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, 1997
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 March 31, 1997 there were 56,127,181 shares of the issuer's Common
Stock, $.01 par value outstanding.
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, 1997 and 1996..... 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........................... 15
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, except share data)
March 31, December 31,
1997 1996
----------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 115,848 $ 111,446
Marketable Securities --- 2,999
Accounts Receivable:
Trade 61,602 72,674
Dow 1,879 1,889
Affiliates 41,282 44,385
Other 406 930
Notes receivable - affiliates 5,501 6,328
Income taxes receivable 26,169 24,830
Deferred taxes - net 5,370 5,370
Costs and estimated earnings in
excess of billings on uncompleted
contracts - affiliates 32,571 44,841
Recoverable project costs 2,773 884
Prepaid expenses and other assets 24,834 23,482
---------- ----------
Total current assets 318,235 340,058
---------- ----------
Property - at cost 403,379 401,652
Accumulated depreciation,
depletion and amortization (71,462) (65,979)
---------- ----------
Property, net 331,917 335,673
---------- ----------
Lease receivable from Dow 44,159 44,159
Equity investments 323,880 323,250
Long-term notes receivable -
affiliates 8,354 8,444
Goodwill (Net of accumulated
amortization of $18,108 and $17,498
at March 31, 1997 and December 31,
1996, respectively) 79,792 80,402
Other assets 12,067 13,160
---------- ----------
Total $1,118,404 $1,145,146
========== ==========
The accompanying notes are in integral part of the consolidated financial
statements.
2
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, except share data)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $ 46,203 $ 64,635
Dow 12,019 12,661
Accrued liabilities 43,860 48,792
Billings in excess of costs and estimated
earnings on uncompleted contracts -
affiliates 2,691 3,646
---------- ----------
Total current liabilities 104,773 129,734
---------- ----------
Long-term liabilities 48,048 50,089
Project financing debt 52,885 53,820
Deferred taxes - net 72,894 71,844
Deferred income 50,637 51,917
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 477,775 470,305
Unearned compensation - related to
outstanding deferred stock (475) (543)
Cumulative translation adjustments 339 3,726
Less 6,122,819 and 6,170,740 sharesof
treasury stock at cost at March 31, 1997
and December 31, 1996, respectively (83,391) (80,665)
---------- ----------
Total stockholders' equity 789,167 787,742
---------- ----------
Total $1,118,404 $1,145,146
========== ==========
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,
------------------------
1997 1996
----------- -----------
Revenues:
Power, steam, syngas and energy resources - affiliates $ 90,265 $ 42,225
Development, engineering and operations - affiliates 25,847 115,536
----------- -----------
Total Revenues 116,112 157,761
----------- -----------
Operating Costs:
Power, steam, syngas and energy resources
-affiliates --- 576
-nonaffiliates 81,641 42,042
----------- -----------
Total power, steam, syngas, and energy resources 81,641 42,618
Development, engineering and operations - affiliates 22,169 101,691
----------- -----------
Total Operating Costs 103,810 144,309
----------- -----------
Amortization of intangibles 610 618
----------- -----------
Selling, General and Administrative Expenses:
Dow 65 46
Direct 11,139 7,189
----------- -----------
Total selling, general and administrative 11,204 7,235
----------- -----------
Total operating costs and expenses 115,624 152,162
----------- -----------
Operating Income 488 5,599
----------- -----------
Earnings from equity investments 7,241 2,246
----------- -----------
Other Income (Expense):
Interest Expense (891) ---
Interest Income - Dow --- 1,335
Interest Income - Other 3,048 4,690
Sundry income - Net 86 16
----------- -----------
Total Other Income 2,243 6,041
----------- -----------
Income before provision for taxes 9,972 13,886
Provision for taxes 2,573 4,453
----------- -----------
Net Income $ 7,399 $ 9,433
=========== ===========
Per Share Amounts:
Net Income Per Share $ 0.13 $ 0.16
=========== ===========
Weighted average shares outstanding 56,118,485 57,893,038
=========== ===========
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,
--------------------------
1997 1996
------------ -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 7,399 $ 9,433
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: (7,241) (2,246)
Deferred income, net.............................. (1,280) 4,021
Depreciation, depletion and amortization.......... 6,093 3,755
Cumulative translation adjustments................ (3,387) ---
Compensation recognized under Variable Pay Plan... 68 ---
Increase in deferred income taxes, net............ 1,050 3,132
Changes in assets and liabilities that provided
(used) cash: ....................................
Accounts receivable ............................ 14,709 9,666
Notes receivable - affiliates................... 827 7
Income taxes receivable......................... (1,339) 1,918
Costs and estimated earnings in excess of
billings on uncompleted contracts - affiliates. 12,270 12,484
Recoverable project costs....................... (1,889) 37,286
Prepaid expenses and other assets............... (1,352) (2,833)
Accounts payable................................ (19,074) 36,580
Accrued liabilities............................. (4,932) (12,919)
Billings in excess of costs and estimated
earnings on uncompleted contracts - affiliates. (955) (41,008)
Income taxes payable............................ --- (249)
Long - term liabilities......................... (2,041) 1,834
-------- --------
Net Cash (Used in) Provided by Operating Activities. (1,074) 60,861
-------- --------
Cash Flows From Investing Activities:
Investments in marketable securities.............. --- (403,119)
Proceeds from sale of marketable securities....... 2,999 443,600
Purchases of property, net........................ (1,726) (23,774)
Long - term notes receivable - affiliates......... 90 ---
Equity investments - contributions................ (427) (6,015)
Equity investments - distributions................ 7,038 6,606
Other assets...................................... 1,093 (5,982)
-------- --------
Net Cash Provided by Investing Activities........... 9,067 11,316
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings - Dow.................... --- ---
Repayment of borrowings - Dow..................... --- ---
Project financing debt............................ (935) ---
Proceeds from issuance of treasury stock.......... 690 9
Treasury stock purchases.......................... (3,345) (6,077)
-------- --------
Net Cash Used in Financing Activities............... (3,590) (6,068)
-------- --------
Net Increase in Cash and Cash Equivalents........... 4,403 66,109
Cash and Cash Equivalents at Beginning of Period.... 111,446 11,466
-------- --------
Cash and Cash Equivalents at End of Period.......... $115,849 $ 77,575
======== ========
Supplemental Disclosures of Cash Flow Information:
Schedule of Noncash Operating, Investing and
Financing Activities:
Gain on sale of treasury stock.................... $ 71 ---
Treasury Stock issued under Variable Pay Plan..... --- $ 2,239
Unrealized loss on marketable securities.......... --- $ 1,888
Unearned compensation............................. $ 68 $ 814
Cumulative translation adjustments................ $ 3,387 ---
Cash paid for:
Interest.......................................... $ 545 ---
Income taxes...................................... $ 264 $ 47
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, 1996, included in Destec's 1996 Annual Report and on Destec's Form 10-K for
the year ended December 31, 1996. The results for interim periods are not
necessarily indicative of results for the full year.
2. TREASURY STOCK
Since 1992, the Destec Board of Directors (the "Board") has authorized the
repurchase of up to $95,000 of Destec's common stock through 1999. As of March
31, 1997, Destec had repurchased 6,816,549 shares and reissued 693,730 shares of
common stock repurchased under these programs.
3. 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, 1997, Destec's
remaining accrual relating to this charge was $1,723 for vacated lease space net
of revenues from subleases.
4. PENDING SALE OF DESTEC
On February 17, 1997, Destec executed an Agreement and Plan of Merger (the
"Merger Agreement"), by and among Destec, Dow, NGC and NGC Acquisition
Corporation II, a wholly owned subsidiary of NGC ("Purchaser"), pursuant to
which, among other things, Purchaser will merge with and into Destec (the
"Merger"). The surviving corporation after the Merger will be a wholly owned
subsidiary of NGC. Pursuant to the Merger Agreement, among other things, each
outstanding share of common stock of Destec will be converted into the right to
receive $21.65 in cash, or approximately $1,270,000 in the aggregate. The
consummation of the Merger is subject to certain conditions, including the
approval by the affirmative vote of at least 66-2/3% of the outstanding
shares of Destec common stock entitled to vote, as well as the approval by the
Federal Energy Regulatory Commission. Dow, which owns approximately 80% of the
outstanding common stock, has agreed to vote its shares of common stock for
approval and adoption of the Merger Agreement.
5. PENDING SALE OF TIGER BAY COGENERATION FACILITY
On January 17, 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
nominally rated 220 MW Tiger Bay cogeneration facility, located in Fort Meade,
Florida to a wholly owned subsidiary of Florida Power Corporation for
approximately $445,000. Destec's estimated share of the proceeds after
repayment of partnership debt and the net settlement of other partnership
obligations is anticipated to be approximately $140,000. The sale is subject to
certain conditions, including, without limitation, regulatory approvals and the
sale of Destec (see Note 4).
6
6. ACCOUNTING POLICIES
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This new
standard requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the earnings statement and requires a reconciliation of
the numerators and denominators of basic and diluted EPS calculations. This
statement will be effective for both interim and annual periods ending after
December 15, 1997. Destec's current EPS calculation conforms to basic EPS.
Diluted EPS as defined by SFAS No. 128 will not be materially different from
basic EPS.
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.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Historical results and trends which
might appear should not be taken as indicative of future operations.
OVERVIEW
Destec is an independent power producer and marketer of electricity, thermal
energy and syngas. In February 1997, Destec announced that its Board of
Directors (the "Board") had approved a Merger Agreement under which NGC
Corporation ("NGC") will acquire Destec in a merger ("Merger") for $21.65 in
cash for each outstanding share of Destec common stock, or approximately $1.27
billion in the aggregate. Following the Merger, Destec will become a wholly
owned subsidiary of NGC. The consummation of the Merger is subject to certain
conditions, including approval by holders of two-thirds of the outstanding
shares of common stock and by the Federal Energy Regulatory Commission. The Dow
Chemical Company ("Dow"), which owns over 80% of the outstanding common stock as
of March 31, 1997, has agreed to vote its shares of common stock for approval
and adoption of the Merger.
Destec's project portfolio includes a total of twenty-four operating projects
consisting of nineteen power projects in the U.S., one syngas project in the
U.S. and four international power projects located in Australia, Canada, the
Dominican Republic and the United Kingdom. During 1997, Destec received
revenues from the sale of electricity, thermal energy and syngas from Destec's
owned or leased projects and from power marketing revenues earned by Destec
Power Services, Inc. ("DPS"). These revenues are classified as "Power, steam and
syngas" in the "Summary of Statements of Consolidated Income" presented below.
Destec also received revenue from its oil and gas properties and lignite
properties (classified as "Energy resources"), from fees earned in connection
with its activities as an engineer, operator and manager 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.
DOMESTIC POWER
Destec owns, leases or has an equity interest in nineteen operating power
projects in the U.S. Eleven of the nineteen projects are located in California,
three are located in Texas and the remainder are located in Virginia, Nevada,
Georgia, Florida and Michigan. In addition, DPS began selling excess power from
Destec's facilities, as well as from other sources, in June 1995.
These domestic projects generally operate under energy sales contracts based
upon the purchasing utility's avoided costs. Competitive initiatives in several
states, as well as federal initiatives, are designed to phase-in market based
pricing. The initiatives in California propose phasing in market based pricing
by the year 2002. These initiatives are generally not yet effective and will be
the subject of considerable debate and modification. Contract prices could
change as a result of the legislative process.
DPS began selling power in June 1995 and is currently marketing power through
its Western Operations and Southern Operations located in Walnut Creek,
California and Houston, Texas,
8
respectively. DPS sells power through either spot or firm sales. Spot sales are
short-term, covering a period of thirty days or less. Firm sales are long-term
and usually include a capacity revenue component which gives the purchaser of
power the right to call energy held in reserve by DPS as needed. During the
first quarter of 1997, an increasing number of DPS' sales were made under firm
contracts. DPS' Western Operations are currently marketing power under firm
contracts with the Port of Oakland and Pacific Gas & Electric Company ("PG&E").
DPS' Southern Operations are selling power under both firm and spot contracts to
several utilities and power marketers including Central and Southwest Services,
Inc., Houston Lighting and Power Company, The Lower Colorado River Authority
("LCRA"), South Texas Electric Cooperative, Texas-New Mexico Power Co. ("TNP"),
Enron Power Marketing, Inc., National Gas & Electric, and LG&E Power Marketing,
Inc. In addition, DPS' Southern Operations also markets power from the CoGen
Lyondell, Inc. ("CLI") facility and other non-utility facilities and coordinates
with other generators within the Electric Reliability Council of Texas to market
ancillary services.
INTERNATIONAL POWER
Destec has four operating international projects which include Los Mina (Santo
Domingo, Dominican Republic), Indian Queens (Cornwall, United Kingdom), Kingston
(Ontario, Canada) and Hazelwood (Victoria, Australia). Currently, Destec is
constructing the Elsta facility (Terneuzen, The Netherlands) with completion
expected in 1997. The Chiahui Power (Taiwan, Republic of China), Termoriente
(Barrancabermeja, Colombia) and Kingsnorth (Kent, United Kingdom) projects are
currently in active development.
Destec is currently in negotiations with the Taiwan Power Company regarding
development of the 450 MW Chiahui Power project. Termoriente, located in
Colombia, is a 95 MW natural gas fueled independent power project. Management
expects to sell approximately 50% of its power under signed power purchase
agreements and the remainder on the Colombian spot market after scheduled
completion in 1998. Kingsnorth, a 740 MW natural gas fueled independent power
project located in the United Kingdom, is scheduled for completion in 1999 and
will provide power to the national power grid.
SYNGAS
The Wabash River Coal Gasification facility ("Wabash"), a joint venture of
Destec and PSI Energy, Inc. ("PSI"), with cost-sharing supplied by the U.S.
Department of Energy ("DOE"), began commercial operations in November 1995 and
is constructed to process 2,700 tons of coal per day for the net production of
262 MW of electricity. The Wabash project has an agreement with PSI which
subjects Wabash 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 operating year and is calculated based on the annual syngas production and
is settled at the end of 1998. As of March 31, 1997, Destec's accrual for the
potential penalty is $3.3 million. During 1996, Destec began making significant
equipment and process improvements in order to improve the reliability and
profitability of the Wabash facility. The total cost of the improvements, which
were financed through the new operating lease in June 1996, is estimated at
$14.0 million and completion is expected in mid 1997.
9
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
The following table sets forth a summary of Destec's statements of
consolidated income for the three month periods ended March 31, 1997 and 1996,
respectively. This information has been derived from Destec's unaudited
Consolidated Financial Statements.
SUMMARY OF STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------- ----------
Revenues:
Power, steam and syngas............... $ 81,272 $ 38,378
Engineering and operations............ 25,847 106,327
Energy resources...................... 8,993 3,847
Development........................... --- 9,209
---------- ----------
Total Revenues...................... 116,112 157,761
---------- ----------
Operating Costs and Expenses:
Power, steam and syngas............... 77,192 40,455
Engineering and operations............ 20,848 97,723
Energy resources...................... 4,449 2,163
Development........................... 1,321 3,968
Amortization of intangibles........... 610 618
Selling, general & administrative
expenses............................. 11,204 7,235
---------- ----------
Total Operating Costs and Expenses.. 115,624 152,162
---------- ----------
Earnings from equity investments........ 7,241 2,246
Other income............................ 2,243 6,041
---------- ----------
Income before provision for taxes on
income................................ 9,972 13,886
Provision for taxes on income........... 2,573 4,453
---------- ----------
Net Income.............................. $ 7,399 $ 9,433
========== ==========
- ---------------------
Certain amounts from previous years have been reclassified to conform to the
1997 presentation.
REVENUES
Destec's revenue decreased $41.7 million or 26% for the three month period
ended March 31, 1997 as compared to the same period in 1996. This decrease
resulted from an $80.5 million decrease in engineering and operations revenue
and a $9.2 million decrease in development revenue, partially offset by a $42.9
million increase in power, steam and syngas revenue and a $5.1 million increase
in energy resources revenue.
The $80.5 million decrease in engineering and operations revenue resulted
primarily from lower engineering revenue recognition on the construction cost
related to the Elsta and Kingston projects in the first quarter of 1997, as
compared to revenue recognition on the Elsta, Kingston, Bear Mountain and
Michigan Power projects in the same period of 1996. The decrease was partially
offset by engineering revenue earned in 1997 from the Hazelwood partnership
under an engineering services agreement ("Hazelwood Engineering Services
Agreement"). Operations revenue remained relatively unchanged
10
for 1997 as compared to the same period in 1996. Engineering revenues are
expected to decrease after completion of the Elsta project, which is the last
full engineering and construction contract, due to management's strategy of de-
emphasizing vertical integration, which occurred as a result of the
restructuring in 1994. Revenue earned from the Hazelwood partnership will
continue to be recognized under the Hazelwood Engineering Services Agreement.
The $9.2 million decrease in development revenue resulted from the recognition
of development fees associated with the financial closing of the Elsta project
in the first quarter of 1996. There were no similar fees earned in the first
quarter of 1997.
The $42.9 million increase in power, steam and syngas revenue was primarily a
result of higher power revenue due to the commencement of commercial operations
at the Los Mina and Indian Queens facilities in May and December 1996,
respectively, and higher power and steam revenue from the CLI and CoGen Power
facilities as a result of higher gas prices in the first quarter of 1997 as
compared to the same period in 1996. In addition, revenue from DPS was higher in
1997 as a result of increased sales from the Southern Operations under firm
contracts with TNP and LCRA which both included capacity revenue and increased
spot sales to other customers. DPS sales from Western Operations also increased
under contracts with PG&E and the Port of Oakland in 1997.
The $5.1 million increase in energy resources revenue was due to higher oil
and gas revenue resulting from higher gas prices in the first quarter of 1997
compared to the same period in 1996 and higher production revenue as a result of
the purchase of the Southeast Piceance gas properties in April 1996. Lignite
revenue increased as a result of contract escalators for lignite production and
price and due to the royalty revenue earned from the Cotton Valley Pinnacle Reef
well, Blanton #1, which was completed in November 1996.
OPERATING COSTS AND EXPENSES
Destec's total operating costs and expenses decreased $36.5 million or 24% for
the three months ended March 31, 1997, as compared to the same period in 1996.
This decrease resulted from a $76.9 million decrease in engineering and
operations cost and a $2.6 million decrease in development cost, partially
offset by a $36.7 million increase in power, steam and syngas cost, a $2.3
million increase in energy resources cost and a $4.0 million increase in
selling, general and administrative cost.
The $76.9 million decrease in engineering and operations cost resulted
primarily from lower construction costs related to the Elsta and Kingston
projects in the first quarter of 1997, as compared to construction costs on the
Elsta, Kingston, Bear Mountain and Michigan Power projects in the same period of
1996. Engineering costs are expected to decrease after completion of the Elsta
project, which is the last full engineering and construction contract, due to
management's strategy of de-emphasizing vertical integration which occurred as a
result of the restructuring in 1994. Costs will be incurred as a result of
performing under the Hazelwood Engineering Services Agreement.
The $2.6 million decrease in development cost was due to cost associated with
the Elsta project in the first quarter of 1996, with no such costs incurred in
the same period of 1997. In addition, costs of $1.9 million related to the
projects in active development was capitalized in the first quarter of 1997.
The $36.7 million increase in power, steam and syngas cost was primarily a
result of higher power costs due to the commencement of commercial operations at
the Los Mina and Indian Queens projects in May and December 1996, respectively.
Costs at the CLI facility increased in the first quarter of 1997 as compared to
the same period in 1996 as a result of higher gas prices. In addition, DPS costs
were higher as a result of increased power marketing activities in the first
quarter of 1997 as compared to the same period in 1996.
11
The $2.3 million increase in energy resources cost is a result of higher
production costs associated from the Southeast Piceance gas properties purchased
in April 1996.
The $4.0 million increase in selling, general and administrative expenses is a
result of costs incurred related to the pending sale of Destec (see Note 4 of
the Notes to Consolidated Financial Statements).
EQUITY INVESTMENTS, OTHER INCOME AND TAXES
Earnings from equity investments increased $5.0 million for the first quarter
of 1997 as compared to the same period in 1996. The increase was due primarily
to contract capacity payment escalators and to more favorable fuel spreads in
the first quarter of 1997 compared to 1996. Equity investments also included
earnings in 1997 from the Crockett and Kingston projects which became
operational in June 1996 and January 1997, respectively, and the Hazelwood
project which was acquired in September 1996.
Other income decreased $3.8 million due primarily to a reduction in interest
income as a result of a lower average cash balance in the first quarter of 1997
compared to the same period of 1996. In addition, interest expense of $0.9
million on the Indian Queens project debt was included in the first quarter of
1997. Interest expense was capitalized prior to Indian Queens commencing
commercial operations at the end of December 1996.
The effective tax rate for the three months ended March 31, 1997 was 25.8% as
compared to 32.1% for the three months ended March 31, 1996. The 1997 tax rate
was lower than the 1996 rate primarily as a result of increased utilization of
non-conventional fuels source credits in 1997 after entering into the tax
sharing agreement (the "Tax Agreement") with the Dow Chemical Company in June
1996. As a result of the Tax Agreement, Destec is included in the consolidated
federal income tax return of Dow, as Dow's ownership increased above 80%. The
Tax Agreement allows Destec to reduce its federal stand-alone tax liability by
certain non-conventional fuels tax credits which have been utilized in Dow's
consolidated return, even where such credits would not be otherwise currently
usable by Destec.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, cash and cash equivalents totaled $115.8 million and
working capital totaled $213.5 million. For the three months ended March 31,
1997, cash and cash equivalents increased $4.4 million. Working capital
increased $3.1 million. The increase in cash and cash equivalents resulted
mainly from $9.1 million provided by Destec's investing activities, partially
offset by $1.1 million used in Destec's operating activities and $3.6 million
used in Destec's financing activities. See Destec's "Statements of Consolidated
Cash Flows" for additional detail.
The CLI lease is an operating lease with an initial non-cancelable term of 5
years ending in 2000 and an extended term of an additional 13 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, 1997, the future estimated minimum lease payments
under the operating lease are approximately $209.4 million.
The Wabash lease is backed by a Destec guarantee which expires on April 30,
2001. At that time, Destec can refinance, abandon and pay termination costs or
purchase the facility. The future minimum lease payments associated with the
lease as of March 31, 1997 are approximately $220.6 million. Under the Wabash
lease agreement, the occurrence of certain events ("Termination Events"), such
as a change in control of Destec (see Note 4 of the Notes to Consolidated
Financial Statements), will automatically terminate the lease. According to the
Wabash lease agreement, if Dow shall fail to own a majority of outstanding
shares of Destec, the Guarantor, a Termination Event will occur. Upon the date
of the
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occurrence of any Termination Event, the lessee shall, on the payment date
relating to the payment of partnership rent next succeeding the Termination
Event date, purchase the lessor's interest in the property from the lessor for a
purchase price equal to the lease termination payment in accordance with
purchase provisions set forth in the agreement. The lease termination payment is
$193.3 million plus accrued interest from the date of last lease payment.
The Wabash project has an agreement with PSI which subjects Wabash 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 operating year and is
calculated based on the annual syngas production and is settled at the end of
1998. As of March 31, 1997, Destec's accrual for the potential penalty is $3.3
million. During 1996, Destec began making significant equipment and process
improvements in order to improve the reliability and profitability of the Wabash
facility. The total cost of the improvements, which were financed through the
new operating lease in June 1996, is estimated at $14.0 million and completion
is expected in mid 1997.
At March 31, 1997, Destec had outstanding irrevocable letters of credit from
banks totaling $34.5 million. These letters of credit are pledged to support
certain Destec equity commitments and other development activities. As of March
31, 1997, Destec has corporate guarantees associated with equity contributions
to the Kingston and Elsta projects of approximately $12.7 million and $32.4
million which are expected to be made in mid 1997 and 1998, respectively. The
Hazelwood partnership is planning a major capital expenditure program during the
first three years of ownership, which may be funded from future capital
contributions to refurbish two of the eight operating units in order to maximize
operating efficiencies and upgrade environmental performance.
Pursuant to an agreement dated September 6, 1996, Destec has agreed to pay
the investment banking firm of Morgan Stanley & Co. Incorporated ("Morgan
Stanley") to assist Destec in exploring strategic alternatives to maximize
shareholder value. If the Merger (see Note 4 of the Notes to Consolidated
Financial Statements) is consummated, Destec will pay a total fee of
approximately $5.1 million (against which any previously paid fees would be
credited) for services performed. If the Merger is not consummated the fee
would be between $0.2 million and $0.5 million. In addition to the foregoing
compensation, Destec has agreed to reimburse Morgan Stanley for its expenses,
including reasonable fees and expenses of its counsel, and to indemnify Morgan
Stanley for liabilities and expenses arising out of the engagement and the
transactions in connection therewith, including liabilities under federal
securities laws.
Destec has a commitment to the Tiger Bay project, in which Destec has an
approximate 50% non-controlling equity interest, to loan up to an additional
$10.0 million (subordinated to the partnership's senior lenders) based on the
project steam host's ability to contractually perform. In December 1993, Destec
entered into a twenty year firm transportation agreement with Florida Gas
Transmission to maintain firm gas transportation capacity which became effective
in March 1995. Destec is required to pay approximately $3.5 million per year
over the contract life to maintain transportation capacity. During the first
three months of 1997, Destec sold the excess capacity which the Tiger Bay
project was unable to utilize. Because the current market rate for natural gas
transportation capacity was less than Destec's contracted cost, a resulting net
fuel expense of $0.7 million was incurred in 1997.
In January 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
Tiger Bay cogeneration facility, located in Fort Meade, Florida to a wholly
owned subsidiary of Florida Power Corporation for $445.0 million. Destec's
estimated share of the proceeds after repayment of partnership debt and the net
settlement of other partnership obligations is anticipated to be approximately
$140.0 million. The sale is subject to certain conditions, including regulatory
approvals and the sale of Destec. See Notes 4 and 5 of the Notes to
Consolidated Financial Statements for additional discussion.
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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 IRS. If the VCR application is approved by the IRS,
Destec will make a contribution to the Plan of approximately $5.0 million
(before tax effect) including accrued interest. Destec's management believes
that adequate reserves are provided as of March 31, 1997 for this potential
liability.
Since 1992, the Board of Directors authorized the repurchase of up to $95.0
million of Destec's common stock through 1999. As of March 31, 1997, Destec had
repurchased 6,816,549 and reissued 693,730 shares of common stock repurchased
under these programs.
In August 1996, Destec arranged non-recourse financing for the 140 MW Indian
Queens facility located in Cornwall, United Kingdom. The project financing,
which consists of a $56.6 million construction facility and $39.8 million in
term facility and other debt instruments, was arranged and underwritten by
Barclays Bank PLC. Through March 31, 1997, Destec has recorded advances under
the construction facility of $52.9 million in Project financing debt. The credit
agreement divides the facility into two tranches which carry interest at LIBOR
plus variable margins. The conversion of the construction loan to term is
expected to occur in 1997. The term loan matures over a period of 17 years.
Interest costs of approximately $1.0 million incurred during the construction of
the facility were capitalized as of December 31, 1996. The interest rates in
effect as of March 31, 1997 were 6.46% on $22.9 million and 7.21% on $30.0
million. During the period ended March 31, 1997, interest expense of $0.9 was
incurred. Under the terms of the credit agreement, the unconsolidated financial
statements of the Indian Queens project are subject to various coverage ratios;
however, because these are at the project level, management does not believe
they will affect Destec's ability to conduct business.
Covenants are contained in various agreements relating to Dow's indebtedness.
Management believes that current cash and cash equivalents and operating cash
flows will be sufficient to fund Destec's working capital, additions to fixed
assets and investments in projects.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statements re: computation of per share earnings
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 17, 1997 was filed with the
Securities and Exchange Commission which reported the execution of the Agreement
and Plan of Merger, dated as of February 17, 1997, by and among Destec, NGC and
NGC Acquisition Corporation II, a wholly owned subsidiary of NGC ("NGC
Acquisition") pursuant to which NGC Acquisition will merge with and into Destec
and each outstanding share of Destec's common stock will be converted into the
right to receive $21.65 in cash.
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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 14, 1997
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