing operations, the Zinc Recovery
Project’s assets are being dismantled and sold, and certain employees of the
operator of the Zinc Recovery Project have been paid one-time termination
benefits. Implementation of a disposal plan began in September 2004 and is
continuing into 2005.





**Royalty
Projects**





The
Royalty Guarantor has received an assignment from Magma of certain Royalties
received from the Elmore, Leathers and Del Ranch Projects in exchange for the
provision to those projects of the rights to use certain geothermal resources.
Substantially all of the assigned Royalties are based on a percentage of energy
and capacity revenue of the respective projects. Pursuant to the assignment, the
Royalty Guarantor is entitled to receive the aggregate percentages of such
project's energy and capacity revenue as illustrated in the chart below. The
Partnership Guarantors are also entitled to receive Royalties from the
Partnership Projects as illustrated in the chart below. Royalties are subject to
netting and reduction from time to time to reflect various operating costs, as
reflected in the financial statements herein. All such Royalties (other than the
various operating costs, as reflected in the financial statements) are payable
from revenue which will constitute Partnership Guarantor’s
collateral.





**Royalties
      to be Paid to**
    
    **Royalties
      to be Paid to****Royalty
      Guarantor**
    
    **Partnership
      Guarantors****%
      of Energy**
    
    **%
      of Capacity**
    
    **%
      of Energy**
    
    **%
      of Capacity****Project**
    
    **Revenues**
    
    **Revenues**
    
    **Revenues**
    
    **Revenues**Del
      Ranch
    
    23.33
    
    1.00
    
    5.67
    
    3.00Elmore
    
    23.33
    
    1.00
    
    5.67
    
    3.00Leathers
    
    21.50
    
    0.00
    
    7.50
    
    3.00Vulcan
    
    0.00
    
    0.00
    
    4.17
    
    0.00


****


**Reliance
on Single Utility Customer**





Each of
the Vulcan, Elmore, Leathers, Del Ranch, and Salton Sea I-IV Projects relies on
an agreement with Edison to generate 100% of its operating revenue. The payments
(excluding those for power sales from March 22 through June 22, 2001) under
these agreements have constituted 100% of the operating revenue of each Project
since its inception, and may do so for the life of the securities. Any material
failure of Edison to fulfill its contractual obligations under the power
purchase agreements could have a material adverse effect on the ability of the
Funding Corporation to pay principal of and interest on its Senior Secured Notes
and Bonds (the "Securities").





**Uncertainties
Relating to Exploration and Development of Geothermal Energy
Resources**





Geothermal
exploration, development and operations are subject to uncertainties, which vary
among different geothermal reservoirs and are similar to those typically
associated with oil and gas exploration and development, including dry holes and
uncontrolled releases. Because of the geological complexities of geothermal
reservoirs, the geographic area and sustainable output of geothermal reservoirs
can only be estimated and cannot be definitively established. There is,
accordingly, a risk of an unexpected decline in the capacity of geothermal wells
and a risk of geothermal reservoirs not being sufficient for sustained
generation of the electrical power capacity desired.





In
addition, both the cost of operations and the operating performance of
geothermal power plants may be adversely affected by a variety of operating
factors. Production and injection wells can require frequent maintenance or
replacement. Corrosion caused by high-temperature and high-salinity geothermal
fluids may require the replacement or repair of certain equipment, vessels or
pipelines. New production and injection wells may be required for the
maintenance of current operating levels, thereby requiring substantial capital
expenditures.





8


**Insurance**





The
Salton Sea Projects and the Partnership Projects currently possess property,
business interruption, catastrophic and general liability insurance. Proceeds of
insurance received in connection with the Salton Sea Projects will be payable to
the Depositary for the account of the Salton Sea Guarantors and will be applied
as required under the financing documents. There can be no assurance that such
comprehensive insurance coverage will be available in the future at commercially
reasonable costs or terms or that the amounts for which the Salton Sea
Guarantors and the Partnership Guarantors are or will be insured will cover all
potential losses.





Because
areas of geothermal activity such as the area in which the Imperial Valley
Projects are located are subject to frequent low-level seismic disturbances, and
serious seismic disturbances are possible, the power generating plants and other
facilities at the Imperial Valley Projects are designed and built to withstand
relatively significant levels of seismic disturbance. However, there is no
assurance that seismic disturbances of a nature and magnitude so as to cause
material damage to the Imperial Valley Projects or gathering systems or a
material change in the nature of the geothermal resource will not occur, that
insurance with respect to seismic disturbances will be maintained by or on
behalf of all of the Imperial Valley Projects, that insurance proceeds will be
adequate to cover all potential losses sustained, or that insurance will
continue to be available in the future in amounts adequate to insure against
such seismic disturbances.





**Regulatory
and Environmental Matters**





The
Guarantors are subject to a number of environmental laws and regulations
affecting many aspects of their present and future operations, including the
disposal of various forms of materials resulting from geothermal reservoir
production and the drilling and operation of new wells. Such laws and
regulations generally require the Guarantors to obtain and comply with a wide
variety of licenses, permits and other approvals. In addition, regulatory
compliance for the construction of new facilities is a costly and time-consuming
process, and intricate and rapidly changing environmental regulations may
require major expenditures for permitting and create the risk of expensive
delays or material impairment of project value if projects cannot function as
planned due to changing regulatory requirements or local opposition. The
Guarantors and the Imperial Valley Projects also remain subject to a varied and
complex body of environmental and energy regulations that both public officials
and private individuals may seek to enforce. There can be no assurance that
existing regulations will not be revised or that new regulations will not be
adopted or become applicable to the Guarantors and the Imperial Valley Projects
which could have an adverse impact on their operations. In particular, the
independent power market in the United States is dependent on the existing
energy regulatory structure, including the Public Utility Regulatory Policies
Act and its implementation by utility commissions in the various states. The
structure of such federal and state energy regulations has in the past, and may
in the future, be the subject of various challenges and restructuring proposals
by utilities and other industry participants. The implementation of regulatory
changes in response to such challenges or restructuring proposals, or otherwise
imposing more comprehensive or stringent requirements on the Guarantors and
Imperial Valley Projects, which would result in increased compliance costs could
have a material adverse effect on the Guarantors' and the Imperial Valley
Projects' results of operations.





**Employees**





Employees
necessary for the operation of the Imperial Valley Projects are provided by
CEOC. As of December 31, 2004, CEOC employed 214 people. CEOC maintains a
qualified technical staff covering a broad range of disciplines including
geology, geophysics, geochemistry, hydrology, volcanology, drilling technology,
reservoir engineering, plant engineering, construction management, maintenance
services, production management, and electric power operation. CEOC employees
are not covered by any collective bargaining agreement. CEOC has no material
employee disputes.


****


**Item
2.** **Properties.**





The
Funding Corporation’s most significant physical properties are its current
interest in operating power facilities and its related real property interests.
The Funding Corporation maintains an inventory of approximately 23,000 acres of
geothermal property leases in the SSKGRA to support the Imperial Valley
Projects. Funding Corporation, as lessee, pays certain royalties and other fees
to the property owners and other royalty interest holders from the revenue
generated by the Imperial Valley Projects.





9


Lessors
and royalty holders are generally paid a monthly or annual rental payment during
the term of the lease or mineral interest, unless and until the acreage goes
into production, in which case the rental typically stops and the (generally
higher) royalty payments begin. Leases of federal property are transacted with
the Department of Interior, Bureau of Land Management, pursuant to standard
geothermal leases under the Geothermal Steam Act and the regulations promulgated
thereunder, and are for a primary term of 10 years, extendible for an additional
5 years if drilling is commenced within the primary term and is diligently
pursued for two successive 5-year periods upon certain conditions set forth in
the regulations. A secondary term of up to 40 years is available so long as
geothermal resources from the property are being produced or used in commercial
quantities. Leases of state lands may vary in form. Leases of private lands vary
considerably, since their terms and provisions are the product of negotiations
with the landowners.


****


**Item
3.** **LegalProceedings.**





On
July 10, 2003, the Salton Sea IV Project’s 40 MW 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 PPA 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 of
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.





On
October 9, 2003, the Salton Sea III Project’s 50 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended and the Salton Sea III Project’s turbine returned to service, on
December 12, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea III PPA totaling $0.8 million. SSPG, owner of the Salton Sea III
Project, served notice of error on Edison for such unpaid amounts. As a result,
the Salton Sea Guarantors had established an allowance for doubtful accounts for
the full amount of this receivable. Pursuant to a letter agreement dated
December 2, 2004, Edison made a settlement
payment of $0.6 million  on
December 13, 2004. Consequently,
in December 2004, the allowance for doubtful accounts was released and the
remaining receivable of $0.2 million was written off.





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 EPME
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.





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. CalEnergy Minerals ultimately determined
that AMEC did not have the requisite licenses, including a California
contractor’s license. 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 seeking 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.




**Item
4.** **Submission of Matters to a Vote of Security
Holders.**





Not
applicable.


10


PART II




****


**Item
5.** **Market for Registrant's Common Equity and Related Stockholder
Matters.**





Not
applicable.


****


**Item
6.** **Selected Financial Data.**





The
Funding Corporation





The
following tables set forth selected financial data of the Funding Corporation.
The data should be read in conjunction with the financial statements and related
notes and other financial information appearing elsewhere in this Form 10-K (in
thousands):





**Year
      Ended December 31,****2004****(1)**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****Statement
      of Operations Data:**Total
      revenue
    
    $
    21,666
    
    $
    36,586
    
    $
    39,755
    
    $
    41,791
    
    $
    43,718Net
      income (loss)
    
    
    (4,861
    )
    
    (271
    )
    
    (125
    )
    
    (137
    )
    
    174**Balance
      Sheet Data:**Total
      assets
    
    $
    326,475
    
    $
    490,415
    
    $
    570,503
    
    $
    540,580
    
    $
    565,375Senior
      secured notes and bonds(2)
    
    
    298,377
    
    
    463,592
    
    
    491,678
    
    
    520,250
    
    
    543,908Total
      stockholder’s equity
    
    
    10,736
    
    
    13,653
    
    
    13,418
    
    
    13,098
    
    
    13,235








(1)
    2004
      net loss includes a $4.4 million long-lived asset impairment charge which
      represents Funding Corporations 1% equity interest in the non-cash
      impairment charge related to the decision to cease operations of the Zinc
      Recovery Project on September 10, 2004. Refer to Note 3 in Item 8.
      Financial Statements and Supplementary Data - Notes to Financial
      Statementsæ for additional information.(2)
    Includes
      current portion.







11


Salton
Sea Guarantors





The
following tables set forth selected financial data of the Salton Sea Guarantors.
The data should be read in conjunction with the financial statements and related
notes and other financial information appearing elsewhere in this Form 10-K (in
thousands):





**Year
      Ended December 31,****2004****(1)**
    
    **2003****(2)**
    
    **2002****(3)**
    
    **2001****(4)**
    
    **2000****(5)****Statement
      of Operations Data:**Total
      revenue
    
    $
    105,083
    
    $
    83,428
    
    $
    87,893
    
    $
    113,228
    
    $
    98,410Income
      (loss) from continuing operations
    
    
    7,698
    
    
    (37,917
    )
    
    (33,975
    )
    
    (9,550
    )
    
    28,323Net
      income (loss)
    
    
    (83,936
    )
    
    (37,963
    )
    
    (33,975
    )
    
    (9,550
    )
    
    28,323**Balance
      Sheet Data:**Total
      assets
    
    $
    415,201
    
    $
    527,439
    
    $
    584,279
    
    $
    629,950
    
    $
    626,543Senior
      secured project note(6)
    
    
    199,238
    
    
    223,647
    
    
    246,419
    
    
    266,899
    
    
    284,217Total
      guarantors’ equity
    
    
    166,071
    
    
    250,007
    
    
    287,970
    
    
    321,945
    
    
    331,495


(1)
    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 of $91.4 million has been recorded to write-off the
      Mineral Reserves. The charge and related activity of the Mineral Reserves
      are classified separately as discontinued operations. Refer to Note 3 in
      "Item 8. Financial Statements and Supplementary Data - Notes to Combined
      Financial Statements" for additional information.(2)
    2003
      net loss includes a $23.3 million impairment of goodwill. Refer to
      Note 2 in "Item 8. Financial Statements and Supplementary Data - Notes to
      Combined Financial Statements" for additional
  information.(3)
    2002
      net loss includes a $21.0 million impairment of goodwill recognized
      as a cumulative effect of change in accounting principle. Refer to Note 2
      in "Item 8. Financial Statements and Supplementary Data - Notes to
      Combined Financial Statements" for additional
  information.(4)
    2001
      net loss includes a $15.0 million asset impairment and an
      $8.7 million loss on a cumulative change in accounting policy. Refer
      to Note 2 in "Item 8. Financial Statements and Supplementary Data - Notes
      to Combined Financial Statements" for additional
    information.(5)
    The
      Salton Sea V Project commenced operations in the third quarter of
      2000.(6)
    Includes
      current portion.








12


Partnership
Guarantors





The
following tables set forth selected financial data of the Partnership
Guarantors. The data should be read in conjunction with the financial statements
and related notes, and other financial information appearing elsewhere in this
Form 10-K (in thousands):





**Year
      Ended December 31,****2004****(1)**
    
    **2003****(2)**
    
    **2002**
    
    **2001****(3)**
    
    **2000****(4)****Statement
      of Operations Data:**Total
      revenue
    
    $
    95,325
    
    $
    96,166
    
    $
    96,152
    
    $
    125,471
    
    $
    107,608Income
      (loss) from continuing operations
    
    
    4,992
    
    
    (12,117
    )
    
    8,799
    
    
    18,706
    
    
    29,961Net
      income (loss)
    
    
    (407,997
    )
    
    (39,698
    )
    
    (10,828
    )
    
    16,085
    
    
    27,180**Balance
      Sheet Data:**Total
      assets
    
    $
    610,951
    
    $
    988,128
    
    $
    970,197
    
    $
    938,342
    
    $
    921,701Senior
      secured project note(5)
    
    
    98,702
    
    
    239,100
    
    
    244,116
    
    
    248,742
    
    
    250,650Total
      guarantors’ equity
    
    
    399,860
    
    
    612,204
    
    
    601,288
    
    
    567,579
    
    
    551,494





(1)
    On
      September 10, 2004, management made the decision to cease operations
      of the Zinc Recovery Project. Based on this decision, a non-cash,
      after-tax impairment charge of $390.0 million has been recorded to
      write-off the Zinc Recovery Project, Mineral Reserves, and allocated
      goodwill (collectively, the Mineral Assets). The charge and related
      activity of the Mineral Assets are classified separately as discontinued
      operations. Refer to Note 3 in "Item 8. Financial Statements and
      Supplementary Data - Notes to Combined Financial Statements" for
      additional information.(2)
    2003
      net loss includes a $21.2 million impairment of goodwill. Refer to
      Note 2 in "Item 8. Financial Statements and Supplementary Data - Notes to
      Combined Financial Statements" for additional
  information.(3)
    2001
      net income includes a $6.9 million loss on a cumulative effect of
      change in accounting policy. Refer to Note 2 in "Item 8. Financial
      Statements and Supplementary Data - Notes to Combined Financial
      Statements" for additional information.(4)
    CE
      Turbo commenced operations in the third quarter of
2000.(5)
    Includes
      current portion.


Royalty
Guarantor





The
following tables set forth selected financial data of the Royalty Guarantor. The
data should be read in conjunction with the financial statements and related
notes and other financial information appearing elsewhere in this Form 10-K (in
thousands):





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****Statement
      of Operations Data:**Total
      revenue
    
    $
    12,046
    
    $
    12,509
    
    $
    12,577
    
    $
    16,882
    
    $
    14,130Net
      income
    
    
    7,755
    
    
    8,199
    
    
    8,171
    
    
    10,092
    
    
    7,352**Balance
      Sheet Data:**Total
      assets
    
    $
    99,229
    
    $
    91,884
    
    $
    83,991
    
    $
    79,300
    
    $
    73,670Senior
      secured project note(1)
    
    
    437
    
    
    845
    
    
    1,147
    
    
    4,607
    
    
    9,041Members’
      equity
    
    
    98,789
    
    
    91,034
    
    
    82,835
    
    
    74,664
    
    
    64,572





(1)
    Includes
      current portion.





13


**Item
7.** **Management's Discussion and Analysis of Financial Condition
and Results of Operations.**





*The
following discussion and analysis should be read in conjunction with the
selected consolidated financial data and the financial statements included in
Items 6 and 8 herein.*





**Executive
Summary**





The
following significant events and changes, as discussed in more detail herein,
highlight the factors that affect the comparability of our operating results,
liquidity and capital for the years ended December 31, 2004, 2003 and
2002:





·
    On
      September 10, 2004, management made the decision to cease operations
      of the Zinc Recovery Project. Based on this decision, a non-cash,
      after-tax, impairment charge of $390.0 million and $91.4 million
      for the Partnership Guarantors and Salton Sea Guarantors, respectively,
      has been recorded to write-off the Mineral Assets.


·
    On
      March 1, 2004, Funding Corporation completed the redemption of
      approximately $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 MEHC and MEHC performed under that demand in
      order to fund the redemption.


·
    The
      settlement agreement in regards to the Salton Sea V Project reached in
      April 2003 with Stone & Webster Inc. ("Stone & Webster") resulted
      in the receipt of $12.1 million from Stone & Webster. The
      settlement was recorded as a$7.6 million
      reduction to operating expenses and a $4.5 million reduction to
      capital expenditures.


·
    The
      decreased production at the Salton Sea III and IV Projects due to the
      uncontrollable force events in 2003.


·
    The
      collection of the majority of the amounts in dispute with Edison in 2002,
      resulting in positive adjustments to allowances for doubtful accounts of
      $6.0 million and $14.1 million by the Salton Sea Guarantors and
      Partnership Guarantors, respectively.


·
    In
      June and November 2001, the Imperial Valley Projects, which receive
      Edison’s Avoided Cost of Energy entered into agreements that provide for
      amended energy payments under the SO4 Agreements. The amendments provide
      for fixed energy payments per kWh in lieu of Edison’s Avoided Cost of
      Energy. The fixed energy price was 3.25 cents per kWh from December 1,
      2001 to April 30, 2002 and increased to 5.37 cents per kWh commencing May
      1, 2002 through April 30, 2007.





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 year. At December 31, 2004, 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 MW, respectively. At December 31, 2004,
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:





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Overall
      capacity factor
    
    
    85.8%
    
    
    70.32%
    
    
    78.4%MWh
      produced
    
    
    1,269,000
    
    
    1,037,300
    
    
    1,156,800Capacity
      NMW (weighted average)
    
    
    168.4
    
    
    168.4
    
    
    168.4





The
changes in the overall capacity factor and production for the Salton Sea
Guarantors are primarily due to the uncontrollable force events at the Salton
Sea III and IV Projects and other extended scheduled maintenance outages in
2003. Due to the uncontrollable force events, the Salton Sea IV Project’s 40 MW
turbine went out of service on July 10, 2003 and returned to service on
September 14, 2003 and Salton Sea III Project’s 50 MW turbine went out of
service on October 2, 2003 and returned to service on December 12,
2003.








14


The
following operating data represents the aggregate capacity and electricity
production of the Partnership Projects:





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Overall
      capacity factor
    
    
    97.7%
    
    
    99.7%
    
    
    101.5%MWh
      produced
    
    
    1,356,100
    
    
    1,380,400
    
    
    1,405,000Capacity
      NMW (weighted average)
    
    
    158.0
    
    
    158.0
    
    
    158.0





The
changes in production and overall capacity factor for the Partnership Guarantors
are due to scheduled maintenance outages.





**Results
of Operations for the Years Ended December 2004 and 2003**





The
Funding Corporation's net loss increased to $4.5 million for the year ended
December 31, 2004 from $0.3 million for the same period in 2003. The
net loss primarily represents the Funding Corporation's 1% equity in earnings of
the Guarantors, which includes a non-cash, after-tax impairment charge to write
off the Minerals Assets of $390.0 million and $91.4 million for the
Partnership Guarantors and Salton Sea Guarantors, respectively, in 2004, and
interest income and expense, net of applicable tax.





The
Salton Sea Guarantors' operating revenue increased $21.2 million, or 25%,
to $105.0 million for the year ended December 31, 2004 from
$83.8 million for the same period in 2003. Revenue increased $6.5 million
due to higher market prices in 2004 and $14.7 million due to higher production
in 2004 resulting from the impact of extended overhauls and the Salton Sea III
and IV Projects uncontrollable force events in 2003.





The
Salton Sea Guarantors' royalty, operating, general and administrative expenses
increased $1.4 million, or 3%, to $54.9 million for year ended
December 31, 2004 from $53.5 million for the same period in 2003. The
increase was primarily due to the 2003 warranty claim settlement with Stone
& Webster, which included a $7.6 million reimbursement of incremental
operating expenses related to legal, other expenses and equipment write-offs
partially offset by higher maintenance costs in 2003 related to the repairs
associated with the Salton Sea III and IV Projects uncontrollable force
events.





The
Salton Sea Guarantors' depreciation and amortization decreased $0.8 million
to $24.7 million for the year ended December 31, 2004 from
$25.5 million for the same period in 2003.





The
Salton Sea Guarantors' interest expense decreased $1.8 million to
$17.0 million for the year ended December 31, 2004 from $18.8 million
for the same period in 2003. The decrease was due to reduced
indebtedness.





In
accordance with the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), the Salton Sea Guarantors
completed their annual goodwill impairment tests during the fourth quarter of
2003, primarily using a discounted cash flow methodology as of October 31, 2003.
As a result of these tests, the Salton Sea Guarantors recognized a goodwill
impairment of $23.3 million in the fourth quarter of 2003.





The
Salton Sea Guarantors’ loss from discontinued operations for the year ended
December 31, 2004 was $91.6 million and included a non-cash impairment
charge of $91.4 million recognized in connection with ceasing operations of
the Zinc Recovery Project. The remaining amounts for each period represent the
depreciation of the mineral reserves.





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
Partnership Guarantors' operating revenue decreased $1.0 million, or 1%, to
$94.3 million for the year ended December 31, 2004 from
$95.3 million for the same period in 2003. The decrease was due to lower
production in 2004.





The
Partnership Guarantors' operating expenses increased $4.1 million, or 8%,
to $53.8 million for year ended December 31, 2004, from
$49.7 million for the same period in 2003 due to increased maintenance in
2004.





15


The
Partnership Guarantors' depreciation and amortization increased
$2.2 million to $27.9 million for the year ended December 31, 2004
from $25.7 million for the same period in 2003. The increase is due to
increased depreciable asset balances in 2004.





The
Partnership Guarantors' interest expense decreased $0.1 million to
$8.1 million for the year ended December 31, 2004 from $8.2 million
for the same period in 2003. The decrease was due to reduced
indebtedness.





The 2004
and 2003 asset impairment reflects the write-off of abandoned equipment and
capitalized leases.





In
accordance with SFAS 142 the Partnership Guarantors completed their annual
goodwill impairment tests during the fourth quarter of 2003, primarily using a
discounted cash flow methodology as of October 31, 2003. As a result of these
tests the Partnership Guarantors recognized a goodwill impairment of
$21.2 million in the fourth quarter of 2003.





The
Partnership Guarantors' benefit for income tax was $4.2 million for the
year ended December 31, 2004 as compared to a provision of $2.0 million for
the same period in 2003. 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 to the parent company by the Partnership Guarantors, which occur
after payment of operating expenses and debt service.





The
Partnership Guarantors’ loss from discontinued operations for the year ended
December 31, 2004 increased $385.4 million to $413.0 million from
$27.6 million for the same period in 2003. CalEnergy Minerals began the
process of disposing of its Zinc Recovery Project in September 2004 and the
increase in loss from discontinued operations is mainly due to a non-cash,
after-tax impairment charge of $390.0 million recorded during the third
quarter of 2004. The remaining amounts for each period represent the operating
losses of the Zinc Recovery Project.





The
Royalty Guarantor's net income was $7.8 million for the year ended
December 31, 2004 as compared to $8.2 million for the same period in
2003. The decrease was due to reduced revenue at the Partnership Guarantors’
projects.





The
Royalty Guarantor is a limited liability company. Income taxes are the
responsibility of the members and the Royalty Guarantor has no obligation to
provide funds to the members for payment of any tax liabilities. Accordingly,
the Royalty Guarantor has no tax obligations.





**Results
of Operations for the Years Ended December 2003 and 2002**





The
Funding Corporation's net loss was not significant for the years ended December
31, 2003 and 2002. The net loss primarily represents interest income and
expense, net of applicable tax, and the Funding Corporation's 1% equity in
earnings of the Guarantors.





The
Salton Sea Guarantors' operating revenue decreased $0.4 million to
$83.8 million for the year ended December 31, 2003 from $84.2 million
for the same period in 2002. The decrease was primarily due to the impact of a
$6.0 million adjustment to the Edison allowance for doubtful accounts in
2002 and lower production due to extended overhauls and the Salton Sea III and
IV Projects uncontrollable force events in 2003, partially offset by higher
average rates in 2003.





The
Salton Sea Guarantors’ interest and other income (loss) was $(0.4) million
for the year ended December 31, 2003 as compared to $3.7 million in 2002.
The 2002 interest income was due primarily to a business interruption insurance
recovery for lost revenue at the Salton Sea II Project from an uncontrollable
force event





The
Salton Sea Guarantors' operating expenses, which include royalty, operating,
general and administrative expenses decreased $5.7 million, or 10% to
$53.5 million for year ended December 31, 2003 from $59.2 million for
the same period in 2002. The decrease was primarily due to the second quarter
2003 warranty claim settlement with Stone & Webster, which included a
$7.6 million reimbursement of incremental operating expenses related to
legal, other expenses and equipment write-offs. The decrease was also due to
lower brine pond and legal expenses in 2003, partially offset by repair costs
associated with the Salton Sea III and IV Projects uncontrollable force
events.





16


The
Salton Sea Guarantors' depreciation and amortization increased $4.3 million
to $25.5 million for the year ended December 31, 2003 from
$21.2 million for the same period in 2002. The increase was due to a change
in salvage value assumptions and higher depreciable asset balances in
2003.





The
Salton Sea Guarantors' interest expense decreased $1.6 million to
$18.8 million for the year ended December 31, 2003 from $20.4 million
for the same period in 2002. The decrease was due to reduced
indebtedness.





In
accordance with the SFAS 142, the Salton Sea Guarantors completed their annual
goodwill impairment tests during the fourth quarter of 2003, primarily using a
discounted cash flow methodology as of October 31, 2003. As a result of these
tests the Salton Sea Guarantors recognized a goodwill impairment of
$23.3 million in the fourth quarter of 2003.





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
Partnership Guarantors' operating revenue increased $0.6 million to
$95.3 million for the year ended December 31, 2003 from $94.7 million
for the same period in 2002. The impact of a $14.1 million adjustment to
the Edison allowance for doubtful accounts in 2002 was mostly offset by higher
average rates under the settlement agreement in 2003.





The
Partnership Guarantors' operating expenses decreased $6.0 million, or 11%,
to $49.7 million for year ended December 31, 2003, from
$55.7 million for the same period in 2002 primarily due to lower legal
expenses in 2003 as compared to 2002 in connection with the Edison
disputes.





The
Partnership Guarantors' depreciation and amortization increased
$2.6 million to $25.7 million for the year ended December 31, 2003
from $23.1 million for the same period in 2002. The increase was due a
change in salvage value assumptions.





The
Partnership Guarantors' interest expense, net of capitalized amounts, decreased
$1.2 million to $8.2 million for the year ended December 31, 2003 from
$9.4 million for the same period in 2002. The decrease was due to reduced
indebtedness.





The 2003
asset impairment reflects the write-off of abandoned equipment.





In
accordance with the SFAS 142 the Partnership Guarantors completed their annual
goodwill impairment tests during the fourth quarter of 2003, primarily using a
discounted cash flow methodology as of October 31, 2003. As a result of these
tests the Partnership Guarantors recognized a goodwill impairment of
$21.2 million in the fourth quarter of 2003.





The
Partnership Guarantors' provision for income tax was $2.0 million for the
year ended December 31, 2003 as compared to $0.4 million for the same
period in 2002. 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 to the parent company by the Partnership Guarantors, which occur
after payment of operating expenses and debt service.





The
Partnership Guarantors’ loss from discontinued operations for the year ended
December 31, 2003 increased $8.0 million to $27.6 million from
$19.6 million for the same period in 2002. The increase related to
increased costs in 2003 due to the commencement of limited operations in
December 2002.





The
Royalty Guarantor's net income was $8.2 million for the years ended
December 31, 2003 and 2002.





The
Royalty Guarantor is a limited liability company. Income taxes are the
responsibility of the members and the Royalty Guarantor has no obligation to
provide funds to the members for payment of any tax liabilities. Accordingly,
the Royalty Guarantor has no tax obligations.





**Related
Party Transactions**





Commencing
March 27, 2001, Salton Sea Power and CE Turbo entered into a series of
transaction agreements to sell available power from the Salton Sea V Project and
CE Turbo Project to EPME based on percentages of the Dow Jones SP-15 Index. On
February 11, 2003, Salton Sea Power and CE Turbo ceased selling available power
to EPME. Pursuant to these transaction agreements, sales to EPME totaled
$1.2 million and $8.9 million in 2003 and 2002, respectively. As of
December 31, 2004 and 2003, there were no accounts receivable balances from
EPME.





17


Pursuant
to the TransAlta Transaction Agreement, Salton Sea Power and CE Turbo began
selling available power from the Salton Sea V Project and CE Turbo Project to
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 termination has been
given by either party. Pursuant to this agreement, sales to TransAlta totaled
$10.5 million and $9.9 million in 2004 and 2003, respectively. As of
December 31, 2004 and 2003, accounts receivable balances from TransAlta
were $1.3 million and $1.6 million, respectively.





On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale agreement to sell Green Tags 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 Marketing at a market price per
Green Tag. Pursuant to this agreement, sales to TransAlta Marketing commenced in
July 2004 and totaled $0.5 million in 2004. As of December 31, 2004,
there were no accounts receivable balances from TransAlta
Marketing.





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 EPME
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.





Pursuant
to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton
Sea Power and CE Turbo may provide CalEnergy Minerals with its full 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 $1.3 million, $0.9 million and $0.4 million for the years
ended December 31, 2004, 2003 and 2002, respectively, and there were no
sales to CalEnegy Minerals from CE Turbo for the years ended December 31,
2004, 2003 and 2002. On September 10, 2004, CalEnergy Minerals ceased
operations of the 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 December 31, 2004 and 2003 from CalEnergy
Minerals





On
December 31, 2004, in connection with the dismantling and decommissioning of the
Zinc Recovery Project, CalEnergy Minerals sold certain equipment to the Imperial
Valley Projects. The equipment was sold at a fair market value of approximately
$0.4 million, which was paid in January 2005.





On
October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285.0 million aggregate amount of the Series F Bonds. A
portion of the proceeds was advanced to CalEnergy Minerals, an indirect wholly
owned subsidiary of MEHC, to fund the cost of construction of the Zinc Recovery
Project. The direct and indirect owners of the Zinc Recovery Project (the "Zinc
Guarantors", which include CalEnergy Minerals and its sole member, Salton Sea
Minerals Corp.) are among the guarantors of Funding Corporation debt. In
connection with the divestiture of 50% of CE Generation, MEHC guaranteed the
payment by the Zinc Guarantors of a specified portion of the scheduled debt
service and certain payments on certain senior project notes issued by the
Partnership Guarantors securing the Series F Bonds.





On
March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of approximately $136.4 million of its Series F Bonds at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC, and MEHC performed under that demand, for the full amount
remaining on MEHC's guarantee of the Series F Bonds in order to fund the
redemption. Given the payment under MEHC's guarantee, MEHC no longer has any
liability with respect to its guarantee.





18


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. Equity contributions for the years ended December 31, 2004,
2003 and 2002 were $156.8 million $50.6 million and
$44.5 million, respectively, and are included in the accompanying combined
statements of cash flows as part of net financing activity cash flows from
discontinued operations. The 2004 equity contributions 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 $20.4 million funding of the Zinc
Recovery Project’s operating losses. Additionally, through September 10, 2004,
MEHC had funded $41.7 million of the Zinc Recovery Project’s operating
losses, which had been recorded as a due to affiliate on the Partnership
Guarantors’ combined balance sheet. Due to the cessation of the Zinc Recovery
Project’s operations, MEHC does not expect to recover these amounts. As such,
the $41.7 million due to affiliate has been reclassified as an equity
contribution and is included in total equity contributions of
$198.5 million for the year ended December 31, 2004.





**Liquidity
and Capital Resources**





The
Salton Sea Guarantors’ only source of revenue is payments received pursuant to
long-term power sales agreements with Edison, other than 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 projects, it could significantly impair the ability, of the
Guarantors, to fund operating and maintenance expenses, payments of interest and
principal on the Securities, projected capital expenditures and debt service
reserve fund requirements.





The
Salton Sea Guarantors generated cash flows from operations of $30.5 million
for the year ended December 31, 2004 compared with $11.4 million for
the same period in 2003. Cash flows increased in 2004 due to the impact of the
uncontrollable force events at the Salton Sea III and Salton Sea IV Projects in
2003.





The
Partnership Guarantors generated cash flows from continuing operations of
$37.9 million for the year ended December 31, 2004 compared with
$36.7 million for the same period in 2003. The Partnership Guarantors' cash
flows used in discontinued operations decreased to $35.0 million for the
year ended December 31, 2004 compared with $43.4 million for the same
period in 2003. The decrease in cash used in discontinued operations relates to
decreased operating expenditures in 2004.





The
Royalty Guarantors generated cash flows from operations of $8.8 million for
the year ended December 31, 2004 compared with $9.2 million for the
same period in 2003.





The
Salton Sea Guarantors cash flow used in investing was $4.5 million for the
year ended December 31, 2004 compared with $3.8 million for the same
period in 2003. Capital expenditures are the primary component of investing
activities.





The
Partnership Guarantors cash flows used in continuing investing activities was
$14.7 million for the year ended December 31, 2004 compared with
$17.7 million for the same period in 2003. The Partnership Guarantors' cash
flows used in discontinued investing activities decreased to $- for the year
ended December 31, 2004 compared with $7.0 million for the same period
in 2003. Capital expenditures are the primary component of investing
activities.





The
Salton Sea Guarantors cash flows used in financing was $26.0 million for
the year ended December 31, 2004 compared with $7.6 million for the
same period in 2003. Cash flows used in financing reflects scheduled debt
repayments and changes in amounts due to affiliates.





The
Partnership Guarantors cash flow used in continuing financing activities was
$23.3 million for the year ended December 31, 2004 compared with $19.1
million for the same period in 2003. Cash
flows used in financing activities from continuing operations reflect changes in
amounts due from affiliates and debt repayments. The Partnership Guarantors’
cash flow from discontinued financing activities was $35.0 million for the
year ended December 31, 2004 compared with $50.4 million for the same
period in 2003. Cash flows generated from financing activities from discontinued
operations 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 Guarantor generated cash flows used in financing was $8.8 million
for the year ended December 31, 2004 compared with $9.2 million for
the same period in 2003. Cash flows used in financing reflects scheduled debt
repayments and changes in amounts due from affiliates.





19


***Zinc
Recovery Project and Minerals Assets***





On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. Based on this decision, a non-cash, after-tax impairment
charge of $390.0 million and $91.4 million for the Partnership
Guarantors and Salton Sea Guarantors, respectively, has been recorded to
write-off the Mineral Assets. The charge and related activity of the Mineral
Assets are classified separately as discontinued operations in the respective
combined statements of operations for each of the Partnership Guarantors and
Salton Sea Guarantors.





In
connection with ceasing operations, CalEnergy Minerals has made cash
expenditures of approximately $4.1 million, consisting of pre-tax disposal
costs, termination benefit costs and property taxes. CalEnergy Minerals expects
to make additional cash expenditures of pre-tax disposal costs and property
taxes of approximately $1.6 million. Substantially all of such costs relate
to disposal activities, and the disposal costs are expected to be partially
offset by proceeds from sales of the Zinc Recovery Project’s assets. These costs
are recognized in the period in which the related liability is incurred. Salvage
proceeds will be recognized in the period earned. Implementation of a disposal
plan began in September 2004 and is continuing into 2005.





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, fixed price, date certain basis. Under the terms of the Equipment
Purchase Agreement the contractor has agreed to purchase certain Zinc Recovery
Project equipment for a guaranteed purchase price of approximately
$4.1 million, payable in scheduled installments, the payment of which is
secured by a $0.5 million letter of credit that has been issued for the
benefit of CalEnergy Minerals. 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 will retain 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.





***Stone
& Webster***





The
Salton Sea V Project was constructed by Stone & Webster, pursuant to the
Salton Sea V Project EPC Contract. On March 7, 2002, Salton Sea Power, the
owner of the Salton Sea V Project, filed a Demand for Arbitration against Stone
& Webster for breach of contract and breach of warranty arising from
deficiencies in Stone & Webster’s design, engineering, construction and
procurement of equipment for the Salton Sea V Project pursuant to the Salton Sea
V Project EPC Contract. The demand for arbitration did not include a stated
claim amount. On April 25, 2003, Salton Sea Power entered into a settlement
agreement with Stone & Webster. The Settlement Agreement resulted in a total
payment of $12.1 million from Stone & Webster in the second quarter of
2003 and the arbitration was dismissed. The settlement was recorded as a
$4.5 million reduction of incremental capital expenditures and a
$7.6 million reduction of incremental operating expenses related to legal,
other expenses and equipment write-offs.





The CE
Turbo Project was constructed by Stone & Webster, pursuant to the CE Turbo
Project EPC Contract. On March 7, 2002, Vulcan, Del Ranch, and CE Turbo,
the owners of the CE Turbo Project, filed a Demand for Arbitration against Stone
& Webster for breach of contract and breach of warranty arising from
deficiencies in Stone & Webster’s design, engineering, construction and
procurement of equipment for the CE Turbo Project pursuant to the CE Turbo
Project’s EPC Contract. On November 25, 2002, Vulcan, Del Ranch, and CE
Turbo entered into a settlement agreement with Stone & Webster. The
settlement agreement resulted in a $3.5 million payment from Stone &
Webster which was recorded as a reduction of incremental capital
expenditures.





20


**Contractual
Obligations and Commercial Commitments**





The
Funding Corporation has contractual obligations and commercial commitments that
may affect its financial condition. Contractual obligations to make future
payments arise primarily from long-term debt. Contractual obligations that could
make future payments arise primarily from lines of credit and standby letters of
credit. The following tables identify material obligations and commitments as of
December 31, 2004 (in thousands):





**Payments
      Due by Period****<1**
    
    **2-3**
    
    **4-5**
    
    **>5****Total**
    
    **Year**
    
    **Years**
    
    **Years**
    
    **Years**Contractual
      cash obligations-Long-term
      debt
    
    $
    298,377
    
    $
    28,620
    
    $
    51,008
    
    $
    54,275
    
    $
    164,474Interest
      expense
    
    
    145,059
    
    
    22,037
    
    
    38,598
    
    
    30,339
    
    
    54,085Total
      contractual cash obligations
    
    $
    443,436
    
    $
    50,657
    
    $
    89,606
    
    $
    84,614
    
    $
    218,559





**Off
Balance Sheet Arrangements**





The
Guarantors do not have any obligations which meet the definition of an
off-balance sheet arrangement and which have or are reasonably likely to have a
material effect on the financial statements.





**New
Accounting Pronouncements**





In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest,
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
In December 2003, the FASB issued FASB Interpretation No. 46R ("FIN 46R") which
served to clarify guidance in FIN 46. During the fourth quarter of 2003, the
Guarantors adopted the provisions of FIN 46R with respect to special purpose
entities. The adoption did not have a significant impact on the Guarantors'
financial position, results of operations or cash flows. The Guarantors adopted
the provisions of FIN 46R related to non-special purpose entities in the first
quarter of 2004. The Guarantors have considered the provisions of FIN 46R for
all subsidiaries and their related power purchase or power sale agreements.
Factors considered in the analysis include the duration of the agreements, how
capacity and energy payments are determined, as well as responsibility and
payment for operating and maintenance expenses. As a result of these
considerations, the Guarantors have determined their power purchase and power
sale agreements do not represent significant variable interest. Accordingly, the
Guarantors have concluded that it is appropriate to continue to consolidate its
power plant projects.





**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 balance
sheets at their undiscounted amounts. As of December 31, 2004 and December 31,
2003, the Guarantors environmental liabilities recorded on the balance sheet
were not material.





21


**Critical
Accounting Policies**





The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles 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
the financial statements for the year ended December 31, 2004 included in
this annual report describe 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, income taxes and contingent liabilities. Actual results
could differ from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and estimates used by
management in the preparation of the financial statements.





Allowance
for Doubtful Accounts





The
allowance for doubtful accounts is based on the Guarantors’ assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than the Guarantors’ historical experience,
estimates of the recoverability of amounts due could be adversely
affected.





Impairment
of Long-Lived Assets





The
Guarantors’ long-lived assets consist primarily of properties, plants, contracts
and equipment. Depreciation is computed using the straight-line method based on
economic lives. The Guarantors believe the useful lives assigned to the
depreciable assets, which generally range from 3 to 30 years, are
reasonable.





The
Guarantors periodically evaluate long-lived assets, including properties,
plants, contracts and equipment, when events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. Upon
the occurrence of a triggering event, the carrying amount of a long-lived asset
is reviewed to assess whether the recoverable amount has declined below its
carrying amount. The recoverable amount is the estimated net future cash flows
that the Guarantors expect to recover from the future use of the asset,
undiscounted and without interest, including the asset’s residual value on
disposal. Where the recoverable amount of the long-lived asset is less than the
carrying value, an impairment loss would be recognized to write down the asset
to its fair value that is based on discounted estimated cash flows from the
future use of the asset including the asset’s residual value on
disposal.





The
estimate of cash flows arising from future use of the asset that are used in the
impairment analysis requires judgment regarding what the Guarantors would expect
to recover from future use of the asset. Any changes in the estimates of cash
flows arising from future use of the asset or the residual value of the asset on
disposal based on changes in the market conditions, changes in the use of the
asset, management’s plans, the determination of the useful life of the asset and
technology changes in the industry could significantly change the calculation of
the fair value or recoverable amount of the asset and the resulting impairment
loss, which could significantly affect the results of operations. The
determination of whether impairment has occurred is based on an estimate of
undiscounted cash flows attributable to the assets, as compared to the carrying
value of the assets. An impairment analysis of generating facilities requires
estimates of possible future market prices, load growth, competition and many
other factors over the lives of the facilities. A resulting impairment loss is
highly dependent on these underlying assumptions.





The
provisions of Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which establishes the accounting for
acquired goodwill and other intangible assets and provides that goodwill and
indefinite-lived intangible assets will not be amortized, requires allocating
goodwill to each reporting unit and testing for impairment using a two-step
approach. The goodwill impairment test is performed annually or whenever an
event has occurred that would more than likely not reduce the fair value of the
reporting unit below its carrying amount. The Guarantors completed their annual
reviews as of October 31, 2004, primarily using a discounted cash flow
methodology. Refer to Note 2 of Notes to Combined Financial Statements for both
Salton Sea Guarantors and Partnership Guarantors included in "Item 8. Financial
Statements and Supplementary Data" for further discussion regarding the results
of the annual impairment tests.








22


Income
Taxes





The
Guarantors are included in the consolidated income tax returns with their parent
and affiliates; however, income taxes are provided on a separate return basis
for the Partnership Guarantors. Tax obligations of the Partnership Guarantors
will be remitted to the parent only to the extent of cash flows available after
operating expenses and debt service. Deferred
tax assets and liabilities are recognized based on the difference between the
financial statement and tax bases of assets and liabilities using estimated tax
rates in effect for the year in which the differences are expected to reverse.
The calculation of current and deferred income taxes requires management to
apply judgment related to the application of complex tax laws or related
interpretations and uncertainties related to the outcomes of tax audits. Changes
in such factors may result in changes to management’s estimates which could
require the Partnership Guarantors to adjust its currently recorded tax assets
and liabilities and record additional income tax expense or
benefits.





Contingent
Liabilities





The
Guarantors establish reserves for estimated loss contingencies, such as
environmental, legal and income taxes, when it is management’s assessment that a
loss is probable and the amount of the loss can be reasonably estimated.
Revisions to contingent liabilities are reflected in operations in the period in
which different facts or information become known or circumstances change that
affect the previous assumptions with respect to the likelihood or amount of
loss. Reserves for contingent liabilities are based upon management’s
assumptions and estimates, and advice of legal counsel or other third parties
regarding the probable outcomes of any matters. Should the outcomes differ from
the assumptions and estimates, revisions to the estimated reserves for
contingent liabilities would be required.




**Item
7A.** **Quantitative and Qualitative Disclosures About Market
Risk.**





**Interest
Rate Risk**





At
December 31, 2004 and 2003, the Funding Corporation had fixed-rate
long-term debt of $298.4 million and $463.6 million, respectively, in
principal amount and having a fair value of $332.8 million and
$483.3 million, respectively. These instruments are fixed-rate and
therefore do not expose the Funding Corporation to the risk of earnings loss due
to changes in market interest rates. However, the fair value of these
instruments would decrease by approximately $7.6 million and
$23.3 million if interest rates were to increase by 10% from their levels
at December 31, 2004 and 2003, respectively. In general, such a decrease in fair
value would impact earnings and cash flows only if the Funding Corporation were
to reacquire all or a portion of these instruments prior to their
maturity.








23


**Item
8.** **Financial
Statements and Supplementary Data.**








**SALTON
      SEA FUNDING CORPORATION**Report
      of Independent Registered Public Accounting Firm
    25Balance
      Sheets
    26Statements
      of Operations
    27Statements
      of Stockholder's Equity
    28Statements
      of Cash Flows
    29Notes
      to Financial Statements
    30**SALTON
      SEA GUARANTORS**Report
      of Independent Registered Public Accounting Firm
    35Combined
      Balance Sheets
    36Combined
      Statements of Operations
    37Combined
      Statements of Guarantors' Equity
    38Combined
      Statements of Cash Flows
    39Notes
      to Combined Financial Statements
    40**PARTNERSHIP
      GUARANTORS**Report
      of Independent Registered Public Accounting Firm
    47Combined
      Balance Sheets
    48Combined
      Statements of Operations
    49Combined
      Statements of Guarantors' Equity
    50Combined
      Statements of Cash Flows
    51Notes
      to Combined Financial Statements
    52**SALTON
      SEA ROYALTY LLC**Report
      of Independent Registered Public Accounting Firm
    65Balance
      Sheets
    66Statements
      of Operations
    67Statements
      of Members' Equity
    68Statements
      of Cash Flows
    69Notes
      to Financial Statements
    70











24





**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To the
Board of Directors and Stockholder


Salton
Sea Funding Corporation


Omaha,
Nebraska





We have
audited the accompanying balance sheets of Salton Sea Funding Corporation ("the
Company") as of December 31, 2004 and 2003, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 2004. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, such financial statements present fairly, in all material respects, the
financial position of Salton Sea Corporation as of December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.





As
discussed in Note 2 to the financial statements, the equity method investees of
the Company changed their accounting policy for goodwill and other intangible
assets in 2002.





/s/
Deloitte & Touche LLP





Omaha,
Nebraska


February
25, 2005











25


**SALTON
SEA FUNDING CORPORATION**


**BALANCE
SHEETS**


(Amounts
in thousands, except share data)





**As
      of December 31,****2004**
    
    **2003****ASSETS**Current
      assets:Cash
    
    $
    19,524
    
    $
    14,341Accrued
      interest receivable and other current assets
    
    
    1,927
    
    
    2,950Current
      portion secured project notes from Guarantors
    
    
    28,620
    
    
    165,215Total
      current assets
    
    
    50,071
    
    
    182,506Secured
      project notes from Guarantors
    
    
    269,757
    
    
    298,377Investment
      in 1% of net assets of Guarantors
    
    
    6,675
    
    
    9,532**Total
      assets**
    
    $
    326,503
    
    $
    490,415**LIABILITIES
      AND STOCKHOLDER’S EQUITY**Current
      liabilities:Accrued
      interest
    
    $
    1,914
    
    $
    2,945Current
      portion of long-term debt
    
    
    28,620
    
    
    165,215Total
      current liabilities
    
    
    30,534
    
    
    168,160Due
      to affiliates
    
    
    15,073
    
    
    10,225Senior
      secured notes and bonds
    
    
    269,757
    
    
    298,377Total
      liabilities
    
    
    315,364
    
    
    476,762Commitments
      and contingencies (Note 5)Stockholder’s
      equity:Common
      stock authorized - 1,000 shares, par value $.01 per share; issued and
      outstanding 100 shares
    
    
    -
    
    
    -Additional
      paid-in capital
    
    
    8,302
    
    
    6,317Retained
      earnings
    
    
    2,837
    
    
    7,336Total
      stockholder’s equity
    
    
    11,139
    
    
    13,653**Total
      liabilities and stockholder’s equity**
    
    $
    326,503
    
    $
    490,415





The
accompanying notes are an integral part of these financial
statements.





26


**SALTON
SEA FUNDING CORPORATION**


**STATEMENTS
OF OPERATIONS**


(Amounts
in thousands)








**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue:**Interest
      income
    
    $
    26,495
    
    $
    37,281
    
    $
    39,938Equity
      in loss of Guarantors
    
    
    (4,842
    )
    
    (695
    )
    
    (183
    )Total
      revenue
    
    
    21,653
    
    
    36,586
    
    
    39,755**Costs
      and expenses:**General
      and administrative expenses
    
    
    324
    
    
    283
    
    
    720Interest
      expense
    
    
    26,119
    
    
    36,763
    
    
    38,891Total
      costs and expenses
    
    
    26,443
    
    
    37,046
    
    
    39,611**Income
      (loss) before income taxes**
    
    
    (4,790
    )
    
    (460
    )
    
    144Provision
      (benefit) for income taxes
    
    
    (291
    )
    
    (189
    )
    
    59**Income
      (loss) before cumulative effect of change in accounting
      principle**
    
    
    (4,499
    )
    
    (271
    )
    
    85Cumulative
      effect of change in accounting principle, net of tax (Note
    2)
    
    
    -
    
    
    -
    
    
    (210
    )**Net
      loss**
    
    $
    (4,499
    )
    $
    (271
    )
    $
    (125
    )





The
accompanying notes are an integral part of these financial
statements.








27


**SALTON
SEA FUNDING CORPORATION**


**STATEMENTS
OF STOCKHOLDER'S EQUITY**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**


(Amounts
in thousands, except share amounts)








**Additional****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **Earnings**
    
    **Equity****Balance,
      January 1, 2002**
    
    
    100
    
    $
    -
    
    $
    5,366
    
    $
    7,732
    
    $
    13,098Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (125
    )
    
    (125
    )Adjustments
      resulting from capital transactions of Guarantors
    
    
    -
    
    
    -
    
    
    445
    
    
    -
    
    
    445**Balance,
      December 31, 2002**
    
    
    100
    
    $
    -
    
    $
    5,811
    
    $
    7,607
    
    $
    13,418Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (271
    )
    
    (271
    )Adjustments
      resulting from capital transactions of Guarantors
    
    
    -
    
    
    -
    
    
    506
    
    
    -
    
    
    506**Balance,
      December 31, 2003**
    
    
    100
    
    $
    -
    
    $
    6,317
    
    $
    7,336
    
    $
    13,653Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (4,499
    )
    
    (4,499
    )Adjustments
      resulting from capital transactions of Guarantors
    
    
    -
    
    
    -
    
    
    1,985
    
    
    -
    
    
    1,985**Balance,
      December 31, 2004**
    
    
    100
    
    $
    -
    
    $
    8,302
    
    $
    2,837
    
    $
    11,139





The
accompanying notes are an integral part of these financial
statements.





28


**SALTON
SEA FUNDING CORPORATION**


**STATEMENTS
OF CASH FLOWS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      flows from operating activities:**Net
      loss
    
    $
    (4,499
    )
    $
    (271
    )
    $
    (125
    )Adjustments
      to reconcile net loss to net cash flows from operating
      activities:Equity
      in loss of Guarantors
    
    
    4,842
    
    
    695
    
    
    393Changes
      in assets and liabilities:Accrued
      interest receivable and other current assets
    
    
    1,023
    
    
    278
    
    
    123Accrued
      interest payable
    
    
    (1,031
    )
    
    (211
    )
    
    (177
    )Net
      cash flows from operating activities
    
    
    335
    
    
    491
    
    
    214**Cash
      flows from investing activities:**Principal
      repayments of secured project notes from Guarantors
    
    
    165,215
    
    
    28,086
    
    
    28,572**Cash
      flows from financing activities:**Repayment
      of senior secured notes and bonds
    
    
    (165,215
    )
    
    (28,086
    )
    
    (28,572
    )Decrease
      (increase) in restricted cash
    
    
    -
    
    
    46,293
    
    
    (43,344
    )Due
      to affiliates, net
    
    
    4,848
    
    
    (52,026
    )
    
    58,352Net
      cash flows from financing activities
    
    
    (160,367
    )
    
    (33,819
    )
    
    (13,564
    )**Net
      change in cash**
    
    
    5,183
    
    
    (5,242
    )
    
    15,222**Cash
      at the beginning of year**
    
    
    14,341
    
    
    19,583
    
    
    4,361**Cash
      at the end of year**
    
    $
    19,524
    
    $
    14,341
    
    $
    19,583**Supplemental
      disclosure:**Interest
      paid
    
    $
    27,178
    
    $
    36,941
    
    $
    39,058Income
      taxes paid (received)
    
    $
    (291
    )
    $
    (189
    )
    $
    36





The
accompanying notes are an integral part of these financial
statements.








29


**SALTON
SEA FUNDING CORPORATION**


**NOTES
TO FINANCIAL STATEMENTS**





**1.** **Organization
and Operations**





Salton
Sea Funding Corporation ("Funding Corporation"), which was formed on June 20,
1995, is a special purpose Delaware corporation and was organized for the sole
purpose of acting as issuer of senior secured notes and bonds. On July 21,
1995, June 20, 1996 and October 31, 1998, Funding Corporation issued
$475.0 million, $135.0 million and $285.0 million, respectively,
of Senior Secured Notes and Bonds (collectively, the "Securities").





Funding
Corporation is a wholly-owned subsidiary of Magma Power Company ("Magma"), which
in turn was wholly-owned by MidAmerican Energy Holdings Company ("MEHC"). On
February 8, 1999, MEHC created a new subsidiary, CE Generation, LLC ("CE
Generation") and subsequently transferred its interest in Magma and its power
generation assets located in the Imperial Valley of California to CE Generation
with certain assets being retained by MEHC. On March 3, 1999, MEHC closed the
sale of 50% of its ownership interests in CE Generation to El Paso CE Generation
Holding Company ("El Paso"). On January 29, 2003, El Paso sold all its interest
in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.





The
Securities are payable from the proceeds of payments made of principal and
interest on the secured project notes from the Guarantors to Funding Corporation
(the "Senior Project Notes"). The Securities are also guaranteed on a joint and
several basis by the Salton Sea Guarantors, the Partnership Guarantors and the
Royalty Guarantor (collectively, the "Guarantors"), each of which is an
affiliate of Magma and Funding Corporation.





The
Salton Sea Guarantors (not a legal entity) consist 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"), together own
100% interest in five operating geothermal electric power generating plants
located 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 and CE Salton Sea Inc. (collectively, the "Salton Sea
Guarantors").





The
Partnership Guarantors (not a legal entity) consist of the Vulcan/BN Geothermal
Power Company ("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"),
Del Ranch, L.P. ("Del Ranch") and 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 CE Turbo Project (collectively, the "Partnership Projects"),
CalEnergy Minerals LLC ("CalEnergy Minerals"), which installed facilities near
the Partnership Projects that were intended to recover zinc from the geothermal
brine through an ion exchange, solvent extraction, electrowinning and casting
process (the "Zinc Recovery Project"); CalEnergy Operating Corporation ("CEOC")
and Vulcan Power Company ("VPC"), both 99% owned by Magma and 1% owned by
Funding Corporation, San Felipe Energy Company ("San Felipe"), Conejo Energy
Company ("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC
("VPCG"), Salton Sea Minerals Corp. and CE Salton Sea Inc (collectively, the
"Partnership Guarantors"). VPC and VPCG, collectively own 100% of the
partnership interests in Vulcan. CEOC, Niguel, San Felipe and Conejo
collectively own 90% of the partnership interests in each of Elmore, Leathers
and Del Ranch, respectively. Salton Sea Minerals Corp. owns CalEnergy Minerals.
Salton Sea Minerals Corp. is an indirect wholly-owned subsidiary of MEHC. CE
Salton Sea Inc. owns CE Turbo.





Salton
Sea Royalty LLC (the "Royalty Company") is the Royalty Guarantor. The Royalty
Company received an assignment of certain fees and royalties paid by the Elmore,
Leathers and Del Ranch Projects.





The
guarantees of the Partnership Guarantors and the Royalty Guarantor are limited
to available cash flow. The Funding Corporation does not conduct any operations
apart from issuing the Senior Project Notes.


****


**2.** **Summary
of Significant Accounting Policies**





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.





30


Investment
in Guarantors





Since
Funding Corporation has the ability to assert significant influence over the
operations of the Guarantors, it accounts for its one percent investment in the
Guarantors using the equity method of accounting.





Goodwill





The
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which establishes the accounting for
acquired goodwill and other intangible assets, and provides that goodwill and
indefinite-lived intangible assets will not be amortized, requires allocating
goodwill to each reporting unit and testing for impairment using a two-step
approach. The goodwill impairment test is performed annually or whenever an
event has occurred that would more likely than not reduce the fair value of the
reporting unit below its carrying amount.





In
accordance with SFAS 142, the Guarantors determined their reporting units and
completed their transitional impairment testing of goodwill in the second
quarter of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill impairment
at the Salton Sea Guarantors and the Partnership Guarantors.





During
the fourth quarter of 2002, the Salton Sea Guarantors and the Partnership
Guarantors completed their annual assessment of the implied fair value of
goodwill. As a result, an impairment of goodwill was recognized as a cumulative
effect of change in accounting principle of $21.0 million at the Salton Sea
Guarantors as of January 1, 2002. However, as a result of this test, no goodwill
impairment was recognized at the Partnership Guarantors as of January 1, 2002.
Funding Corporation recorded its share of the Guarantors’ cumulative effect of
this change of $0.2 million as of January 1, 2002. Additionally, the
Guarantors completed their 2002 annual reviews as of October 31, 2002. No
impairments were indicated as a result of these assessments.





Following
is a reconciliation of net loss as originally reported for the years ended
December 31, 2004, 2003 and 2002 to adjusted net income (loss) assuming SFAS 142
was in effect for all periods (in thousands):





**2004**
    
    **2003**
    
    **2002**Reported
      net loss
    
    $
    (4,499
    )
    $
    (271
    )
    $
    (125
    )Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    210Adjusted
      net income (loss)
    
    $
    (4,499
    )
    $
    (271
    )
    $
    85


The
Guarantors completed their 2003 annual review as of October 31, 2003, primarily
using a discounted cash flow methodology. Due to changes in our zinc price and
capital expenditure forecasts, the cash flow forecasts were revised. As a result
of these revisions and the changes in the fair value of debt, the tests
indicated goodwill impairment at the Salton Sea and Partnership Guarantors.
Therefore, the Salton Sea Guarantors and the Partnership Guarantors completed
their assessments of the implied fair value of goodwill and as a result
recognized goodwill impairment as of October 31, 2003 of $23.3 million and
$21.2 million, respectively. Funding Corporation’s share of this impairment
is approximately $0.5 million.





The
Partnership Guarantors completed their 2004 annual review as of October 31,
2004, primarily using a discounted cash flow methodology. No impairments were
indicated as a result of the assessments.





Fair
Value of Financial Instruments





The fair
value of a financial instrument is the amount in which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that Funding
Corporation could realize in a current transaction.





31


The
methods and assumptions used to estimate fair value are as follows:





Debt-instruments
- The fair value of all debt instruments has been estimated based upon quoted
market prices as supplied by third-party broker dealers.





Income
Taxes





Funding
Corporation is included in the consolidated income tax returns with its parent
and affiliates. Income taxes are provided on a separate return basis; however,
tax obligations of Funding Corporation will be remitted to the parent only to
the extent of cash flows available after operating expenses and debt
service.





The
Salton Sea Guarantors and the Royalty Guarantor are each comprised of
partnerships or limited liability companies. Income taxes are the responsibility
of the individual partners or members. Accordingly, Funding Corporation’s
provision (benefit) for income taxes includes Funding Corporation’s income taxes
on its 1% equity interest in the Salton Sea and the Royalty Guarantors. The
Partnership Guarantors are included in the consolidated income tax returns with
their parent and affiliates and computes its income tax expense on a stand-alone
basis. Accordingly, no additional income tax benefit is recorded at Funding
Corporation on the 1% equity interest in the Partnership Guarantor’s net
losses.


**3.** **Mineral
Reserves and Zinc Recovery Project**





The
Guarantors' long-lived assets include rights to commercial quantities of
extractable minerals from elements in solution in the geothermal brine and
fluids utilized at the Imperial Valley Projects ("Mineral Reserves") and the
Zinc Recovery Project.





The Zinc
Recovery Project began limited production during December 2002 and continued
limited production until September 10, 2004. Efforts to increase production had
continued since the Zinc Recovery Project was placed in service with an emphasis
on process modification. Management had been assessing the long-term economic
viability of the Zinc Recovery Project in light of continuing cash flow and
operating losses and the efforts to increase production, and had continued to
evaluate the expected impact of the planned improvements to the extraction
process during the third quarter of 2004. Furthermore, management had been
exploring other operating alternatives, such as establishing strategic
partnerships and consideration of ceasing operations of 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, after-tax impairment
charge of $390.0 million and $91.4 million for the Partnership
Guarantors and the Salton Sea Guarantors, respectively, has been recorded to
write-off the Zinc Recovery Project, Mineral Reserves, and allocated goodwill
(collectively, the "Mineral Assets"). Funding Corporation’s net loss includes a
$4.4 million long-lived asset charge which represents 1% equity interest in the
non-cash impairment charge.





In
connection with ceasing operations, CalEnergy Minerals has made cash
expenditures of approximately $4.1 million, consisting of pre-tax disposal
costs, termination benefit costs and property taxes. CalEnergy Minerals expects
to make additional cash expenditures consisting of pre-tax disposal costs and
property taxes of approximately $1.6 million. Substantially all of such
costs relate to disposal activities, and the disposal costs are expected to be
partially offset by proceeds from sales of the Zinc Recovery Project’s assets.
These costs are recognized in the period in which the related liability is
incurred. Salvage proceeds will be recognized in the period earned.
Implementation of a disposal plan began in September 2004 and is continuing in
2005.





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, fixed price, date certain basis. Under the terms of the Equipment
Purchase Agreement the contractor has agreed to purchase certain Zinc Recovery
Project equipment for a guaranteed purchase price of approximately
$4.1 million, payable in scheduled installments, the payment of which is
secured by a $0.5 million letter of credit that has been issued for the
benefit of CalEnergy Minerals. 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 will retain 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.





32


**4.** **Senior
Secured Notes and Bonds**





Funding
Corporation’s Securities are as follows (in thousands):





**Final**
    
    
    
    **December
      31,****Date
      issued**
    
    **Securities**
    
    **Maturity
      Date**
    
    **Rate**
    
    **2004**
    
    **2003**July
      21, 1995
    
    
    B
      Bonds
    
    
    May
      30, 2005
    
    
    7.370%
    
    $
    21,504
    
    $
    41,662July
      21, 1995
    
    
    C
      Bonds
    
    
    May
      30, 2010
    
    
    7.840%
    
    
    98,396
    
    
    102,014June
      20, 1996
    
    
    E
      Bonds
    
    
    May
      30, 2011
    
    
    8.300%
    
    
    40,072
    
    
    43,322October
      13, 1998
    
    
    F
      Bonds
    
    
    November
      30, 2018
    
    
    7.475%
    
    
    138,405
    
    
    276,594$
    298,377
    
    $
    463,592





Principal
and interest payments are made in semi-annual installments. Principal maturities
of the Securities are expected to be as follows (in thousands):





**Amount**2005
    
    $
    28,6202006
    
    
    25,9172007
    
    
    25,0912008
    
    
    28,0652009
    
    
    26,209Thereafter
    
    
    164,475Total
    
    $
    298,377





On
October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285.0 million aggregate amount of 7.475% Senior Secured
Series F Bonds due November 30, 2018 ("Series F Bonds"). A portion of the
proceeds was advanced to CalEnergy Minerals, an indirect wholly owned subsidiary
of MEHC, to fund the cost of construction of the Zinc Recovery Project. The
direct and indirect owners of the Zinc Recovery Project (the "Zinc Guarantors",
which include CalEnergy Minerals and its sole member, Salton Sea Minerals Corp.)
are among the guarantors of Funding Corporation debt. In connection with the
divestiture of 50% of CE Generation, MEHC guaranteed the payment by the Zinc
Guarantors of a specified portion of the scheduled debt service of and certain
payments of the senior project notes issued by the Partnership Guarantors
securing the Series F Bonds.





On
March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of $136.4 million of the Series F Bonds, pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC, and MEHC performed under that demand, for the full amount
remaining on MEHC's guarantee of the Series F Bonds in order to fund the
redemption. Given the payment under MEHC's guarantee, MEHC no longer has any
liability with respect to its guarantee.





In May
2003, the previous $65.4 million debt service reserve letter of credit
issued by a financial institution for the account of Funding Corporation, which
was due to expire, was replaced by letters of credit issued by a financial
institution for the account of TransAlta and by a financial institution for the
account of MEHC. Each letter of credit is currently issued in the amount of
$25.3 million. Due to the pending expiration of the previous debt service
reserve letter of credit, certain cash balances became restricted in a debt
service reserve account maintained on behalf of Funding Corporation. Upon the
issuance of the new letters of credit, such cash was released from the debt
service reserve account and distributed to CE Generation on May 29, 2003. During
2003, Funding Corporation distributed $69.8 million to CE
Generation.





The
estimated fair values of the Securities at December 31, 2004 and 2003 were
$332.8 million and $483.3 million, respectively.








33
 
 **5.** **Commitments
and Contingencies**





On
July 10, 2003, the Salton Sea IV Project’s 40 MW 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. Southern California Edison Company ("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.





On
October 9, 2003, the Salton Sea III Project’s 50 MW turbine went out of
service due to an uncontrollable force event. Such uncontrollable force event
ended, and the Salton Sea III Project’s turbine returned to service, on
December 12, 2003. Edison failed to recognize the uncontrollable force
event and, as such, has not paid amounts otherwise due and owing under the
Salton Sea III power purchase agreement totaling approximately
$0.8 million. SSPG, owner of the Salton Sea III Project, served notice of
error on Edison for such unpaid amounts. As a result, the Salton Sea Guarantors
had established an allowance for doubtful accounts for the full amount of this
receivable. Pursuant to a letter agreement dated December 2, 2004, Edison
made a settlement payment of $0.6 million on December 13, 2004.
Consequently, in December 2004, the allowance was released and the remaining
receivable of $0.2 million was written off.





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.










34


**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To the
Board of Directors and Stockholder


Magma
Power Company


Omaha,
Nebraska





We have
audited the accompanying combined balance sheets of the Salton Sea Guarantors as
of December 31, 2004 and 2003, and the related combined statements of
operations, Guarantors' equity and cash flows for each of the three years in the
period ended December 31, 2004. The combined financial statements include
the accounts of the companies discussed in Note 1, which are under common
ownership and management. Our audits also included the combined financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Salton Sea
Guarantors' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Salton Sea Guarantor’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, such combined financial statements present fairly, in all material
respects, the combined financial position of the Salton Sea Guarantors as of
December 31, 2004 and 2003 and the combined results of their operations and
their combined cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles general accepted
in the United States of America. Also in our opinion, such combined financial
statement schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.





As
discussed in Note 2 to the combined financial statements, the Salton Sea
Guarantors changed their accounting policy for goodwill and other intangible
assets in 2002.





/s/
Deloitte and Touche LLP





Omaha,
Nebraska


February
25, 2005











35


**SALTON
SEA GUARANTORS**


**COMBINED
BALANCE SHEETS**


(Amounts
in thousands)





**As
      of December 31,****2004**
    
    **2003**Current
      assets:Trade
      accounts receivable, net of allowance of $- and $5,477,
      respectively
    
    $
    14,872
    
    $
    14,070Trade
      accounts receivable from affiliates
    
    
    932
    
    
    1,131Prepaid
      expenses and other current assets
    
    
    4,032
    
    
    4,255Total
      current assets
    
    
    19,836
    
    
    19,456Properties,
      plants and equipment, net
    
    
    372,986
    
    
    484,454Intangible
      assets, net
    
    
    22,379
    
    
    23,529**Total
      assets**
    
    $
    415,201
    
    $
    527,439Current
      liabilities:Accounts
      payable
    
    $
    256
    
    $
    146Accrued
      interest
    
    
    1,269
    
    
    1,421Other
      accrued liabilities
    
    
    4,282
    
    
    6,566Current
      portion of long-term debt
    
    
    23,918
    
    
    24,409Total
      current liabilities
    
    
    29,725
    
    
    32,542Due
      to affiliates
    
    
    44,085
    
    
    45,652Senior
      secured project notes
    
    
    175,320
    
    
    199,238Total
      liabilities
    
    
    249,130
    
    
    277,432Commitments
      and contingencies (Note 7)Guarantors’
      equity
    
    
    166,071
    
    
    250,007**Total
      liabilities and guarantors’ equity**
    
    $
    415,201
    
    $
    527,439





The
accompanying notes are an integral part of these financial
statements.





36


**SALTON
SEA GUARANTORS**


**COMBINED
STATEMENTS OF OPERATIONS**


**** (Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue:**Operating
      revenue
    
    $
    104,953
    
    $
    83,786
    
    $
    84,176Interest
      and other income (loss)
    
    
    130
    
    
    (358
    )
    
    3,717Total
      revenue
    
    
    105,083
    
    
    83,428
    
    
    87,893**Costs
      and expenses:**Royalty,
      operating, general and administrative expense
    
    
    54,933
    
    
    53,480
    
    
    59,234Depreciation
      and amortization
    
    
    24,649
    
    
    25,474
    
    
    21,195Interest
      expense
    
    
    16,977
    
    
    18,810
    
    
    20,421Goodwill
      impairment
    
    
    -
    
    
    23,252
    
    
    -Asset
      impairment
    
    
    826
    
    
    329
    
    
    -Total
      costs and expenses
    
    
    97,385
    
    
    121,345
    
    
    100,850**Income
      (loss) from continuing operations before cumulative effect of change in
      accounting principle**
    
    
    7,698
    
    
    (37,917
    )
    
    (12,957
    )Cumulative
      effect of change in accounting principle (Note 2)
    
    
    -
    
    
    -
    
    
    (21,018
    )**Income
      (loss) from continuing operations**
    
    
    7,698
    
    
    (37,917
    )
    
    (33,975
    )Loss
      from discontinued operations (Note 3)
    
    
    (91,634
    )
    
    (46
    )
    
    -**Net
      loss**
    
    $
    (83,936
    )
    $
    (37,963
    )
    $
    (33,975
    )





The
accompanying notes are an integral part of these financial
statements.








37


**SALTON
SEA GUARANTORS**


**COMBINED
STATEMENTS OF GUARANTORS' EQUITY**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**


(Amounts
in thousands)





**Amount****Balance,
      January 1, 2002**
    
    $
    321,945Net
      loss
    
    
    (33,975
    )**Balance,
      December 31, 2002**
    
    $
    287,970Net
      loss
    
    
    (37,963
    )**Balance,
      December 31, 2003**
    
    $
    250,007Net
      loss
    
    
    (83,936
    )**Balance,
      December 31, 2004**
    
    $
    166,071





The
accompanying notes are an integral part of these financial
statements.








38


**SALTON
SEA GUARANTORS**


**COMBINED
STATEMENTS OF CASH FLOWS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      flows from operating activities:**Income
      (loss) from continuing operations
    
    $
    7,698
    
    $
    (37,917
    )
    $
    (33,975
    )Adjustments
      to reconcile income (loss) from continuing operations to net cash flows
      from continuing operations:Depreciation
      and amortization
    
    
    24,649
    
    
    25,474
    
    
    21,195Goodwill
      impairment
    
    
    -
    
    
    23,252
    
    
    -Asset
      impairment
    
    
    826
    
    
    329
    
    
    -Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    21,018Changes
      in assets and liabilities:Trade
      accounts receivable, net
    
    
    (603
    )
    
    5,323
    
    
    16,123Prepaid
      expenses and other current assets
    
    
    223
    
    
    1,028
    
    
    31Accounts
      payable and accrued liabilities
    
    
    (2,326
    )
    
    (6,092
    )
    
    228Net
      cash flows from continuing operating activities
    
    
    30,467
    
    
    11,397
    
    
    24,620**Cash
      flows from investing activities:**Capital
      expenditures, net of warranty settlement
    
    
    (4,491
    )
    
    (3,816
    )
    
    (12,696
    )**Cash
      flows from financing activities:**Repayments
      of senior secured project notes
    
    
    (24,409
    )
    
    (22,772
    )
    
    (20,480
    )Increase
      (decrease) in due to affiliates
    
    
    (1,567
    )
    
    15,191
    
    
    8,556Net
      cash flows from financing activities
    
    
    (25,976
    )
    
    (7,581
    )
    
    (11,924
    )**Net
      change in cash**
    
    
    -
    
    
    -
    
    
    -**Cash
      at beginning of year**
    
    
    -
    
    
    -
    
    
    -**Cash
      at end of year**
    
    $
    -
    
    $
    -
    
    $
    -**Supplemental
      disclosure:**Cash
      paid for interest
    
    $
    16,593
    
    $
    18,332
    
    $
    19,893





The
accompanying notes are an integral part of these financial
statements.








39


**SALTON
SEA GUARANTORS**


**NOTES
TO COMBINED FINANCIAL STATEMENTS**


****


**1.** **Organization
and Operations**





The
Salton Sea Guarantors (not a legal entity) consist of Salton Sea Brine
Processing, L.P. ("SSBP"), Salton Sea Power Generation L.P. ("SSPG"), Salton Sea
Power L.L.C. ("Salton Sea Power"), and Fish Lake Power LLC ("Fish Lake") each of
which owns 100% interests in five operating geothermal electric power generating
plants located in the Imperial Valley of California known as the Salton Sea I
Project, the Salton Sea II Project, the Salton Sea III Project, the Salton Sea
IV Project and the Salton Sea V Project (collectively, the "Salton Sea
Projects") and CE Salton Sea Inc. (together with the Salton Sea Projects, the
"Salton Sea Guarantors"). The Salton Sea Guarantors guarantee loans from Salton
Sea Funding Corporation ("Funding Corporation"), an indirect wholly-owned
subsidiary of Magma Power Company ("Magma"), which was wholly-owned by
MidAmerican Energy Holdings Company ("MEHC") until March 1999.





On
February 8, 1999, MEHC created a new subsidiary, CE Generation, LLC ("CE
Generation") and subsequently transferred its interest in Magma and its power
generation assets located in the Imperial Valley of California to CE Generation,
with certain assets being retained by MEHC. On March 3, 1999, MEHC closed the
sale of 50% of its ownership interests in CE Generation to El Paso CE Generation
Holding Company ("El Paso"). On January 29, 2003, El Paso sold all its interest
in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.


****


**2.** **Summary
of Significant Accounting Policies**





Basis
of Presentation





The
accompanying financial statements of the Salton Sea Guarantors present the
accounts of (1) SSBP, a California limited partnership between Magma as a 99%
limited partner and Salton Sea Power Company ("SSPC"), a wholly-owned subsidiary
of Magma, as a 1% general partner, (2) SSPG, a California limited partnership
between Salton Sea Brine Processing, L.P., as a 99% limited partner, and SSPC,
as a 1% general partner, (3) assets and liabilities attributable to Salton Sea
IV Project which are held 99% by SSPG and 1% by Fish Lake and (4) Salton Sea
Power, a Delaware limited liability company. Funding Corporation owns 1%
interests in SSPC and Fish Lake. All of the entities in the combination are
affiliates of Magma and indirect subsidiaries of CE Generation. All intercompany
balances and transactions have been eliminated.





Reclassifications





Certain
amounts in the fiscal 2003 and 2002 financial statements and supporting note
disclosures have been reclassified to conform to the fiscal 2004 presentation,
including the reclassification of activity related to discontinued operations
(see Note 3). Such reclassifications did not impact previously reported net
losses or guarantors’ equity.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the combined financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.





Allowance
for Doubtful Accounts





The
allowance for doubtful accounts is based on the Salton Sea Guarantors’
assessment of the collectibility of specific customer accounts and the aging of
the accounts receivable. If there is a deterioration of a major customer's
credit worthiness or actual defaults are higher than the Salton Sea Guarantors’
historical experience, estimates of the recoverability of amounts due could be
adversely affected.








40


Properties,
Plants and Equipment, Net





Properties,
plants and equipment are recorded at historical cost. The cost of major
additions and betterments are capitalized, while replacements, maintenance,
overhaul and well rework and repairs that do not improve or extend the lives of
the respective assets are expensed. Depreciation
of the operating power plant costs, net of salvage value if applicable, is
computed using the straight-line method based on economic lives. The Salton Sea
Guarantors believe the useful lives assigned to the depreciable assets, which
generally range from 2 to 30 years, are reasonable.





Intangible
Assets, Net





The
Salton Sea Guarantors intangible assets consist of acquired power sales
agreements and are amortized using the straight-line method over the remaining
contract periods, which have ranged from 5 to 30 years.





Impairment
of Long-Lived Assets





The
Salton Sea Guarantors periodically evaluate long-lived assets, including
properties, plants and equipment, rights to commercial quantities of extractable
minerals ("Mineral Reserves") and intangible assets when events or changes in
circumstances indicate that the carrying value of these assets may not be
recoverable. Upon the occurrence of a triggering event, the carrying amount of a
long-lived asset or intangible asset is reviewed to assess whether the
recoverable amount has declined below its carrying amount. The recoverable
amount is the estimated net future cash flows that the Salton Sea Guarantors
expect to recover from the future use of the asset, undiscounted and without
interest, including the asset’s residual value on disposal. Where the
recoverable amount of the long-lived asset or intangible asset is less than the
carrying value, an impairment loss would be recognized to write down the asset
to its fair value that is based on discounted estimated cash flows from the
future use of the asset, including the asset’s residual value on disposal.





Goodwill





The
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which establishes the accounting for
acquired goodwill and other intangible assets, and provides that goodwill and
indefinite-lived intangible assets will not be amortized, requires allocating
goodwill to each reporting unit and testing for impairment using a two-step
approach. The goodwill impairment test is performed annually or whenever an
event has occurred that would more likely than not reduce the fair value of the
reporting unit below its carrying amount.





In
accordance with SFAS 142, the Salton Sea Guarantors determined their reporting
units and completed their transitional review of goodwill in the second quarter
of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill
impairment at the Salton Sea Guarantors.





During
the fourth quarter of 2002, the Salton Sea Guarantors completed their annual
assessment of the implied fair value of goodwill. As a result, an impairment of
goodwill was recognized as a cumulative effect of change in accounting principle
of $21.0 million as of January 1, 2002. Additionally, the Salton Sea
Guarantors completed the 2002 annual review as of October 31, 2002. No
impairment was indicated as a result of these assessments.





Following
is a reconciliation of net loss as originally reported for the years ended
December 31, 2004, 2003 and 2002 to adjusted net loss (in
thousands):





**2004**
    
    **2003**
    
    **2002**Reported
      net loss
    
    $
    (83,936
    )
    $
    (37,963
    )
    $
    (33,975
    )Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    21,018Adjusted
      net loss
    
    $
    (83,936
    )
    $
    (37,963
    )
    $
    (12,957
    )





The
Salton Sea Guarantors completed their 2003 review as of October 31, 2003,
primarily using a discounted cash flow methodology. Due to changes in our zinc
price and capital expenditure forecasts, the cash flow forecasts were revised.
As a result of these revisions and the changes in the fair value of debt, the
assessments indicated goodwill impairment. Therefore, the Salton Sea Guarantors
completed their assessment of the implied fair value of goodwill and as a result
recognized goodwill impairment of $23.3 million, as of October 31,
2003.





41


The
changes in the carrying amount of goodwill for the two years ended
December 31, 2004, are as follows (in thousands):





Balance,
      January 1, 2003
    
    $
    23,252Impairment
      losses
    
    
    (23,252
    )Balance,
      December 31, 2003 and 2004
    
    $
    -





Capitalization
of Interest and Deferred Financing Costs





Prior to
the commencement of operations, interest is capitalized on the costs of the
plants and geothermal resource development to the extent incurred. Capitalized
interest and other deferred charges are amortized over the lives of the related
assets.





Deferred
financing costs are amortized over the term of the related financing using the
effective interest method.





Fair
Value of Financial Instruments





The fair
value of a financial instrument is the amount in which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the Salton
Sea Guarantors could realize in a current transaction.





The
methods and assumptions used to estimate fair value are as follows:





Debt-instruments
- The fair value of all debt instruments has been estimated based upon quoted
market prices as supplied by third-party broker dealers.





Contingent
Liabilities





The
Salton Sea Guarantors are subject to the possibility of various loss
contingencies arising in the ordinary course of business. The Salton Sea
Guarantors consider the likelihood of the loss or impairment of an asset or the
incurrence of a liability as well as the ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated loss contingency
is accrued when it is probable that a liability has been incurred or an asset
has been impaired and the amount of loss can be reasonably estimated. The Salton
Sea Guarantors regularly evaluate current information available to determine
whether such accruals should be adjusted.





Revenue
Recognition





The
Salton Sea Guarantors recognize revenue and related accounts receivable from
sales of electricity on an accrual basis. All of the Salton Sea Guarantors’
sales of electricity, except for the Salton Sea V Project, are to Southern
California Edison Company ("Edison") under long-term power purchase
contracts.





Income
Taxes





The
Salton Sea Guarantors are comprised substantially of partnership interests. The
income or loss of each partnership for income tax purposes, along with any
associated tax credits, is the responsibility of the individual partners.
Accordingly, no recognition has been given to federal or state income taxes in
the accompanying combined financial statements.





**New
Accounting Pronouncements**





In
January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51" ("Fin 46"). Fin 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest, or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
issued FASB Interpretation No. 46R ("FIN 46R") which served to clarify guidance
in Fin 46. During the fourth quarter of 2003, the Salton Sea Guarantors adopted
the provisions of FIN 46R with respect to special purpose entities. The adoption
did not have a significant impact on the Salton Sea Guarantors' financial
position, results of operations or cash flows. The Salton Sea Guarantors adopted
the provisions of FIN 46R related to non-special purpose entities in the first
quarter of 2004. The Salton Sea Guarantors have considered the provisions of FIN
46R for all subsidiaries and their related power purchase or power sale
agreements. Factors considered in the analysis include the duration of the
agreements, how capacity and energy payments are determined, as well as
responsibility and payment for operating and maintenance expenses. As a result
of these considerations, the Salton Sea Guarantors have determined their power
purchase and power sale agreements do not represent significant variable
interest. Accordingly, the Salton Sea Guarantors have concluded that it is
appropriate to continue to consolidate its power plant projects.





42


**3.** **Discontinued
Operations - Mineral Reserves and Zinc Recovery Project**





The
Salton Sea Guarantors' long-lived assets include Mineral Reserves from the
elements in solution in the geothermal brine and fluids utilized at the Salton
Sea Projects. 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").





The Zinc
Recovery Project began limited production during December 2002 and continued
limited production until September 10, 2004. Efforts to increase production had
continued since the Zinc Recovery Project was placed in service with an emphasis
on process modification. Management had been assessing the long-term economic
viability of the Zinc Recovery Project in light of continuing cash flow and
operating losses and the efforts to increase production, and had continued to
evaluate the expected impact of the planned improvements to the extraction
process during the third quarter of 2004. Furthermore, management had been
exploring other operating alternatives, such as establishing strategic
partnerships and consideration of ceasing operations of 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 of
$91.4 million has been recorded to write-off the Mineral Reserves. The
charge and related activity of the Mineral Reserves are classified separately as
discontinued operations in the accompanying combined statements of operations
and consist of depreciation and amortization of $0.2 million, $- and $- for
the years ended December 31, 2004, 2003 and 2002, respectively, in addition
to the $91.4 million impairment charge recorded in September
2004.




**4.** **Properties,
Plants and Equipment, Net**





Properties,
plants, contracts and equipment as of December 31 are as follows (in thousands):





**Estimated
      Useful lives**
    
    **2004**
    
    **2003**Plant
      and equipment
    
    
    2
      to 30 years
    
    $
    454,762
    
    $
    452,763Mineral
      Reserves (see Note 3)
    
    
    n/a
    
    
    -
    
    
    91,811Wells
      and resource development
    
    
    2
      to 20 years
    
    
    67,511
    
    
    66,824Total
      operating assets
    
    
    
    
    
    522,273
    
    
    611,398Accumulated
      depreciation and amortization
    
    
    
    
    
    (149,287
    )
    
    (126,944
    )Property,
      plants and equipment, net
    
    
    
    
    $
    372,986
    
    $
    484,454





The
Salton Sea Guarantors wrote down $0.8 million and $0.3 million of
abandoned equipment in 2004 and 2003, respectively.




The
Salton Sea V Project was constructed by Stone & Webster Inc. ("Stone &
Webster"), pursuant to the Salton Sea V Project EPC Contract. On March 7,
2002, Salton Sea Power, the owner of the Salton Sea V Project, filed a Demand
for Arbitration against Stone & Webster for breach of contract and breach of
warranty arising from deficiencies in Stone & Webster’s design, engineering,
construction and procurement of equipment for the Salton Sea V Project pursuant
to the Salton Sea V Project EPC Contract. On April 25, 2003, Salton Sea
Power entered into a settlement agreement with Stone & Webster. The
settlement agreement resulted in a total payment of $12.1 million from
Stone & Webster in the second quarter of 2003 and the arbitration was
dismissed. The settlement was recorded as a $4.5 million reduction of
incremental capital expenditures and a $7.6 million reduction of
incremental operating expenses related to legal, other expenses and equipment
write-offs.


43


**5.** **Intangible** **Assets, Net**





The
Salton Sea Guarantors’ acquired intangible assets consist of power purchase
agreements with a cost of $33.4 million and $33.4 million and
accumulated amortization of $11.1 million and $9.9 million at December
31, 2004 and 2003, respectively. Amortization expense on the power purchase
agreements was $1.2 million, for each of the years ended December 31, 2004,
2003 and 2002. The Salton Sea Guarantors expect amortization expense on the
power purchase agreements to be $1.2 million for each of the five
succeeding fiscal years. The power purchase agreements are being amortized over
the remaining fixed price periods which range from 5 to 30 years.


****


**6.** **Senior
Secured Project Notes**





The
Salton Sea Guarantors’ project notes payable to Funding Corporation as of
December 31 are as follows (in thousands):





**Senior**
    
    **Final****Date
      issued**
    
    **Secured
      Securities**
    
    **Maturity
      Date**
    
    **Rate**
    
    **2004**
    
    **2003**July
      21, 1995
    
    
    B
      Bonds
    
    
    May
      30, 2005
    
    
    7.370%
    
    $
    21,067
    
    $
    40,817July
      21, 1995
    
    
    C
      Bonds
    
    
    May
      30, 2010
    
    
    7.840%
    
    
    98,391
    
    
    102,014October
      13, 1998
    
    
    F
      Bonds
    
    
    November
      30, 2018
    
    
    7.475%
    
    
    79,780
    
    
    80,816$
    199,238
    
    $
    223,647





The
Salton Sea Guarantors have also guaranteed, along with other guarantors, the
debt of Funding Corporation, which amounted to $298.4 million at December
31, 2004. The guarantee issued is collateralized by a lien on substantially all
the assets of and a pledge of the equity interests in the Salton Sea Guarantors.
The structure has been designed to cross collateralize cash flows from each
Guarantor without cross collateralizing all of the Guarantors'
assets.





Principal
maturities of the senior secured project note are as follows (in
thousands):





**Amount**2005
    
    $
    23,9182006
    
    
    22,6212007
    
    
    22,1312008
    
    
    23,4942009
    
    
    22,501Thereafter
    
    
    84,573Total
    
    $
    199,238





The
estimated fair values of the senior secured project notes at December 31,
2004 and 2003 were $221.4 million and $230.4 million,
respectively.


****


**7.** **Related
Party Transactions**





The
Salton Sea Guarantors have entered into the following agreements:





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,
rights to extract geothermal brine from the geothermal lease rights property
which is necessary to operate the Salton Sea Projects in return for 5% of all
electricity revenue received by the Salton Sea Guarantors. The amount expensed
for the years ended December 31, 2004, 2003 and 2002 was $5.3 million,
$3.4 million and $3.6 million, respectively.





44


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 total electricity revenue. The amount expensed for the
years ended December 31, 2004, 2003 and 2002 was $1.4 million,
$1.2 million and $1.2 million, respectively.





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 2004, 2003 and 2002, the Salton Sea Guarantors reimbursed CEOC
for expenses of $18.1 million, $14.7 million and $13.8 million,
respectively.





Commencing
March 27, 2001, Salton Sea Power entered into a series of transaction agreements
to sell available power from the Salton Sea V Project to El Paso Merchant Energy
Company ("EPME") based on percentages of the Dow Jones SP-15 Index. On February
11, 2003, Salton Sea Power ceased selling available power to EPME. Pursuant to
these agreements, sales to EPME totaled $0.8 million and $7.3 million
in 2003 and 2002, respectively. As of December 31, 2004 and 2003, there were no
accounts receivable balances from EPME.





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 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
termination has been given by either party. Pursuant to this agreement, sales to
TransAlta totaled $7.2 million and $7.7 million in 2004 and 2003,
respectively. As of December 31, 2004 and 2003, accounts receivable balances
from TransAlta were $0.9 million and $1.1 million,
respectively.





On
January 21, 2004, Salton Sea Power and CE Turbo LLC entered into a Green Energy
Tag Purchase and Sale Agreement to sell the non-power attributes (the non-power
attributes made available by 1 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 in 2004. As of December 31, 2004, there
were no accounts receivable balances from TransAlta Marketing.





Pursuant
to the November 1, 1998 Amended and Restated Power Sales Agreements, Salton Sea
Power provided CalEnergy Minerals with the 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 $1.3 million, $0.9 million and
$0.4 million for the years ended December 31, 2004, 2003 and 2002,
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.


****


**8.** **Commitments
and Contingencies**





Edison
and the California Power Exchange





On
July 10, 2003, the Salton Sea IV Project’s 40 MW 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.





On
October 9, 2003, the Salton Sea III Project’s 50 MW turbine went out of service
due to an uncontrollable force event. Such uncontrollable force event ended and
the Salton Sea III Project’s turbine returned to service, on December 12,
2003. Edison failed to recognize the uncontrollable force event and, as such,
has not paid amounts otherwise due and owing under the Salton Sea III power
purchase agreement totaling $0.8 million. SSPG, owner of the Salton Sea III
Project, served notice of error on Edison for such unpaid amounts. As a result,
the Salton Sea Guarantors had established an allowance for doubtful accounts for
the full amount of this receivable. Pursuant to a letter agreement dated
December 2, 2004, Edison made a
settlement payment of $0.6 million which was received  on
December 13, 2004. Consequentially , in
December 2004 the allowance for doubtful accounts was released and the remaining
receivable of $0.2 million was written off.





45


In
January 2001, the California Power Exchange declared bankruptcy. As a result,
Salton Sea V had not received payment for power sold to EPME 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 V entered into separate Transfer of
Claims Agreements with TransAlta and MEHC (the "Transfer of Claims Agreements"),
pursuant to which Salton Sea V 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.





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 the 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
December 31, 2004 and 2003, the environmental liabilities recorded on the
combined balance sheets were not material.








46


**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To the
Board of Directors and Stockholder


Magma
Power Company


Omaha,
Nebraska





We have
audited the accompanying combined balance sheets of the Partnership Guarantors
as of December 31, 2004 and 2003, and the related combined statements of
operations, Guarantors' equity and cash flows for each of the three years in the
period ended December 31, 2004. The combined financial statements include the
accounts of the companies discussed in Note 1, which are under common ownership
and management. Our audits also included the combined financial statement
schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Partnership
Guarantors' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership Guarantor’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, such combined financial statements present fairly, in all material
respects, the combined financial position of the Partnership Guarantors as of
December 31, 2004 and 2003 and the combined results of their operations and
their combined cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, such combined financial
statement schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.





/s/
Deloitte & Touche LLP





Omaha,
Nebraska


February
25, 2005








47


**PARTNERSHIP
GUARANTORS**


**COMBINED
BALANCE SHEETS**


(Amounts
in thousands)





**As
      of December 31,****2004**
    
    **2003**Current
      assets:Trade
      accounts receivable, net of allowance of $- and $791,
      respectively
    
    $
    13,841
    
    $
    13,500Trade
      accounts receivable from affiliate
    
    
    353
    
    
    433Inventory
    
    
    18,513
    
    
    19,616Prepaid
      expenses and other current assets
    
    
    1,649
    
    
    3,641Total
      current assets
    
    
    34,356
    
    
    37,190Restricted
      cash
    
    
    965
    
    
    441Properties,
      plants and equipment, net
    
    
    204,985
    
    
    583,195Intangible
      assets, net
    
    
    50,017
    
    
    53,515Management
      fee
    
    
    61,544
    
    
    66,603Due
      from affiliates
    
    
    205,386
    
    
    157,531Goodwill
    
    
    56,528
    
    
    99,653**Total
      assets**
    
    $
    613,781
    
    $
    998,128Current
      liabilities:Accounts
      payable
    
    $
    1,771
    
    $
    1,883Accrued
      interest
    
    
    642
    
    
    1,519Other
      accrued liabilities
    
    
    14,605
    
    
    12,812Current
      portion of long-term debt
    
    
    4,265
    
    
    140,398Total
      current liabilities
    
    
    21,283
    
    
    156,612Senior
      secured project notes
    
    
    94,437
    
    
    98,702Deferred
      income taxes
    
    
    95,371
    
    
    130,610Total
      liabilities
    
    
    211,091
    
    
    385,924Commitments
      and contingencies (Note 10)Guarantors’
      equity:Common
      stock
    
    
    3
    
    
    3Additional
      paid-in capital
    
    
    681,297
    
    
    482,814Retained
      earnings (deficit)
    
    
    (278,610
    )
    
    129,387Total
      guarantors’ equity
    
    
    402,690
    
    
    612,204**Total
      liabilities and guarantors’ equity**
    
    $
    613,781
    
    $
    998,128





The
accompanying notes are an integral part of these financial
statements.





48


**PARTNERSHIP
GUARANTORS**


**COMBINED
STATEMENTS OF OPERATIONS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue:**Operating
      revenue
    
    $
    94,343
    
    $
    95,254
    
    $
    94,697Interest
      and other income
    
    
    982
    
    
    912
    
    
    1,455Total
      revenue
    
    
    95,325
    
    
    96,166
    
    
    96,152**Costs
      and expenses:**Royalty,
      operating, general and administrative costs
    
    
    53,789
    
    
    49,716
    
    
    55,662Depreciation
      and amortization
    
    
    27,908
    
    
    25,697
    
    
    23,052Interest
      expense
    
    
    8,087
    
    
    8,239
    
    
    9,391Less
      capitalized interest
    
    
    -
    
    
    -
    
    
    (1,117
    )Asset
      impairment
    
    
    4,716
    
    
    1,428
    
    
    -Goodwill
      impairment
    
    
    -
    
    
    21,213
    
    
    -Total
      costs and expenses
    
    
    94,500
    
    
    106,293
    
    
    86,988**Income
      (loss) from continuing operations before income
    taxes**
    
    
    825
    
    
    (10,127
    )
    
    9,164Provision
      (benefit) for income taxes
    
    
    (4,167
    )
    
    1,990
    
    
    365**Income
      (loss) from continuing operations**
    
    
    4,992
    
    
    (12,117
    )
    
    8,799Loss
      from discontinued operations, net of tax benefits (Note 3)
    
    
    (412,989
    )
    
    (27,581
    )
    
    (19,627
    )**Net
      loss**
    
    $
    (407,997
    )
    $
    (39,698
    )
    $
    (10,828
    )





The
accompanying notes are an integral part of these financial
statements.





49


**PARTNERSHIP
GUARANTORS**


**COMBINED
STATEMENTS OF GUARANTORS' EQUITY**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**


(Amounts
in thousands, except share amounts)





**Additional**
    
    **Retained****Common
      Stock**
    
    **Paid-in**
    
    **Earnings**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **(Deficit)**
    
    **Equity****Balance,
      January 1, 2002**
    
    
    3
    
    $
    3
    
    $
    387,663
    
    $
    179,913
    
    $
    567,579Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (10,828
    )
    
    (10,828
    )Equity
      contribution
    
    
    -
    
    
    -
    
    
    44,537
    
    
    -
    
    
    44,537**Balance,
      December 31, 2002**
    
    
    3
    
    $
    3
    
    $
    432,200
    
    $
    169,085
    
    $
    601,288Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (39,698
    )
    
    (39,698
    )Equity
      contribution
    
    
    -
    
    
    -
    
    
    50,614
    
    
    -
    
    
    50,614**Balance,
      December 31, 2003**
    
    
    3
    
    $
    3
    
    $
    482,814
    
    $
    129,387
    
    $
    612,204Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (407,997
    )
    
    (407,997
    )Equity
      contribution
    
    
    -
    
    
    -
    
    
    198,483
    
    
    -
    
    
    198,483**Balance,
      December 31, 2004**
    
    
    3
    
    $
    3
    
    $
    681,297
    
    $
    (278,610
    )
    $
    402,690





The
accompanying notes are an integral part of these financial
statements.





50


**PARTNERSHIP
GUARANTORS**


**COMBINED
STATEMENTS OF CASH FLOWS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      flows from operating activities:**Income
      (loss) from continuing operations
    
    $
    4,992
    
    $
    (12,117
    )
    $
    8,799Adjustments
      to reconcile income (loss) from continuing operations to cash flows from
      continuing operations:Depreciation
      and amortization
    
    
    27,908
    
    
    25,697
    
    
    23,052Deferred
      income taxes
    
    
    (4,961
    )
    
    3,038
    
    
    (7,789
    )Asset
      impairment
    
    
    4,716
    
    
    1,428
    
    
    -Goodwill
      impairment
    
    
    -
    
    
    21,213
    
    
    -Changes
      in assets and liabilities:Trade
      accounts receivable, net
    
    
    (160
    )
    
    585
    
    
    45,086Inventory,
      prepaid expenses and other current assets
    
    
    (1,381
    )
    
    (2,680
    )
    
    (448
    )Accounts
      payable and accrued liabilities
    
    
    6,825
    
    
    (441
    )
    
    (9,761
    )Net
      cash flows from continuing operations
    
    
    37,939
    
    
    36,723
    
    
    58,939Net
      cash flows from discontinued operations
    
    
    (34,975
    )
    
    (43,407
    )
    
    (1,992
    )Net
      cash flows from operating activities
    
    
    2,964
    
    
    (6,684
    )
    
    56,947**Cash
      flows from investing activities:**Capital
      expenditures related to operating projects
    
    
    (14,790
    )
    
    (16,905
    )
    
    (7,425
    )Construction
      and other development
    
    
    -
    
    
    -
    
    
    (557
    )Other
    
    
    124
    
    
    (758
    )
    
    (706
    )Net
      cash flows from continuing operations
    
    
    (14,666
    )
    
    (17,663
    )
    
    (8,688
    )Net
      cash flows from discontinued operations
    
    
    1
    
    
    (7,017
    )
    
    (42,279
    )Net
      cash flows from investing activities
    
    
    (14,665
    )
    
    (24,680
    )
    
    (50,967
    )**Cash
      flows from financing activities:**Increase
      in due from affiliates
    
    
    (19,258
    )
    
    (15,450
    )
    
    (47,731
    )Repayment
      of senior secured project notes
    
    
    (4,015
    )
    
    (3,609
    )
    
    (2,520
    )Net
      cash flows from continuing operations
    
    
    (23,273
    )
    
    (19,059
    )
    
    (50,251
    )Net
      cash flows from discontinued operations
    
    
    34,974
    
    
    50,423
    
    
    44,271Net
      cash flows from financing activities
    
    
    11,701
    
    
    31,364
    
    
    (5,980
    )**Net
      change in cash**
    
    
    -
    
    
    -
    
    
    -**Cash
      at beginning of period**
    
    
    -
    
    
    -
    
    
    -**Cash
      at the end of period**
    
    
    -
    
    
    -
    
    
    -**Supplemental
      disclosure:**Cash
      paid for interest, net of capitalized interest
    
    $
    10,531
    
    $
    18,831
    
    $
    8,066Income
      taxes paid (received)
    
    $
    794
    
    $
    (1,048
    )
    $
    8,154Forgiveness
      of amounts borrowed from MEHC to fund Zinc Recovery Project operating
      losses (Note 7)
    
    $
    41,708
    
    $
    -
    
    $
    -





The
accompanying notes are an integral part of these financial
statements.





51
 
 **PARTNERSHIP
GUARANTORS**


**NOTES
TO COMBINED FINANCIAL STATEMENTS**


****


**1.** **Organization
and Operations**





The
Partnership Guarantors (not a legal entity) consist of the Vulcan/BN Geothermal
Power Company ("Vulcan"), Elmore, L.P. ("Elmore"), Leathers, L.P. ("Leathers"),
Del Ranch, L.P. ("Del Ranch") and 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 CE Turbo Project, (collectively, the "Partnership Projects");
CalEnergy Minerals LLC ("CalEnergy Minerals"), which installed facilities near
the Partnership Projects that were intended to recover zinc from the geothermal
brine through an ion exchange, solvent extraction, electrowinning and casting
process (the "Zinc Recovery Project"); CalEnergy Operating Corporation ("CEOC")
and Vulcan Power Company ("VPC"), both 99% owned by Magma Power Company
("Magma") and 1% owned by Salton Sea Funding Corporation ("Funding
Corporation"), San Felipe Energy Company ("San Felipe"), Conejo Energy Company
("Conejo"), Niguel Energy Company ("Niguel"), VPC Geothermal LLC ("VPCG"),
Salton Sea Minerals Corp. and CE Salton Sea Inc (collectively, the "Partnership
Guarantors"). VPC and VPCG, collectively own 100% of the partnership interests
in Vulcan. CEOC, Niguel, San Felipe and Conejo collectively own 90% of the
partnership interests in each of Elmore, Leathers and Del Ranch, respectively.
Salton Sea Minerals Corp. owns CalEnergy Minerals. Salton Sea Minerals Corp. is
an indirect wholly-owned subsidiary of MidAmerican Energy Holdings Company
("MEHC"), CE Salton Sea Inc. owns CE Turbo.





Magma
owns all of the remaining 10% interests in each of Elmore, Leathers and Del
Ranch. CEOC is entitled to receive from Magma, as payment for certain data and
services provided by CEOC, all of the partnership distributions Magma receives
with respect to its 10% ownership interests in each of the Elmore, Leathers and
Del Ranch Projects and Magma’s special distributions equal to 4.5% of total
energy revenue from the Leathers Project.





On
February 8, 1999, MEHC created a new subsidiary, CE Generation, LLC ("CE
Generation") and subsequently transferred its interest in Magma and its power
generation assets located in the Imperial Valley of California to CE Generation,
with certain assets being retained by MEHC. On March 3, 1999, MEHC closed the
sale of 50% of its ownership interests in CE Generation to El Paso CE Generation
Holding Company ("El Paso"). On January 29, 2003, El Paso sold all its interest
in CE Generation to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.


****


**2.** **Summary
of Significant Accounting Policies**





Basis
of Presentation





The
accompanying financial statements of the Partnership Guarantors present the
accounts of CEOC, VPC, CE Turbo and CalEnergy Minerals and their proportionate
share of the partnerships in which they have an undivided interest in the assets
and are proportionately liable for their share of the liabilities. All
intercompany balances and transactions have been eliminated.





Reclassifications





Certain
amounts in the fiscal
2003 and 2002 financial
statements and supporting note disclosures have been reclassified to conform to
the fiscal 2004 presentation, including the reclassification of activity related
to ceasing of operations at the Zinc Recovery Project, as discontinued
operations (see Note 3) and a $10.1 million reclassification between due
from affiliates and deferred income taxes. Such reclassifications did not impact
previously reported net losses or retained earnings .





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the combined financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.








52


Allowance
for Doubtful Accounts





The
allowance for doubtful accounts is based on the Partnership Guarantors’
assessment of the collectibility of specific customer accounts and the aging of
the accounts receivable. If there is a deterioration of a major customer's
credit worthiness or actual defaults are higher than the Partnership Guarantors’
historical experience, estimates of the recoverability of amounts due could be
adversely affected.





Properties,
Plants and Equipment, Net





Properties,
plants and equipment are recorded at historical cost. The cost of major
additions and betterments are capitalized, while replacements, maintenance,
overhaul and well rework and repairs that do not improve or extend the lives of
the respective assets are expensed. Depreciation
of the operating power plant costs, net of salvage value if applicable, is
computed using the straight-line method based on economic lives. The Partnership
Guarantors believe the useful lives assigned to the depreciable assets, which
generally range from 2 to 30 years, are reasonable.





Intangible
Assets, Net





The
Partnership Guarantors’ intangible assets consist of acquired power sales
agreements and are amortized using the straight-line method over the remaining
contract periods, which have ranged from 4 to 24 years.





Impairment
of Long-Lived Assets





The
Partnership Guarantors periodically evaluate long-lived assets, including
properties, plants and equipment, rights to commercial quantities of extractable
minerals ("Mineral Reserves") and intangible assets when events or changes in
circumstances indicate that the carrying value of these assets may not be
recoverable. Upon the occurrence of a triggering event, the carrying amount of a
long-lived asset or intangible asset is reviewed to assess whether the
recoverable amount has declined below its carrying amount. The recoverable
amount is the estimated net future cash flows that the Partnership Guarantors
expect to recover from the future use of the asset, undiscounted and without
interest, including the asset’s residual value on disposal. Where the
recoverable amount of the long-lived asset or intangible asset is less than the
carrying value, an impairment loss would be recognized to write down the asset
to its fair value that is based on discounted estimated cash flows from the
future use of the asset, including the asset’s residual value on
disposal.





Goodwill





The
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which establishes the accounting for
acquired goodwill and other intangible assets and provides that goodwill and
indefinite-lived intangible assets will not be amortized, requires allocating
goodwill to each reporting unit and testing for impairment using a two-step
approach. The goodwill impairment test is performed annually or whenever an
event has occurred that would more likely than not reduce the fair value of the
reporting unit below its carrying amount.





In
accordance with SFAS 142, the Partnership Guarantors determined their reporting
units and completed their transitional impairment testing of goodwill in the
second quarter of 2002, primarily using a discounted cash flow methodology as of
January 1, 2002. The transitional impairment tests indicated goodwill impairment
at the Partnership Guarantors.





During
the fourth quarter of 2002, the Partnership Guarantors completed their annual
assessment of the implied fair value of goodwill. No goodwill impairment was
recognized at the Partnership Guarantors as of January 1, 2002. Additionally,
the Partnership Guarantors completed their 2002 annual reviews as of October 31,
2002. No impairments were indicated as a result of these assessments.





The
Partnership Guarantors completed their 2003 annual review as of October 31,
2003, primarily using a discounted cash flow methodology as of October 31, 2003.
Due to changes in our zinc price and capital expenditure forecasts, the cash
flow forecasts were revised. As a result of these revisions and the changes in
the fair value of debt, the tests indicated goodwill impairment. Therefore, the
Partnership Guarantors completed their assessments of the implied fair value of
goodwill and as a result recognized goodwill impairment as of October 31, 2003
of $21.2 million.





The
Partnership Guarantors completed their 2004 annual review as of October 31,
2004, primarily using a discounted cash flow methodology. No impairments were
indicated as a result of the assessments.





53


The
changes in the carrying amount of goodwill for the two years ended December 31,
2004, are as follows (in thousands):





Balance,
      January 1, 2003
    
    $
    120,866Impairment
      losses
    
    
    (21,213
    )Balance,
      December 31, 2003
    
    
    99,653Impairment
      losses (see Note 3)
    
    
    (43,125
    )Balance,
      December 31, 2004
    
    $
    56,528





Capitalization
of Interest and Deferred Financing Costs





Prior to
the commencement of operations, interest is capitalized on the costs of the
plants and geothermal resource development to the extent incurred. Capitalized
interest and other deferred charges are amortized over the lives of the related
assets.





Deferred
financing costs are amortized over the term of the related financing using the
effective interest method.





Fair
Value of Financial Instruments





The fair
value of a financial instrument is the amount in which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the
Partnership Guarantors could realize in a current transaction.





The
methods and assumptions used to estimate fair value are as follows:





Debt-instruments
- The fair value of all debt instruments has been estimated based upon quoted
market prices as supplied by third-party broker dealers.





Contingent
Liabilities





The
Partnership Guarantors establish reserves for estimated loss contingencies, such
as environmental and legal, when it is management’s assessment that a loss is
probable and the amount of the loss can be reasonably estimated.





Revenue
Recognition





The
Partnership Guarantors recognize revenue and related accounts receivable from
sales of electricity on an accrual basis. All of the Partnership Guarantors’
sales of electricity, except for the CE Turbo Project, are to Southern
California Edison Company ("Edison") under long-term power purchase contracts.





Management
Fee





Pursuant
to the Magma Services Agreement, Magma has agreed to pay CEOC all equity cash
flows and certain royalties payable by the Partnership Guarantors in exchange
for providing data and services to Magma. As security for the obligations of
Magma under the Magma Services Agreement, Magma has collaterally assigned to
CEOC its rights to such equity cash flows and certain royalties.





Income
Taxes





The
entities comprising the Partnership Guarantors are included in consolidated
income tax returns with their parent and affiliates; however, income taxes are
provided on a separate return basis. Tax obligations of the Partnership
Guarantors will be remitted to the parent only to the extent of cash flows
available after operating expenses and debt service.








54


**New
Accounting Pronouncements**





In
January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51" ("Fin 46"). Fin 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest, or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R") which served to clarify guidance in Fin 46. During
the fourth quarter of 2003, the Partnership Guarantors adopted the provisions of
FIN 46R with respect to special purpose entities. The adoption did not have a
significant impact on the Partnership Guarantors' financial position, results of
operations or cash flows. The Partnership Guarantors adopted the provisions of
FIN 46R related to non-special purpose entities in the first quarter of 2004.
The Partnership Guarantors have considered the provisions of FIN 46R for all
subsidiaries and their related power purchase or power sale agreements. Factors
considered in the analysis include the duration of the agreements, how capacity
and energy payments are determined, as well as responsibility and payment for
operating and maintenance expenses. As a result of these considerations, the
Partnership Guarantors have determined their power purchase and power sale
agreements do not represent significant variable interest. Accordingly, the
Partnership Guarantors have concluded that it is appropriate to continue to
consolidate their power plant projects.





**3.** **Discontinued
Operations - Mineral Assets and Zinc Recovery Project**





The
Partnership Guarantors' long-lived assets include rights to commercial
quantities of extractable minerals from elements in solution in the geothermal
brine and fluids utilized at the Partnership Projects and the Zinc Recovery
Project, which was intended to recover zinc from the geothermal brine through an
ion exchange, solvent extraction, electrowinning and casting
process.





The Zinc
Recovery Project began limited production during December 2002 and continued
limited production until September 10, 2004. Efforts to increase production had
continued since the Zinc Recovery Project was placed in service with an emphasis
on process modification. Management had been assessing the long-term economic
viability of the Zinc Recovery Project in light of continuing cash flow and
operating losses and the efforts to increased production, and had continued to
evaluate the expected impact of the planned improvements to the extraction
process during the third quarter of 2004. Furthermore, management had been
exploring other operating alternatives, such as establishing strategic
partnerships and consideration of ceasing operations of the Zinc Recovery
Project.





On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project, effective immediately. Based on this decision, a
non-cash, after-tax impairment charge of $390.0 million has been recorded
to write-off the Zinc Recovery Project, rights to quantities of extractable
minerals, and allocated goodwill (collectively the "Mineral Assets"). The income
tax benefit recorded in connection with the impairment charge represents the
reversal of book and tax basis differences related to property, plant and
equipment, net of tax benefits previously recognized on operating losses.
The


charge
and related activity of the Mineral Assets are classified separately as
discontinued operations in the accompanying combined statements of operations
and include the following (in thousands):





**Years
      Ended****December
      31,****2004**
    
    **2003**
    
    **2002**Total
      revenue
    
    $
    3,401
    
    $
    659
    
    $
    288Losses
      from discontinued operations
    
    $
    (32,577
    )
    $
    (46,550
    )
    $
    (33,126
    )Costs
      of disposal activities, net
    
    
    (4,134
    )
    
    -
    
    
    -Asset
      impairment charges
    
    
    (363,432
    )
    
    -
    
    
    -Goodwill
      impairment charges
    
    
    (43,125
    )
    
    -
    
    
    -Income
      tax benefits
    
    
    30,279
    
    
    18,969
    
    
    13,499Loss
      from discontinued operations, net of tax
    
    $
    (412,989
    )
    $
    (27,581
    )
    $
    (19,627
    )







55


In
connection with ceasing operations, CalEnergy Minerals has made cash
expenditures of approximately $4.1 million, consisting of pre-tax disposal
costs, termination benefit costs and property taxes. CalEnergy Minerals expects
to make additional cash expenditures consisting of pre-tax disposal costs and
property taxes of approximately $1.6 million. Substantially all of such
costs relate to disposal activities, and the disposal costs are expected to be
partially offset by proceeds from sales of the Zinc Recovery Project’s assets.
These costs are recognized in the period in which the related liability is
incurred. Salvage proceeds will be recognized in the period earned.
Implementation of a disposal plan began in September 2004 and is continuing into
2005. The costs of disposal activities for the year ended December 31,
2004, are as follows (in thousands):





Accrued
      disposal costs at December 31, 2003
    
    $
    -Costs
      of disposal activities
    
    
    4,552Payments
      of disposal costs
    
    
    (4,122
    )Proceeds
      from sales of assets
    
    
    -Accrued
      disposal costs at December 31, 2004
    
    $
    430





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, fixed price, date certain basis. Under the terms of the Equipment
Purchase Agreement the contractor has agreed to purchase certain Zinc Recovery
Project equipment for a guaranteed purchase price of approximately
$4.1 million, payable in scheduled installments, the payment of which is
secured by a $0.5 million letter of credit that has been issued for the
benefit of CalEnergy Minerals. 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 will retain 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


****


**4.** **Properties,
Plants and Equipment, Net**





Properties,
plants and equipment as of December 31 are as follows (in thousands):





**2004**
    
    **2003**Cost:Power
      plant and equipment
    
    $
    234,865
    
    $
    232,842Zinc
      Recovery Project (see Note 3)
    
    
    -
    
    
    209,726Mineral
      Reserves (see Note 3)
    
    
    -
    
    
    162,487Wells
      and resource development
    
    
    108,396
    
    
    105,210Total
      operating assets
    
    
    343,261
    
    
    710,265Accumulated
      depreciation and amortization
    
    
    (138,276
    )
    
    (127,070
    )Property,
      plant and equipment, net
    
    $
    204,985
    
    $
    583,195





The CE
Turbo Project was constructed by Stone & Webster, Inc. ("Stone &
Webster"), pursuant to the CE Turbo Project EPC Contract. On March 7, 2002,
Vulcan, Del Ranch, and CE Turbo, the owners of the CE Turbo Project, filed a
Demand for Arbitration against Stone & Webster for breach of contract and
breach of warranty arising from deficiencies in Stone & Webster’s design,
engineering, construction and procurement of equipment for the CE Turbo Project
pursuant to the CE Turbo Project’s EPC Contract. On November 25, 2002, Vulcan,
Del Ranch, and CE Turbo entered into a settlement agreement with Stone &
Webster. The settlement agreement resulted in a $3.5 million payment from
Stone & Webster which was recorded as a reduction of incremental capital
expenditures.








56
 
 **5.** **Intangible
Assets, Net**





The
following table summarizes the acquired intangible assets as of December 31 (in
thousands):





**2004**
    
    **2003****Gross**
    
    
    
    **Gross****Estimated**
    
    **Carrying**
    
    **Accumulated**
    
    **Carrying**
    
    **Accumulated****Useful
      Lives**
    
    **Amount**
    
    **Amortization**
    
    **Amount**
    
    **Amortization**Power
      Purchase Contracts
    
    
    4
      to 20 years
    
    $
    123,002
    
    $
    100,032
    
    $
    123,002
    
    $
    98,463Patented
      Technology
    
    
    24
      years
    
    
    46,290
    
    
    19,243
    
    
    46,290
    
    
    17,314Total
    
    
    
    
    $
    169,292
    
    $
    119,275
    
    $
    169,292
    
    $
    115,777





Amortization
expense on acquired intangible assets was $3.5 million, $3.8 million
and $3.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The Partnership Guarantors expect amortization expense on acquired
intangible assets to be $3.5 million for each of the five succeeding fiscal
years.


****


**6.** **Senior
Secured Project Notes**





The
Partnership Guarantors’ project notes payable to Funding Corporation as of
December 31 are as follows (in thousands):





**Senior**
    
    **Final****Date
      issued**
    
    **Secured
      Securities**
    
    **Maturity
      Date**
    
    **Rate**
    
    **2004**
    
    **2003**June
      20, 1996
    
    
    E
      Bonds
    
    
    May
      30, 2011
    
    
    8.300%
    
    
    40,072
    
    
    43,322October
      13, 1998
    
    
    F
      Bonds
    
    
    November
      30, 2018
    
    
    7.475%
    
    
    58,630
    
    
    195,778$
    98,702
    
    $
    239,100





The
Partnership Guarantors have guaranteed, along with other guarantors, the debt of
Funding Corporation, which amounted to $298.4 million at December 31,
2004. The guarantee is collateralized by a lien on the available cash flow of
and a pledge of stock in the Partnership Guarantors. The structure has been
designed to cross collateralize cash flows from each Guarantor without cross
collateralizing all of the Guarantors' assets.





Principal
maturities of the senior secured project notes are as follows (in
thousands):





**Amount**2005
    
    $
    4,2652006
    
    
    3,2962007
    
    
    2,9602008
    
    
    4,5722009
    
    
    3,709Thereafter
    
    
    79,900Total
    
    $
    98,702





On
October 13, 1998, Funding Corporation completed a sale to institutional
investors of $285.0 million aggregate amount of 7.475% Senior Secured
Series F bonds due November 30, 2018 (the "Series F Bonds"). A portion of the
proceeds was advanced to CalEnergy Minerals, an indirect wholly owned subsidiary
of MEHC, to fund the cost of construction of the Zinc Recovery Project. The
direct and indirect owners of the Zinc Recovery Project (the "Zinc Guarantors",
which include CalEnergy Minerals and its sole member, Salton Sea Minerals Corp.)
are among the guarantors of Funding Corporation debt. In connection with the
divestiture of 50% of CE Generation, MEHC guaranteed the payment by the Zinc
Guarantors of a specified portion of the scheduled debt service and certain
payments on the senior secured project notes issued by the Partnership
Guarantors securing the Series F Bonds.





57


On
March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of $136.4 million of the Series F Bonds, pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC, and MEHC performed under that demand, for the full amount
remaining on MEHC's guarantee of the Series F Bonds in order to fund the
redemption. Given the payment under MEHC's guarantee, MEHC no longer has any
liability with respect to its guarantee.





The
estimated fair values of the senior secured project note at December 31,
2004 and 2003 were $110.9 million and $249.7 million,
respectively.


****


**7.** **Related
Party Transactions**





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. Equity contributions for the years ended December 31, 2004, 2003
and 2002 were $156.8 million, $50.6 million and $44.5 million,
respectively, and are included in the accompanying combined statements of cash
flows as part of net financing activity cash flows from discontinued operations.
The 2004 equity contributions 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 $20.4 million funding of the Zinc Recovery Project’s operating
losses. Additionally, through September 10, 2004, MEHC had funded
$41.7 million of the Zinc Recovery Project’s operating losses, which had
been recorded as a due to affiliate on the Partnership Guarantors’ combined
balance sheet. Due to the cessation of the Zinc Recovery Project’s operations,
MEHC does not expect to recover these amounts. As such, the $41.7 million
due to affiliate has been reclassified as an equity contribution and is included
in total equity contributions of $198.5 million for the year ended December
31, 2004.





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 plant. The Partnership
Guarantors' share of amounts expensed under this agreement for 2004, 2003 and
2002 were $8.2 million, $8.8 million and $8.5 million,
respectively.





Pursuant
to Ground Leases dated March 15 and August 15, 1988 with Magma, the Partnership
Guarantors lease from Magma for 32 years the surface of the land as described in
the Imperial County Assessor's official records. Amounts expensed under the
ground leases for 2004, 2003 and 2002 were $70,000 per year.





Pursuant
to the Administrative Services Agreements with CEOC, CEOC will provide to the
Partnerships administrative and management services for a period of 32 years
through 2020. Fees payable to CEOC amount to the greater of 3% of total
electricity revenue or $60,000 per month. The minimum monthly payments for years
subsequent to 1989 are increased based on the consumer price index of the Bureau
of Labor and Statistics. Amounts expensed related to these agreements for 2004,
2003 and 2002 amounted to $2.8 million, $2.1 million and
$2.1 million, respectively.





Commencing
March 27, 2001, CE Turbo entered into a series of transaction agreements to sell
all available power from the CE Turbo Project to El Paso Merchant Energy Company
("EPME") based on percentages of the Dow Jones SP-15 Index. On February 11,
2003, CE Turbo ceased selling available power to EPME. Pursuant to these
agreements, sales to EPME totaled $0.4 million and $1.6 million in
2003 and 2002, respectively. As of December 31, 2004 and 2003, there were no
accounts receivable balances from EPME.





Pursuant
to a transaction agreement dated January 29, 2003 (the "TransAlta Transaction
Agreement"), CE Turbo began selling available power to 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 were $3.3 million and
$2.2 million in 2004 and 2003, respectively. As of December 31, 2004
and 2003, accounts receivable from TransAlta was $0.4 million.





On
January 21, 2004 CE Turbo and Salton Sea Power L.L.C. entered into a Green
Energy Tag Purchase and Sale Agreement to sell the non-power attributes (the
non-power attributes made available by 1 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 (U.S.) Inc. ("TransAlta Marketing") at a market price per Green
Tag. Pursuant to this agreement, there were no sales to TransAlta Marketing from
CE Turbo in 2004.





58
 
 **8.** **Condensed
Financial Information (in thousands)**





**Vulcan**
    
    ****
    
    ****
    
    
    
    ****
    
    **Vulcan**
    
    **CalEnergy**
    
    **Turbo**
    
    **Adjustments/**
    
    **Combined****Power**
    ****
    **CEOC**
    ****
    **Elmore**
    ****
    **Del
      Ranch**
    ****
    **Leathers**
    ****
    **BNG**
    ****
    **Minerals**
    ****
    **Turbo**
    ****
    **Eliminations**
    ****
    **Total**December
      31, 2004:Assets:Restricted
      cash
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    965
    
    $
    -
    
    $
    -
    
    $
    965Trade
      accounts receivable and other current assets
    
    
    **-**
    
    
    18,693
    
    
    3,514
    
    
    3,589
    
    
    3,543
    
    
    3,496
    
    
    375
    
    
    570
    
    
    576
    
    
    34,356Due
      from affiliates
    
    
    32,667
    
    
    61,121
    
    
    63,291
    
    
    67,744
    
    
    56,111
    
    
    76,006
    
    
    -
    
    
    (1,118
    )
    
    (150,436
    )
    
    205,386Properties,
      plants, and equipment and intangible assets
    
    
    12,182
    
    
    10,565
    
    
    47,523
    
    
    43,718
    
    
    55,164
    
    
    46,245
    
    
    -
    
    
    9,788
    
    
    29,817
    
    
    255,002Management
      fee and goodwill
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    118,072
    
    
    118,072Investments
      in partnerships
    
    
    125,013
    
    
    340,518
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (465,531
    )
    
    -Total
      assets
    
    $
    169,862
    
    $
    430,897
    
    $
    114,328
    
    $
    115,051
    
    $
    114,818
    
    $
    125,747
    
    $
    1,340
    
    $
    9,240
    
    $
    (467,502
    )
    $
    613,781Liabilities
      and Guarantors' Equity:Accounts
      payable, accrued liabilities and deferred taxes
    
    $
    149
    
    $
    9,486
    
    $
    1,149
    
    $
    1,291
    
    $
    1,239
    
    $
    734
    
    $
    (1,904
    )
    $
    1,015
    
    $
    99,230
    
    $
    112,389Senior
      secured project notes
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    98,702
    
    
    98,702Total
      liabilities
    
    
    149
    
    
    9,486
    
    
    1,149
    
    
    1,291
    
    
    1,239
    
    
    734
    
    
    (1,904
    )
    
    1,015
    
    
    197,932
    
    
    211,091Guarantors'
      equity
    
    
    169,713
    
    
    421,411
    
    
    113,179
    
    
    113,760
    
    
    113,579
    
    
    125,013
    
    
    3,244
    
    
    8,225
    
    
    (665,434
    )
    
    402,690Total
      liabilities and guarantors' equity
    
    $
    169,862
    
    $
    430,897
    
    $
    114,328
    
    $
    115,051
    
    $
    114,818
    
    $
    125,747
    
    $
    1,340
    
    $
    9,240
    
    $
    (467,502
    )
    $
    613,781








59





**Vulcan**
    
    
    
    
    
    ****
    
    
    
    **Vulcan**
    
    **CalEnergy**
    
    
    
    **Adjustments/**
    
    **Combined****Power**
    
    **CEOC**
    
    **Elmore**
    
    **Del
      Ranch**
    
    **Leathers**
    
    **BNG**
    
    **Minerals**
    
    **Turbo**
    
    **Eliminations**
    
    **Total**December
      31, 2003:Assets:Restricted
      cash
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    441
    
    $
    -
    
    $
    -
    
    $
    441Trade
      accounts receivable and other current assets
    
    
    **-**
    
    
    17,716
    
    
    3,628
    
    
    3,471
    
    
    3,385
    
    
    3,452
    
    
    4,749
    
    
    681
    
    
    108
    
    
    37,190Due
      from affiliates
    
    
    33,628
    
    
    48,297
    
    
    58,832
    
    
    59,179
    
    
    54,883
    
    
    64,659
    
    
    56,764
    
    
    (2,684
    )
    
    (216,027
    )
    
    157,531Properties,
      plants, and equipment and intangible assets, net
    
    
    11,202
    
    
    13,333
    
    
    51,215
    
    
    51,037
    
    
    58,464
    
    
    54,141
    
    
    167,074
    
    
    9,043
    
    
    221,201
    
    
    636,710Management
      fee and goodwill
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    166,256
    
    
    166,256Investments
      in partnerships
    
    
    121,136
    
    
    341,755
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (462,891
    )
    
    -Total
      assets
    
    $
    165,966
    
    $
    421,101
    
    $
    113,675
    
    $
    113,687
    
    $
    116,732
    
    $
    122,252
    
    $
    229,028
    
    $
    7,040
    
    $
    (291,353
    )
    $
    998,128Liabilities
      and Guarantors' Equity:Accounts
      payable, accrued liabilities and deferred taxes
    
    $
    130
    
    $
    3,802
    
    $
    364
    
    $
    1,304
    
    $
    671
    
    $
    1,116
    
    $
    22,833
    
    $
    80
    
    $
    116,524
    
    $
    146,824Senior
      secured project notes
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    136,383
    
    
    -
    
    
    102,717
    
    
    239,100Total
      liabilities
    
    
    130
    
    
    3,802
    
    
    364
    
    
    1,304
    
    
    671
    
    
    1,116
    
    
    159,216
    
    
    80
    
    
    219,241
    
    
    385,924Guarantors'
      equity
    
    
    165,836
    
    
    417,299
    
    
    113,311
    
    
    112,383
    
    
    116,061
    
    
    121,136
    
    
    69,812
    
    
    6,960
    
    
    (510,594
    )
    
    612,204Total
      liabilities and guarantors' equity
    
    $
    165,966
    
    $
    421,101
    
    $
    113,675
    
    $
    113,687
    
    $
    116,732
    
    $
    122,252
    
    $
    229,028
    
    $
    7,040
    
    $
    (291,353
    )
    $
    998,128








60


Condensed
combining statements of operations including information of the Partnership
Guarantors' pro rata interest in the respective entities for the years ended
December 31, 2004, 2003 and 2002 are as follows (in thousands):





**Vulcan**
    
    
    
    
    
    ****
    
    
    
    **Vulcan**
    
    
    
    **CalEnergy**
    
    ****Adjustments/****
    
    ****Combined******Power**
    
    **CEOC**
    
    **Elmore**
    
    **Del
      Ranch**
    
    **Leathers**
    
    **BNG**
    
    **Turbo**
    
    **Minerals**
    
    ****Eliminations****
    
    **Total**December
      31, 2004:Revenue
    
    $
    677
    
    $
    5,372
    
    $
    23,163
    
    $
    22,587
    
    $
    22,543
    
    $
    21,798
    
    $
    4,381
    
    $
    -
    
    $
    (5,196
    )
    $
    95,325Costs
      and expenses
    
    
    677
    
    
    15
    
    
    23,295
    
    
    21,210
    
    
    25,025
    
    
    17,921
    
    
    3,118
    
    
    -
    
    
    (928
    )
    
    90,333Income
      (loss) from continuing operations
    
    
    -
    
    
    5,357
    
    
    (132
    )
    
    1,377
    
    
    (2,482
    )
    
    3,877
    
    
    1,263
    
    
    -
    
    
    (4,268
    )
    
    4,992Loss
      from discontinued operations
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (412,989
    )
    
    -
    
    
    (412,989
    )Net
      income (loss)
    
    $
    -
    
    $
    5,357
    
    $
    (132
    )
    $
    1,377
    
    $
    (2,482
    )
    $
    3,877
    
    $
    1,263
    
    $
    (412,989
    )
    $
    (4,268
    )
    $
    (407,997
    )December
      31, 2003:
      Revenue
    
    $
    648
    
    $
    5,071
    
    $
    23,821
    
    $
    23,204
    
    $
    23,347
    
    $
    21,615
    
    $
    3,388
    
    
    -
    
    $
    (4,928
    )
    $
    96,166Cost
      and expenses
    
    
    908
    
    
    470
    
    
    21,656
    
    
    20,402
    
    
    21,496
    
    
    15,737
    
    
    2,918
    
    
    -
    
    
    24,696
    
    
    108,283Income
      (loss) from continuing operations
    
    
    (260
    )
    
    4,601
    
    
    2,165
    
    
    2,802
    
    
    1,851
    
    
    5,878
    
    
    470
    
    
    -
    
    
    (29,624
    )
    
    (12,117
    )Loss
      fromdiscontinuedoperations
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (27,581
    )
    
    -
    
    
    (27,581
    )Net
      income (loss)
    
    $
    (260
    )
    $
    4,601
    
    $
    2,165
    
    $
    2,802
    
    $
    1,851
    
    $
    5,878
    
    $
    470
    
    $
    (27,581
    )
    $
    (29,624
    )
    $
    (39,698
    )December
      31, 2002:Revenue
    
    $
    1,352
    
    $
    4,214
    
    $
    23,712
    
    $
    23,702
    
    $
    23,564
    
    $
    22,222
    
    $
    2,246
    
    
    -
    
    $
    (4,860
    )
    $
    96,152Costs
      and expenses
    
    
    689
    
    
    -
    
    
    21,104
    
    
    19,812
    
    
    23,705
    
    
    15,822
    
    
    2,062
    
    
    -
    
    
    4,159
    
    
    87,353Income
      (loss) from continuing operations
    
    
    663
    
    
    4,214
    
    
    2,608
    
    
    3,890
    
    
    (141
    )
    
    6,400
    
    
    184
    
    
    -
    
    
    (9,019
    )
    
    8,799Loss
      from discontinued operations
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (19,627
    )
    
    -
    
    
    (19,627
    )Net
      income (loss)
    
    $
    663
    
    $
    4,214
    
    $
    2,608
    
    $
    3,890
    
    $
    (141
    )
    $
    6,400
    
    $
    184
    
    $
    (19,627
    )
    $
    (9,019
    )
    $
    (10,828
    )




(1)
    Adjustments
      and eliminations include, among other items, the year’s income tax benefit
      or provision, interest expense on senior secured project notes and the
      elimination of intercompany royalty and administration charges.
      Additionally, the Partnership Guarantors completed their 2003 annual
      goodwill impairment test as of October 31, 2003 and, as a result of the
      assessment, recognized an impairment of $21.2 million which is
      included as an adjustment to costs and expenses above in
    2003.





61


**9.** **Income
Taxes**





The
provision (benefit) for income tax from continuing operations for the years
ended December 31, 2004, 2003 and 2002 was as follows (in thousands):





**2004**
    
    **2003**
    
    **2002**Current:Federal
    
    $
    447
    
    $
    (940
    )
    $
    6,519State
    
    
    347
    
    
    (108
    )
    
    1,635794
    
    
    (1,048
    )
    
    8,154Deferred:Federal
    
    
    (4,123
    )
    
    2,371
    
    
    (6,326
    )State
    
    
    (838
    )
    
    667
    
    
    (1,463
    )(4,961
    )
    
    3,038
    
    
    (7,789
    )Total
      provision (benefit)
    
    $
    (4,167
    )
    $
    1,990
    
    $
    365





The net
deferred tax liability at December 31, 2004 and 2003 was as follows (in
thousands):





**2004**
    
    **2003**(As
      reclassified)Deferred
      tax liabilities-Properties,
      plant, contracts and equipment
    
    $
    (105,386
    )
    $
    (195,267
    )Deferred
      tax assets:Net
      operating loss carryforwards
    
    
    -
    
    
    53,115Accruals
      not currently deductible for tax purposes
    
    
    2,579
    
    
    2,929Energy
      credits
    
    
    5,379
    
    
    6,556AMT
      credit
    
    
    2,057
    
    
    2,057Total
      deferred tax assets
    
    
    10,015
    
    
    64,657Net
      deferred tax liabilities
    
    $
    (95,371
    )
    $
    (130,610
    )





Since the
commencement of operations in December 2002, the Zinc Recovery Project incurred
net operating losses, and accordingly, a deferred tax asset relating to the net
operating loss carryforwards was recognized. At December 31, 2003,
management believed based upon available evidence, that the amount of the
deferred tax asset recognized for net operating loss carryforwards would be
realized through future taxable income generated by the Mineral Assets. On
September 10, 2004, management made the decision to cease operations of the
Zinc Recovery Project. In connection with ceasing the operations and recognizing
the non-cash impairment charge, the Partnership Guarantors wrote-off the
deferred tax asset related to the net operating loss carryforwards as it became
evident that the asset would not be recoverable through future taxable income.
The income tax benefit recorded in connection with the impairment charge
represents the reversal of the book and tax basis differences related to
property, plant and equipment, net of the tax benefits previously recognized on
operating losses.




The
Partnership Guarantors have a federal energy tax credit carryforward of $5.4
million that begins to expire in 2021 unless previously utilized. The
Partnership Guarantors have a federal alternative minimum tax credit
carryforward of $2.1 million that does not expire and will carryforward
indefinitely until utilized.


The
reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income from continuing operations before provision for income
taxes is as follows:





**2004**
    
    **2003**
    
    **2002**Federal
      statutory rate
    
    
    35.0
    %
    
    35.0
    %
    
    35.0
    %Adjustments
      to taxes resulting from:Percentage
      depletion
    
    
    (335.2
    )
    
    20.4
    
    
    (33.2
    )Investment
      and energy tax credits
    
    
    (213.5
    )
    
    4.8
    
    
    (3.9
    )Goodwill
      impairment/amortization
    
    
    -
    
    
    (85.3
    )
    
    -State
      taxes, net of federal benefit
    
    
    8.5
    
    
    5.6
    
    
    6.0Other
    
    
    0.1
    
    
    (0.2
    )
    
    0.1Effective
      tax rate
    
    
    (505.1
    )%
    
    (19.7)
    %
    
    4.0
    %







62


During
2002, the Partnership Guarantors made progress on several significant income tax
examination matters for prior tax years, including percentage of depletion,
which resulted in a decrease in income tax expense of $3.1 million in 2002.
Federal and state income tax returns for 1999 through 2003 have been examined or
are currently under examination by the internal revenue service. The Partnership
Guarantors believe they have adequately reserved for federal and state income
taxes, and do not expect that resolution of these exams will have a materially
adverse effect on their financial condition, results of operation or
liquidity.


****


**10.** **Commitments
and Contingencies**





In
January 2001, the California Power Exchange declared bankruptcy. As a result, CE
Turbo has not received payment for power sold to EPME 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.





The Zinc
Recovery Project was being constructed by Kvaerner U.S. Inc. ("Kvaerner")
pursuant to a date certain, fixed-price, turnkey engineering, procure, construct
and manage contract (the "Zinc Recovery Project EPC Contract"). On June 14,
2001, CalEnergy Minerals issued notices of default termination and demand for
payment of damages to Kvaerner under the Zinc Recovery Project EPC Contract due
to failure to meet performance obligations. CalEnergy Minerals denied all
material allegations in Kvaerner’s Amended Demand for Arbitration, and asserted
a counterclaim against Kvaerner for breach of contract and specific performance.
On July 11, 2001, Kvaerner filed an Amended Demand for Arbitration against
CalEnergy Minerals. CalEnergy Minerals offset these damages by exercising its
rights under the EPC Contract to claim the retainage and by drawing on a letter
of credit. On May 23, 2002, CalEnergy Minerals and Kvaerner entered into a
Settlement Agreement. Under the terms of the agreement, CalEnergy Minerals
retained the amounts drawn under the letter of credit, the EPC retainage amounts
and the EPC contract balance and paid to Kvaerner $6.75 million in three equal
annual installments with the last installment being paid on December 31, 2004.





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.





63


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
December 31, 2004 and 2003, the environmental liabilities recorded on the
combined balance sheets were not material.








64


**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To the
Board of Directors and Members


Magma
Power Company


Omaha,
Nebraska





We have
audited the accompanying balance sheets of Salton Sea Royalty LLC (the
"Company") as of December 31, 2004 and 2003, and the related statements of
operations, members’ equity and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Standards Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such financial statements present fairly, in all material respects, the
financial position of Salton Sea Royalty LLC as of December 31, 2004 and 2003
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.





/s/
Deloitte and Touche LLP





Omaha,
Nebraska


February
25, 2005









65


**SALTON
SEA ROYALTY LLC**


**BALANCE
SHEETS**


(Amounts
in thousands, except per share data)





**As
      of December 31,****2004**
    
    **2003**Prepaid
      expenses and other current assets
    
    $
    -
    
    $
    5Royalty
      stream, net
    
    
    11,913
    
    
    13,002Goodwill
    
    
    30,464
    
    
    30,464Due
      from affiliates
    
    
    56,852
    
    
    48,413**Total
      assets**
    
    $
    99,229
    
    $
    91,884Current
      liabilities:Accrued
      interest
    
    $
    3
    
    $
    5Current
      portion of long-term debt
    
    
    437
    
    
    408Total
      current liabilities
    
    
    440
    
    
    413Senior
      secured project note
    
    
    -
    
    
    437Total
      liabilities
    
    
    440
    
    
    850Commitments
      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
    
    
    97,228
    
    
    89,473Total
      members’ equity
    
    
    98,789
    
    
    91,034**Total
      liabilities and members’ equity**
    
    $
    99,229
    
    $
    91,884





The
accompanying notes are an integral part of these financial
statements.





66


**SALTON
SEA ROYALTY LLC**


**STATEMENTS
OF OPERATIONS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenue
      - royalty income**
    
    $
    12,046
    
    $
    12,509
    
    $
    12,577**Costs
      and expenses:**Royalty,
      operating, general and administrative expenses
    
    
    3,145
    
    
    3,216
    
    
    3,280Amortization
      of royalty stream
    
    
    1,089
    
    
    1,009
    
    
    854Interest
      expense
    
    
    57
    
    
    85
    
    
    272Total
      costs and expenses
    
    
    4,291
    
    
    4,310
    
    
    4,406**Net
      income**
    
    $
    7,755
    
    $
    8,199
    
    $
    8,171





The
accompanying notes are an integral part of these financial
statements.





67


**SALTON
SEA ROYALTY LLC**


**STATEMENTS
OF MEMBERS' EQUITY**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**


(Amounts
in thousands, except share amounts)





**Additional****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Total****Shares**
    
    **Amount**
    
    **Capital**
    
    **Earnings**
    
    **Equity****Balance,
      January 1, 2002**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    73,103
    
    $
    74,664Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    8,171
    
    
    8,171**Balance,
      December 31, 2002**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    81,274
    
    $
    82,835Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    8,199
    
    
    8,199**Balance,
      December 31, 2003**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    89,473
    
    $
    91,034Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    7,755
    
    
    7,755**Balance,
      December 31, 2004**
    
    
    100
    
    $
    -
    
    $
    1,561
    
    $
    97,228
    
    $
    98,789





The
accompanying notes are an integral part of these financial
statements.





68


**SALTON
SEA ROYALTY LLC**


**STATEMENTS
OF CASH FLOWS**


(Amounts
in thousands)





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      flows from operating activities:**Net
      income
    
    $
    7,755
    
    $
    8,199
    
    $
    8,171Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of royalty stream
    
    
    1,089
    
    
    1,009
    
    
    854Changes
      in assets and liabilities:Prepaid
      expenses and other current assets
    
    
    5
    
    
    8
    
    
    18Accrued
      interest
    
    
    (2
    )
    
    (2
    )
    
    (22
    )Net
      cash flows from operating activities
    
    
    8,847
    
    
    9,214
    
    
    9,021**Net
      cash flows from financing activities:**Increase
      in due from affiliates
    
    
    (8,439
    )
    
    (8,910
    )
    
    (5,561
    )Repayment
      of senior secured project note
    
    
    (408
    )
    
    (304
    )
    
    (3,460
    )Net
      cash flows from financing activities
    
    
    (8,847
    )
    
    (9,214
    )
    
    (9,021
    )**Net
      change in cash**
    
    
    -
    
    
    -
    
    
    -**Cash
      at beginning of year**
    
    
    -
    
    
    -
    
    
    -**Cash
      at the end of year**
    
    $
    -
    
    $
    -
    
    $
    -**Supplemental
      disclosure:**Cash
      paid for interest
    
    $
    59
    
    $
    79
    
    $
    579





The
accompanying notes are an integral part of these financial
statements.





69


**SALTON
SEA ROYALTY LLC**


**NOTES
TO FINANCIAL STATEMENTS**


****


**1.** **Organization
and Operations**





Salton
Sea Royalty LLC (the "Royalty Company") is a special-purpose entity, 99% owned
by Magma Power Company ("Magma") and 1% owned by Salton Sea Funding Corporation
("Funding Corporation") an indirect wholly-owned subsidiary of Magma, which in
turn was wholly-owned by MidAmerican Energy Holdings Company
("MEHC").





On
February 8, 1999, MEHC created a new subsidiary, CE Generation, LLC ("CE
Generation") and subsequently transferred its interest in Magma and its power
generation assets in the Imperial Valley to CE Generation, with certain assets
being retained by MEHC. On March 3, 1999, MEHC closed the sale of 50% of its
ownership interests in CE Generation to El Paso CE Generation Holding Company
("El Paso"). On January 29, 2003, El Paso sold all its interest in CE Generation
to TransAlta USA Inc. ("TransAlta"), an affiliate of TransAlta
Corporation.





The
Royalty Company receives an assignment of royalties and certain fees paid by
three partnership projects; Del Ranch, Elmore and Leathers (collectively, the
"Partnership Projects"). All of the Partnership Projects are engaged in the
operation of geothermal power plants located in the Imperial Valley of
California. Substantially all of the assigned royalties are based on a
percentage of energy and capacity revenue of the Partnership
Projects.





Each of
the Partnership Projects sells electricity generated by the respective plants
pursuant to a separate Standard Offer No. 4 Agreement ("SO4 Agreement") between
the projects and Southern California Edison Company ("Edison"). These SO4
Agreements provide for capacity payments, capacity bonus payments and energy
payments. Edison makes fixed annual capacity payments to the projects, and to
the extent that capacity factors exceed certain benchmarks, is required to make
capacity bonus payments. The price for capacity and capacity bonus payments is
fixed for the life of the SO4 Agreements. Energy is sold at a rate based on the
cost that Edison avoids by purchasing energy from the project instead of
obtaining the energy from other sources ("Edison’s Avoided Cost of Energy"). In
June and November 2001, the Partnership Projects entered into agreements that
provide for a fixed energy payment per kilowatt-hour ("kWh") in lieu of Edison’s
Avoided Cost of Energy. The fixed energy payments were 3.25 cents per kWh from
December 1, 2001 through April 30, 2002 and 5.37 cents per kWh commencing May 1,
2002 for a five-year period. Following the five-year period, the energy payment
reverts back to Edison’s Avoided Cost of Energy.





For the
year ended December 31, 2004, 2003 and 2002, Edison's Avoided Cost of Energy was
5.9 cents, 5.4 cents, and 3.5 cents per kWh, respectively. Estimates of Edison's
Avoided Cost of Energy in the future vary substantially from year-to-year,
primarily based on the estimated future cost of gas.


****


**2.** **Summary
of Significant Accounting Policies**





Basis
of Presentation





The
accompanying statements of operations present revenue and expenses, which have
been assigned to the Royalty Company under the arrangements described above on
the accrual method of accounting. This presentation is a carve-out of
information from Magma and certain of its affiliates. Such revenue, net of
related expenses, guarantees loans from Funding Corporation.





The
financial statements reflect the acquisition of Magma and the resulting push
down to the Royalty Company of the accounting as a purchase business
combination.





Income
taxes are the responsibility of the members and the Royalty Company has no
obligation to provide funds to the members for payment of any tax liabilities.
Accordingly, the Royalty Company has no tax obligations.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.





70


Goodwill





The
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which establishes the accounting for
acquired goodwill and other intangible assets, and provides that goodwill and
indefinite-lived intangible assets will not be amortized, requires allocating
goodwill to each reporting unit and testing for impairment using a
two step approach. The goodwill impairment test is performed annually or
whenever an event has occurred that would more likely than not reduce the fair
value of the reporting unit below its carrying amount . The
Royalty Company completed its annual review pursuant to SFAS 142 as of
October 31, 2004 using a discounted cash flow methodology. No impairment
was indicated as a result of the assessment.





Royalty
Stream





The
Royalty Company's policy is to provide amortization expense beginning upon the
commencement of revenue production over the estimated remaining useful life of
the identifiable assets.





The
royalty streams have been assigned values separately for each of (1) the
remaining portion of the fixed price periods of the Projects’ power sales
agreements and (2) the 20-year avoided cost periods of the Projects’ power sales
agreements and are amortized separately over such periods using the straight
line method. At December 31, 2004 and 2003, accumulated amortization was
$48.6 million and $47.5 million, respectively.





The
Royalty Company periodically evaluates long-lived assets, including the royalty
steams, when events or changes in circumstances indicate that the carrying value
of these assets may not be recoverable. Upon the occurrence of a triggering
event, the carrying amount of a long-lived asset or intangible asset is reviewed
to assess whether the recoverable amount has declined below its carrying amount.
The recoverable amount is the estimated net future cash flows that the Royalty
Company expects to recover from the future use of the asset, undiscounted and
without interest, including the asset’s residual value on disposal. Where the
recoverable amount of the long-lived asset or intangible asset is less than the
carrying value, an impairment loss would be recognized to write down the asset
to its fair value that is based on discounted estimated cash flows from the
future use of the asset, including the asset’s residual value on
disposal.





Fair
Value of Financial Instruments





The fair
value of a financial instrument is the amount in which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts that the
Guarantors could realize in a current transaction.





The
methods and assumptions used to estimate fair value are as follows:





Debt-instruments
- The fair value of all debt instruments has been estimated based upon quoted
market prices as supplied by third-party broker dealers.


****


**3.** **Senior
Secured Project Note**





The
Royalty Company has a project note payable to Funding Corporation, with an
outstanding balance of $0.4 million and $0.8 million, respectively, at
December 31, 2004 and 2003 at an interest rate of 7.37%. The senior secured
project note will be paid in full in 2005.





The
estimated fair values of the senior secured project note at December 31, 2004
and 2003 were $0.4 million and $0.9 million,
respectively.





The
Royalty Company has also guaranteed, along with other guarantors, the debt of
Funding Corporation, which amounted to $298.4 million at December 31, 2004.
The guarantee issued is collateralized by a lien on substantially all the assets
of and a pledge of stock in the Royalty Company. The structure has been designed
to cross collateralize cash flows from each guarantor without cross
collateralizing all of the guarantors' assets.





71





**Item
9.** **Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.**





None.


****


**Item
9A.** **Controls and Procedures**





An
evaluation was performed under the supervision and with the participation of
Funding Corporation’s 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 December 31, 2004. Based on that evaluation, Funding
Corporation’s management, including the respective persons acting as chief
executive officer and chief financial officer, concluded that Funding
Corporation’s disclosure controls and procedures were effective. There have been
no significant changes during the period covered by this respect in Funding
Corporation’s internal controls or in other factors that could significantly
affect internal controls.


****


**Item
9B.** **Other
Information**




None.











72


**PART
III**


****


**Item
10.** **Directors and Executive Officers of the
Registrant.**





Set forth
below are the current executive officers of Funding Corporation and the
Guarantors and their positions with Funding Corporation and each of the
Guarantors (or general partner thereof):





**Executive
      Officer**
    
    **Position**Stefan
      A. Bird
    
    PresidentGregory
      E. Abel*
    
    DirectorWayne
      F. Irmiter
    
    Vice
      President and ControllerDouglas
      L. Anderson
    
    Senior
      Vice PresidentIan
      A. Bourne
    
    DirectorJ.
      Thomas Coyle
    
    DirectorPatrick
      J. Goodman
    
    DirectorMitchell
      L. Pirnie
    
    Vice
      President, General Counsel and Director*Gregory
      E. Abel is Director of CalEnergy Minerals and Salton Sea Minerals Corp.
      only.





STEFAN A.
BIRD, 38, President of CE Generation and each Guarantor subsidiary, is
responsible for independent power plant operations and construction in the
United States of America. Mr. Bird joined MEHC in January of 1998 as Project
Development Manager and was promoted to Vice President, Project Development in
August 1999. Prior to joining MEHC, Mr. Bird held various positions at Koch
Industries from 1989 to 1997 including Director of Finance, Latin America for
Koch Industries International in Mexico City; Director of Marketing and Risk
Manager for Koch Power Services in Houston, Texas; Senior Financial Analyst for
Koch International Finance Services in Fribourg, Switzerland; Project Manager,
Corporate Development for Koch Industries in Wichita, Kansas; and Project
Engineer and Maintenance Planner for Koch Refining Company in St. Paul,
Minnesota.





GREGORY
E. ABEL, 42, Director for CalEnergy Minerals and Salton Sea Minerals Corp. only.
Mr. Abel joined MEHC in 1992. Mr. Abel is a Chartered Accountant and
from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the San
Francisco office of Price Waterhouse, he was responsible for clients in the
energy industry.





WAYNE F.
IRMITER, 39, Vice President and Controller. Mr. Irmiter joined MEHC as Vice
President and Chief Accounting Officer in November 2002. Mr. Irmiter is a
Certified Public Accountant and from 1988 to 1993 he worked in public
accounting. Most recently, Mr. Irmiter was with Gateway, Inc. in various
management positions including Director-Strategic Initiatives and
Director-Finance.





DOUGLAS
L. ANDERSON, 46, Senior Vice President. Mr. Anderson joined MEHC in February
1993. Prior to that, Mr. Anderson was an attorney in private practice.





IAN A.
BOURNE, 57, Executive Vice President and Chief Financial Officer of TransAlta
Corporation and a director of CE Generation and each Guarantor subsidiary. Mr.
Bourne joined TransAlta Corporation in January 1998 as Senior Vice President and
Chief Financial Officer and was appointed to his current position June 1, 1998.
Immediately prior to joining TransAlta Corporation, Mr. Bourne had been Senior
Vice President and Chief Financial Officer of Canada Post Corporation from 1992.
Prior to 1992 Mr. Bourne gained extensive financial experience with General
Electric Company, including positions as European Treasurer, based in London;
Chief Financial Officer for GE Canada, and Chief Financial Officer for GE
Medical Systems Europe, based in Paris.





J. THOMAS
COYLE, 57, President of TransAlta Marketing, and a director of CE Generation and
each assigning subsidiary. Mr. Coyle joined TransAlta in 1998 as Director, Risk
Portfolio Management, Energy Marketing. Prior to joining TransAlta, Mr. Coyle
held various positions at Petro-Canada from 1986 to 1997 including Portfolio
Manager - Natural Gas Marketing, Manager Market Development - Natural Gas
Marketing and Risk Manager.








73


PATRICK
J. GOODMAN, 38, Senior Vice President and Chief Financial Officer of MEHC and
Director of CE Generation and each Guarantor subsidiary. Mr. Goodman joined
MEHC in 1995 and served in various accounting positions including Senior Vice
President and Chief Accounting Officer. Prior to joining MEHC, Mr. Goodman
was a financial manager for National Indemnity Company and a senior associate at
Coopers & Lybrand.





MITCHELL
L. PIRNIE, 46, Vice President, General Counsel and Director of CE Generation and
each Guarantor subsidiary. Mr. Pirnie joined MEHC in November 1997. Prior to
joining MEHC, Mr. Pirnie was engaged in the private practice of law in Omaha,
Nebraska.





**Audit
Committee and Audit Committee Financial Expert**





Funding
Corporation and the Guarantors do not have a separately designated audit
committee. No member of their respective Board of Directors, as applicable, has
the qualifications required to be considered an independent audit committee
financial expert for purposes of the SEC rules and regulations. Currently,
Funding Corporation and the Guarantors are not required to have an audit
committee or an audit committee financial expert under the Sarbanes-Oxley Act of
2002 or any other applicable regulation.


****


**Item
11.** **Executive Compensation.**





Funding
Corporation's and the Guarantors' directors and executive officers receive no
remuneration for serving in such capacities.


****


**Item
12.** **Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.**





Description
of Capital Stock





As of
December 31, 2004, the authorized capital stock of Funding Corporation consisted
of 1,000 shares of common stock, par value $0.01 per share (the "Common Stock"),
of which 100 shares were issued and outstanding. There is no public trading
market for the Common Stock. As of December 31, 2004, there was one holder of
record of the Common Stock. Holders of Common Stock are entitled to one vote per
share on any matter coming before the stockholders for a vote.





Funding
Corporation does not expect in the foreseeable future to pay any dividends on
the Common Stock. The Indenture contains certain restrictions on the payment of
dividends with respect to the Common Stock.





Principal
Holders





Since the
formation of Funding Corporation in June 1995, all of the outstanding shares of
Common Stock have been owned by Magma. Magma directly or indirectly owns all of
the capital stock of or partnership interests in Funding Corporation and the
Guarantors.


****


**Item
13.** **Certain Relationships and Related
Transactions.**





Other
Relationships and Related Transactions





The
Salton Sea Projects' and the Partnership Projects' geothermal power plants are
owned, administered and operated by Magma or subsidiaries of Magma. Geothermal
fluid supplying these facilities is provided from Magma's (or a subsidiary's)
geothermal resource holdings in the Salton Sea Known Geothermal Resource
Area.





In
providing rights to geothermal resources and/or geothermal fluids, administering
and operating the geothermal power plants, and disposing of solids from these
facilities, Magma (directly and through subsidiaries) receives certain
royalties, cost reimbursements and fees for its services and the rights it
provides. See the financial statements in Item 8.





In
January 2001, the California Power Exchange declared bankruptcy. As a result,
the Salton Sea Power and CE Turbo have not received payment of 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 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.





74


On
January 21, 2004, Salton Sea Power and CE Turbo entered into a Green Energy
Tag Purchase and Sale Agreement to sell the Green Tags associated with up to
931,800 MWh of available generation at the Salton Sea V and CE Turbo Projects
through December 31, 2008 to TransAlta Marketing at a market price per
Green Tag. Sales under this agreement commenced in July 2004.





Funding
Corporation believes that the transactions with related parties described above,
taking into consideration all of the respective terms and conditions of each of
the relevant contracts and agreements, are at least as favorable to the
Guarantors as those which could have been obtained from unrelated parties in
arms' length negotiations.





Relationship
of Funding Corporation and the Guarantors





Funding
Corporation is a wholly owned direct subsidiary of Magma organized for the sole
purpose of acting as issuer of the Securities. Funding Corporation is
restricted, pursuant to the terms of the Indenture, to acting as issuer of the
Securities and other indebtedness as permitted under the Indenture, making loans
to the Guarantors pursuant to the Credit Agreements, and transactions related
thereto. Funding Corporation and each of the Guarantors (and, in the case of
Salton Sea Brine Processing LP, SSPG, Elmore, Leathers, Del Ranch and Vulcan,
the general partners thereof) have been organized and are operated as legal
entities separate and apart from MEHC, TransAlta, CE Generation, Magma and any
other Affiliates of MEHC, TransAlta, CE Generation or Magma, and, accordingly,
the assets of Funding Corporation and the Guarantors (and, in the case of Salton
Sea Brine Processing LP, SSPG, Elmore, Leathers, Del Ranch and Vulcan, the
general partners thereof) will not be generally available to satisfy the
obligations of MEHC, CE Generation, Magma or any other Affiliates of MEHC,
TransAlta, CE Generation or Magma; provided, however, that unrestricted cash of
Funding Corporation and the Guarantors or other assets which are available for
distribution may, subject to applicable law and the terms of financing
arrangements of such parties, be advanced, loaned, paid as dividends or
otherwise distributed or contributed to MEHC, TransAlta, CE Generation, Magma or
Affiliates thereof.


****


**Item
14.** **Principal Accountant Fees and Services.**





MEHC
entered into an administrative services agreement with CE Generation. The
agreement includes principal accountant fees and services for CE Generation,
Funding Corporation and the Guarantors. Funding Corporation and the Guarantors
do not have preapproval policies and procedures and do not specifically identify
principal accountant fees and services as they are part of the administrative
fees paid to MEHC. The fees and services of Funding Corporation’s and the
Guarantors’ principal accountant are preapproved by the audit committee of MEHC.





75


**PART
IV**


**Item
15.** **Exhibits
and Financial Statement Schedules.**





(a)
    Financial
      Statements and Schedules(i)
    Financial
      StatementsFinancial
      Statements are included in Item 8 of this Form 10-K(ii)
    Financial
      Statement SchedulesSee
      Schedule II on page 77.Schedules
      not listed above have been omitted because they are either not applicable,
      not required or the information required to be set forth therein is
      included in the consolidated financial statements or notes
      thereto.(b)
    
    ExhibitsThe
      exhibitslistedon
      the accompanying Exhibit Index are filed as part of this Annual
      Report.(c)
    
    Financial
      statements required by Regulations S-X, which are excluded from the Annual
      Report by Rule 14a-3(b).Not
      Applicable








76


**SCHEDULE
II**








**SALTON
SEA FUNDING CORPORATION**


**COMBINED
VALUATION AND QUALIFYING ACCOUNTS**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 2004**





**Column
      A**
    
    **Column
      B**
    
    **Column
      C**
    
    **Column
      D**
    
    **Column
      E****Balance
      at**
    
    **Additions**
    
    
    
    **Balance****Beginning**
    
    **Charged**
    
    
    
    **at
      End****Decription**
    
    **of
      Year**
    
    **to
      Income**
    
    **Deductions**
    
    **of
      Year**Allowance
      for doubtful accountsSalton
      Sea Guarantors:Year
      ended 2004
    
    $
    5,477
    
    $
    -
    
    $
    (5,477)
    
    $
    -Year
      ended 2003
    
    $
    3,800
    
    $
    2,433
    
    $
    (756)
    
    $
    5,477Year
      ended 2002
    
    $
    9,829
    
    $
    756
    
    $
    (6,785)
    
    $
    3,800Partnership
      Guarantors:Year
      ended 2004
    
    $
    791
    
    $
    -
    
    $
    (791)
    
    $
    -Year
      ended 2003
    
    $
    2,696
    
    $
    -
    
    $
    (1,905)
    
    $
    791Year
      ended 2002
    
    $
    14,925
    
    $
    1,905
    
    $
    (14,134)
    
    $
    2,696








77


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SALTON
SEA FUNDING CORPORATION





By: /s/
Stefan Bird


Stefan Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








78


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SALTON
SEA BRINE PROCESSING, L.P.,


a
California limited partnership





By:
Salton Sea Power Company, a California


corporation,
its general partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








79


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SALTON
SEA POWER GENERATION, L.P.,


a
California limited partnership





By:
Salton Sea Power Company, a California


corporation,
its general partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








80


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





FISH LAKE
POWER LLC





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








81


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





VULCAN
POWER COMPANY





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








82


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





CALENERGY
OPERATING CORPORATION





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








83


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SALTON
SEA ROYALTY LLC





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








84


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





LEATHERS,
L.P.,


a
California limited partnership





By:
CalEnergy Operating Corporation,


a
Delaware corporation, its general partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








85


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2004.





ELMORE
L.P.,


a
California limited partnership





By:
CalEnergy Operating Corporation,


a
Delaware corporation, its general partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








86


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





DEL RANCH
L.P.,


a
California limited partnership





By:
CalEnergy Operating Corporation,


a
Delaware corporation, its general partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








87


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





VPC
GEOTHERMAL LLC,


a
Delaware corporation





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








88


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





NIGUEL
ENERGY COMPANY,


a
California corporation





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








89


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





CONEJO
ENERGY COMPANY,


a
California corporation








By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








90


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SAN
FELIPE ENERGY COMPANY,


a
California corporation





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








91


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





VULCAN/BN
GEOTHERMAL POWER COMPANY,


a Nevada
general partnership





By:
VULCAN POWER COMPANY,


a Nevada
corporation, Partner





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








92


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





SALTON
SEA POWER L.L.C.,


a
Delaware Limited Liability Company





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








93


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





CE TURBO
LLC,


a
Delaware Limited Liability Company





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director











94


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





CE SALTON
SEA INC.,


a
Delaware Corporation





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Wayne F. Irmiter
    
    February
      25, 2005Wayne
      F. IrmiterVice
      President and Controller(Principal
      Accounting Officer)/s/
      Ian A. Bourne
    
    February
      25, 2005Ian
      A. BourneDirector/s/
      J. Thomas Coyle
    
    February
      25, 2005J.
      Thomas CoyleDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director











95


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February 25, 2005.





CALENERGY
MINERALS LLC,


a
Delaware Limited Liability Company





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Gregory E. Abel
    
    February
      25, 2005Gregory
      E. AbelDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








96


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Omaha, State of
Nebraska, on February __, 2005.





SALTON
SEA MINERALS CORP.,


a
Delaware Corporation





By: /s/
Stefan A. Bird


Stefan A.
Bird


President





Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, each thereunto
duly authorized in the City of Omaha, State of Nebraska, on the dates
indicated.





Signature
    
    Date/s/
      Stefan A. Bird
    
    February
      25, 2005Stefan
      A. BirdPresident(Principal
      Executive Officer)/s/
      Gregory E. Abel
    
    February
      25, 2005Gregory
      E. AbelDirector/s/
      Patrick J. Goodman
    
    February
      25, 2005Patrick
      J. GoodmanDirector/s/
      Mitchell L. Pirnie
    
    February
      25, 2005Mitchell
      L. PirnieVice
      President, General Counsel and Director








97





**EXHIBIT INDEX**








Exhibit
No.





3.1
    Articles
      of Incorporation of the Funding Corporation (incorporated by reference to
      Exhibit 3.1 to the Funding Corporation Registration Statement on Form S-4
      dated August 9, 1995, 33-95538 ("Form S-4")).3.2
    By-laws
      of the Funding Corporation (incorporated by reference to Exhibit 3.2 to
      the Funding Corporation Form S-4).3.3
    Limited
      Partnership Agreement of SSBP (incorporated by reference to Exhibit 3.3 to
      the Funding Corporation Form S-4).3.4
    Limited
      Partnership Agreement of SSPG (incorporated by reference to Exhibit 3.4 to
      the Funding Corporation Form S-4).3.5
    Certificate
      of Formation of Fish Lake, LLC (incorporated by reference to Exhibit 3.5
      to the Amendment No. 1 dated June 29, 1999 of the Funding Corporation Form
      S-4 ("99 Form S 4)).3.6
    Limited
      Liability Company Agreement of Fish Lake (incorporated by reference to
      Exhibit 3.6 to the Funding Corporation Form 99 Form
  S-4).3.7
    Articles
      of Incorporation of VPC (incorporated by reference to Exhibit 3.7 to the
      Funding Corporation Form S-4).3.8
    By-laws
      of VPC (incorporated by reference to Exhibit 3.8 to the Funding
      Corporation Form S-4).3.9
    Articles
      of Incorporation of CEOC (incorporated by reference to Exhibit 3.9 to the
      Funding Corporation Form S-4).3.10
    By-laws
      of CEOC (incorporated by reference to Exhibit 3.10 to the Funding
      Corporation Form S-4).3.11
    Certificate
      of Formation of the Royalty Guarantor (incorporated by reference to
      Exhibit 3.11 to the Funding Corporation 99 Form S-4).3.12
    Limited
      Liability Company Agreement of the Royalty Guarantor (incorporated by
      reference to Exhibit 3.12 to the Funding Corporation 99 Form
      S-4).3.13
    Certificate
      of Formation of VPC Geothermal (incorporated by reference to Exhibit 3.13
      to the Funding Corporation 99 Form S 4).3.14
    Limited
      Liability Company Agreement of VPG Geothermal (incorporated by reference
      to Exhibit 3.14 to the Funding Corporation 99 Form
S-4).3.15
    Articles
      of Incorporation of San Felipe (incorporated by reference to Exhibit 3.15
      to the Funding Corporation Registration Statement of Form S-4 dated July
      2, 1996, 333-07527 ("Funding Corporation II Form
S-4")).3.16
    By-laws
      of San Felipe (incorporated by reference to Exhibit 3.16 to the Funding
      Corporation II Form S-4).3.17
    Articles
      of Incorporation of Conejo (incorporated by reference to Exhibit 3.17 to
      the Funding Corporation II Form S-4).3-18
    By-laws
      of Conejo (incorporated by reference to Exhibit 3.18 to the Funding
      Corporation II Form S-4).3.19
    Articles
      of Incorporation of Niguel (incorporated by reference to Exhibit 3.19 to
      the Funding Corporation II Form S-4).
  98
 3.20
    By-laws
      of Niguel (incorporated by reference to Exhibit 3.20 to the Funding
      Corporation II Form S-4).3.21
    General
      Partnership Agreement of Vulcan (incorporated by reference to Exhibit 3.21
      to the Funding Corporation II Form S-4).3.22
    Limited
      Partnership Agreement of Leathers (incorporated by reference to Exhibit
      3.22 to the Funding Corporation II Form S-4).3.23
    Amended
      and Restated Limited Partnership Agreement of Del Ranch (incorporated by
      reference to Exhibit 3.23 to the Funding Corporation II Form
      S-4).3.24
    Amended
      and Restated Limited Partnership Agreement of Elmore (incorporated by
      reference to Exhibit 3.24 to the Funding Corporation II Form
      S-4).3.25
    Certificate
      of Formation of CalEnergy Minerals LLC (incorporated by reference to
      Exhibit 3.25 to the Funding Corporation 99 Form S-4)3.26
    Limited
      Liability Company Agreement of CalEnergy Minerals LLC (incorporated by
      reference to Exhibit 3.26 to the Funding Corporation 99 Form
      S-4).3.27
    Certificate
      of Formation of CE Turbo LLC (incorporated by reference to Exhibit 3.27 to
      the Funding Corporation 99 Form S-4).3.28
    Limited
      Liability Company Agreement of CE Turbo LLC (incorporated by reference to
      Exhibit 3.28 to the Funding Corporation 99 Form S-4).3.29
    Articles
      of Incorporation of CESS (incorporated by reference to Exhibit 3.29 to the
      Funding Corporation 99 Form S-4).3.30
    By-laws
      of CESS (incorporated by reference to Exhibit 3.30 to the Funding
      Corporation 99 Form S-4).3.31
    Articles
      of Incorporation of SSMC (incorporated by reference to Exhibit 3.31 to the
      Funding Corporation 99 Form S-4).3.32
    By-laws
      of SSMC (incorporated by reference to Exhibit 3.32 to the Funding
      Corporation 99 Form S-4).3.33
    Certificate
      of Formation of Power LLC (incorporated by reference to Exhibit 3.33 to
      the Funding Corporation 99 Form S-4).3.34
    Limited
      Liability Company Agreement of Power LLC (incorporated by reference to
      Exhibit 3.34 to the Funding Corporation 99 Form S-4).4.1(a)
    Indenture,
      dated as of July 21, 1995, between Chemical Trust Company of California
      and the Funding Corporation (incorporated by reference to Exhibit 4.1(a)
      to the Funding Corporation FormS-4).4.1(b)
    First
      Supplemental Indenture, dated as of October 18, 1995, between Chemical
      Trust Company of California and the Funding Corporation (incorporated by
      reference to Exhibit 4.1(b) to the Funding Corporation Form
      S-4).4.1(c)
    Second
      Supplemental Indenture, dated as of June 20, 1996, between Chemical Trust
      Company of California and the Funding Corporation (incorporated by
      reference to Exhibit 4.1(c) to the Funding Corporation II Form
      S-4).4.1(d)
    Third
      Supplemental Indenture between Chemical Trust Company of California and
      the Funding Corporation (incorporated by reference to Exhibit 4.1(d) to
      the Funding Corporation II Form S-4).4.1(e)
    Fourth
      Supplemental Indenture between Chemical Trust Company of California and
      the Funding Corporation (incorporated by reference to Exhibit 4.1(e) to
      the Funding Corporation Form 10-K/A for the year ending December 31,
      1998).
  99
 4.2
    Amended
      and Restated Salton Sea Secured Guarantee, dated as of July 21, 1995, by
      SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.2 to the Funding Corporation Form
      S-4).4.3
    Second
      Amended and Restated Partnership Secured Limited Guarantee, dated as of
      October 13, 1998 by CEOC, and VPC, Conejo, Niguel, Sal Felipe, BNG, Del
      Ranch, Elmore, Leathers and Vulcan in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.3(c) to the Funding
      Corporation Form 10-K/A for the year ending December 31,
      1998).4.4
    Royalty
      Guarantor Secured Limited Guarantee, dated as of July 21, 1995, by the
      Royalty Guarantor in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.4 to the Funding Corporation Form
      S-4).4.5
    Intentionally
      left blank.4.6(a)
    Collateral
      Agency and Intercreditor Agreement, dated as of July 21, 1995, by and
      among Credit Suisse, Chemical Trust Company of California, the Funding
      Corporation and the Guarantors (incorporated by reference to Exhibit 4.6
      to the Funding Corporation Form S-4).4.6(b)
    First
      Amendment to the Collateral Agency and Intercreditor Agreement, dated as
      of June 20, 1996, by and among Credit Suisse, Chemical Trust Company of
      California, the Funding Corporation and the Guarantors (incorporated by
      reference to Exhibit 4.6(b) to the Funding Corporation II Form
      S-4).4.6(c)
    Second
      Amendment to the Collateral Agency and Intercreditor Agreement, dated as
      of October 13, 1998, by and among Credit Suisse, Chemical Trust Company of
      California, the Funding Corporation and the Guarantors (incorporated by
      reference to Exhibit 4.6(c) to the Funding Corporation Form 10-K/A for the
      year ending December 31, 1998).4.7
    Stock
      Pledge Agreement, dated as of July 21, 1995, by Magma Power Company in
      favor of Chemical Trust Company of California (incorporated by reference
      to Exhibit 4.7 to the Funding Corporation Form S-4).4.8
    Intentionally
      left blank.4.9
    Support
      Letter, dated as of July 21, 1995, by and among Magma Power Company, the
      Funding Corporation and the Guarantors (incorporated by reference to
      Exhibit 4.9 to the Funding Corporation Form S-4).4.10
    Debt
      Service Reserve Letter of Credit and Reimbursement Agreement, dated as of
      July 21, 1995, by and among the Funding Corporation, certain banks and
      Credit Suisse, as agent (incorporated by reference to Exhibit 4.10 to the
      Funding Corporation Form S-4).4.10(a)
    Amendment
      to Notes and to Amended Debt Service Reserve Letter of Credit and
      Reimbursement Agreement, dated October 13, 1998, by and among the Funding
      Corporation, certain banks and Credit Suisse, as agent (incorporated by
      reference to Exhibit 4.10(a) to the Funding Corporation Form 10-K/A for
      the year ending December 31, 1998).4.11
    Revolving
      Credit Agreement, dated as of July 21, 1995, by and among Credit Suisse
      and the Funding Corporation (incorporated by reference to Exhibit 4.11 to
      the Funding Corporation Form S-4).4.12
    Amended
      and Restated Salton Sea Credit Agreement, dated October 13, 1998, by and
      among SSBP, SSPG, Power LLC and Fish Lake (incorporated by reference to
      Exhibit 4.12 to the Funding Corporation 99 Form S-4).4.13
    Salton
      Sea Project Note (SSI), dated October 13, 1998, by SSBP, SSPG, Power LLC
      and Fish Lake in favor of the Funding Corporation (incorporated by
      reference to Exhibit 4.13 to the Funding Corporation 99 Form
      S-4).4.13a
    Salton
      Sea Project Note (SSIII), dated October 13, 1998, by SSBP, SSPG, Power LLC
      and Fish Lake in favor of the Funding Corporation (incorporated by
      reference to Exhibit 4.13(a) to the Funding Corporation 99 Form
      S-4).
  100
 4.14
    Amended
      and Restated Deposit and Disbursement Agreement, dated as of October 13,
      1998, by and among the Funding Corporation, Chemical Trust Company of
      California and the Guarantors. (incorporated by reference to Exhibit 4.14
      to the Funding Corporation 99 Form S-4).4.15
    Partnership
      Interest Pledge Agreement, dated as of July 21, 1995, by Magma Power
      Company and Salton Sea Power Company in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.15 to the Funding
      Corporation Form S-4).4.16
    Partnership
      Interest Pledge Agreement, dated as of July 21, 1995, by SSBP and Salton
      Sea Power Company in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.16 to the Funding Corporation Form
      S-4).4.17
    Stock
      Pledge Agreement (Pledge of Stock of Fish Lake by Magma Power Company and
      the Funding Corporation), dated as of July 21, 1995, by Magma Power
      Company and the Funding Corporation in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.17 to the Funding
      Corporation Form S-4).4.18
    Cost
      Overrun Commitment, dated as of July 21, 1995, between MidAmerican, SSPG,
      SSBP and Fish Lake (incorporated by reference to Exhibit 4.18 to the
      Funding Corporation Form S-4).4.19
    Second
      Amended and Restated Partnership Guarantors Credit Agreement, dated
      October 13, 1998, by and among the Partnership Guarantors and the Funding
      Corporation (incorporated by reference to Exhibit 4.19(c) to the Funding
      Corporation Form 10-K/A).4.20
    Partnership
      Guarantors Security Agreement and Assignment of Rights, dated as of July
      21, 1995, by CEOC and VPC in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.20 to the Funding Corporation Form
      S-4).4.21
    Stock
      Pledge Agreement (Pledge of Stock of CEOC by Magma Power Company and the
      Funding Corporation), dated as of July 21, 1995, by Magma Power Company
      and Funding Corporation in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.21 to the Funding Corporation Form
      S-4).4.22
    Stock
      Pledge Agreement (Pledge of Stock of VPC by Magma Power Company and the
      Funding Corporation), dated as of July 21, 1995, by Magma Power Company
      and the Funding Corporation in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.22 to the Funding
      Corporation Form S-4).4.23
    Royalty
      Guarantor Credit Agreement, among the Royalty Guarantor and the Funding
      Corporation, dated as of July 21, 1995 (incorporated by reference to
      Exhibit 4.23 to the Funding Corporation Form S-4).4.24
    Royalty
      Project Note, dated as of July 21, 1995, by the Royalty Guarantor in favor
      of the Funding Corporation (incorporated by reference to Exhibit 4.24 to
      the Funding Corporation Form S-4).4.25
    Royalty
      Security Agreement and Assignment of Revenues, dated as of July 21, 1995,
      by the Royalty Guarantor in favor of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.25 to the Funding Corporation Form
      S-4).4.26
    Royalty
      Deed of Trust, dated as of July 21, 1995, by the Royalty Guarantor to
      Chicago Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.26 to the Funding
      Corporation Form S-4).4.27
    Stock
      Pledge Agreement (Pledge of Stock of Royalty Guarantor by Magma Power
      Company and the Funding Corporation), dated as of July 21, 1995, by Magma
      Power Company and the Funding Corporation in favor of Chemical Trust
      Company of California (incorporated by reference to Exhibit 4.27 to the
      Funding Corporation Form S-4).
  101
 4.28
    Collateral
      Assignment of the Imperial Irrigation District Agreements, dated as of
      July 21, 1995, by SSBP, SSPG and Fish Lake in favor of Chemical Trust
      Company of California (incorporated by reference to Exhibit 4.28 to the
      Funding Corporation Form S-4).4.29
    Collateral
      Assignments of Certain Salton Sea Agreements, dated as of July 21, 1995,
      by SSBP, SSPG and Fish Lake in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.29 to the Funding
      Corporation Form S-4).4.30
    Debt
      Service Reserve Letter of Credit by Credit Suisse in favor of Chemical
      Trust Company of California (incorporated by reference to Exhibit 4.30 to
      the Funding Corporation Form S-4).4.31
    Partnership
      Project Note (SSI), dated October 13, 1998, by VPC and CEOC, Conejo, San
      Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE
      Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation
      (incorporated by reference to Exhibit 4.31(a) to the Funding Corporation
      Form 10-K/A).4.31(a)
    Partnership
      Project Note (SSII), dated October 13, 1998, by VPC and CEOC, Conejo, San
      Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE
      Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation
      (incorporated by reference to Exhibit 4.31(b) to the Funding Corporation
      Form 10-K/A).4.31(b)
    Partnership
      Project Note (SSIII), dated October 13, 1998, by VPC and CEOC, Conejo, San
      Felipe, Niguel, VPC Geothermal, Del Ranch, Elmore, Leathers, Vulcan, CE
      Turbo LLC and CalEnergy Minerals LLC in favor of the Funding Corporation
      (incorporated by reference to Exhibit 4.31(c) to the Funding Corporation
      Form 10-K/A).4.32
    Collateral
      Assignment of the Imperial Irrigation District Agreements, dated as of
      June 20, 1996, by Vulcan, Elmore, Leathers, VPC and Del Ranch in favor of
      Chemical Trust Company of California (incorporated by reference to Exhibit
      4.29 to the Funding Corporation II Form S-4).4.33
    Collateral
      Assignments of Certain Partnership Agreements, dated as of June 20, 1996,
      by Vulcan Elmore, Leathers and Del Ranch in favor of Chemical Trust
      Company of California (incorporated by reference to Exhibit 4.31 to the
      Funding Corporation II Form S-4).4.34
    Debt
      Service Reserve Letter of Credit by Credit Suisse in favor of Chemical
      Trust Company of California (incorporated by reference to Exhibit 4.32 to
      the Funding Corporation II Form S-4).4.35
    Intentionally
      Omitted.4.36
    Intentionally
      Omitted4.37
    Deed
      of Trust, dated as of June 20, 1996, by Vulcan to Chicago Title Company
      for the use and benefit of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.35 to the Funding Corporation II
      Form S-4).4.37(a)
    First
      Amendment to Deed of Trust, dated October 13, 1998 by Vulcan to Chicago
      Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.37(a) to the Form
      10-K/A).4.38
    Deed
      of Trust, dated as of June 20, 1996, by Elmore to Chicago Title Company
      for the use and benefit of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.36 to the Funding Corporation II
      Form S-4).4.38(a)
    First
      Amendment to Deed of Trust, dated October 13, 1998, by Elmore to Chicago
      Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.38(a) to the Form
      10-K/A).4.39
    Deed
      of Trust, dated as of June 20, 1996, by Leathers to Chicago Title Company
      for the use and benefit of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.37 to the Funding Corporation II
      Form S-4).
  102
 4.39(a)
    First
      Amendment to Deed of Trust, dated October 13, 1998, by Leathers to Chicago
      Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.39(a) to the Form
      10-K/A).4.40
    Deed
      of Trust, dated as of June 20, 1996, by Del Ranch to Chicago Title Company
      for the use and benefit of Chemical Trust Company of California
      (incorporated by reference to Exhibit 4.38 to the Funding Corporation II
      Form S-4).4.40(a)
    First
      Amendment to Deed of Trust, dated October 13, 1998, by Del Ranch to
      Chicago Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 4.40(a) to the Form
      10-K/A).4.41
    Stock
      Pledge Agreement, Dated as of June 20, 1996, by CEOC, pledging the stock
      of Conejo, Niguel and San Felipe in favor of Chemical Trust Company of
      California for the benefit of the Secured Parties and the Funding
      Corporation (incorporated by reference to Exhibit 4.39 to the Funding
      Corporation II Form S-4).4.42
    Stock
      Pledge Agreement, dated as of June 20, 1996, by VPC, pledging the stock of
      BNG in favor of Chemical Trust Company of California for the benefit of
      the Secured Parties and the Funding Corporation (incorporated by reference
      to Exhibit 4.40 to the Funding Corporation II Form
S-4).4.43
    Partnership
      Interest Pledge Agreement, dated as of June 20, 1996, by VPC and BNG,
      pledging the partnership interests in Vulcan in favor of Chemical Trust
      Company of California for the benefit of the Secured Parties and the
      Funding Corporation (incorporated by reference to Exhibit 4.41 to the
      Funding Corporation II Form S-4).4.44
    Partnership
      Interest Pledge Agreement, dated as of June 20, 1996, by Magma, CEOC and
      each of Conejo, Niguel, San Felipe, respectively, pledging the partnership
      interests in Del Ranch, Elmore and Leathers, respectively, in favor of
      Chemical Trust Company of California for the benefit of the Secured
      Parties and the Funding Corporation (incorporated by reference to Exhibit
      4.42 to the Funding Corporation II Form S-4).4.45
    Agreement
      regarding Security Documents, dated as of June 20, 1996, by and among the
      Initial Guarantors, Magma, SSPC, the Funding Corporation and Chemical
      Trust Company of California (incorporated by reference to Exhibit 4.45 to
      the Funding Corporation II Form S-4).10.1(a)
    Salton
      Sea Deed of Trust, Assignment of Rents, Security Agreement and Fixture
      Filing, dated as of July 21, 1995, by SSBP, SSPG and Fish Lake to Chicago
      Title Company for the use and benefit of Chemical Trust Company of
      California (incorporated by reference to Exhibit 10.1 to the Funding
      Corporation Form S-4) .10.1(b)
    First
      Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security
      Agreement and Fixed Filing, dated as of June 20, 1996, by SSBP, SSPG and
      Fish Lake to Chicago Title Company for the use and benefit of Chemical
      Trust Company of California (incorporated by reference to Exhibit 10.2 to
      the Funding Corporation II Form S-4).10.1(c)
    Second
      Amendment to Salton Sea Deed of Trust, Assignment of Rents, Security
      Agreement and Fixed Filing, dated as of October 13, 1998, by SSBP, SSPG
      and Fish Lake to Chicago Title Company for the use and benefit of Chemical
      Trust Company of California (incorporated by reference to Exhibit 10.1(c)
      to the Form 10-K/A).10.2
    Collateral
      Assignment of Southern California Edison Company Agreements, dated as of
      July 21, 1995, by SSPG and Fish Lake in favor of Chemical Trust Company of
      California (incorporated by reference to Exhibit 10.3 to the Funding
      Corporation Form S-4)10.3
    Contract
      for the Purchase and Sale of Electric Power from the Salton Sea Geothermal
      Facility, dated May 9, 1987 (the "Unit 1 Power Purchase Agreement"),
      between Southern California Edison Company and Earth Energy, Inc.
      (incorporated by reference to Exhibit 10.4 to the Funding Corporation Form
      S-4).10.4
    Amendment
      No. 1 to the Unit 1 Power Purchase Agreement, dated as of March 30, 1993,
      between Southern California Edison Company and Earth Energy, Inc.
      (incorporated by reference to Exhibit 10.5 to the Funding Corporation Form
      S-4).
  103
 10.5
    Amendment
      No. 2 to Unit 1 Power Purchase Agreement, dated November 29, 1994, between
      Southern California Edison Company and SSPG (incorporated by reference to
      Exhibit 10.6 to the Funding Corporation Form S-4).10.6
    Contract
      for the Purchase and Sale of Electric Power, dated April 16, 1985 (the
      "Unit 2 Power Purchase Agreement"), between Southern California Edison
      Company and Westmoreland Geothermal Associates (incorporated by reference
      to Exhibit 10.7 to the Funding Corporation Form S-4).10.7
    Amendment
      No. 1 to Unit 2 Power Purchase Agreement, dated as of December 18, 1987,
      between Southern California Edison Company and Earth Energy, Inc.
      (incorporated by reference to Exhibit 10.8 to the Funding Corporation Form
      S-4).10.8
    Power
      Purchase Contract, dated April 16, 1985 (the "Unit 3 Power Purchase
      Agreement"), between Southern California Edison Company and Union Oil
      Company of California (incorporated by reference to Exhibit 10.9 to the
      Funding Corporation Form S-4).10.9
    Power
      Purchase Contract (the "Unit 4 Power Purchase Agreement"), dated November
      29, 1994, between Southern California Edison Company, SSPG and Fish Lake
      (incorporated by reference to Exhibit 10.10 to the Funding Corporation
      Form S-4).10.10
    Plant
      Connection Agreement (Unit 2), dated October 3, 1989, between the Imperial
      Irrigation District and Earth Energy, Inc. (incorporated by reference to
      Exhibit 10.11 to the Funding Corporation Form S-4).10.11
    Plant
      Connection Agreement, dated August 2, 1988 (Unit 3), between the Imperial
      Irrigation District and Desert Power Company (incorporated by reference to
      Exhibit 10.12 to the Funding Corporation Form S-4).10.12
    Imperial
      Irrigation District Funding and Construction Agreements as amended (Units
      2 and 3), dated as of June 29, 1987, among the Imperial Irrigation
      District, Earth Energy, Inc., Chevron Geothermal Company of California,
      Geo East Mesa No. 3, Inc., Magma Power Company, Desert Power Company, Geo
      East Mesa No. 2, Inc., Heber Geothermal Company, Ormesa Geothermal, Ormesa
      Geothermal II, Vulcan/BN Geothermal Power Company, Union Oil Company of
      California, Del Ranch L.P., Elmore L.P., Leathers L.P., Geo East Mesa
      Limited Partnership and Imperial Resource Recovery Associates, L.P.
      (incorporated by reference to Exhibit 10.13 to the Funding Corporation
      Form S-4).10.13
    Transmission
      Service Agreement, dated as of October 3, 1989 (Unit 2), between the
      Imperial Irrigation District and Earth Energy, Inc. (incorporated by
      reference to Exhibit 10.14 to the Funding Corporation Form
      S-4).10.14
    Transmission
      Service Agreement, dated as of August 2, 1988 (Unit 3), between the
      Imperial Irrigation District and Desert Power Company (incorporated by
      reference to Exhibit 10.15 to the Funding Corporation Form
      S-4).10.15
    Plant
      Connection Agreement (Unit 4), dated as of July 14, 1995, by and between
      the Imperial Irrigation District, SSPG and Fish Lake (incorporated by
      reference to Exhibit 10.16 to the Funding Corporation Form S-4).10.16
    Letter
      Agreement, dated February 2, 1995, between Magma Power Company and the
      Imperial Irrigation District (incorporated by reference to Exhibit 10.17
      to the Funding Corporation Form S-4).10.17
    Transmission
      Service Agreement (Unit 4), dated as of July 14, 1995, by and between the
      Imperial Irrigation District, SSPG and Fish Lake (incorporated by
      reference to Exhibit 10.18 to the Funding Corporation Form
      S-4).10.18
    Transmission
      Line Construction Agreement (Unit 4), dated July 14, 1995, between the
      Imperial Irrigation District, SSPG and Fish Lake (incorporated by
      reference to Exhibit 10.19 to the Funding Corporation Form
      S-4).10.19
    Funding
      Agreement, dated June 15, 1988 (Unit 2), between Southern California
      Edison Company and Earth Energy, Inc. (incorporated by reference to
      Exhibit 10.20 to the Funding Corporation Form S-4).10.20
    Second
      Amended and Restated Administrative Services Agreement, by and among CEOC,
      SSBP, SSPG and Fish Lake, dated as of July 15, 1995 (incorporated by
      reference to Exhibit 10.21 to the Funding Corporation Form
      S-4).
  104
 10.21
    Second
      Amended and Restated Operating and Maintenance Agreement, dated as of July
      15, 1995, by and among Magma Power Company, SSBP, SSPG and Fish Lake
      (incorporated by reference to Exhibit 10.22 to the Funding Corporation
      Form S-4).10.22
    Intentionally
      Omitted.10.23
    Collateral
      Assignment of Southern California Edison Company Agreements, dated as of
      June 20, 1996, by Vulcan, Elmore, Leathers and Del Ranch in favor of
      Chemical Trust Company of California (incorporated by reference to Exhibit
      10.23 to the Funding Corporation II Form S-4).10.24
    Administrative
      Services Agreement, dated as of June 17, 1996, between CEOC and Vulcan
      (incorporated by reference to Exhibit 10.24 to the Funding Corporation II
      Form S-4).10.25
    Amended
      and Restated Construction, Operating and Accounting Agreement, dated as of
      June 17, 1996, between VPC and Vulcan (incorporated by reference to
      Exhibit 10.25 to the Funding Corporation IIForm
      S-4).10.26
    Long
      Term Power Purchase Contract, dated March 1, 1984, as amended, between SCE
      and Vulcan, as successor to Magma Electric Company (incorporated by
      reference to Exhibit 10.26 to the Funding Corporation II Form
      S-4).10.27
    Transmission
      Service Agreement, dated December 1, 1988, between VPC and IID
      (incorporated by reference to Exhibit 10.27 to the Funding Corporation II
      Form S-4).10.28
    Plant
      Connection Agreement, dated as of December 1, 1988, between VPC and IID
      (incorporated by reference to Exhibit 10.28 to the Funding Corporation II
      Form S-4).10.29
    Amended
      and Restated Administrative Services Agreement, dated as of June 17, 1996
      between CEOC and Elmore (incorporated by reference to Exhibit 10.29 to the
      Funding Corporation II Form S-4).10.30
    Amended
      and Restated Operating and Maintenance Agreement, dated as of June 17,
      1996, between CEOC and Elmore (incorporated by reference to Exhibit 10.30
      to the Funding Corporation II Form S-4).10.31
    Long
      Term Power Purchase Contract, dated June 15, 1984, as amended, between SCE
      and Elmore, as successor to Magma Electric Company (incorporated by
      reference to Exhibit 10.31 to the Funding Corporation II Form
      S-4).10.32
    Transmission
      Service Agreement, dated as of August 2, 1988, as amended, between Elmore
      and IID (incorporated by reference to Exhibit 10.32 to the Funding
      Corporation II Form S-4).10.33
    Plant
      Connection Agreement, dated as of August 2, 1988, between Elmore and IID
      (incorporated by reference to Exhibit 10.33 to the Funding Corporation II
      Form S-4).10.34
    Amended
      and Restated Administrative Services Agreement, dated as of June 17, 1996,
      between CEOC and Leathers (incorporated by reference to Exhibit 10.34 to
      the Funding Corporation II Form S-4).10.35
    Amended
      and Restated Operating and Maintenance Agreement, dated as of June 17,
      1996, between CEOC and Leathers (incorporated by reference to Exhibit
      10.35 to the Funding Corporation II Form S-4).10.36
    Long
      Term Power Purchase Contract, dated August 16, 1985, as amended, between
      SCE and Leathers, as successor to Imperial Energy Corporation
      (incorporated by reference to Exhibit 10.36 to the Funding Corporation II
      Form S-4).10.37
    Transmission
      Service Agreement, dated as of October 3, 1989, as amended, between
      Leathers and IID (incorporated by reference to Exhibit 10.37 to the
      Funding Corporation II Form S-4).10.38
    Plant
      Connection Agreement, dated as of October 3, 1989, between Leathers and
      IID (incorporated by reference to Exhibit 10.38 to the Funding Corporation
      II Form S-4).
  105
 10.39
    Amended
      and Restated Administrative Services Agreement, dated as of June 17, 1996,
      between CEOC and Del Ranch (incorporated by reference to Exhibit 10.39 to
      the Funding Corporation II Form S-4).10.40
    Amended
      and Restated Operating and Maintenance Agreement, dated as of June 17,
      1996, between CEOC and Del Ranch (incorporated by reference to Exhibit
      10.40 to the Funding Corporation II Form S-4).10.41
    Long
      Term Power Purchase Contract, dated February 22, 1984, as amended, between
      SCE and Del Ranch, as successor to Magma (incorporated by reference to
      Exhibit 10.41 to the Funding Corporation II Form S-4).10.42
    Transmission
      Service Agreement, dated as of August 2, 1988, as amended, between Del
      Ranch and IID (incorporated by reference to Exhibit 10.42 to the Funding
      Corporation II Form S-4).10.43
    Plant
      Connection Agreement, dated as of August 2, 1988, between Del Ranch and
      IID (incorporated by reference to Exhibit 10.43 to the Funding Corporation
      II Form S-4).10.44
    Funding
      Agreement, dated May 18, 1990, between SCE and Del Ranch (incorporated by
      reference to Exhibit 10.44 to the Funding Corporation II Form
      S-4).10.45
    Funding
      Agreement, dated May 18, 1990, between SCE and Elmore (incorporated by
      reference to Exhibit10.45
      to the Funding Corporation II Form S-4).10.46
    Funding
      Agreement, dated June 15, 1990, between SCE and Leathers (incorporated by
      reference to Exhibit 10.46 to the Funding Corporation II Form
      S-4).10.47
    Funding
      Agreement, dated May 18, 1990, between SCE and Leathers (incorporated by
      reference to Exhibit10.47
      to the Funding Corporation II Form S-4).10.48
    Funding
      Agreement, dated May 18, 1990, between SCE and Vulcan (incorporated by
      reference to Exhibit 10.48 to the Funding Corporation II Form
      S-4).14.1
    Salton
      Sea Funding Corporation - Code of Ethics for Chief Executive Officer,
      Chief Financial Officer and Chief Accounting Officer (incorporated by
      reference to Exhibit 14.1 to the Funding Corporation Form 10-K dated
      December 31, 2003).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.








106