UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2003
Commission File Number: 33-74254
COGENTRIX ENERGY, INC.
(Exact name of registrant as specified in its charter)
North Carolina | 56-1853081 |
9405 Arrowpoint Boulevard | 28273-8110 |
Registrant's telephone number, including area code:(704) 525-3800
Securities registered pursuant to Section 12(b) of Act: NONE
Securities registered pursuant to Section 12(g) of Act: NONE
Indicate by checkmark 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.
x Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Act).
o Yes x No
Number of shares of Common Stock, no par value, outstanding at August 14, 2003: 282,000
Explanatory information
We are filing this form 10-Q/A to amend the disclosure in the second paragraph under the subheading "Liquidity and Capital Resources - Parent Company Liquidity" in Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Quarterly Report on Form 10-Q for the three months ended June 30, 2003. In that paragraph, we accurately disclosed that the Parent company received payments from its subsidiaries of $176.5 million during the twelve months ended June 30, 2003 related to dividends, management fees, tax payments and other fees. The $176.5 million included, however, only $32.4 million (representing the gain from the sale of our Jenks facility) rather than the $71.6 million gross proceeds of the sale, as we originally disclosed.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
In addition to discussing and analyzing our recent historical financial results and condition, the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes statements concerning certain trends and other forward-looking information affecting or relating to us which are intended to qualify for the protections afforded "Forward-Looking Statements" under the Private Securities Litigation Reform Act of 1995, Public Law 104-67. The forward-looking statements made herein are inherently subject to risks and uncertainties which could cause our actual results to differ materially from the forward-looking statements.
This section should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent report on Form 10-K for the year ended December 31, 2002, including discussion of Critical Accounting Policies, which was filed with the Securities and Exchange Commission on March 31, 2003.
General
Cogentrix Energy, Inc. is an independent power producer that through its direct and indirect subsidiaries acquires, develops, owns and operates electric generating plants. We derive most of our revenue from the sale of electricity, but we also produce and sell steam. We sell the electricity we generate to regulated electric utilities and power marketers, primarily under long-term power purchase agreements. We sell the steam we produce to industrial customers with manufacturing or other facilities located near our electric generating plants. We were one of the early participants in the market for electric power generated by independent power producers that developed as a result of energy legislation the United States Congress enacted in 1978. We believe we are one of the larger independent power producers in the United States based on our total project megawatts in operation.
We currently own - entirely or in part - a total of 26 electric generating facilities in the United States and one in the Dominican Republic. Our 27 plants are designed to operate at a total production capability of approximately 7,695 megawatts. After taking into account our partial interests in the 20 plants that are not wholly-owned by us, which range from 1.6% to approximately 74.2%, our net ownership interests in the total production capability of our 27 electric generating facilities is approximately 4,160 megawatts. We currently operate 14 of our facilities, 12 of which we developed and constructed.
Unless the context requires otherwise, references in this report to "we," "us," "our," or "Cogentrix" refer to Cogentrix Energy, Inc. and its subsidiaries, including subsidiaries that hold investments in other corporations or partnerships whose financial results are not consolidated with ours. The term "Cogentrix Energy" refers only to Cogentrix Energy, Inc., which is a development and management company that conducts its business primarily through subsidiaries. Cogentrix Energy's subsidiaries that are engaged in the development, ownership or operation of cogeneration facilities are sometimes referred to individually as a "project subsidiary" and collectively as Cogentrix Energy's "project subsidiaries." The unconsolidated affiliates of Cogentrix Energy that are engaged in the ownership and operation of electric generating facilities and in which we have less than a majority interest are sometimes referred to individually as a "project affiliate" o r collectively as "project affiliates."
Results of Operations - Three Months and Six Months Ended June 30, 2003 and 2002 (dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||
Operating revenues, gains and |
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Operating costs | 72,919 | 38 | 79,837 | 51 | 150,478 | 43 | 148,973 | 48 | ||||||
Three Months Ended June 30, 2003 as Compared to Three Months Ended June 30, 2002
Operating Revenues, Gains and Income from Unconsolidated Investments
Total operating revenues, gains and income from unconsolidated investments increased 20.9% to $190.3 million for the quarter ended June 30, 2003 as compared to $157.4 for the quarter ended June 30, 2002 as a result of the following:
- | Electric revenues decreased approximately $31.9 million primarily as the result of the suspension of operations at the San Pedro facility due to non-payment by its power purchaser (see "Liquidity and Capital Resources - Cash Flow from Our Project Subsidiaries and Project Affiliates - Dominican Republic Facility"). The decrease was also due to scheduled decreases in capacity payments at the Hopewell and Portsmouth facilities in accordance with the terms of their power purchase agreements which were partially offset by increases in the number of megawatt hours produced by the facilities. To a lesser extent, the decrease was due to a decrease in the rates charged to the purchasing utility at the Roxboro and Southport facilities. |
- | Lease revenues decreased approximately $3.6 million as a result of the sale of a 90% interest in the Jenks facility during June 2003. The conversion services agreement for this facility provides the conversion services purchaser the right to use the facility, and as a result, the capacity payments of the Jenks facility are considered minimum lease payments and are accounted for as lease revenues. The company now accounts for its remaining 10% interest in the facility's operations using the equity method of accounting. |
- | Service revenue increased approximately $2.7 million as a result of an increase in the variable energy rate charged to the purchasing utilities at our Cottage Grove and Whitewater facilities which is a direct result of an overall increase in the average natural gas prices for the quarter ended June 30, 2003 over the corresponding period of 2002. This increase was partially offset by a decrease in megawatt hours sold to the purchasing utilities. |
- | Gain on sale of project interests, net of transaction costs increased approximately $58.8 million primarily as a result of the $58.8 million gain recognized on the sale of a 90% interest in our Jenks facility during June 2003 (see "Liquidity and Capital Resources - Sale of Interest in Our Jenks Facility"). There were no such transactions during the corresponding period of 2002. |
- | Income from unconsolidated investments in power projects increased approximately $3.8 million as a result of the commencement of commercial operations at the Sterlington facility which was under construction during the quarter ended June 30, 2002. The facility began commercial operations in August 2002. |
Operating Costs
Total operating costs decreased 8.6% to $72.9 million for the quarter ended June 30, 2003 as compared to $79.8 million for the quarter ended June 30, 2002 as a result of the following:
- | Fuel expense decreased approximately $7.1 million as a result of a decrease in fuel costs at the San Pedro facility which did not operate during the quarter ended June 30, 2003 due to non-payment of past due invoices from its power purchaser (see "Liquidity and Capital Resources - Cash Flow from Our Project Subsidiaries and Project Affiliates - Dominican Republic Facility"). |
- | Cost of services increased approximately $2.5 million as a result of an increase in fuel expense at our Cottage Grove and Whitewater facilities, a component of cost of services, related to an increase in natural gas prices. The increase was partially offset by a decrease in megawatt hours sold to the purchasing utilities at those facilities. |
General, Administrative and Development
General, administrative and development expense decreased 64.9% to $7.1 million for the quarter ended June 30, 2003 as compared to $20.2 million for the quarter ended June 30, 2002 as a result of the following:
- | Salary expense and related employee benefits decreased approximately $3.2 million as a result of the elimination of various positions at our corporate headquarters during 2002. |
Depreciation Expense
Depreciation expense decreased 22.6% to $15.1 million for the quarter ended June 30, 2003 as compared to $19.5 million primarily due to the lack of operations at the San Pedro facility. Certain plant components are depreciated based on the number of starts which has been zero for the quarter ended June 30, 2003. The plant was in operation during the corresponding quarter of 2002.
Six Months Ended June 30, 2003 as Compared to Six Months Ended June 30, 2002
Operating Revenues, Gains and Income from Unconsolidated Investments
Total operating revenues, gains and income from unconsolidated investments increased 11.3% to $346.5 million for the six months ended June 30, 2003 as compared to $311.3 for the six months ended June 30, 2002 as a result of the following:
- | Electric revenues decreased approximately $51.4 million primarily as the result of the cessation of operations at the San Pedro facility due to non-payment by its power purchaser (see "Liquidity and Capital Resources - Cash Flow from Our Project Subsidiaries and Project Affiliates - Dominican Republic Facility"). The decrease was also due to scheduled decreases in capacity payments at the Hopewell and Portsmouth facilities in accordance with the terms of their power purchase agreements which were partially offset by increases in the number of megawatt hours produced by the facilities. To a lesser extent, the decrease was due to a decrease in the rates charged to the purchasing utility at the Roxboro and Southport facilities. |
- | Service revenue increased approximately $12.6 million as a result of an increase in the variable energy rate charged to the purchasing utilities at our Cottage Grove and Whitewater facilities which is a direct result of an overall increase in the average natural gas prices for the six months ended June 30, 2003 over the corresponding period of 2002. This increase was partially offset by a decrease in megawatt hours sold to the purchasing utilities. |
- | Gain on sale of project interests, net of transaction costs increased approximately $58.8 million primarily as a result of the $58.8 million gain recognized on the sale of a 90% interest in our Green Country facility during June 2003 (see "Liquidity and Capital Resources - Sale of Interest in Our Jenks Facility"). There were no such transactions during the corresponding period of 2002. |
- | Income from unconsolidated investments in power projects increased approximately $8.1 million as a result of the commencement of commercial operations at the Sterlington facility which was under construction during the six months ended June 30, 2002. The facility began commercial operations in August 2002. |
Operating Costs
Total operating costs increased 1.0% to $150.5 million for the six months ended June 30, 2003 as compared to $149.0 million for the six months ended June 30, 2002 as a result an increase in cost of services of approximately $8.1 million. Cost of services increased as a result of an increase in fuel expense at our Cottage Grove and Whitewater facilities related to an increase in natural gas prices. The increase was partially offset by a decrease in megawatt hours sold to the purchasing utilities at those facilities.
General, Administrative and Development
General, administrative and development expense decreased 59.9% to $14.1 million for the six months ended June 30, 2003 as compared to $35.2 million for the quarter ended June 30, 2002 as a result of the following:
- | Salary expense and related employee benefits decreased approximately $4.4 million as a result of the elimination of various positions at our corporate headquarters during 2002. |
- | Incentive compensation costs decreased approximately $4.9 million as a result of not meeting certain performance targets. |
- | Development costs decreased approximately $8.8 million as a result of a write-off of development costs during the second quarter of 2002. |
Liquidity and Capital Resources
Consolidated Information
The primary components of cash flows from operations for the six months ended June 30, 2003, were as follows (dollars in millions):
Net income | $ 27.8 |
Total cash flows from operations of $92.3 million, proceeds from sale of project interest of $71.6 million (net of litigation reserve, transaction costs and additional contributions) and proceeds from borrowings of $139.3 million were used primarily to (dollars in millions):
Purchase property, plant and equipment and fund project development costs and turbine deposits |
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Parent Company Liquidity
As of June 30, 2003, we had long-term debt (including the current portion thereof) of approximately $2.3 billion, including approximately $471.0 million of debt classified as a component of liabilities of discontinued operations. With the exception of the $394.7 million of senior notes outstanding as of June 30, 2003, and $107.1 million in advances under the corporate credit facility as of June 30, 2003, substantially all such indebtedness is project financing debt, the majority of which is non-recourse to Cogentrix Energy (the "Parent"). Accordingly, we believe that the unconsolidated Parent company liquidity position is more important than the liquidity position of the Company and its consolidated subsidiaries as presented on a consolidated basis. As of June 30, 2003, the Parent company had approximately $17.9 million of unrestricted cash and Cogentrix Delaware Holdings, Inc., a wholly-owned subsidiary of Cogentrix Energy and guarantor of a ll of Cogentrix Energy's senior, unsecured debt, had approximately $30.0 million of unrestricted cash. The Parent company's principal sources of liquidity are:
- | Management fees, dividends and other distributions from its project subsidiaries and project affiliates |
The Parent company's principal uses of cash are:
- | Debt service on Parent company level indebtedness |
During the twelve months ended June 30, 2003, the Parent company received payments from its subsidiaries of $176.5 million related to dividends (including $32.4 million related to the gain from the sale of our Jenks facility; see "- Sale of Interest in Our Jenks Facility"), management fees, tax payments and other fees. During the same period, the Parent company paid $25.8 million in corporate overhead and development charges and $41.8 million in interest and fees on its senior unsecured bonds and corporate credit facility.
As of the date of this filing, the Parent company's non-contingent contractual obligations are set forth below (dollars in millions):
Payment Due By Period | ||||||||||||
Non-Contingent Contractual Obligation | Through 12/31/03 | 2004-2006 | Beyond 2006 | Total | ||||||||
Senior Notes due 2004 and 2008 - principal | $ - | $ 39.7 | $355.0 | $394.7 | ||||||||
Corporate credit facility (excluding interest) | 107.1 | - | - | 107.1 | ||||||||
Construction commitments (a) | 14.4 | - | - | 14.4 | ||||||||
Turbine commitments | 7.9 | - | - | 7.9 | ||||||||
Compensation related commitments | 8.8 | 17.6 | 3.9 | 30.3 | ||||||||
Lease and other commitments | 0.2 | 5.7 | 14.5 | 20.4 | ||||||||
As of the date of this filing, the Parent company's contingent contractual obligations are set forth below (in millions, except for number of agreements):
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Guarantees and reimbursement obligations | $ 23.4 | 5 | $0 - 9.6 | ||||||
Standby equity (a) | 5.7 | 3 | 0 - 4.9 | ||||||
Supplemental equity commitments (a) | 8.1 | 1 | 0 - 8.1 | ||||||
(a) Secured by letters of credit primarily issued under our corporate credit facility
One of our contingent contractual obligations is a reimbursement obligation to our partner at our 50%-owned project affiliate which owns the Birchwood facility. For the benefit of the Birchwood project lenders, our Birchwood partner has posted a $19.2 million debt service letter of credit which expires on October 31, 2003. The project lenders have the ability to draw on this letter of credit 30 days prior to the expiration if the letter of credit is not extended or replaced. We have an obligation to reimburse our partner for 50% ($9.6 million) of any amount drawn under this letter of credit. Our Birchwood partner has entered into an agreement with a third party to sell its entire 50% interest in the Birchwood facility and, under the terms of the sale agreement, the third party is required to replace our current partner's debt service letter of credit. In the event this sale transaction is not completed or, alternatively, our current partner is unable to extend the expiration of the debt service letter of credit, and the project lenders draw the letter of credit, we will be required to reimburse our Birchwood partner for 50% of the amount drawn by the lenders. We cannot provide any assurances that our partner will consummate this sale transaction and replace the letter of credit or obtain an extension of the expiration on the existing letter of credit.
Our other contingent contractual obligations are designed to cover potential risks and only require payment if certain targets are not met or certain contingencies occur. The risks associated with these contingent obligations include construction cost overruns, reimbursement of test gas purchased by our Southaven facility's former customer (see "- Facilities Recently Achieving Commercial Operations") and guarantees supporting our project subsidiaries' obligations under certain project operating documents. Aside from the Birchwood reimbursement obligation, we do not expect these other contingent contractual obligations to be funded or drawn upon for any material amounts. However, many of the events that would result in a draw upon these letters of credit are beyond our control.
Our management believes that cash on hand and remaining expected 2003 cash flows from our project subsidiaries and project affiliates will be adequate to meet our non-contingent contractual obligations in the table above and our other remaining 2003 operating obligations, including interest and fees related to the corporate credit facility and recurring general and administrative costs. However, this belief is based on a number of material assumptions, including, without limitation, the continuing ability of our project subsidiaries and project affiliates to pay dividends, management fees and other distributions and our ability to refinance our corporate credit facility before maturity. We cannot assure you that these sources of cash will be available when needed or that our actual cash requirements will not be greater than we anticipate.
Corporate Credit Facility
We have an unsecured $225 million corporate credit facility that provides for either direct borrowings or the issuance of letters of credit for our benefit to third parties that, if they become entitled to and do draw upon them, will convert into borrowings under this credit facility. In June 2003, we utilized $50.0 million of the proceeds from the sale of our Jenks facility (see "- Sale of Interest in Our Jenks Facility") to repay outstanding borrowings under the corporate credit facility. As of the date of this filing, there are $116.8 million of borrowings and $28.2 million of letters of credit outstanding representing a total use of the commitment of $145.0 million. We posted the letters of credit primarily to secure commitments - both non-contingent and contingent - we have made to support our project subsidiary that is constructing the Southaven facility. Under the terms of the corporate credit facility, the Company is subject to certain covenants. Under the tangible net worth covenant in our corporate credit facility, at June 30, 2003, we could have experienced a reduction in the balance of shareholder's equity, prior to considering the amount of accumulated other comprehensive loss, of approximately $36.0 million and still have been in compliance with this covenant.
The corporate credit facility matures on October 29, 2003 at which time all outstanding obligations will become due and payable. We are currently negotiating for a restructured facility and have engaged two of our existing lenders to lead the restructuring process. Deteriorating market conditions for borrowers in the energy industry and concerns about the uncertainties we face and our liquidity are likely to result in higher interest costs, reduced borrowing capacity and more restrictive terms and conditions in any restructured credit facility than we have in our current credit facility. Although we believe we will be successful, we can make no assurances that we will be able to restructure the credit facility and refinance the outstanding obligations prior to the facility's maturity date on October 29, 2003 due to these uncertainties.
As a result of the maturity of the outstanding obligations under our corporate credit facility on October 29, 2003, our independent auditors expressed a going concern uncertainty in their report on our consolidated financial statements for the year ended December 31, 2002 that triggered an event of default under our corporate credit facility. Cogentrix Energy has a forbearance agreement in effect with the lenders to the credit facility pursuant to which the lenders agreed to forbear through August 31, 2003 from terminating their commitments or accelerating the outstanding obligations and demanding payment. Additionally, the lenders agreed to allow Cogentrix Energy to continue to convert to borrowings drawings under outstanding letters of credit issued under the corporate credit facility during this forbearance period. Until we cure this event of default, we will not be able to make any restricted payments, a category that includes shareholder div idends and loans, or repay any of our other senior indebtedness prior to its scheduled maturity. Even though the lenders have granted this forbearance, we can make no assurances that the lenders to the corporate credit facility will not choose to accelerate the obligations outstanding under the corporate credit facility and demand immediate payment of all obligations outstanding after the August 31, 2003 forbearance expiration. In the event the lenders to the corporate credit facility accelerate the outstanding obligations, or if the corporate credit facility matures and is not repaid, this would create a cross-default under the indentures under which we issued our senior notes, and the senior note holders would have the ability to accelerate the $394.7 million of senior notes currently outstanding and demand immediate payment.
Facilities Recently Achieving Commercial Operations
Two of our electric generating facilities, Southaven and Caledonia, achieved commercial operations during May 2003. The construction of each facility was or is being funded under each project subsidiary's separate financing agreements and our equity contribution commitments. Our remaining Southaven firm equity commitments are supported by letters of credit issued under our corporate credit facility and are expected to be contributed utilizing corporate cash balances or converting the outstanding letters of credit to borrowings under the corporate credit facility. Summarized information regarding each of the facilities follows (dollars in millions):
Caledonia, | Southaven, | ||||
Ownership Percentage | 100% | 100% | |||
Financial Close Date | July 2001 | May 2001 | |||
Project Funding: |
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Cogentrix Project Equity Commitment: |
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(a) | See " - Cash Flow From Our Project Subsidiaries and Project Affiliates - Caledonia and Southaven Facility Default and Pending Ownership Transfer" |
(b) | Excluded from the Southaven facility's supplemental equity commitments is a $27.4 million commitment which we had provided to secure payment for liquidated damages owed by the Southaven facility's construction contractor. As a result of the Southaven facility achieving performance test completion during May 2003 and the determination that no liquidated damages were due by the former construction contractor, this $27.4 million supplemental equity commitment and the letter of credit issued to support this commitment were cancelled during July 2003. In addition, we executed an amendment to the Southaven non-recourse loan agreement during August 2003, whereby a $24.8 million supplemental equity commitment and the letter of credit issued to support this commitment were reduced to $8.1 million. In conjunction with this amendment we were required to make additional supplemental equity contributions of approximately $7.6 million which are included in the project firm and supplemental equity contri butions through August 19, 2003 in the table above. In the event the Southaven facility is required to reimburse the former conversion services purchaser for the purchase of test gas utilized during the construction phase, we will be required to contribute to the Southaven project up to $8.1 million in Supplemental Equity Commitments. Although we currently do not expect to pay for test gas, we cannot assure you we will not. See "- Southaven and Caledonia Facilities PGET Arbitration." |
Any projects we develop in the future, and those electric generating facilities we may seek to acquire, are likely to require substantial capital investment. Our ability to arrange financing on a non-recourse basis and the cost of such capital are dependent on numerous factors. These factors include, but are not limited to, general economic and market conditions, conditions in the independent power generation market, and investor confidence and credit availability in our industry. In order to access capital on a non-recourse basis in the future, we may have to make larger equity investments in, or provide more financial support for, the project entity.
Equipment Commitments
We currently have commitments with turbine and other equipment suppliers to purchase a set of three combustion/steam turbines and heat recovery steam generators. We have made cumulative payments of $165.3 million with remaining payments of $7.9 million due on the turbines over the remainder of 2003. We are currently storing the turbine engines and partially completed generators and most of the accessories related to this equipment.
Project Level Defaults
Cogentrix Energy's project subsidiaries which own the Southaven, Caledonia and Dominican Republic facilities are in default of their senior project debt aggregating $1.0 billion as of June 30, 2003. As a result, this project debt is callable and classified as components of current liabilities in our consolidated financial statements as of June 30, 2003. In addition, Cogentrix Energy's project affiliate which owns the Sterlington facility is in default of its project debt which is callable. The Sterlington facility is accounted for under the equity method and accordingly, the Company's proportional share of the facility's assets and related liabilities, including long-term debt, are reflected net as an investment in unconsolidated project affiliates in our consolidated financial statements. The debt for these four facilities is non-recourse to Cogentrix Energy and, therefore, the lenders to these projects cannot look to Cogentrix Energy or any ot her project subsidiary or affiliate for the repayment of these obligations and can only look to the applicable project assets of these project subsidiaries (book value of approximately $1.3 billion as of June 30, 2003 for our Southaven, Caledonia and Dominican Republic facilities) to satisfy these obligations. While these lenders do not have direct recourse to Cogentrix Energy, these defaults by our project subsidiaries and project affiliates can still have important consequences for our results of operations and liquidity, including, without limitation,
1) | reducing Cogentrix Energy's cash flows since these four projects will be prohibited from distributing cash to Cogentrix Energy or our partners during the pendency of any default; and |
Sale of Interest in Our Jenks Facility
Cogentrix of Oklahoma, Inc. ("Cogentrix of Oklahoma"), our wholly-owned subsidiary, was formed to own and hold 100% of the membership interest in Green Country Energy, LLC ("Green Country"). Green Country is the owner of an approximate 810-megawatt combined-cycle, natural gas-fired electric generating facility located in Jenks, Oklahoma.
On June 10, 2003, Cogentrix of Oklahoma sold 100% of its direct membership interest in Green Country to a newly formed limited liability company, Green Country Holding LLC (the "Purchaser") formed by affiliates of General Electric Structured Finance, Inc. (collectively, "GESF") in exchange for cash consideration and a 10% interest in the Purchaser. As a result of the transaction, Green Country is now wholly-owned by the Purchaser, and the Purchaser is 90% owned by GESF and 10% owned by Cogentrix of Oklahoma. Cogentrix of Oklahoma remains an indirect, wholly-owned subsidiary of Cogentrix Energy. The purchase was effected pursuant to a purchase agreement, as amended, dated April 11, 2003 (the "Purchase Agreement"). The sale to the Purchaser was consummated in connection with a refinancing of the Green Country bank loan which refinancing required additional equity contributions from GESF and Cogentrix of Oklahoma.
In connection with the refinancing and sale of the Green Country interest, GESF and the financial institutions providing the refinancing required that Cogentrix Energy and Cogentrix of Oklahoma provide certain guarantees and indemnities pursuant to the Purchase Agreement and other related transaction agreements. The Cogentrix Energy guarantees and indemnities relate to any costs or expenses arising from (1) certain litigation to which Green Country is a party (see " - Legal Proceedings - Letter of Credit Draw Litigation - Jenks, Oklahoma Facility"), and (2) any claim arising out of a breach of representations and warranties made under the Purchase Agreement. The Cogentrix of Oklahoma indemnities relate to any claims, costs or expenses arising from (1) certain litigation to which Green Country is a party (see " - Legal Proceedings - Letter of Credit Draw Litigation - Jenks, Oklahoma Facility"); (2) a performance guarantee for services provided to G reen Country by a Cogentrix Energy affiliate; and (3) any claim arising out of a breach of representations and warranties made under the amended Purchase Agreement. In conjunction with the sale of our interest in Green Country, Cogentrix of Oklahoma agreed to escrow (the "Litigation Escrow") a portion of the sale proceeds until final and non-appealable resolution of the litigation has been reached.
The sale proceeds received by Cogentrix Energy, net of the Litigation Escrow, Cogentrix of Oklahoma capital contribution required upon refinancing, and transaction costs were approximately $71.6 million. We utilized $50.0 million of proceeds from the transaction to repay outstanding borrowings under our corporate credit facility. We recorded a gain of approximately $58.8 million which is included in gain on sale of project interest in the consolidated statements of income.
Cash Flow from Our Project Subsidiaries and Project Affiliates
The ability of our project subsidiaries and project affiliates to pay management fees, dividends and distributions periodically to Cogentrix Energy is subject to limitations imposed by various financing documents. These limitations generally require that (1) debt service payments are current; (2) historical and projected debt service coverage ratios are met; (3) all debt service and other reserve accounts are funded at required levels; and (4) there are no defaults or events of default under the relevant financing documents. There are also additional limitations that are adapted to the particular characteristics of each project subsidiary and project affiliate. Events of default and other circumstances currently exist at certain project subsidiaries or project affiliates that are in some cases eliminating or blocking the payment of management fees, dividends and distributions to Cogentrix Energy. In addition, certain facilities achieving commerc ial operations and the termination and modification of certain other facilities' power sales agreements have changed the source of where Cogentrix Energy expects to receive management fees, dividends and distributions in the future. Certain of these circumstances are described in detail below.
PG&E National Energy Group, Inc. ("NEG") Bankruptcy Impact on Our Project Subsidiaries and
Project Affiliates
During July 2003, NEG and certain of its subsidiaries voluntarily filed for protection from their creditors under Chapter 11 of the United States Bankruptcy Code. Included in this filing was PG&E Energy Trading-Power, L.P. ("PGET"), the former conversion services purchaser at our Southaven and Caledonia facilities. See " - Southaven Facility Defaults and - Caledonia Facility Defaults and Pending Ownership Transfer." Certain other subsidiaries of NEG provide operations and maintenance services to seven of our project affiliates and are partners at ten of our project affiliates. To date, neither the operations and maintenance service providers nor our NEG project affiliate partners has been included in the NEG bankruptcy proceedings. If the NEG affiliate that provides maintenance and operating services to our Logan facility is brought into bankruptcy proceedings with NEG, it would create an event of default under the Logan facility' s non-recourse project loan agreements if the project subsidiary is unable to cure this default within the time period provided. This event of default would create a cross-default under our subsidiary Eastern America's credit facility that would give the lenders the right to exercise all remedies available to them including foreclosing upon and taking possession of the capital stock of Eastern America (see "- Cogentrix Eastern America").
Southaven Facility Defaults
Our Southaven facility achieved commercial operations during May 2003. The project subsidiary which owns the Southaven facility is currently in default of its non-recourse project loan agreements as a result of NEG, the guarantor of the then existing conversion services agreement, being downgraded during August 2002 below investment grade creating an event of default under our then existing conversion services agreement by our purchaser, PGET. The project lenders are not obligated to continue funding draws and have the right to exercise all remedies available to them under the project loan agreement, including foreclosing upon and taking possession of all of the project's assets. Until the event of default under the project loan agreements is cured and we convert the Southaven construction loan to a term loan, our project subsidiary will be unable to make any distributions to Cogentrix Energy. This project could remain in default for an exte nded period of time until we can provide a replacement conversion services or power purchaser or refinance the project loan agreement. However, there can be no assurances that we will be able to enter into a replacement conversion services or power purchase agreement or refinance the project loan agreement. As a result of this event of default, this facility's non-recourse project debt is callable and has been classified as a current liability, as of June 30, 2003. The project lender is able to satisfy this obligation with the project's assets only and cannot look to Cogentrix Energy or its other subsidiaries to satisfy this obligation. As a result of the Southaven debt being in default and callable, the projects' independent auditors expressed a going concern uncertainty in the project's financial statements for the year ended December 31, 2002 that triggered an additional event of default under their non-recourse loan agreement during the second quarter of 2003. The Chapter 11 filing in the United Sta tes Bankruptcy Court by NEG and PGET triggered an additional event of default under their non-recourse loan agreement during July 2003. On August 4, 2003, the bankruptcy court approved the rejection of the Southaven conversion services agreement by PGET as an executory contract. The termination of the conversion services agreement triggered an additional event of default under our project subsidiary's non-recourse loan agreement.
During July 2003, we began operating the Southaven facility as a merchant generating facility under a commodity management agreement with a third party. The third party will manage and provide power marketing, fuel procurement and related services on our project subsidiary's behalf. Operation of this facility as a merchant electric generating facility should not add additional risks such as commodity risk exposure with changing commodity prices for the natural gas and electricity we may sell in the open market. There is a potential for exposure to additional costs, risks and requirements to post additional credit support to obtain short to intermediate term contracts to sell our power, to procure fuel supply and transportation agreements and obtain electrical transmission arrangements, under the commodity management agreement.
During August 2003, our Southaven project subsidiary and the project lenders amended the non-recourse loan agreement to require all excess cash generated by the facility to be utilized to repay the outstanding borrowings on a quarterly basis beginning after the construction loans are converted to term loans and through the remaining term of the Southaven facility's loan agreement (through June 2007). The non-recourse project loan agreements require the construction loan to be converted to term loans on or before December 1, 2003. In the event our project subsidiary is unable to complete this conversion, this would trigger an additional event of default under the non-recourse loan agreement.
Caledonia Facility Default and Pending Ownership Transfer
Our Caledonia facility achieved commercial operations during May 2003. The project subsidiary which owns the Caledonia facility is in default of its non-recourse project loan agreements as a result of NEG, the guarantor of the then existing conversion services agreement being downgraded during August 2002 below investment grade creating an event of default under our conversion services agreement by our purchaser, PGET.
As a consequence of this event of default we entered into an agreement with the lender to the Caledonia facility that will involve the transfer of our ownership interest in the Caledonia facility to the project lender in exchange for the project lender assuming all obligations of the Caledonia project including long-term debt and the project lender releasing all security provided by us under the project loan agreements. In conjunction with this agreement, we recognized a loss of approximately $38.1 million, before taxes, to write-down the value of the facility's long-lived assets to its fair value. The assets and liabilities have been classified as discontinued operations as of June 30, 2003 and operations of the facility are accounted for as part of discontinued operations. We expect the closing of this transaction prior to December 31, 2003. However, we can provide no assurances that conditions to transferring our ownership be satisfied and th e transaction be completed.
Southaven and Caledonia Facilities PGET Arbitration
On February 4, 2003, our project subsidiaries for both facilities received a notice from PGET of PGET's intention to terminate the conversion services agreements alleging our project subsidiaries failed to properly interconnect our facilities to the applicable transmission systems. This notice indicated that the conversion services agreements would terminate on March 6, 2003 and that PGET did not intend to continue to perform under the agreements after February 6, 2003. On February 7, 2003, the project subsidiaries filed an emergency petition to compel arbitration or, in the alternative, for a temporary restraining order and preliminary injunction in the Circuit Court for Montgomery County, Maryland. By order dated February 7, 2003, the court denied our petition for a temporary restraining order and set the remaining aspects of the petition for hearing.
On March 5, 2003, the Circuit Court ruled that PGET was required to comply with the arbitration provisions of the conversion services agreements. The court further ordered that PGET and the project subsidiaries continue to perform their obligations under the conversion services agreements during the pendency of the disputes and the arbitration proceedings. On March 7, 2003, PGET filed an emergency motion to stay the court's ruling, which compels performance pending their appeal of the Circuit Court ruling in the Court of Special Appeals of Maryland. This motion was denied on March 11, 2003. In April 2003, the Court of Special Appeals of Maryland by its own motion removed PGET's appeal of the lower court ruling to the Court of Appeals of Maryland. On March 24, 2003, PGET issued a Demand for Arbitration to resolve the disputes. In accordance with the terms of the conversion services agreements, three arbitrators are to be designated to resolve t hese disputes. The American Arbitration Association has confirmed the designated arbitrators. Through the NEG/PGET Chapter 11 filing in the United States Bankruptcy Court on July 8, 2003, our project subsidiaries performed their obligations and PGET performed certain of their obligations under the conversion services agreements. Both the arbitration and the Maryland State court proceedings have been stayed by order of the bankruptcy court. In the event arbitration is allowed to proceed and our project subsidiaries are unsuccessful and the conversion services agreements are found to have been terminated on March 6, 2003, our project subsidiaries may be required to reimburse PGET for purchase of test gas, net of revenues from the sale of test energy.
Sterlington Facility
Our 50%-owned project affiliate is currently in default under its non-recourse project loan agreements as a result of the credit ratings of Dynegy, the guarantor of the conversion services agreement at our Sterlington facility, being downgraded during July 2002 below investment grade creating a purchaser event of default under our conversion services agreement. During October 2002, our Sterlington project affiliate and the project lenders amended the non-recourse loan agreement to require all excess cash generated by the facility to be utilized to repay the outstanding borrowings on a quarterly basis during the remaining term of the Sterlington facility's loan agreement (through August 2007). Management does not expect to receive distributions from this project affiliate until the non-recourse project debt can be refinanced. Until then the project lenders continue to have the right to exercise all remedies available to them under the project loan agreements including foreclosing upon and taking possession of all project assets. The project lender to this facility is able to satisfy this obligation with the Sterlington facility's project assets only and cannot look to Cogentrix Energy or its other subsidiaries to satisfy the project affiliate's debt. The Company accounts for this project using the equity method of accounting, and our proportional interest in the facility's assets and related liabilities, including long-term debt, are reflected net as an investment in unconsolidated affiliates in the accompanying consolidated balance sheets. The Company's investment in this project was approximately $9.8 million as of June 30, 2003. As a result of the Sterlington debt being in default and callable, the project's independent auditors expressed a going concern uncertainty in the Sterlington financial statements for the year ended December 31, 2002 that triggered an additional event of default under the Sterlington non-recourse loan agreement dur ing April 2003.
Dominican Republic Facility
Our 65%-owned project subsidiary that owns our Dominican Republic facility has notified the power purchaser, Corporación Dominicana de Electricidad ("CDE"), on several occasions since the facility achieved commercial operations in March 2002 of events of default under the power purchase agreement based on CDE's failure to pay amounts due for the sale of capacity and electricity (collectively, the "Payment Defaults"). We have notified the State of the Dominican Republic ("SDR"), the guarantor of CDE's payment obligations, of defaults under the project subsidiary's implementation agreement with the SDR related to a portion of these amounts overdue by CDE (the "SDR Defaults"). During July 2003, CDE and the SDR made payments aggregating $45.0 million to our project subsidiary curing all existing Payment Defaults and SDR Defaults.
As a result of certain Payment Defaults and SDR Defaults existing at the time, we were unable to convert the construction loans to term loans by March 28, 2003. This failure to convert created an event of default under our project subsidiary's non-recourse loan agreement and the lenders currently have the right to exercise all remedies available to them including foreclosing upon and taking possession of all project assets. As a result of the Dominican Republic debt being in default and callable, the project's independent auditors expressed a going concern uncertainty in the Dominican Republic financial statements for the year ended December 31, 2002 that triggered an additional event of default under the Dominican Republic non-recourse loan agreement during April 2003. As a result of this event of default, this non-recourse project debt is currently callable and has been classified as a current liability in our consolidated financial statements a s of June 30, 2003. The project lender to this facility is able to satisfy this obligation with the Dominican Republic facility's project assets only and cannot look to Cogentrix Energy or its other subsidiaries to satisfy their debt. Until these events of default under the project loan agreement are cured and as long as the borrowings remain construction loans, our project subsidiary will be unable to make distributions to Cogentrix Energy or our partner. Continued slow payment by CDE and the SDR in the future may increase our project subsidiary's working capital needs and delay distributions to Cogentrix Energy or our partner. We are currently negotiating with the project lender to obtain permanent waivers related to these remaining defaults and obtain approval to convert the construction loans to term loans. We are unable to provide any assurance that the project lenders will waive the remaining events of default or approve the conversion of the construction loans.
Cogentrix Eastern America
Our intermediate, wholly-owned subsidiary, Cogentrix Eastern America, Inc. ("Eastern America"), which was formed to hold interests in twelve electric generating facilities acquired in 1998 and 1999, has a credit facility with a financial institution consisting of a term loan with principal payments due quarterly through the final maturity date of September 30, 2005. The total outstanding borrowings were $56.5 million as of June 30, 2003. The Eastern America credit facility is secured by, among other things, a pledge of the Eastern America capital stock and the capital stock of the project subsidiaries that hold the Company's investment in our Northampton and Logan projects as well as the dividends, distributions and other payments made to us by the Northampton, Logan, Indiantown and Carneys Point projects. The credit agreement, as amended, requires Eastern America to continue to accumulate in escrow, the distributions received from these four proj ect affiliates (collectively, the "Significant Affiliates"). If certain conditions exist at February 15, 2004 at certain of the Significant Affiliates which prevent those Significant Affiliates from making distributions to Eastern America (the "Eastern America Distribution Restrictions"), the entire amount held in escrow and, as long as any such conditions exist, any future distributions from those Significant Affiliates will be used to prepay debt at the next quarterly distribution date. If at February 15, 2004, these conditions do not exist and the Significant Affiliates are able to make distributions to Eastern America, the remaining amount in escrow can be distributed to Eastern America and ultimately to Cogentrix Energy. In addition, if an event of default occurs under the project loan agreements for certain of Eastern America's project affiliates, a corresponding event of default would be triggered under the Eastern America credit agreement.
Indiantown Facility
During November and December 2002, certain letters of credit posted to secure certain of the Indiantown facility's operating obligations were drawn upon and converted to loans ("L/C Loans") when the bank that provided these letters of credit did not extend the terms of these letters of credit past their original expiration date. The Indiantown facility will be prohibited from making distributions to Eastern America (and ultimately, to Cogentrix Energy) until these L/C Loans (currently $10.0 million) are repaid in full or replacement letters of credit are obtained.
The Indiantown facility also has posted a letter of credit in the amount of approximately $29.9 million which, together with cash in the debt service reserve account, represents the required debt service reserve. The bank that issued this letter of credit has notified the Indiantown facility of its intention not to extend the term of this letter of credit, which is due to expire in November 2005. As a result, unless a replacement letter of credit provider is obtained, the Indiantown facility will be prohibited from making distributions to Eastern America (and ultimately, to Cogentrix Energy) until the Indiantown facility has fully funded the debt service reserve account. The remaining balance to be funded into this reserve account is approximately $23.9 million.
The Company's management believes that the Indiantown facility will be able to enter into arrangements to obtain all of these letters of credit from replacement letter of credit providers. There can be no assurances, however, that the Indiantown facility will be able to obtain such replacement letters of credit. The failure to obtain such replacement letters of credit would constitute one of the Eastern America Distribution Restrictions.
Newly Adopted Accounting Pronouncements
On January 1, 2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to record a liability relating to legal obligations to retire and remove assets used in their business. We identified obligations to remove or dismantle certain facilities under the terms of these facilities' land leases or, in the case of one facility, under a development agreement. We developed cost estimates representing the future cost to dismantle and remove these facilities at the end of the respective lease term or useful life. The future cost to dismantle and remove these facilities has been discounted to its present value, and the related asset and liability have been recorded on the balance sheet as of January 1, 2003. The asset will be depreciated over the life of the asset and the liability will be accreted to its future value and eventually extinguished when th e asset is taken out of service. As of January 1, 2003, we recorded an expense of $1.0 million, net of tax, related to these obligations as a cumulative effect of an accounting change in the accompanying consolidated condensed financial statements. This amount represents the cumulative accretion expense and depreciation expense which would have been recorded had the accounting pronouncement been applied since the retirement obligation was created. The adoption of this pronouncement had no impact on our cash flows.
On January 1, 2003, we adopted SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections." SFAS No. 4 had required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. During the first quarter of 2003, we recognized a gain of approximately $1.3 million related to the repurchase of approximately $5.9 million Cogentrix Energy's senior unsecured notes due 2004. In accordance with SFAS No. 145, this gain is included in other income in our condensed consolidated financial statements. In addition, SFAS No. 145 rescinds SFAS No. 4 and the related required classification gains and losses from extinguishment of debt as extraordinary items under certain circumstances. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions related to SFAS No. 13 are applicable for transactions occurring after May 15, 2002.
On January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires costs associated with exit or disposal activities to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Our adoption of this statement did not have an impact on our financial condition or results of operations.
In December 2002, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, and interpretation of SFAS Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34". This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this new standa rd did not have a material impact on our financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have an impact on our consolidated financial statements.
The FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" in May 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 on July 1, 2003 and this adoption did not have a material impact on its financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. | Description of Exhibit | |
31.1 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COGENTRIX ENERGY, INC. |
