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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-10592
DESTEC ENERGY, INC.
(A DELAWARE CORPORATION)
2500 CITYWEST BLVD.
HOUSTON, TEXAS 77042
(NAME OF REGISTRANT, STATE OF INCORPORATION, ADDRESS
OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
I.R.S. EMPLOYER IDENTIFICATION NO. 38-2875546
TELEPHONE: (713) 735-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On May 8, 1996 there were 57,684,078 shares of the issuer's Common
Stock, $.01 par value, outstanding.
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DESTEC ENERGY, INC. AND SUBSIDIARIES
PART I Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets............................... 2
Statements of Consolidated Income -
For the three months ended March 31, 1996 and 1995.. 4
Statements of Consolidated Cash Flows..................... 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K......................... 14
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 76,773 $ 7,044
Cash equivalents-Dow 802 4,422
---------- ----------
Total cash and cash equivalents 77,575 11,466
---------- ----------
Marketable Securities 286,430 328,799
Accounts Receivable:
Trade 57,560 64,029
Dow 1,179 1,144
Affiliates 20,899 23,832
Other 3,786 4,085
Notes receivable-affiliates 2,976 2,983
Income taxes receivable 16 1,934
Deferred taxes-net 5,573 5,680
Costs and estimated earnings in excess of billings
on uncompleted contracts-affiliates 24,579 37,063
Recoverable project costs 21,112 58,398
Prepaid expenses and other assets 16,909 14,076
---------- ----------
Total current assets 518,594 553,489
---------- ----------
Property-at cost 388,794 365,020
Accumulated depreciation, depletion and
amortization (157,968) (154,831)
---------- ----------
Property, net 230,826 210,189
---------- ----------
Lease receivable from Dow 44,159 44,159
Equity investments 141,439 139,784
Goodwill (Net of accumulated amortization of $15,645
and $15,027 at March 31, 1996 and December 31, 1995,
respectively 83,163 83,781
Other assets 18,411 16,410
Other assets-affiliates 3,981 --
---------- ----------
Total $1,040,573 $1,047,812
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
2
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $ 83,658 $ 45,169
Dow 11,340 13,249
Accrued liabilities 37,032 49,951
Billings in excess of costs and estimated earnings
on uncompleted contracts-affiliates 301 41,309
Income taxes payable -- 249
---------- ----------
Total current liabilities 132,331 149,927
---------- ----------
Long-term liabilities 46,581 46,172
Deferred taxes-net 37,745 34,720
Deferred income 51,697 47,676
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 50,000,000 shares
authorized, none issued
Common stock, $.01 par value; 150,000,000 shares
authorized, 62,250,000 issued 623 623
Additional paid-in capital 394,296 394,296
Retained earnings 437,190 427,757
Unearned compensation-related to outstanding deferred
stock (814) --
Unrealized gains (losses) on investments (1,237) 651
Less 4,449,602 and 4,159,464 shares of treasury
stock at cost at March 31, 1996 and December 31,
1995, respectively (57,839) (54,010)
---------- ----------
Total stockholders' equity 772,219 769,317
---------- ----------
Total $1,040,573 $1,047,812
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
DESTEC ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
-------- --------
Revenues:
Power, steam, syngas and energy resources
-affiliates $ -- $ 5,242
-guaranteed payments -- 22,385
-nonaffiliates 42,225 23,185
----------- -----------
Total power, steam, syngas, and energy resources 42,225 50,812
Development, engineering and operations-affiliates 115,536 114,113
----------- -----------
Total Revenues 157,761 164,925
----------- -----------
Operating Costs:
Power, steam, syngas and energy resources
-affiliates 576 20,224
-nonaffiliates 42,042 26,064
----------- -----------
Total power, steam, syngas, and energy resources 42,618 46,288
Development, engineering and operations-affiliates 101,691 108,362
----------- -----------
Total Operating Costs 144,309 154,650
----------- -----------
Amortization of intangibles 618 618
----------- -----------
Selling, General and Administrative Expenses:
Dow 46 202
Direct 7,189 6,993
----------- -----------
Total selling, general and administrative 7,235 7,195
----------- -----------
Total operating costs and expenses 152,162 162,463
----------- -----------
Operating Income 5,599 2,462
----------- -----------
Earnings from equity investments 2,246 1,088
----------- -----------
Other Income:
Interest Income-Dow 1,335 5,354
Interest Income-other 4,927 1,201
Sundry (expense) income-net (221) 230
----------- -----------
Total Other Income 6,041 6,785
----------- -----------
Income before provision for taxes 13,886 10,335
Provision for taxes 4,453 3,101
----------- -----------
Net Income $ 9,433 $ 7,234
=========== ===========
Per Share Amounts:
Net Income Per Share $ 0.16 $ 0.12
=========== ===========
Weighted average shares outstanding 57,893,000 58,842,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
DESTEC ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
-------- --------
Cash Flows From Operating Activities:
Net Income.......................................................................... $ 9,433 $ 7,234
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings from equity investments.................................................. (2,246) (1,088)
Deferred income, net.............................................................. 4,021 (258)
Depreciation, depletion and amortization.......................................... 3,755 8,516
Increase in deferred income taxes, net............................................ 3,132 39
Changes in assets and liabilities that provided (used) cash:
Accounts receivable-trade....................................................... 6,469 6,954
Accounts receivable-Dow......................................................... (35) 7,110
Accounts receivable-affiliates.................................................. 2,933 3,686
Accounts receivable-other....................................................... 299 (577)
Notes receivable-affiliates..................................................... 7 331
Income taxes-receivable......................................................... 1,918 --
Costs and estimated earnings in excess of billings on uncompleted contracts-
affiliates..................................................................... 12,484 (15,258)
Recoverable project costs....................................................... 37,286 32,240
Prepaid expenses and other assets............................................... (2,833) 1,477
Accounts payable-trade.......................................................... 38,489 (7,013)
Accounts payable-Dow............................................................ (1,909) 4,747
Accrued liabilities............................................................. (12,919) (12,085)
Billings in excess of costs and estimated earnings on uncompleted contracts-
affiliates..................................................................... (41,008) 1,970
Income taxes payable............................................................ (249) (7,231)
Long-term liabilities........................................................... 1,834 2,873
--------- --------
Net Cash Provided by Operating Activities........................................... 60,861 33,667
--------- --------
Cash Flows From Investing Activities:
Investments in marketable securities.............................................. (403,119) --
Proceeds from sale of marketable securities....................................... 443,600 --
Purchases of property, net........................................................ (23,774) (7,600)
Long-term notes receivable-affiliates............................................. -- 585
Equity investments-contributions.................................................. (6,015) --
Equity investments-distributions.................................................. 6,606 4,122
Other assets...................................................................... (5,982) (805)
--------- --------
Net Cash Provided by (Used in) Investing Activities................................. 11,316 (3,698)
--------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings-Dow...................................................... -- --
Repayment of borrowings-Dow....................................................... -- --
Proceeds from issuance of treasury stock.......................................... 9 58
Treasury stock purchases.......................................................... (6,077) (741)
--------- --------
Net Cash Used in Financing Activities............................................... (6,068) (683)
--------- --------
Net (Decrease) Increase in Cash and Cash Equivalents................................ 66,109 29,286
Cash and Cash Equivalents at Beginning of Period.................................... 11,466 354,137
--------- --------
Cash and Cash Equivalents at End of Period.......................................... $ 77,575 $383,423
========= ========
Supplemental Disclosures of Cash Flow Information:
Schedule of Noncash Investing and Financing Activities:
Unrealized loss on marketable securities.......................................... $ 1,888 $ --
Proceeds from treasury stock...................................................... $ 2,239 $ --
Unearned compensation............................................................. $ 814 $ --
Cash paid for:
Interest.......................................................................... $ -- $ 165
Income taxes...................................................................... $ 47 $ 10,000
The accompanying notes are an integral part of the consolidated financial
statements.
5
DESTEC ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. OPINION OF MANAGEMENT
In the opinion of management, all adjustments necessary for a fair
presentation of the unaudited results for the period are included. These
interim consolidated financial statements should be read in conjunction with the
Destec Energy, Inc. ("Destec") Financial Statements for the year ended December
31, 1995, included in Destec's 1995 Annual Report and on Destec's Form 10-K for
the year ended December 31, 1995. The results for interim periods are not
necessarily indicative of results for the full year.
2. TREASURY STOCK
During each of the years, 1993 and 1992, the Destec Board of Directors (the
"Board") authorized the repurchase of up to $20,000 of Destec's common stock
over the succeeding three year periods. In 1994, the Board authorized the
repurchase of an additional 2,300,000 shares of its common stock over the next
three years with a maximum cost of $30,000. As of March 31, 1996, Destec had
repurchased 4,960,749 shares and reissued 511,147 shares of common stock
repurchased under these programs.
In May 1996, the Board authorized the repurchase of an additional 1,750,000
shares of its common stock over the next three years with a maximum cost of
$25,000.
3. UNEARNED COMPENSATION
As of March 31, 1996, a total of 65,114 shares of deferred stock have been
issued from treasury stock under the 1995 Variable Pay Plan for the Executive
Group at the grant date price of $12.50. These shares are currently held for the
employees and will be distributed at the end of the vesting periods in one-third
increments on December 31, 1996, 1997 and 1998, if the average market price for
the thirty day period ending on such dates equals or exceeds the defined targets
under the 1995 Variable Pay Program as approved by the Compensation Committee.
If the average market price of the stock for the thirty day period ending on the
applicable vesting date is below the defined targets, no deferred stock shall be
awarded that year. However, if on the subsequent vesting date, the average
market price equals or exceeds the defined targets, the employee will receive
the current year shares as well as shares not awarded in the previous period.
Compensation expense will be adjusted in future periods based on the difference
between the value assigned to the award at the grant date and the value of the
stock at the respective measurement dates.
4. FINANCING OF ELSTA PROJECT
In February 1996, Destec obtained construction financing for the 405 MW Elsta
project located in Terneuzen, The Netherlands. The project financing of
approximately $494,000 was jointly arranged by ABN Amro Bank N.V. and ING Bank
N.V. As a result of the financing, development fees and development cost
recovery were recognized in the first quarter of 1996. The Elsta facility will
provide steam and electricity to The Dow Chemical Company ("Dow") and
electricity to two Dutch utilities when commercial operations begin in 1997. As
contractor, Destec has a $332,500 performance guarantee under its engineering
contract and a $1,500 performance guarantee under its operating and maintenance
contract. The partnership has obtained a construction loan to finance the
building of this facility, and Destec has guaranteed to make partnership capital
contributions of up to $36,900.
6
5. RESTRUCTURING CHARGES
In 1994, Destec's management announced a corporate restructuring in order to
refocus business development efforts from domestic to international markets and
to de-emphasize vertical integration. In order to implement this shift in
focus, management developed a restructuring plan to reduce and realign the work
force and reduce overhead. During 1994, Destec recorded a $10,000 restructuring
charge as a component of operating costs. As of March 31, 1996, Destec's
remaining accrual relating to this charge was $3,094 for vacated lease space net
of revenues from potential subleases and leasehold improvement write-offs.
6. ACCOUNTING POLICIES
Effective January 1, 1996, Destec adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Under this statement,
Destec evaluates the recovery of long-lived assets based upon the estimated
future net cash flows to be received over the life of the asset. The adoption
of this standard had no effect on Destec's financial position or results of
operations.
Effective January 1, 1996, Destec adopted SFAS No. 123, "Accounting for Stock-
Based Compensation". As allowed under this statement, Destec has continued to
use the intrinsic value method of accounting for such plans.
7. EVENTS SUBSEQUENT TO MARCH 31, 1996
In May 1996, Destec agreed to acquire from Snyder Oil Corporation ("SOCO") an
undivided 45% interest in proved producing natural gas properties and related
undeveloped leasehold acreage and gas pipeline system in northwest Colorado for
approximately $22,000. The total proved reserves for Destec's interest in the
properties are estimated to be approximately 42 billion cubic feet. SOCO will
retain a majority working interest in the properties and will continue to
operate the wells. Destec has entered into a joint venture agreement with SOCO
covering the long-term development of the underlying properties and associated
gas pipeline. Management believes that these gas reserves will assist Destec in
developing and providing low cost power in the future.
8. RECLASSIFICATIONS
Certain amounts for 1995 have been reclassified to conform to the 1996
presentation.
7
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forwardlooking statements reflecting the Company's
expectations in the near future; however, many factors which may affect the
actual results, especially contract prices and changing regulations, are
difficult to predict. Accordingly, there is no assurance that the Company's
expectations will be realized.
OVERVIEW
Destec is an independent producer and marketer of electricity, thermal energy
and syngas. Destec has eighteen operating power projects and one operating
syngas project in the U.S. and is currently developing additional projects in
the U.S. and abroad. During the first quarter of 1996, Destec received revenues
from the sale of electricity, thermal energy and syngas from Destec's owned or
leased projects. These revenues and revenues earned in 1995 from the sale of
syngas to Dow and from the sale of power from Dow's Freeport facility under the
Power Marketing Agreement ("PMA") are classified as "Power, steam and syngas" in
the "Summary of Statements of Consolidated Income" presented below. Destec also
received revenues from its oil and gas properties and lignite properties
(classified as "Energy resources"), from fees earned in connection with its
activities as an engineer and operator of various cogeneration projects
(classified as "Engineering and operations") and from fees earned as a developer
of power generation projects (classified as "Development"). The related costs
for each of these activities appears in the corresponding section of the summary
as "Operating Costs and Expenses." Gross margin for these activities represents
revenues less the related operating costs.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
DOMESTIC POWER
Destec owns, leases and operates or has an equity investment in and receives
income from eighteen operating power projects in the United States. Ten of the
eighteen operating projects are located in California, three are located in
Texas and the remainder are located in Virginia, Nevada, Georgia, Florida and
Michigan.
In February 1996, CoGen Lyondell ("CLI") and Lyondell Petrochemical Company
("LYO") formed Channelview CoGen General Partnership (the "Partnership") with
CLI as an 88% partner and LYO as a 12% partner. CLI will sublease the facility
to the Partnership for a period coterminous with CLI's operating lease with
CoGen Funding, subject to certain cancellation provisions. The power generated
at the CLI facility will be distributed to the partners, in proportion to their
partnership percentages, under the self generation exception of the Texas Public
Utility Regulatory Act. LYO is currently constructing a private transmission
line to interconnect with the CLI facility. The transmission line is expected to
be operational by the end of 1996. Destec will continue to operate and manage
the facility on behalf of the Partnership.
During 1995, Destec acquired a minority ownership interest in the 240 MW
Crockett Cogeneration project located in Crockett, California from a subsidiary
of Pacific Generation. In April 1996, Destec made an equity contribution of
$8.6 million to the Crockett project which is currently under construction and
is scheduled to begin commercial operations in the second quarter of 1996.
The 150 MW Blue Mountain Power project is located in the Richland Township,
Pennsylvania. The natural gas-fueled power project is in advanced development
and is expected to commence commercial operations in 1997.
8
INTERNATIONAL POWER
Currently, Destec is in construction or active development on several
international projects including Kingston (Ontario, Canada), Elsta (Terneuzen,
The Netherlands), Indian Queens (Cornwall, England), Los Mina (Santo Domingo,
Dominican Republic) and Chiahui (Taipei, Taiwan). In addition, management
is currently evaluating the acquisition or development of several international
project opportunities in areas including Asia, the Far East, Europe, Africa, the
Middle East and Latin America.
The Kingston, Indian Queens and Los Mina projects are under construction and
are expected to commence commercial operations later in 1996. The Elsta
project, which is also under construction, is expected to begin operations in
1997, and construction of the Chiahui project is scheduled to begin in 1997 with
commercial operations estimated to begin in 2000.
SYNGAS
The Wabash River Coal Gasification facility ("Wabash facility") began
commercial operations in November 1995. Under the terms of the gasification
services agreement with PSI Energy, Inc., Wabash is subject to either an
operating bonus or penalty depending on the operating rate of the facility. The
maximum bonus or penalty is $7.0 million per year and is calculated based on the
annual average syngas production. As of March 31, 1996, Destec's accrual for
this potential liability was $1.7 million which was recorded in the fourth
quarter of 1995. Management is currently assessing ways to improve the
reliability and profitability of the Wabash facility. The improvements are
expected to require additional expenditures of approximately $15 million.
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1995
The following table sets forth a summary of statements of consolidated income
for Destec for the three month periods ended March 31, 1996 and 1995,
respectively. This information has been derived from Destec's unaudited
Consolidated Financial Statements.
9
SUMMARY OF STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS)
For the
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
Revenues:
Power, steam and syngas............................ $ 38,378 $ 46,813
Engineering and operations......................... 106,327 106,071
Energy resources................................... 3,847 3,999
Development........................................ 9,209 8,042
-------- --------
Total Revenues.................................... 157,761 164,925
-------- --------
Operating Costs and Expenses:
Power, steam and syngas............................ 40,455 42,117
Engineering and operations......................... 97,598 102,181
Energy resources................................... 2,163 4,171
Development........................................ 4,093 6,181
Amortization of intangibles........................ 618 618
Selling, general & administrative expenses......... 7,235 7,195
-------- --------
Total Operating Costs and Expenses............... 152,162 162,463
-------- --------
Earnings from equity investments.................... 2,246 1,088
Other income........................................ 6,041 6,785
-------- --------
Income before provision for taxes on income......... 13,886 10,335
Provision for taxes on income....................... 4,453 3,101
-------- --------
Net Income.......................................... $ 9,433 $ 7,234
======== ========
For the three months ended March 31, 1996, Destec recorded net income of $9.4
million. The operating income for the quarter was $5.6 million which resulted
primarily from the positive gross margins contributed by engineering and
operations, energy resources and development. These positive results were
partially offset by a negative gross margin from power, steam and syngas and
charges for amortization of intangibles and selling, general and administrative
expenses.
The major factors supporting the operating income during the period ended
March 31, 1996 were the financing of the Elsta project (see Note 4 of the Notes
to Consolidated Financial Statements), continued construction of the Elsta and
Kingston projects, and operating earnings from the Bear Mountain and Michigan
Power projects which began commercial operations in 1995. Negative factors
affecting the operating income included the low operating rate of the Wabash
facility, the additional decommissioning expense for the LGTI facility and an
unfavorable fuel variance at the CLI facility. See the discussion below for a
detailed analysis of revenue and expense for the three month periods ending
March 31, 1996 and 1995.
REVENUES
Destec's first quarter revenue decreased $7.2 million, or 4%, for 1996 as
compared to 1995. This decrease resulted primarily from an $8.4 million
decrease in power, steam and syngas and a $0.2 million
10
decrease in energy resources revenue, partially offset by a $0.2 million
increase in engineering and operations revenue and a $1.2 million increase in
development revenue.
The $8.4 million decrease in power, steam and syngas revenue resulted from an
$18.4 million decrease in syngas revenue and a $2.6 million decrease in PMA
revenue, partially offset by an $11.5 million increase in revenue from the CLI
facility, a $0.6 million increase in revenue from Destec Power Services ("DPS")
and a $0.5 million increase in revenue from the CoGen Power ("CPI") facility.
Syngas revenue decreased due to the decommissioning of the LGTI facility in
November 1995, partially offset by syngas revenue contributed by the Wabash
facility which began commercial operations in November 1995. PMA revenue
decreased due to the expiration on April 30, 1995 of the remaining power
contract supporting the PMA agreement with Dow. These decreases were partially
offset by higher production at the CLI facility due to the addition of the sixth
gas turbine in June 1995 which provides approximately 120 MW of additional
capacity and increased revenue due to higher fuel prices for both CLI and CPI.
Also included in the first quarter is revenue from DPS which began selling power
in June 1995.
Energy resources revenue decreased $0.2 million due to lower production
revenue as a result of the sale of gas properties in the third quarter of 1995.
The $0.2 million increase in engineering and operations revenue resulted
primarily from a $3.4 million increase in operations revenue, partially offset
by a $3.2 million decrease in engineering revenue. Operations revenue increased
in the first quarter of 1996 because operating and maintenance services were
provided for the Bear Mountain and Michigan Power projects which began
commercial operations after the first quarter of 1995, as well as a performance
bonus Destec earned related to the High Sierra facility. Engineering revenue was
lower in the first quarter of 1996 due to revenue recognition on the
construction costs related to the Elsta and Kingston projects in 1996, as
compared to revenue recognition on the Wabash River, Michigan Power and Bear
Mountain projects in 1995.
The $1.2 million increase in development revenue results from higher
development fees recognized on the Elsta project (see Note 4 of the Notes to
Consolidated Financial Statements) in 1996, as compared to the development
activities on the Bear Mountain, Elsta and Michigan Power projects in 1995.
OPERATING COSTS AND EXPENSES
Destec's first quarter total operating costs and expenses decreased $10.3
million, or 6%, for 1996 as compared to 1995. This decrease resulted from a
$1.7 million decrease in power, steam and syngas costs, a $4.5 million decrease
in engineering and operations costs, a $2.0 million decrease in energy resources
costs and a $2.1 million decrease in development costs.
The $1.7 million decrease in power, steam and syngas costs is primarily a
result of decreased operating costs at the LGTI facility due to the
decommissioning of the plant in November 1995, partially offset by increased
costs for the Wabash facility which began commercial operations in November
1995. Also contributing to the decrease in power, steam and syngas costs was
lower lease costs resulting from the refinancing of the CLI lease in August
1995, partially offset by higher fuel, ad valorem and depreciation costs related
to the addition of the sixth turbine in June 1995.
The $4.5 million decrease in engineering and operations costs is primarily due
to lower construction costs for the Elsta and Kingston projects in the first
quarter of 1996, as compared to construction costs related to the Wabash River,
Michigan Power and Bear Mountain projects for the same period of 1995. The
decrease in engineering costs is partially offset by an increase in deferred
profit expense in the first quarter of 1996 related to the Elsta project. The
deferred profit expense is a result of Destec's 50% ownership interest in the
Elsta project.
11
The $2.0 million decrease in energy resources costs results from lower
production costs in the first quarter of 1996 due to the sale of the gas
properties in the third quarter of 1995.
Development costs decreased $2.1 million due to costs related to the Bear
Mountain project incurred in the first quarter of 1995. No such expenses were
recorded in 1996.
EQUITY INVESTMENTS, OTHER INCOME AND TAXES
Earnings from equity investments increased $1.2 million for the three months
ended March 31, 1996, as compared to the same period of 1995. The first quarter
of 1996 included positive equity earnings from the Bear Mountain project which
began operations in April 1995, partially offset by negative earnings from the
Michigan Power project which began operations in October 1995. In addition,
equity earnings improved on the Oyster Creek project due to a reduction in
interest expense as a result of converting from a construction loan to a term
loan in July 1995.
Other income decreased $0.7 million due primarily to decreased interest income
on a lower average cash balance at a lower average rate of return for the three
months ended March 31, 1996 compared to the same period of 1995.
The effective tax rate at March 31, 1996 was 32.1% as compared to 30.0% in the
same period of 1995. The tax rate for the first quarter of 1996 is based on the
estimated effective tax rate for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, cash and cash equivalents totaled $77.6 million and
working capital totaled $386.3 million. In the first three months of 1996, cash
and cash equivalents increased $66.1 million and working capital decreased $17.3
million. The increase in cash and cash equivalents resulted mainly from $60.9
million provided by Destec's operating activities, $11.3 million provided by
Destec's investing activities, offset by $6.1 million used in Destec's financing
activities. See Destec's "Statements of Consolidated Cash Flows" for additional
detail.
In August 1995, CLI refinanced and amended the terms of its operating lease
agreement which resulted in a reduction to operating costs for the facility.
The financing underlying the lease expires in August 2000. The lease is an
operating lease with an initial non-cancelable term of five years ending in 2000
and an extended term of an additional thirteen years ending in 2013. The lease
allows for termination after the initial term, subject to a penalty clause. CLI
is required to remit to the lessor, in addition to basic rentals as defined,
variable rentals associated with the leveraged portion of the lease. As of March
31, 1996, the future estimated minimum lease payments under the operating lease
are approximately $220 million.
In August 1993, Destec entered into an operating lease and a related financing
agreement for the Wabash project with a third-party owner. Both agreements
expire in August 1998. Under the lease, Destec assumed a $178 million
construction performance obligation which resulted in future estimated minimum
lease payments of approximately $210 million and subjects Destec to several
additional financial covenants. The lease allows for termination in August 1998,
subject to a penalty clause. Management is currently assessing ways to improve
the reliability and profitability of the Wabash facility. The improvements are
expected to require additional expenditures of approximately $15 million.
Destec's management believes that these lease obligations and covenants will not
significantly affect Destec's ability to conduct its business.
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At March 31, 1996, Destec had irrevocable letters of credit from banks
totaling $25.4 million pledged to support certain Destec obligations including
$8.7 million and $11.5 million for equity contributions to the Crockett and
Michigan Power projects, respectively. The remainder is pledged to support
various obligations related to the Blue Mountain, Bear Mountain, Indian Queens,
Oyster Creek and Live Oak projects. In April 1996, Destec made an $8.6 million
equity contribution to the Crockett project related to the letter of credit, and
management plans to fund Destec's remaining equity contribution to the Michigan
Power project in mid-1996. Additionally, Destec has committed to make a capital
contribution to the Elsta project of up to $36.9 million.
In 1993, Destec entered into a twenty-year firm transportation agreement with
Florida Gas Transmission to maintain firm gas transportation capacity which
began in March 1995. Destec is required to pay approximately $3.5 million per
year over the life of the contract. During the first three months of 1996,
Destec sold the excess capacity which the Tiger Bay project was unable to
utilize. The current market rate for natural gas transportation capacity is
less than Destec's contracted cost resulting in net costs of $0.5 million to
Destec in the first quarter of 1996.
Between August 1992 and November 1994, Destec's Board of Directors (the
"Board") authorized the repurchase of up to $70.0 million of Destec's common
stock. In May 1996, the Board authorized the repurchase of an additional
1,750,000 shares of Destec's common stock with a maximum cost of $25.0 million
(see Note 2 of the Notes to Consolidated Financial Statements).
Destec currently has $350 million available under a revolving credit agreement
with Dow (the "Dow Credit Agreement"). Under the terms of this agreement which
expires in December 1996, interest is paid quarterly on advances based on Dow's
short-term borrowing rate plus .125%. At March 31, 1996, there were no
outstanding borrowings under this line of credit. This credit agreement along
with cash, cash equivalents and marketable securities is expected to be
sufficient to fund Destec's working capital, additions to fixed assets, and
investments in projects.
Covenants contained in various agreements relating to certain of Dow's
indebtedness prohibit Dow from allowing Destec, subject to certain exceptions,
to encumber or otherwise pledge as security any of its properties or assets or
the capital stock of any of Destec's subsidiaries. In addition, Dow may not
permit Destec to incur indebtedness to the extent such occurrence would cause
Dow indebtedness on a consolidated basis to exceed 60% of Dow's consolidated
capitalization. As of March 31, 1996, Dow's indebtedness on a consolidated
basis was approximately 32% of consolidated capitalization. Dow's debt
instruments also restrict the ability of Dow and its subsidiaries to engage in
certain sale and lease-back transactions involving facilities which are material
to the business conducted by Dow and its subsidiaries located in the United
States when taken as a whole. Destec's management believes that these
restrictions will not significantly affect Destec's ability to conduct its
business.
As a result of operational defects in the administration of the Destec Energy,
Inc. Retirement and Savings Plan since 1991, Destec filed a Voluntary Compliance
Report ("VCR") with the Internal Revenue Service ("IRS"). If the VCR
application is approved by the IRS, Destec will make a contribution to the Plan
of approximately $3.7 million (before tax effect) plus interest from January 1,
1996 to the date of contribution. As of March 31, 1996, Destec had accrued
interest of $0.1 million related to the projected contribution. Destec has
adequate reserves for this liability.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended March 31, 1996.
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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 THEREUNTO DULY AUTHORIZED.
DESTEC ENERGY, INC.
By: /s/ Craig E. Hess
----------------------------
CRAIG E. HESS, VICE PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER AND DULY
AUTHORIZED SIGNATORY)
May 10, 1996
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