SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 No. 1-13264 TRIGEN ENERGY CORPORATION (Exact name of Registrant as specified in its charter) Delaware 13-3378939 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Water Street White Plains, New York 10601-1009 (Address of principal executive offices) (Zip Code) (914) 286-6600 (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 ------- ------ There were 12,357,183 shares of the Registrant's Common Stock outstanding as of August 11, 1999. TRIGEN ENERGY CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q Quarter Ended June 30, 1999 Page Part I - Financial Information: Item 1. Financial Statements Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1999 and 1998 (Unaudited) 3 Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3.Quantitative and Qualitative Disclosures About Market Risk 13 Part II - Other Information: 14 Signatures: 15 Disclosure Regarding Forward-Looking Statements THIS REPORT INCLUDES HISTORICAL INFORMATION AS WELL AS STATEMENTS REGARDING OUR FUTURE EXPECTATIONS. THE STATEMENTS REGARDING THE FUTURE (REFERRED TO AS "FORWARD-LOOKING STATEMENTS") INCLUDE AMONG OTHER THINGS STATEMENTS ABOUT ENERGY MARKETS IN 1999, COST REDUCTION TARGETS, RETURN ON CAPITAL GOALS, DEVELOPMENT, PRODUCTION AND ACCEPTANCE OF NEW PRODUCTS AND PROCESS TECHNOLOGIES, ONGOING AND PLANNED CAPACITY ADDITIONS AND EXPANSIONS AND JOINT VENTURES. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE: SUPPLY/DEMAND FOR OUR PRODUCTS, COMPETITIVE PRICING PRESSURES, WEATHER PATTERNS, CHANGES IN INDUSTRY LAWS AND REGULATIONS, COMPETITIVE TECHNOLOGY, FAILURE TO ACHIEVE OUR COST REDUCTION TARGETS OR COMPLETE CONSTRUCTION PROJECTS ON SCHEDULE AND YEAR 2000 COMPUTER RELATED DIFFICULTIES. WE BELIEVE IN GOOD FAITH THAT THE FORWARD-LOOKING STATEMENTS IN THIS REPORT HAVE A REASONABLE BASIS, INCLUDING WITHOUT LIMITATION, MANAGEMENT'S EXAMINATION OF HISTORICAL OPERATING TRENDS, DATA CONTAINED IN OUR RECORDS AND OTHER DATA AVAILABLE FROM THIRD PARTIES, BUT SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM ANY RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. Part I - Financial Information Item 1. Financial Statements TRIGEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Six Months Ended June 30, 1999 and 1998 Unaudited (In thousands, except per share data) Three Months Six Months -------------------- -------------------- 1999 1998 1999 1998 ---- ----- ------------------ Revenues Thermal energy $ 42,291 $ 37,068 $112,976 $97,278 Electric energy 10,846 8,880 21,639 20,209 Equity in earnings of non-consolidated partnerships 3,878 1,323 4,024 2,026 Fees earned and other revenues 3,871 3,523 7,676 6,193 ---------- ---------- ----------- ------ Total revenues 60,886 50,794 146,315 125,706 ---------- ---------- ----------- ------ Operating expenses Fuel and consumables 23,290 20,296 61,581 52,697 Production and operating costs 13,773 11,714 27,307 24,050 Depreciation and amortization 6,359 5,912 12,449 11,562 General and administrative 9,836 10,600 20,465 19,319 ---------- --------- -------- -------- Total operating expenses 53,258 48,522 121,802 107,628 ---------- ---------- -------- -------- Operating income 7,628 2,272 24,513 18,078 Other income (expense) Interest expense ( 6,126) (5,826) (12,406) (11,567) ----------- --------- -------- -------- Other income, net 14,989 4,313 15,347 4,599 ----------- --------- -------- -------- Earnings before minority interests, income taxes, extraordinary item, and cumulative effect of a change in an accounting principle 16,491 759 27,454 11,110 Minority interests in earnings of subsidiaries 536 782 1,040 1,575 ---------- ---------- -------- ------ Earnings before income taxes, extraordinary item and cumulative effect of a change in an accounting principle 15,955 (23) 26,414 9,535 Income taxes 6,605 (10) 10,935 4,100 ---------- ---------- ------- ------- Earnings before extraordinary item and cumulative effect of a change in an accounting principle 9,350 (13) 15,479 5,435 Extraordinary loss from extinguishment of debt, net of tax benefit - - - - - - (299) Cumulative effect of change in an accounting principle, net of tax benefit - - - - (4,903) - - ---------- ---------- -------- ------- Net earnings (Losses) $9,350 $ (13) $10,576 $ 5,136 ========== ========== ======= ======= Basic earnings per common share Before extraordinary item and cumulative effect of a change in an accounting principle $ .78 - - $ 1.29 $ .45 Extraordinary loss - - - - - - ( .03) Cumulative effect of change in an accounting principle - - - - (.41) - - ---------- ---------- -------- ------ Net earnings $ .78 $ - - $ .88 $ .42 ========== ========== ======== ======= Diluted earnings per common share Before extraordinary item and cumulative effect of a change in an accounting principle $ .78 $ - - $ 1.29 $ .45 Extraordinary loss - - - - - - ( .03) Cumulative effect of change in an accounting principle - - - - ( .41) - - ---------- ---------- --------- ------- Net earnings $ .78 $ - - $ .88 $ .42 ========== ========== ========= ====== Average shares outstanding - basic 12,051 12,031 12,027 12,017 ---------- ---------- --------- ------- Average shares outstanding - diluted 12,073 12,031 12,037 12,019 ---------- ---------- --------- ------- See accompanying notes to consolidated financial statements. TRIGEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Unaudited (In thousands, except share data) June 30, December 31, 1999 1998 ------------ ----------- - - Current assets Cash and cash equivalents $ 14,130 $ 10,074 Accounts receivable Trade (less allowance for doubtful accounts of $1,141 in 1999 and $1,202 in 1998) 34,739 35,236 Other 6,645 5,686 -------- ------- Total accounts receivable 41,384 40,922 Inventories 7,299 7,074 Prepaid expenses and other current assets 6,393 8,016 -------- --------- Total current assets 69,206 66,086 Restricted cash and cash equivalents 4,576 4,623 Property, plant and equipment, net 472,872 442,755 Investment in non-consolidated partnerships 44,880 30,319 Intangible assets, net 47,435 49,968 Deferred costs and other assets, net 23,678 24,405 ----------- ---------- Total assets $662,647 $618,156 ========= ======== Liabilities and Stockholders' Equity Current liabilities Short-term debt $ - - $ 15,000 Current portion of long-term debt 16,859 16,398 Accounts payable 6,052 4,756 Accrued income taxes 7,070 5,728 Accrued fuel 8,636 14,121 Accrued expenses and other current liabilities 29,651 19,626 --------- --------- Total current liabilities 68,268 75,629 Long-term debt 378,153 343,685 Other liabilities 3,987 4,254 Deferred income taxes 43,911 39,422 --------- --------- Total liabilities 494,319 462,990 Minority interests in subsidiaries 9,013 7,238 Stockholders' equity Preferred stock-$.01 par value, authorized and unissued 15,000,000 shares - - - - Common stock-$.01 par value, authorized 60,000,000 shares, issued 12,417,934 shares in 1999 and 1998 124 124 Additional paid-in capital 120,239 120,595 Retained earnings 46,129 36,417 Unearned compensation - restricted stock (4,651) (4,967) Accumulated other comprehensive loss (1,569) (2,002) Treasury stock, at cost, 61,709 shares in 1999 and 145,842 shares in 1998 ( 957) (2,239) --------- ---------- Total stockholders' equity 159,315 147,928 ----------- --------- Total liabilities and stockholders' equity $662,647 $618,156 ======== ========= See accompanying notes to consolidated financial statements. < TRIGEN ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1999 and 1998 Unaudited (In thousands) 1999 1998 ------ ------ Cash flows from operating activities Net earnings $ 10,576 $ 5,136 Reconciliation of net earnings to cash provided by operating activities Non-cash after-tax gain on litigation settlement ( 8,518) - - Extraordinary item - - 299 Cumulative effect of a change in an accounting principle 4,903 - - Depreciation and amortization 13,265 12,361 Deferred income taxes 4,489 202 Provision for doubtful accounts 172 269 Minority interests in subsidiaries 782 1,575 Changes in assets and liabilities Accounts receivable (83) 10,181 Inventories and other current assets 1,398 417 Accounts payable and other current liabilities 4,678 (2,347) Noncurrent assets and liabilities ( 5,115) (2,567) -------- -------- Net cash provided by operating activities 26,547 25,526 -------- -------- Cash flows from investing activities Acquisition of energy facilities. (354) (44,100) Investments in non-consolidated partnerships (310) (990) Capital expenditures (40,197) (20,133) ---------- --------- Net cash used in investing activities (40,861) (65,223) ---------- --------- Cash flows from financing activities Short-term debt, net (15,000) (14,200) Proceeds of long-term debt 43,470 84,850 Payments of long-term debt (9,246) (24,356) Dividends paid (864) (863) Purchase of treasury stock (38) (775) Distribution to minority interests - - (1,550) -------- ------- Net cash provided by financing activities 18,322 43,106 -------- -------- Cash and cash equivalents Increase 4,008 3,409 At beginning of period 14,698 13,693 --------- -------- At end of period $18,706 $17,102 ======= ======= Current $14,130 $12,431 Restricted 4,576 4,671 -------- -------- At end of period $18,706 $17,102 ======= ======= Supplemental disclosure of cash flow information Cash paid during the period for Interest $11,750 $10,606 -------- -------- Income taxes 2,906 1,421 -------- ------- See accompanying notes to consolidated financial statements. TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Trigen Energy Corporation and its subsidiaries ("we"), develop, own and operate commercial and industrial energy systems in the United States, Canada and Mexico. We use our expertise in thermal engineering and proprietary cogeneration processes to convert fuel to various forms of thermal energy and electricity. We combine heat and power generation, producing electricity as a by-product, for use in our facilities and for sale to customers. The consolidated financial statements of Trigen Energy Corporation and its subsidiaries presented herein are unaudited. However, such information reflects all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position as of June 30, 1999, and the results of operations for the three and six months ended June 30, 1999 and 1998 and the cash flows for the six months ended June 30, 1999 and 1998. The results of operations for the three and six month periods ended June 30, 1999 and cash flows for the six month period ended June 30, 1999 are not indicative of those to be expected for the year ending December 31, 1999. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998 included in our Annual Report on Form 10-K for the year ended December 31, 1998. Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. 2. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We are required to adopt SFAS No. 133 for fiscal years beginning after June 15, 2000. Based on preliminary analyses, we do not expect the future adoption of SFAS No. 133 to have a material effect on results of operations and financial condition. 3. Supplementary Income Information Included in other income, net for the three months and six months ended June 30, 1999 is a gain of $14.5 million related to the Grays Ferry Cogeneration Partnership litigation settlement agreement. The gain represents the market value of the share of Adwin's interest in the Partnership that has been surrendered to us as part of this settlement. (See Note 6- Legal Proceedings). Included in other income, net for the three months and six months ended June 30, 1998 were gains of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement. TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Cumulative Effect of a Change in an Accounting Principle Effective January 1, 1999, we adopted the American Institute of Certified Public Accountants Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs associated with start-up activities and organizational costs be expensed as incurred. The effect of the adoption was an after-tax charge of $4.9 million, net of a tax benefit of $3.5 million, to expense deferred organizational and start-up costs as a cumulative effect of a change in an accounting principle. 5. Extraordinary Item We incurred an extraordinary charge of $.3 million, net of a tax benefit of $.2 million, in the six months ended June 30, 1998 in connection with the early retirement of debt. 6. Legal Proceedings Grays Ferry Settlement On April 23, 1999, the Pennsylvania Court of Common Pleas of Philadelphia County approved a settlement agreement which ended the lawsuit brought by Grays Ferry Cogeneration Partnership (the "Partnership"), Trigen-Schuylkill Cogeneration, Inc. and Cogen America Schuylkill Inc. against PECO Energy Company and Adwin (Schuylkill) Cogeneration, Inc. The Partnership is the owner of the Grays Ferry Cogeneration Facility located in Philadelphia, Pennsylvania. The Partnership, Trigen-Schuylkill and Cogen America commenced this lawsuit in reaction to the alleged termination by PECO on March 3, 1998, of the electric power purchase agreements between the Partnership and PECO (the "Power Purchase Agreements"). Prior to the settlement we owned a one third interest in the Partnership through our wholly owned subsidiary, Trigen-Schuylkill. Cogen America and Adwin owned the other two-thirds interests in the Partnership. Adwin is an indirect wholly owned subsidiary of PECO. Under the settlement agreement PECO's subsidiary, Adwin, surrendered its rights to its one-third partnership interest in the Partnership to the two remaining partners, Trigen-Schuylkill and Cogen America. As a result, we own one half of the Partnership and Cogen America owns the other half. During the quarter ended June 30, 1999, we recognized an after tax gain of $8.5 million ($.71 per diluted share) which represents the market value of our share of Adwin's interest. Separately, The Chase Manhattan Bank and Westinghouse Power Generation, which financed the construction of the Gray's Ferry Cogeneration facility, agreed to dismiss their lawsuits against PECO. The Chase Manhattan Bank also agreed that they will not charge the Partnership for any default interest up to April 16, 1999. During the quarter, the Partnership therefore reversed previously accrued default interest of $2.9 million including $1.8 million that was recorded in 1998. Our share of the interest reversal was $1.4 million. TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In the year 2001, the energy price under the Power Purchase Agreements will begin to be based upon a percentage of a market based index, which we expect to produce substantially lower revenues from sales to PECO than the more favorable rates of the early contract years. Under the settlement agreement, the Partnership gained the right to sell to third parties electric energy and capacity from the facility in excess of the 150 megawatts which PECO is required to purchase under the Power Purchase Agreements, subject to a right of first refusal for PECO. We expect that the ability to sell to third parties electric energy and capacity above the 150 megawatts under contract to PECO, will result in an opportunity to improve the financial performance of the Partnership. The Partnership will now have the ability to institute capital modifications to the combustion turbine to increase electric capacity during the summer months when the price of electric capacity and energy are historically the highest. 7. Comprehensive Income Effective January 1, 1998, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement requires disclosure of all items recognized under accounting standards as components of comprehensive income. Following are the components of comprehensive income for the three months and six months ended June 30, 1999 and 1998 (in thousands). Three Months Ended Six Months Ended June 30 June 30 ----------------- ----------------- 1999 1998 1999 1998 ---- ----- ---- ----- Net earnings $9,350 (13) $10,576 $5,136 Other comprehensive income Cumulative foreign currency translation adjustment 367 22 433 19 ------ ---- ------- ------ Comprehensive income $9,717 $ 9 $11,009 $5,155 ====== ===== ======= ====== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months ended June 30, 1999 compared with Three Months ended June 30, 1998. Overview For the quarter ended June 30, 1999, we reported earnings of $9.4 million or $.78 per diluted share. This compared with a $13 thousand loss in the second quarter of 1998. Revenues were $60.9 million in the second quarter compared with $50.8 million last year. Second quarter operating income of $7.6 million increased $5.3 million over the $2.3 million in the like quarter last year. This increase reflects higher sales volume in most of the district energy systems, positive contributions from new industrial accounts and the absence of 1998 special cost adjustments. In addition, equity earnings for unconsolidated subsidiaries increased by $2.6 million versus the second quarter of 1998 due to an increase in our ownership share of the Grays Ferry Cogeneration Partnership from April 23rd forward and the reversal of accrued default interest expense on the Partnership debt. A significant portion of our revenues and profits are subject to seasonal fluctuation due to peak heating demand in the winter and peak cooling demand in the summer. Revenues Revenues of $60.9 million were up $10.1 million or 20% from the second quarter of 1998, due to increased sales volume in most of the district energy systems and positive contributions from our new industrial accounts which became operational in 1999. Thermal energy sales were up $5.2 million to $42.3 million while electric energy sales increased by $2.0 million to $10.8 million. Equity earnings from unconsolidated subsidiaries were up $2.6 million from the second quarter of 1998, primarily due to an increase in our ownership share of the Grays Ferry Cogeneration Partnership to 50% from 33 and 1/3% and from our $1.4 million share of the reversal of accrued default interest on the Partnership debt through April 16, 1999. Operating Expenses Fuel and consumables costs were $23.3 million in the second quarter of 1999 compared with $20.3 million in 1998. This increase was due to the higher level of energy revenues and the addition of fuel and consumables costs associated with new industrial accounts. Production and operating costs increased $2.1 million to $13.8 million in the second quarter due to the increase in revenues and the inclusion of production and operating costs associated with new industrial accounts. General and administrative expenses were down $.8 million from the second quarter 1998 primarily due to the absence of 1998 special cost adjustments of $2.0 million for insurance and employee related costs. Other Income, Net The $10.7 million increase in other income, net is primarily the result of recognizing the gain from our share of the Adwin interest in the Grays Ferry Cogeneration Partnership which was surrendered to us on April 23, 1999 as part of a legal settlement agreement (see Note 6-Legal Proceedings). We recorded a pre-tax gain of $14.5 million which represents the market value of the share of Adwin's interest in the Partnership that was surrendered to us. Second quarter 1998 included the net results from gains of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement. Income Taxes Our effective tax rate is determined primarily by the federal statutory rate of 35%, and state and local income taxes. The effective income tax rate for the second quarter of 1999 and 1998 was 41.4% and 43.0%, respectively. Six months ended June 30, 1999 compared with six months ended June 30, 1998 Overview For the six months ended June 30, 1999, we reported earnings before a cumulative effect of a change in accounting principle of $15.5 million or $1.29 per diluted share. This compared to $5.4 million and $.45 of diluted earnings per share before extraordinary item last year. Net earnings for the six months ended June 30, 1999, amounted to $10.6 million or $.88 per diluted share after the effect of the adoption of the change in accounting principle. Operating income was $24.5 million on revenues of $146.3 million in the first six months of 1999 compared with operating income of $18.1 million on revenues of $125.7 million in 1998. The operating margin was 16.8% in 1999 compared with 14.4% in 1998. Revenues Revenues of $146.3 million were up $20.6 million or 16.4% over 1998. Thermal energy sales increased $15.7 million to $113.0 million and electric energy sales increased $1.4 million to $21.6 million. The increase in thermal energy sales is due to increased sales volume reflecting a colder winter than 1998 and from positive contributions from our new industrial accounts which became operational in 1999. Equity earnings from unconsolidated subsidiaries increased 99% to $4.0 million. This is primarily due to the increase in our ownership share of the Grays Ferry Cogeneration Partnership to 50% from 33 and 1/3% and from our $1.4 million share of the reversal of accrued default interest on the Partnership debt through April 16, 1999. Fees earned and other revenues increased $1.5 million to $7.7 million primarily due to increased equipment sales and to new industrial accounts. Operating Expenses Fuel and consumables costs were $61.6 million compared with $52.7 million last year. This is due to the higher level of energy revenues and the addition of fuel and consumables costs associated with new industrial accounts. Production and operating costs increased 13.5% to $27.3 million due to the increase in revenues and operating costs associated with new industrial accounts. Depreciation and amortization expense was $12.4 million versus $11.6 million in 1998. The increase reflects the higher level of capital expenditures. General and administrative expenses increased $1.1 million compared to 1998. Expenses in 1998 included special cost adjustments of $2.0 million for insurance and employee related costs. Increased costs in 1999 are primarily due to legal expenses incurred in pursuing the Oklahoma City antitrust lawsuit against OG&E, and from overhead related to new industrial accounts. Interest Expense, Net Interest expense increased $.8 million to $12.4 million due to higher debt levels. Other Income, Net Other income, net is up $10.7 million compared to 1998. This is primarily due to recognizing the gain from our share of the Adwin interest in the Grays Ferry Cogeneration Partnership which was surrendered to us on April 23, 1999 as part of a legal settlement agreement (see Note 6-Legal Proceedings). We recorded a pre-tax gain of $14.5 million which represents the market value of the share of Adwin's interest in the Partnership that was surrendered to us. 1998 other income, net included the net results from gains of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement. Income Taxes Our effective tax rate is determined primarily by the federal statutory rate of 35%, and state and local income taxes. The effective tax rate for 1999 and 1998 was 41.4% and 43.0%, respectively. Cumulative effect of a Change in an Accounting Principle We incurred an after-tax charge of $4.9 million, net of a tax benefit of $3.5 million, related to the adoption of SOP 98-5 "Reporting on the Costs of Start-Up Activities" which was recorded as a cumulative effect of a change in an accounting principle. Reference is made to Note 4 of the Notes to Consolidated Financial Statements with respect to the cumulative effect of a change in an accounting principle. Liquidity and Financial Position Cash and cash equivalents were $18.7 million at June 30, 1999 (which included $4.6 million of restricted cash and cash equivalents), an increase of $4.0 million from year end 1998. Working capital was $.9 million compared with a negative $9.5 million at December 31, 1998. At June 30, 1999, receivables and inventories increased slightly to $41.4 million and $7.3 million, respectively from the balances at the end of 1998. Accounts payable were up $1.3 million to $6.1 million, accrued fuels decreased by $5.5 million to $8.6 million and accrued expenses and other current liabilities were up $10.0 million to $29.7 million at June 30, 1999. Our working capital requirements vary in line with the peak heating demand in the winter and peak cooling demand in the summer. During the first six months of 1999, we generated $26.5 million of cash from operating activities compared with $25.5 million in the like period last year. The increase in cash generated from operations in 1999 was due primarily to increased earnings and improved working capital. During the first six months of 1999, we invested $40.2 million in capital expenditures, $.6 million in the acquisition of energy facilities and non- consolidated partnership investments and paid dividends of $.9 million to shareholders. Total debt was $395.0 million at June 30, 1999 compared with $375.1 million at the end of 1998. The $19.9 million increase, along with cash generated from operations, was predominately used to fund capital expenditures. During the first six months of 1999, stockholders' equity increased $11.4 million to $159.3 million at June 30, 1999. This increase reflects $10.6 million of net earnings, $.3 million of amortization of unearned compensation related to restricted shares, a $.4 million cumulative translation adjustment and a profit sharing contribution of $.9 million, partially offset by $.9 million of dividend payments to shareholders. Reference is made to Note 6 of the Notes to Consolidated Financial Statements with respect to legal proceedings involving the Company. Year 2000 Date Conversion An issue affecting us and other businesses is the inability of many computer systems and applications to process the year 2000 ("Y2K") and beyond. To address this problem, we have developed a plan that divides direction for Y2K preparedness into four responsibility areas. These areas are Plant Production, Plant Non- Production, Desktop Systems and Corporate Systems. Plant Production includes primary plant systems that produce steam, chilling and hot water, electricity and other forms of energy. A plan to upgrade all non-compliant software and hardware has been underway since 1996. We have completed testing of our material Plant Production systems for Y2K compatibility. At this time, we believe that all of our material Plant Production systems are Y2K compatible. Plant Non-Production includes Y2K issues related to telecommunications hardware, climate control systems, security systems, elevators, parking controls, and related systems. Generally, these systems achieve 100% compliance with minor hardware upgrades or chip replacements from original parts manufacturers. At this time, we believe that all of our material Plant Non-Production systems are Y2K compliant. We anticipate all Desktop systems to be compliant by September 1999 and Corporate Systems, which include financial and billing systems, to be compliant by December 1999. At this time, we believe our accounting system is Y2K compliant. We are in the process of upgrading our billing and other systems to achieve compliance. If we are not successful in these efforts, we believe that it would not impact our ability to serve our customers, although we may experience administrative difficulties. We estimate the total external cost to achieve Y2K compliance to be $1 million for the years 1997 through 1999. We believe we are staffed sufficiently to address all Y2K issues. We purchase raw material from key vendors to produce energy. These vendors include major natural gas, electricity, and water utilities, fuel oil and chemical distributors and coal producers. We will continue to survey our key vendors to determine their Y2K compliance. At this time, we do not expect any material disruption in services from vendors due to Y2K issues. We are, however, dependent in part, upon the ability of our vendors to be Y2K compliant. Our Y2K efforts are ongoing and our overall plan, as well as consideration of contingency plans, will continue to evolve as new information becomes available. At this time, we do not expect any major interruption of our business activities due to Y2K issues. However, we are unable to estimate the ultimate effect Y2K risks will have on our operating results. Item 3. Quantitative and Qualitative Disclosures About Market Risk We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our short and long- term debt is subject to fixed and variable interest rates including rates based primarily on LIBOR. Based upon the debt balances at June 30, 1999, a change in the LIBOR rate of .25% would have a corresponding change in interest expense of approximately $602,000 per year when three-month LIBOR is over 7.5% ranging to approximately $730,000 per year when three-month LIBOR is under 6.0%. Three-month LIBOR at June 30, 1999 was 5.37%. We use financial instruments to limit the financial risk of increases in interest rates on our floating rate debt. The differential to be paid or received under financial instruments is accrued and recognized in interest expense as interest rates change. As of June 30, 1999, we had outstanding interest rate swap, cap and collar agreements related to $41.6 million of debt outstanding, with an average fixed interest rate of 5.8% and an average remaining life of 5.7 years. If Trigen had liquidated the swap, cap and collar the amount received would have approximated $290,000. We do not expect these financial instruments to have a material effect on our earnings or cash flows. Part II - Other Information Item 1. Legal Proceedings. We report information regarding our legal proceedings under Note 6 to the Consolidated Financial Statements in this Report and in our Annual Report on Form 10-K for the year ended December 31, 1998 as well as in other reports we have filed with the SEC earlier this year. Item 3. Defaults Upon Senior Securities. As part of the settlement of the lawsuit between Grays Ferry Cogeneration Partnership (the "Partnership") and PECO Energy Company, The Chase Manhattan Bank and certain other commercial banks (collectively the "Banks") and Westinghouse Power Generation agreed to waive claims for default interest against the Partnership up to April 16, 1999. The Banks and Westinghouse financed the construction of the Grays Ferry Cogeneration Facility under separate loan agreements. The Partnership owes a total principal amount of approximately $84,400,000 to the Banks. The Partnership owes a total principal amount of approximately $15,000,000 to Westinghouse. As of the date of this Report, the Partnership is in default under its debt agreements with the Banks and Westinghouse for the following reasons. The Partnership did not convert on time the Bank's short term construction loan for the Grays Ferry Cogeneration Facility to a longer term loan. The Partnership could not complete that conversion because of a dispute with the construction contractor which has now been resolved. The Partnership also did not make a principal payment to Westinghouse because the Banks required the Partnership to apply the Partnership's available cash (net of operating expenses) to repayment of principal owed to the Banks. Westinghouse and the Banks have not accelerated the debt owed to them nor charged default interest against the Partnership, although the Banks have reserved their rights to do so. We expect to resolve all outstanding default issues with the Banks and Westinghouse in the third quarter of 1999. Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of security holders was held in Philadelphia, Pennsylvania on May 19, 1999. The security holders voted, as recommended by management, for the election to the Board of Directors of Messrs. Patrick Buffet, George F. Keane, Thomas R. Casten, Philippe Brongniart, Olivier Degos, (11,374,118 votes for, 233,809 votes withheld for Messrs. Buffet, Keane, Casten and Degos; 11,372,998 votes for and 234,929 votes withheld for Mr. Brongniart), and ratified the selection of Arthur Andersen LLP as the Company's independent certified public accountants for the fiscal year ending December 31, 1999 (11,600,175 votes for and 2,224 votes against, 5,527 abstained). The following director's terms of office continued after the meeting: Messrs. Richard E. Kessel, Charles E. Bayless, Michel Bleitrach, and Dominique Mangin d'Ouince. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this amendment: 10.35 Form of Confidentiality, Non-Compete and Severance Agreement, dated July 28, 1998 between Trigen and Martin S. Stone. 27 Financial Data Schedule (b) The following reports on Form 8-K were filed during the quarter ended June 30, 1999 Item 2. Acquisition or Disposition of Assets, April 27, 1999. Form 8-K/A-1. (Amendment of April 27, 1999 Form 8-K) Item 2. Acquisition or disposition of Assets, June 9, 1999. Form 8-K/A-2. Item 2. Acquisition or Disposition of Assets, and Item 7. Financial Statements and Exhibits, July 2, 1999 SIGNATURES 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. TRIGEN ENERGY CORPORATION /s/ MARTIN S. STONE ------------------------------ Martin S. Stone Vice President Finance & Chief Financial Officer /s/ DANIEL J. SAMELA ------------------------------ Daniel J. Samela Controller Date: August 13, 1999