UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
___________
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission File Number 1-9208
COGENERATION CORPORATION OF AMERICA
(Exact name of Registrant as Specified in Charter)
Delaware 59-2076187
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
___________
One Carlson Parkway, Suite 240
Minneapolis, Minnesota 55447-4454
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 745-7900
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. X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
6,836,769 shares of Common Stock, $0.01 par value per share, as of
August 10, 1998.
COGENERATION CORPORATION OF AMERICA
FORM 10-Q
June 30, 1998
INDEX
Page
Part I - Financial Information:
Item 1. Financial Statements 3
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three months and six months ended June 30, 1998
and June 30, 1997 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Item 1. Legal Proceedings 19
Item 3. Default Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
2
PART 1
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
June 30, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents.................................... $ 5,114 $ 3,444
Restricted cash and cash equivalents......................... 9,278 8,527
Accounts receivable, net..................................... 9,881 11,099
Receivables from related parties............................. 245 87
Notes receivable, current.................................... 3 27
Inventories.................................................. 2,439 2,134
Other current assets......................................... 1,229 1,022
Total current assets....................................... 28,189 26,340
Property, plant and equipment, net............................. 124,063 127,574
Property under construction.................................... 80,847 46,247
Project development costs...................................... 129 129
Investments in equity affiliates............................... 16,022 13,381
Deferred financing costs, net.................................. 5,389 5,643
Deferred tax assets, net....................................... 7,996 7,996
Other assets................................................... 543 584
Total assets............................................... $ 263,178 $ 227,894
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of loans and payables due NRG Energy, Inc.... $ 1,596 $ 2,864
Current portion of nonrecourse long-term debt................ 9,068 8,525
Current portion of recourse long-term debt................... 415 495
Short-term borrowings........................................ 1,524 1,313
Accounts payable............................................. 16,713 20,582
Prepetition liabilities...................................... 789 775
Other current liabilities.................................... 2,681 3,083
Total current liabilities.................................. 32,786 37,637
Loans due NRG Energy, Inc...................................... 4,439 4,439
Nonrecourse long-term debt..................................... 201,077 165,020
Recourse long-term debt........................................ 25,000 25,000
Total liabilities.......................................... 263,302 232,096
Stockholders' equity (deficit):
Preferred stock, par value $.01, 20,000,000 shares
authorized; none issued or outstanding..................... - -
New common stock, par value $.01, 50,000,000 shares
authorized, 6,871,069 shares issued,
6,836,769 shares outstanding as of
June 30, 1998 and December 31, 1997, respectively......... 68 68
Additional paid-in capital................................... 65,715 65,715
Accumulated deficit.......................................... (65,540) (69,592)
Accumulated other comprehensive income (loss)................ (367) (393)
Total stockholders' equity (deficit)....................... (124) (4,202)
Total liabilities and stockholders' equity (deficit)....... $ 263,178 $ 227,894
The accompanying notes are an integral part of these consolidated financial
statements.
3
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
REVENUES:
Energy revenues....................... $ 10,518 $ 9,002 $ 21,801 $ 21,393
Equipment sales and services.......... 2,863 4,586 8,334 9,192
Rental revenues....................... 606 467 1,481 927
13,987 14,055 31,616 31,512
COST OF REVENUES:
Cost of energy revenues............... 4,187 4,072 7,700 7,232
Cost of equipment sales and services.. 2,729 3,662 7,468 7,561
Cost of rental revenues............... 524 440 1,174 823
7,440 8,174 16,342 15,616
Gross profit........................ 6,547 5,881 15,274 15,896
Selling, general and
administrative expenses.............. 2,429 1,663 4,536 3,916
Income from operations.............. 4,118 4,218 10,738 11,980
Interest and other income............. 251 227 469 389
Equity in earnings of affiliates...... 1,639 4 2,646 43
Interest and debt expense............. (3,486) (3,794) (7,039) (7,331)
Income before income taxes.......... 2,522 655 6,814 5,081
Provision for income taxes............. 1,143 184 2,762 523
Net income.......................... $ 1,379 $ 471 $ 4,052 $ 4,558
Basic earnings per share............... $ 0.20 $ 0.07 $ 0.59 $ 0.71
Diluted earnings per share............. $ 0.20 $ 0.07 $ 0.58 $ 0.69
Weighted average shares
outstanding (Basic)................... 6,837 6,441 6,837 6,441
Weighted average shares
outstanding (Diluted)................. 6,987 6,578 6,999 6,566
The accompanying notes are an integral part of these consolidated financial
statements.
4
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
June 30, June 30,
1998 1997
Cash Flows from Operating Activities:
Net income..................................................... $ 4,052 $ 4,558
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 4,234 3,774
Equity in earnings of affiliates......................... (2,646) (43)
(Gain) loss on disposition of property and equipment..... (137) 491
Other, net............................................... 31 (38)
Changes in operating assets and liabilities:
Accounts receivable, net............................... 1,218 1,183
Inventories............................................ (305) (121)
Receivables from related parties....................... (158) 121
Other assets........................................... (223) 23
Accounts payable and other current liabilities......... 662 (2,067)
Net cash provided by operating activities............ 6,728 7,881
Cash Flows from Investing Activities:
Capital expenditures......................................... (35,557) (1,277)
Proceeds from disposition of property and equipment.......... 686 600
Investment in equity affiliates.............................. - (1,100)
Project development costs.................................... - (15)
Collections on notes receivable.............................. 24 1,122
Deposits into restricted cash accounts, net.................. (737) (1,158)
Net cash used in investing activities................ (35,584) (1,828)
Cash Flows from Financing Activities:
Proceeds from long-term debt................................. 34,672 1,100
Repayments of long-term debt................................. (4,353) (6,016)
Net proceeds (repayments) of short-term borrowings........... 211 (415)
Net repayments of prepetition liabilities.................... - (1,732)
Deferred financing costs..................................... (4) -
Net cash provided by (used) in financing activities.. 30,526 (7,063)
Net increase in cash and cash equivalents..................... 1,670 (1,010)
Cash and cash equivalents, beginning of period................ 3,444 3,187
Cash and cash equivalents, end of period........................ $ 5,114 $ 2,177
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 7,306 $ 8,040
Income taxes paid.......................................... 648 1,030
Transfer of construction payables into long-term debt...... 6,201 -
The accompanying notes are an integral part of these consolidated financial
statements.
5
COGENERATION CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1998
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cogeneration Corporation of America ("CogenAmerica" or the "Company"
formerly NRG Generating (U.S.) Inc.) and its subsidiaries develop and own
cogeneration projects which produce electricity and thermal energy for sale
to industrial and commercial users and public utilities. In addition, the
Company, through its subsidiaries, sells and rents power generation,
cogeneration and standby/peak shaving equipment and services.
Basis of Presentation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated. Investments in companies, partnerships
and projects that are more than 20% but less than majority-owned are
accounted for by the equity method.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the Company's Report on Form 10-K for
the year ended December 31, 1997. In the opinion of management, the
consolidated financial statements reflect all adjustments necessary for a
fair presentation of the interim periods presented. Results of operations
for an interim period may not give a true indication of results for the
year.
Reclassifications
Certain reclassifications have been made to conform prior years' data
to the current presentation. These reclassifications had no impact on
previously reported net income or stockholders' deficit.
Net Earnings Per Share
Basic earnings per share include no dilution and computed by dividing
net income available to common stockholders by the weighted average shares
outstanding. Diluted earnings per share is computed by dividing net income
by the weighted average shares of common stock and dilutive common stock
equivalents outstanding. The Company's dilutive common stock equivalents
result from stock options and are computed using the treasury stock method.
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
Net income:
Basic EPS $ 1,379 6,837 $ 0.20 $ 471 6,441 $ 0.07
Effect of dilutive
stock options - 150 - 137
Diluted EPS $ 1,379 6,987 $ 0.20 $ 471 6,578 $ 0.07
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1998
(Dollars in thousands)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
Net income:
Basic EPS $ 4,052 6,837 $ 0.59 $ 4,558 6,441 $ 0.71
Effect of dilutive
stock options - 162 - 125
Diluted EPS $ 4,052 6,999 $ 0.58 $ 4,558 6,566 $ 0.69
2. LOANS DUE NRG ENERGY, INC.
Of the June 30, 1998 loan balance of $4,439 due to NRG Energy, Inc.
("NRG Energy"), $2,539 has a maturity date of April 30, 2001 and $1,900 has
a maturity date of July 1, 2005.
3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") which established new rules for the
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Adoption of SFAS 130 had no
impact on the Company's net income or stockholders' equity. Total
comprehensive income for the quarter ended June 30, 1998 and 1997 was
$1,370 and $520, respectively. Total comprehensive income for the six
months ended June 30, 1998 and 1997 was $4,078 and $4,536, respectively.
The difference between total comprehensive income and net income for the
above periods was due to foreign currency translation adjustments.
4. LITIGATION
Grays Ferry Litigation. The Company's wholly-owned subsidiary through
which it owns a one-third interest in the Grays Ferry Cogeneration
Partnership (the "Grays Ferry Partnership"), filed suit as one of three
Plaintiffs (including the Grays Ferry Partnership) in an action brought
against PECO Energy Company ("PECO") on March 9, 1998, in the United States
District Court for the Eastern District of Pennsylvania, for PECO's refusal
to pay the partnership the electricity rates set forth in the power
purchase agreements. On March 19, 1998, the federal district court
dismissed the federal lawsuit for lack of subject matter jurisdiction. On
March 27, 1998, the Plaintiffs filed a motion for reconsideration and leave
to file an amended complaint. On April 13, 1998 the federal district court
judge denied the Plaintiffs' motion. The Plaintiffs thereafter filed a new
lawsuit in state court in Pennsylvania seeking, among other things, to
enjoin PECO from terminating its power purchase agreements with the
partnership and to compel PECO to pay the electricity rates set forth in
the agreements. On May 5, 1998, the Grays Ferry Partnership obtained a
preliminary injunction enjoining PECO from terminating the power purchase
agreements and ordering PECO to comply with the terms of the power purchase
agreements pending the outcome of the litigation. The Court of Common
Pleas in Philadelphia also ordered PECO to abide by all of the terms and
conditions of the power purchase agreements and pay the rates set forth in
the agreements. The Plaintiffs were required to post a bond in the amount
of $50 in connection with the preliminary injunction. On May 8, 1998, PECO
filed a motion to stay the preliminary
7
injunction order. On May 13, 1998, the Grays Ferry Partnership filed an
emergency petition for contempt to compel PECO to pay the amounts due and
owing under the power purchase agreements. On May 20, 1998, the Court of
Common Pleas granted the motion for civil contempt and ordered PECO to pay
$50 for each day that PECO failed to comply with the court's order. The
power purchaser, in response to the preliminary injunction, has made all
past due payments under protest and continues to make payments to the Grays
Ferry Partnership under protest according to the terms of the power
purchase agreements. PECO has filed a notice of appeal from the court's
preliminary injunction order. On July 7, 1998 PECO withdrew its appeal of
the preliminary injunction. The trial date of March 31, 1999 has been
established and the discovery phase of the litigation is progressing. The
Grays Ferry Partnership is vigorously pursuing the litigation and expects
to achieve a favorable result.
As a result of the power purchasers actions, the Grays Ferry
Partnership is currently in default of its project financing credit
agreement. The debt under the credit agreement is secured only by the
partnership's assets and the partners' ownership interest in the
partnership. The lenders have not accelerated the debt as a result of the
default. However, the Grays Ferry Partnership is currently prohibited from
making certain distributions to its owners and other parties. At June 30,
1998 the Company's investment in the Grays Ferry Partnership, which is
accounted for by the equity method, was $15.5 million. While it is
possible that the Company's investment could become impaired, the Company
does not believe that is likely and no provision for loss has been
recorded.
NRG Energy Arbitration. On January 30, 1998, the Company gave notice
to NRG Energy of a dispute to be arbitrated pursuant to the terms of its Co-
Investment Agreement with the Company. With certain exceptions, the Co-
Investment Agreement obligates NRG Energy to offer to sell to the Company
"eligible projects," which are defined in the Co-Investment Agreement as
certain facilities which generate electricity for sale through the
combustion of natural gas, oil or any other fossil fuel. The Co-Investment
Agreement provides that if NRG Energy offers to sell an eligible project to
the Company and the Company declines to purchase the project, NRG Energy
then has the right to sell the project to a third party at a price which
equals or exceeds that offered to the Company. See "Business - Project
Development Activities - Co-Investment Agreement with NRG Energy." In the
arbitration proceeding, the Company contended that NRG Energy breached the
Co-Investment Agreement by, among other things, agreeing to sell to OGE
Energy Corp., an affiliate of Oklahoma Gas and Electric Company a 110 MW
cogeneration project in Oklahoma without first offering the project to the
Company at the same price. The Company requested specific performance of
NRG Energy's obligations under the Co-Investment Agreement. NRG Energy
argued that it had no obligation to offer the project to the Company. On
June 8, 1998, the arbitration panel reviewing the matter issued a
preliminary injunction prohibiting NRG Energy from closing the sale of the
project to OGE Energy Corp., pending the outcome of the arbitration and
subject to the Company's posting of a $500 bond, which the Company posted.
On July 31, 1998 the arbitration panel held that NRG Energy had not
fulfilled its obligations under the Co-Investment Agreement by failing to
offer the project to CogenAmerica under the terms of the Co-Investment
Agreement. The arbitration panel ordered NRG Energy to offer the project
to CogenAmerica. Specifically the order provided for a permanent
injunction enjoining the closing of the sale of the project to OGE Energy
Corp. In addition, the bond that CogenAmerica posted for the preliminary
injunction was released and no additional bond or security was required.
By August 30, 1998, NRG Energy is required to make a written offer of the
project to CogenAmerica on the same terms, price and structure as offered
to OGE Energy Corp. In addition, the offer is required to include
8
seller financing, based on a good faith standard, as required by the Co-
Investment Agreement. CogenAmerica will have thirty days from receipt of
the reoffer to inform NRG Energy if it intends to purchase the project.
On August 4, 1998 NRG Energy made an offer to sell the facility to
CogenAmerica as required by the arbitration panel's order. As of the date
of this Report, CogenAmerica has made no determination whether to accept
NRG Energy's offer.
For additional information see "Part I - Financial Information - Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources;" "Part II - Other
Information - Item 1. Legal Proceedings;" and "Part II - Other Information
- - Item 3. Defaults Upon Senior Securities."
5. REVOLVING CREDIT FACILITY
On December 17, 1997, the Company entered into a credit agreement
providing for a $30,000 reducing revolving credit facility. The facility
reduces by $2,500 on the first and second anniversaries of the agreement
and repayment of the outstanding balance is due on the third anniversary of
the agreement. At June 30, 1998, borrowings of $25,000 were outstanding.
The facility is secured by the assets and cash flows of the Philadelphia
PWD Project as well as the distributable cash flows of the Newark and
Parlin Projects and the Grays Ferry Partnership.
The credit agreement includes cross-default provisions that cause
defaults to occur in the event certain defaults or other adverse events
occur under certain other instruments or agreements (including financing
and other project documents) to which the Company or one or more of its
subsidiaries or other entities in which it owns an ownership interest is a
party. The actions taken by the power purchaser of the Grays Ferry Project
have resulted in a cross default under the revolving credit facility.
Repayment of the revolving credit facility has not been accelerated and the
lender has waived such default through July 1, 1999. The Company has
agreed not to draw any additional amounts under the revolving credit
facility.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this Item 2 updates, and should be read
in conjunction with, the information set forth in Part II, Item 7, of the
Company's Report on Form 10-K for the year ended December 31, 1997.
Capitalized terms used in this Item 2 which are not defined herein have the
meaning ascribed to such terms in the Notes to the Company's financial
statements included in Part I, Item 1 of this Report on Form 10-Q. All
dollar amounts (except per share amounts) set forth in this Report are in
thousands.
Except for the historical information contained in this Report, the
matters reflected or discussed in this Report which relate to the Company's
beliefs, expectations, plans, future estimates and the like are forward-
looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties and other
factors that may cause the actual results, performance or achievements of
the Company to differ materially from historical results or from any
results expressed or implied by such forward-looking statements. Such
factors include, without limitation, uncertainties inherent in predicting
the outcome of litigation and other factors discussed in this report and
the Company's Report on Form 10-K for the year ended December 31, 1997
entitled "Item 1. Business - Risk Factors." Many of such factors are
beyond the Company's ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking statements.
The Company disclaims any obligation to update or review any forward-
looking statements contained in this Report or in any statement referencing
this Report, whether as a result of new information, future events or
otherwise.
General
The Company is engaged primarily in the business of developing, owning
and operating cogeneration projects, which produce electricity and thermal
energy for sale under long-term contracts with industrial and commercial
users and public utilities. In addition to its energy business, the
Company sells and rents power generation and cogeneration equipment through
subsidiaries located in the United States and the United Kingdom.
In its role as a developer and owner of energy projects, the Company
has developed the following projects in which it currently has an ownership
interest:
(a) The 52 megawatt ("MW") Newark Boxboard Project (the "Newark
Project"), located in Newark, New Jersey, began operations in
November 1990, and is owned by the Company's wholly-owned
subsidiary CogenAmerica Newark, Inc. ("Newark");
(b) The 122 MW E.I. du Pont de Nemours Parlin Project (the
"Parlin Project"), located in Parlin, New Jersey, began
operations in June 1991, and is owned by the Company's wholly-
owned subsidiary CogenAmerica Parlin, Inc. ("Parlin");
(c) The 22 MW Philadelphia Cogeneration Project (the
"Philadelphia PWD Project"), located in Philadelphia,
Pennsylvania, began operations in May 1993. The principal
project agreements relating to the Philadelphia PWD Project are
held by an 83%-owned subsidiary of the Company; and
10
(d) The 150 MW Grays Ferry Project, located in Philadelphia,
Pennsylvania, began operations in January 1998. The Company owns
a one-third interest in the Grays Ferry Partnership, which owns
the Grays Ferry Project.
In December 1997, the Company acquired from NRG Energy a 117 MW steam
and electricity cogeneration project located in Morris, Illinois (the
"Morris Project"). The Morris Project is currently under construction with
commercial operation currently expected to occur during the fourth quarter
of 1998.
The Company's power purchase agreements ("PPAs") with utilities have
typically contained, and may in the future contain, price provisions which
in part are linked to the utilities' cost of generating electricity. In
addition, the Company's fuel supply prices, with respect to future
projects, may be fixed in some cases or may be linked to fluctuations in
energy prices. These circumstances can result in high volatility in gross
margins and reduced operating income, either of which could have a material
adverse effect on the Company's financial position or results of
operations. Effective April 30, 1996, the Company renegotiated its PPAs
with Jersey Central Power and Light Company ("JCP&L"), the primary
electricity purchaser from its Newark and Parlin Projects. Under the
amended PPAs, JCP&L is responsible for all natural gas supply and delivery.
Management believes that this change in these PPAs has reduced its
historical volatility in gross margins on revenues from such projects by
eliminating the Company's exposure to fluctuations in the price of natural
gas that must be paid by its Newark and Parlin Projects.
Both the Newark and Parlin Projects were previously certified as
qualifying facilities ("QFs") by the Federal Energy Regulatory Commission
("FERC") under the Public Utility Regulatory Policies Act of 1978
("PURPA"). The effect of QF status is generally to exempt a project's
owners from relevant provisions of the Federal Power Act, the Public
Utility Holding Company Act of 1935 ("PUHCA"), and state utility-type
regulation. However, as permitted under the terms of its renegotiated PPA,
Parlin has chosen to file rates with FERC as a public utility under the
Federal Power Act. The effect of this filing was to relinquish the Parlin
Project's claim to QF status. The FERC approved Parlin's rates effective
April 30, 1996 and has determined Parlin to be an exempt wholesale
generator ("EWG"). As an EWG, Parlin is exempt from PUHCA, and the
ownership of Parlin by the Company does not subject the Company to
regulation under PUHCA. Finally, as a seller of power exclusively at
wholesale, Parlin is not generally subject to state regulation and, in any
case, management believes that Parlin complies with all applicable
requirements of state utility law.
In addition to the energy business, the Company sells and rents power
generation and cogeneration equipment and provides related services. The
Company operates its equipment sales, rentals and services business
principally through two subsidiaries. In the United States, the equipment
sales, rentals and services business operates under the name of O'Brien
Energy Services Company ("OES"). NRG Generating Limited, a wholly-owned
United Kingdom subsidiary, is the holding company for a number of
subsidiaries that operate in the United Kingdom under the common name of
Puma ("Puma"). The Company has determined that OES and Puma are no longer
a part of its strategic plan, and the Company is currently pursuing
alternatives for the disposition of these businesses. The disposition of
these businesses is not expected to have a material impact on the Company's
results of operations or financial position.
11
Net Income and Earnings Per Share
Pre-tax earnings for the 1998 second quarter were $2,522 compared to
$655 in the prior year comparable quarter. Pre-tax earnings for the first
six months of 1998 were $6,814 compared to $5,081 in the prior year
comparable period. Net income for the 1998 second quarter was $1,379, or
diluted earnings per share of $0.20, compared to second quarter 1997 net
income of $471, or diluted earnings per share of $0.07. Net income for the
first six months of 1998 was $4,052, or diluted earnings per share of
$0.58, compared to net income of $4,558 in the prior year comparable
period, or diluted earnings per share of $0.69. The increase in net income
for the second quarter is primarily due to higher earnings from the Newark
and Parlin Projects and the equity in earnings from the Grays Ferry
Project, which commenced operations in January 1998, offset by lower
earnings from the equipment sales, rental and services segment and higher
income tax expense. Net income for the first six months of 1998 was lower
than the prior year period primarily due to lower earnings from the
equipment sales, rental and services segment and higher income tax expense,
offset by the positive impact of earnings from the Grays Ferry Project.
Diluted earnings per share for the 1998 second quarter increased from the
prior comparable quarter due to higher net income, offset by an increase in
the weighted average shares outstanding. Diluted earnings per share for
the first six months of 1998 decreased from the prior year comparable
period due to lower net income and an increase in the weighted average
shares outstanding. Weighted average shares outstanding increased
primarily due to the conversion by NRG Energy in October 1997 of $3,000 of
borrowings to the Company into 396,255 shares of the Company's common
stock.
During the 1997 fourth quarter, the Company recorded an income tax
benefit by reducing the valuation allowance previously established for
federal and state net operating loss carryforwards and other deferred tax
assets. Consequently, although the net operating loss carryforwards
continue to reduce income taxes currently payable, 1998 earnings are
generally fully-taxed. In the quarter and six months ended June 30, 1997,
which was prior to reversal of the valuation allowance, net operating loss
carryforwards were recognized each period as a reduction of income tax
expense based on pretax income. On a comparable basis, net income for the
quarter and six months ended June 30, 1997 would have been $358 and $3,021,
or diluted earnings per share of $0.05 and $0.46, respectively, assuming
the same effective tax rate as in the 1998 periods.
Revenues
Energy revenues for the second quarter 1998 of $10,518 increased from
revenues of $9,002 for the comparable period in 1997. Energy revenues for
the first six months of 1998 of $21,801 increased from $21,393 for the
comparable period in 1997. Energy revenues primarily reflect billings
associated with the Newark and Parlin Projects and the Company's
Philadelphia PWD Project. The increase in energy revenues for the second
quarter 1998 was primarily attributable to seasonal capacity revenues and
due to a major maintenance outage at the Newark Project in the second
quarter 1997.
Revenues recognized at Parlin and Newark were $5,127 and $4,343 for
the second quarter 1998 and $4,317 and $3,615 for the comparable period in
1997, respectively. Revenues recognized at Parlin and Newark were $10,513
and $9,188 for the first six months of 1998 and $10,606 and $8,709 for the
comparable period in 1997, respectively. The increases were primarily due
to seasonal capacity revenues and due to a major maintenance outage at the
Newark Project in the second quarter 1997.
12
Energy revenues from the Company's Philadelphia Water Department
standby facility project for the second quarter 1998 of $1,048 decreased
slightly from revenues of $1,070 for the comparable period in 1997. Energy
revenues from this project for the first six months of 1998 of $2,100
increased slightly from the $2,078 of revenues for the comparable period in
1997.
Equipment sales and services revenues for the second quarter 1998 of
$2,863 decreased from revenues of $4,586 for the comparable period in 1997.
Equipment sales and services revenues for the first six months of 1998 of
$8,334 decreased from the $9,192 of revenues for the comparable period in
1997. The decreases wee primarily attributable to lower sales volume in
the second quarter 1998.
OES equipment sales and services revenues for the second quarter 1998
of $1,208 decreased from revenues of $1,440 for the comparable period in
1997. OES equipment sales and services revenues for the first six months
of 1998 of $3,456 increased from the $2,728 of revenues for the comparable
period in 1997. The increase for the first six months is primarily due to
higher sales volume. Puma equipment sales and services revenues for the
second quarter 1998 of $1,655 decreased from revenues of $3,146 for the
comparable period in 1997. Puma equipment sales and services revenues for
the first six months of 1998 of $4,878 decreased from the $6,464 of
revenues for the comparable period in 1997. The decreases were primarily
due to lower sales volumes in some of Puma's Asian markets.
Rental revenues for the second quarter 1998 of $606 increased from
revenues of $467 for the comparable period in 1997. Rental revenues for
the first six months of 1998 of $1,481 increased from the $927 of revenues
for the comparable period in 1997. The increases were due primarily to
higher sales volume due to ice storms in the northeastern United States and
Canada.
Costs and Expenses
Cost of energy revenues for the second quarter 1998 of $4,187
increased from costs of $4,072 for the comparable period in 1997. Cost of
energy revenues for the first six months of 1998 of $7,700 increased from
the $7,232 of costs for the comparable period in 1997. The increases were
primarily the result of depreciation associated with equipment capitalized
at the Newark and Parlin facilities in periods subsequent to the first
quarter of 1997.
Cost of equipment sales and services for the second quarter 1998 of
$2,729 decreased from costs of $3,662 for the comparable period in 1997.
Cost of equipment sales and services for the first six months of 1998 of
$7,468 decreased from the $7,561 of costs for the comparable period in
1997. The decreases were primarily due to lower sales volume at Puma.
Cost of rental revenues for the second quarter 1998 of $524 increased
from costs of $440 for the comparable period in 1997. Cost of rental
revenues for the first six months of 1998 of $1,174 increased from the $823
of costs for the comparable period in 1997. The increases were primarily
due to increased sales volume due to ice storms in the northeastern United
States and Canada.
The Company's gross profit for the second quarter 1998 of $6,547
(46.8% of sales) increased from the second quarter 1997 gross profit of
$5,881 (41.8% of sales). Gross profit for the first six months of 1998 of
$15,274 (48.3% of sales) decreased from gross
13
profit of $15,896 (50.4% of sales) for the first six months of 1997. The
gross profit increase for the second quarter is primarily attributable to
energy segment seasonal capacity revenues. The gross profit decrease for
the first six months of 1998 is primarily due to lower equipment sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the second
quarter 1998 of $2,429 increased from second quarter 1997 SG&A expenses of
$1,663. SG&A for the first six months of 1998 of $4,536 increased from
SG&A of $3,916 for the comparable period in 1997. The increase is
primarily due to higher legal expenses, offset in part by lower insurance
costs.
Interest and Other Income
Interest and other income for the second quarter 1998 of $251
increased from interest and other income of $227 for the comparable period
in 1997. Interest and other income for the first six months of 1998 of
$469 increased from interest and other income of $389 for the comparable
period in 1997. The increase for the six month period is primarily
attributable to a gain on the disposal of equipment.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the second quarter 1998 of $1,639
increased from second quarter 1997 equity in earnings of affiliates of $4.
Equity in earnings of affiliates for the first six months of 1998 of $2,646
increased from equity in earnings of affiliates of $43 for the comparable
period in 1997. The increases were primarily due to earnings from the
Grays Ferry Project, which commenced operations in January 1998, of $1,646
and $2,632 for the second quarter and first six months of 1998,
respectively. The earnings of the Grays Ferry Project reflect the contract
price of electricity under the terms of the power purchase agreements. The
electric power purchaser has asserted that such power purchase agreements
are not effective and that the power purchaser is not obligated to pay the
rates set forth in the agreements, and the Company and the Grays Ferry
Partnership are in litigation with the power purchaser over that issue.
For additional information see "Part I - Financial Information" and "Part
II - Other Information - Item 1. Legal Proceedings."
Interest and Debt Expense
Interest and debt expense for the second quarter 1998 of $3,486
decreased from interest and debt expense of $3,794 for the comparable
period in 1997. Interest and debt expense for the first six months of 1998
of $7,039 decreased from interest and debt expense of $7,331 for the
comparable period in 1997. The decrease is primarily attributable to lower
average outstanding debt at Parlin and Newark as well as reduced interest
rates on the Company's borrowings.
Income Taxes
During the 1997 fourth quarter, the Company reduced the valuation
allowance established for tax benefits attributable to net operating loss
carryforwards and other deferred tax assets, resulting in recognition of
most remaining operating loss carryforwards in 1997 fourth quarter
earnings. Consequently, beginning with the 1998
14
first quarter, income taxes are generally charged against pre-tax earnings
without any reduction for operating loss carryforwards that continue to be
used to reduce income taxes currently payable. Prior to the 1997 fourth
quarter, net operating loss carryforwards were recognized each period as a
reduction of income tax expense based on pre-tax income.
The consolidated effective tax rate for the quarters ended June 30,
1998 and 1997 was 45.3% and 28.1%, respectively. The consolidated
effective tax rate for the six months ended June 30, 1998 and 1997 was
40.5% and 10.3%, respectively. The higher effective rates in 1998 were due
to the above-mentioned reduction in the valuation allowance and foreign
losses at the Puma subsidiary for which a tax benefit was not recorded.
Liquidity and Capital Resources
In May 1996, the Company's wholly-owned subsidiaries Newark and Parlin
entered into a Credit Agreement (the "Credit Agreement") which established
provisions for a $155,000 fifteen-year loan (of which $139,190 was
outstanding at June 30, 1998) and a $5,000 five-year debt service reserve
line of credit. The loan is secured by all of Newark's and Parlin's assets
and a pledge of the capital stock of such subsidiaries. The Company has
guaranteed repayment of up to $25,000 of the amount outstanding under the
Loan. The interest rate on the outstanding principal is variable based on,
at the option of Newark and Parlin, LIBOR plus a 1.125% margin or a defined
base rate plus a 0.375% margin, with nominal margin increases in the sixth
and eleventh year. For any quarterly period where the debt service coverage
ratio is in excess of 1.4:1, both margins are reduced by 0.125%.
Concurrently with entering into the Credit Agreement, Newark and Parlin
entered into an interest rate swap agreement with respect to 50% of the
principal amount outstanding under the Credit Agreement. This interest
rate swap agreement fixes the interest rate on such principal amount
($69,595 at June 30, 1998) at 6.9% plus the margin.
CogenAmerica Schuylkill, Inc. ("CSI"), a wholly owned subsidiary of
the Company, owns a one-third partnership interest in the Grays Ferry
Project. In March 1996, the Grays Ferry Partnership entered into a credit
agreement with The Chase Manhattan Bank N.A. to finance the project. The
credit agreement obligated each of the project's three partners to make a
$10,000 capital contribution prior to the commercial operation of the
facility. The Company made its required capital contribution in 1997.
NRG Energy entered into a loan commitment to provide CSI the funding,
if needed, for the CSI capital contribution obligation to the Grays Ferry
Partnership. CSI borrowed $10,000 from NRG Energy under this loan
agreement in 1997, of which $1,900 remained outstanding to NRG Energy at
June 30, 1998, and contributed the proceeds to the Grays Ferry Partnership
as part of the above-referenced capital contribution. In connection with
this loan commitment for the Grays Ferry Project, the Company granted NRG
Energy the right to convert $3,000 of borrowings under the commitment into
396,255 shares of common stock of the Company. In October 1997, NRG Energy
exercised such conversion right in full.
In connection with its acquisition of the Morris Project, CogenAmerica
Funding Inc. (a wholly-owned subsidiary of the Company) ("CogenAmerica
Funding") assumed all of the obligations of NRG Energy to provide future
equity contributions to the project, which obligations are limited to the
lesser of 20% of the total project cost or $22,000 and are expected to be
required to be funded starting in September 1998. NRG Energy has
guaranteed to the Morris Project's lenders that CogenAmerica Funding will
make these future equity contributions, and the Company has guaranteed to
NRG Energy the obligation of CogenAmerica
15
Funding to make these future equity contributions (which guarantee is
secured by a second priority lien on the Company's interest in the Morris
Project). NRG Energy has committed in a Supplemental Loan Agreement
between the Company, CogenAmerica Funding and NRG Energy to loan
CogenAmerica Funding and the Company (as co-borrower) the full amount of
such equity contributions by CogenAmerica Funding, subject to certain
conditions precedent, at CogenAmerica Funding's option. Any such loan will
be secured by a second priority lien on all of the membership interests of
the project and will be recourse to CogenAmerica Funding and the Company.
The Company anticipates that certain of such equity contributions will be
financed through the Supplemental Loan Agreement. However, the Company is
continuing to pursue alternative sources of financing for either
CogenAmerica Funding or itself (the terms and manner of which have not been
determined by the Company) to fund the remainder of the required future
equity contributions by CogenAmerica Funding to the Morris Project, which
financing may include a refinancing of any amounts borrowed under the
Supplemental Loan Agreement.
On December 17, 1997, the Company entered into a credit agreement
providing for a $30,000 reducing revolving credit facility with a new
lender. The facility is secured by the assets and cash flows of the
Philadelphia PWD Project as well as the distributable cash flows of the
Newark and Parlin Projects, and the Grays Ferry Partnership. On December
19, 1997 the Company borrowed $25,000 under this facility. The proceeds
were used to repay $16,949 to NRG Energy, to repay $6,551 of obligations of
the Philadelphia PWD Project and $1,500 for general corporate purposes. As
a consequence of the pending Grays Ferry Partnership litigation, however,
the Company has agreed not to draw additional funds under this facility.
In the absence of a waiver which the Company has obtained, the actions
taken by the power purchaser from the Grays Ferry Project would have
resulted in cross-defaults under this facility. The Company is unable to
predict whether or when additional funds may become available under this
facility. The $30,000 facility reduces by $2,500 on the first and second
anniversaries of the agreement and repayment of the outstanding balance is
due on the third anniversary of the agreement. Interest is based, at the
Company's option, on LIBOR plus a margin ranging from 1.50% to 1.875% or
the prime rate plus a margin ranging from 0.75% to 1.125%. The interest
rate resets on a monthly basis. The interest rate was 7.31% at June 30,
1998. The facility provides for commitment fees of 0.375% on the unused
facility.
The electric power purchaser from the Grays Ferry Project has asserted
that its power purchase agreements are not effective and that the power
purchaser is not obligated to pay the rates set forth in the agreements.
The Company and the Grays Ferry Partnership are in litigation with the
power purchaser over its obligations under such agreements. After
initially refusing to pay the rates set forth in the power purchase
agreements, the power purchaser has been ordered by the court in which the
litigation is pending to comply with the power purchase agreements pending
the outcome of the litigation. As a consequence of such order, the power
purchaser is currently paying the contracted rates for electric power under
protest. However, the power purchaser has filed a notice of appeal and
motion to stay the court's order, and there can be no assurance that such
order will not be stayed or reversed on appeal. Moreover, as a result of
the power purchasers actions, the Grays Ferry Partnership is in default of
its principal credit agreement, and the lenders thereunder have the ability
to prevent the Grays Ferry Partnership from distributing or otherwise
disbursing cash held or generated by the Grays Ferry Project. Such rights,
if exercised by such lenders, could prevent the Grays Ferry Partnership
from meeting its obligations to suppliers and others and from distributing
cash to its partners during the pendency of the litigation. Any such
actions by the Grays Ferry Partnership's lenders could materially disrupt
the Grays Ferry Partnership's relations with its suppliers and
16
could have other potentially material adverse effects on its operations and
profitability and on the Company. The Company believes that as long as the
Grays Ferry Partnership continues to receive the contracted amounts due
under the power purchase agreements, such lenders are unlikely to cause
such adverse effects to occur. While the Grays Ferry Partnership's lenders
have allowed the partnership to meet its obligations to suppliers, the
partnership received a notice of default from the lenders on June 22, 1998,
for the failure to timely convert the loan used for construction purposes
to a term loan. Such failure occurred due to the Event of Default created
by the alleged termination of the power purchase agreements by the electric
power purchaser and due to the inability of the Grays Ferry Partnership to
declare either provisional or final acceptance of the Grays Ferry Project
due to the endurance of certain unresolved issues between the Grays Ferry
Partnership and Westinghouse Electric Corporation ("Westinghouse")
regarding completion and testing of the Grays Ferry Project, which issues
are the subject of an ongoing arbitration proceeding between the
partnership and Westinghouse. Based on discussions with representatives of
the lenders to the Grays Ferry Partnership, the Company believes that until
there is a satisfactory resolution of the litigation the lenders will
continue to fund the operations of the project but will not allow
distributions for the payment of subordinated fees, payments to the
subordinated debt lender or equity distributions to the partners. In lieu
of making these payments, the Company anticipates that the Grays Ferry
Partnership will be required to apply such amounts to the repayment of the
loan. The Company further expects that at the time the litigation is
resolved the loan will be restructured. For additional information see
"Part II - Item 1. Legal Proceedings" and "Part II - Item 3. Defaults Upon
Senior Securities."
The Company believes that the Grays Ferry Partnership is likely either
to prevail in the pending litigation with its electric power purchaser or
otherwise to achieve a favorable resolution of this dispute. However, the
Company believes that if the power purchaser's position ultimately were to
be sustained, the Grays Ferry Partnership would cease to be economically
viable as currently structured and the Company's earnings and financial
position could be materially adversely affected. In addition, the Company
could incur other material costs associated with such litigation, which
would not be recovered and could suffer cross-defaults under one or more of
its credit agreements. While the Company intends to continue to pursue a
rapid and favorable resolution of the litigation with the power purchaser,
there can be no assurance that such an outcome will be obtained.
Year 2000
The Year 2000 issue refers generally to the data structure problem
that will prevent systems from properly recognizing dates after the year
1999. For example, computer programs and various types of electronic
equipment that process date information by reference to two digits rather
than four to define the applicable year may recognize a date using "00" as
the year 1900 rather than the year 2000. The Year 2000 problem could
result in system failures or miscalculations causing disruptions of
operations. The Year 2000 problem may occur in computer software programs,
computer hardware systems and any device that relies on a computer chip if
that chip relies on date information. There can be no assurance that the
Company's systems nor the systems of other companies with whom the Company
conducts business will be properly remediated as required prior to December
31, 1999. The failure of any such system could have a material adverse
effect on the Company's business, operating results and financial
condition.
17
New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is
required to be adopted for fiscal years beginning after June 15, 1999
(fiscal year 2000 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. Management has not yet determined the impact that
adoption of SFAS 133 will have on its earnings or financial position.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. The Company is required to first
adopt the provisions of SFAS 131 in its financial statements for the year
ending December 31, 1998, and provide comparative information for earlier
years. Management believes that adoption of SFAS 131 will require minimal,
if any, additional disclosures in its annual financial statements.
18
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
All dollar amounts are in thousands.
Grays Ferry Cogeneration Partnership, Trigen-Schuylkill Cogeneration,
Inc., CogenAmerica (Schuylkill) Inc. and Trigen-Philadelphia Energy Corp.
v. PECO Energy Company, Adwin (Schuylkill) Cogeneration, Inc. and the
Pennsylvania Public Utility Commission, Court of Common Pleas Philadelphia
County, April Term 1998, No. 544, filed April 9, 1998. This action arose
out of PECO Energy Company's ("PECO") notification to the Grays Ferry
Cogeneration Partnership (the "Grays Ferry Partnership") that PECO believes
its power purchase agreements with the Grays Ferry Partnership relating to
the Grays Ferry Cogeneration Project (the "Grays Ferry Project") are no
longer effective and PECO's refusal to pay the electricity rates set forth
in the agreement based on its allegations that the Pennsylvania Public
Utility Commission has denied cost recovery of the power purchase
agreements in retail electric rates. The Grays Ferry Partnership's
complaint against PECO asserts claims which include breach of contract,
fraud, breach of implied covenant of good faith, conversion, breach of
fiduciary duties and tortious interference with contract. The Plaintiffs
are seeking to enjoin PECO from terminating the power purchase agreements
and to compel PECO to pay the rates set forth therein. The Plaintiffs also
are seeking actual and punitive damages and attorneys' fees and costs. On
April 22, 1998, the court allowed the Grays Ferry Partnership to file an
amended complaint to discontinue the suit against the Pennsylvania Public
Utility Commission without prejudice. On May 5, 1998, the Grays Ferry
Partnership obtained a preliminary injunction pending the outcome of the
litigation enjoining PECO from terminating the power purchase agreements
and ordering PECO to comply with the terms of the power purchase
agreements. The Court of Common Pleas in Philadelphia also ordered PECO to
abide by all of the terms and conditions of the power purchase agreements
and pay the rates set forth in the agreements. The Plaintiffs were
required to post a bond in the amount of $50 in connection with the
preliminary injunction. On May 8, 1998, PECO filed a notice of appeal and
a motion to stay the preliminary injunction order. On May 13, 1998, the
Grays Ferry Partnership filed an emergency petition for contempt to compel
PECO to pay the amounts due and owing under the power purchase agreements.
On May 20, 1998, the Court of Common Pleas granted the motion for civil
contempt and ordered PECO to pay $50 for each day that PECO failed to
comply with the court's order. The power purchaser, in response to the
preliminary injunction, has made all past due payments and continues to
make payments to the Grays Ferry Partnership according to the terms of the
power purchase agreements. PECO has filed a notice of appeal from the
court's preliminary injunction order. On July 7, 1998 PECO withdrew its
appeal of the preliminary injunction. The trial date of March 31, 1999 has
been established and the discovery phase of the litigation is progressing.
The Grays Ferry Partnership is vigorously pursuing the litigation and
expects to achieve a favorable result.
NRG Energy Arbitration. On January 30, 1998, the Company gave notice
to NRG Energy of a dispute to be arbitrated pursuant to the terms of its Co-
Investment Agreement with the Company. With certain exceptions, the Co-
Investment Agreement obligates NRG Energy to offer to sell to the Company
"eligible projects," which are defined in the Co-Investment Agreement as
certain facilities, which generate electricity for sale through the
combustion
19
of natural gas, oil or any other fossil fuel. The Co-Investment Agreement
provides that if NRG Energy offers to sell an eligible project to the
Company and the Company declines to purchase the project, NRG Energy then
has the right to sell the project to a third party at a price which equals
or exceeds that offered to the Company. See "Business - Project
Development Activities - Co-Investment Agreement with NRG Energy." In the
arbitration proceeding, the Company contended that NRG Energy breached the
Co-Investment Agreement by, among other things, agreeing to sell to OGE
Energy Corp., an affiliate of Oklahoma Gas and Electric Company a 110 MW
cogeneration project in Oklahoma without offering the project to the
Company at the same price. The Company requested specific performance of
NRG Energy's obligations under the Co-Investment Agreement. NRG Energy
argued that it had no obligation to offer the project to the Company. On
June 8, 1998, the arbitration panel reviewing the matter issued a
preliminary injunction prohibiting NRG Energy from closing the sale of the
project to OGE Energy Corp., pending the outcome of the arbitration and
subject to the Company's posting of a $500 bond, which the Company posted.
On July 31, 1998 the arbitration panel held that NRG Energy had not
fulfilled its obligations under the Co-Investment Agreement by failing to
reoffer the project to CogenAmerica under the terms of the Co-Investment
Agreement. The arbitration panel ordered NRG Energy to reoffer the project
to CogenAmerica. Specifically the order provided for a permanent
injunction enjoining the closing of the sale of the project to OGE Energy
Corp., replacing the preliminary injunction issued on June 8, 1998. In
addition, the bond that CogenAmerica posted for the preliminary injunction
was released and no additional bond or security was required. By August
30, 1998, NRG Energy is required to make a written reoffer of the project
to CogenAmerica on the same terms, price and structure as offered to OGE
Energy Corp. In addition, the reoffer is required to include seller
financing, based on a good faith standard, as required by the Co-Investment
Agreement. CogenAmerica then will have thirty days from receipt of the
reoffer to inform NRG Energy if it intends to purchase the project.
On August 4, 1998 NRG Energy made an offer to sell the facility to
CogenAmerica. As of the date of this Report, CogenAmerica has made no
determination whether to accept any reoffer of the project by NRG Energy as
required by the arbitration panel's order.
20
ITEM 3. Defaults Upon Senior Securities.
All dollar amounts are in thousands.
Grays Ferry Cogeneration Partnership
CogenAmerica Schuylkill Inc., a wholly owned subsidiary of the
Company, owns a one-third partnership interest in the Grays Ferry
Partnership, which owns the Grays Ferry Project. The Grays Ferry
Partnership and The Chase Manhattan Bank N.A. ("Chase"), as Agent bank for
the Lenders (as defined therein), are parties to a Credit Agreement dated
March 1, 1996 to finance the Grays Ferry Project (the "Chase Facility"), of
which $113,000 was outstanding as of June 30, 1998. Certain actions taken
by PECO, the electric power purchaser under two power purchase agreements
with the Grays Ferry Partnership have caused certain defaults to occur
under the Chase Facility. Such defaults have included defaults in the
obligation to make interest payments thereon as well as certain other
defaults resulting directly or indirectly from the actions taken by PECO.
All payment defaults subsequently were cured by the Grays Ferry Partnership
when the agent for the lenders under the Chase Facility permitted the
release of cash held by the Grays Ferry Partnership for the purpose of
making such interest payments. For additional information see "Part I -
Financial Information - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Part II - Other Information - Item 1. Legal Proceedings."
On June 22, 1998, the lenders under the Chase Facility gave notice to
the Grays Ferry Partnership of a default under the Chase Facility arising
out of the failure to timely convert the loan used for construction
purposes to a term loan. Such failure occurred due to the Event of Default
created by the alleged termination of the power purchase agreements by the
electric power purchaser and due to the inability of the Grays Ferry
Partnership to declare either provisional or final acceptance of the Grays
Ferry Project due to the endurance of certain unresolved issues regarding
completion and testing of the Grays Ferry Project. The Grays Ferry
Partnership and Westinghouse are in arbitration over these unresolved
issues. See "Part II - Other Information - Item 1. Legal Proceedings."
The Company
The Company, MeesPierson Capital Corp. ("MeesPierson") and certain
other Lenders (as defined therein) are parties to a Credit Agreement dated
as of December 17, 1997 which provides for a $30,000, three-year reducing,
revolving credit facility agreement (the "MeesPierson Facility"), of which
$25,000 was outstanding on June 30, 1998. The MeesPierson Facility
includes cross-default provisions that cause defaults to occur under the
MeesPierson Facility in the event certain defaults or other adverse events
occur under certain other instruments or agreements (including financing
and other project documents) to which the Company or one or more of its
subsidiaries or other entities in which it owns an ownership interest is a
party. In the absence of a waiver the actions taken by PECO would have
resulted in certain cross-defaults under the MeesPierson Facility. As of
the date of this Report, MeesPierson, as Agent under the MeesPierson
Facility, has waived through July 1, 1999 all such cross-defaults. For
additional information see "Part I - Financial Information - Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
21
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company held on May 22,
1997 (the "Meeting"), the following directors were elected, each of whom
will serve until the 1998 annual meeting of stockholders and until their
successor is elected and qualified:
Nominee Affirmative Negative
Votes Votes Abstentions
David H. Peterson 6,118,142 9,377 -
Julie A. Jorgensen 6,118,955 8,564 -
Lawrence I. Littman 6,118,955 8,564 -
Craig A. Mataczynski 6,118,955 8,564 -
Robert T. Sherman, Jr. 6,118,955 8,564 -
Spyros S. Skouras, Jr. 6,118,955 8,564 -
Charles J. Thayer 6,118,955 8,564 -
Ronald J. Will 6,118,955 8,564 -
In addition, the following proposals were approved at the Meeting:
Ratification of the selection of PricewaterhouseCoopers LLP as the
Company's independent public accountants.
Affirmative Negative
Votes Votes Abstentions
6,115,221 1,650 10,648
Approval of the amendment to the Company's Certificate of
Incorporation to change the Company's name to Cogeneration Corporation of
America.
Affirmative Negative
Votes Votes Abstentions
6,109,280 4,408 13,831
Approval of the Company's 1998 Stock Option Plan authorizing the
Company to grant options to purchase up to 250,000 shares of the Company's
Common Stock to members of the Board of Directors, officers, key employees
of the Company or its subsidiaries and other individuals who occupy
responsible managerial, professional or advisory or other positions and who
have made or have the capability of making a substantial contribution to
the success of the Company.
Affirmative Negative
Votes Votes Abstentions
5,947,174 162,623 17,722
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The "Index to Exhibits" following the signature page is
incorporated herein by reference.
(b) Reports on Form 8-K
None.
22
SIGNATURE
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 hereunto duly authorized.
Cogeneration Corporation of America
Registrant
Date: August 14, 1998 By: /s/ Timothy P. Hunstad
Timothy P. Hunstad
Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
23
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Preferred Stock Certificate of Designation of the Company filed as
Exhibit 3.3 to the Company's Current Report on Form 8-K dated April
30, 1996 and incorporated herein by this reference.
3.3 Restated Bylaws of the Company filed as Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by this reference.
27 Financial Data Schedule for the six months ended June 30, 1998 (for
SEC filing purposes only).
24