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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 1997
Commission File Number 33-83618
SELKIRK COGEN PARTNERS, L.P.
(Exact name of Registrant (Guarantor) as specified in its charter)
Delaware 51-0324332
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
SELKIRK COGEN FUNDING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 51-0354675
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Bowdoin Square, Boston, Massachusetts 02114
(Address of principal executive offices, including zip code)
(617) 227-8080
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
8.65% First Mortgage Bonds Due 2007, Series A
8.98% First Mortgage Bonds Due 2012, Series A
(Title of class)
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
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This document consists of 19 pages of which this page is page 1.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996......................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and March 31, 1996................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and March 31, 1996................ 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations......................................... 7
Liquidity and Capital Resources............................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 13
SIGNATURES............................................................ 14
2
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1997 1996
---------- ------------
ASSETS
Current assets:
Cash............................................ $ 791 $ 2,591
Restricted funds................................ 22,152 6,284
Accounts receivable............................. 17,498 19,899
Due from affiliates............................. 14 40
Fuel inventory and supplies..................... 4,637 4,401
Other current assets............................ 318 449
--------- ---------
Total current assets...................... 45,410 33,664
Plant and equipment, net........................ 331,029 334,229
Long-term restricted funds...................... 20,677 20,446
Deferred financing charges, net................. 12,822 13,115
--------- ---------
Total Assets $ 409,938 $ 401,454
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................ $ 317 $ 588
Accrued bond interest payable................... 9,036 385
Accrued expenses................................ 11,827 16,239
Due to affiliates............................... 1,246 937
Advances from customer.......................... --- 17
Current portion of long-term bonds.............. 2,167 2,167
--------- ---------
Total current liabilities................. 24,593 20,333
Other long-term liabilities..................... 12,058 10,678
Long-term bonds, less current portion........... 389,253 389,253
General partners' capital....................... (144) (173)
Limited partners' capital....................... (15,822) (18,637)
--------- ---------
Total partners' capital................... (15,966) (18,810)
--------- ---------
Total Liabilities and
Partners' Capital $ 409,938 $ 401,454
--------- ---------
--------- ---------
<FN>
See Notes to Condensed Consolidated Financial Statements.
3
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
For the Three Months Ended
--------------------------
March 31, March 31,
1997 1996
---------- ----------
Operating revenues:
Electric and steam............................ $ 42,521 $ 37,713
Gas resale.................................... 1,404 8,692
--------- ---------
Total operating revenues.................. 43,925 46,405
Cost of revenue................................... 31,291 29,833
--------- ---------
Gross Profit...................................... 12,634 16,572
Other operating expenses:
Administrative services - affiliates.......... 609 554
Other general and administrative expenses..... 646 1,068
Amortization of deferred financing charges.... 293 293
--------- ---------
Total other operating expenses............ 1,548 1,915
--------- ---------
Operating income.................................. 11,086 14,657
Net interest expense.............................. 8,242 8,382
--------- ---------
Net income........................................ $ 2,844 $ 6,275
--------- ---------
--------- ---------
Allocated to:
General partners.............................. $ 29 $ 63
Limited partners.............................. 2,815 6,212
--------- ---------
Total..................................... $ 2,844 $ 6,275
--------- ---------
--------- ---------
<FN>
See Notes to Condensed Consolidated Financial Statements.
4
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months Ended
--------------------------
March 31, March 31,
1997 1996
---------- ----------
Net cash provided by operating activities......... $ 14,282 $ 15,219
Cash flows provided by (used in)
investing activities:
Plant and equipment additions................. 34 (441)
Restricted funds.............................. (16,099) (10,778)
--------- ---------
Net cash used in investing activities..... (16,065) (11,219)
Cash flows used in financing activities:
Cash distributions............................ --- (4,223)
Advances from a customer...................... (17) (136)
--------- ---------
Net cash used in financing activities..... (17) (4,359)
Net decrease in cash.............................. (1,800) (359)
Cash at beginning of period....................... 2,591 2,672
--------- ---------
Cash at end of period............................. $ 791 $ 2,313
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest........................ $ 17 $ 292
--------- ---------
--------- ---------
<FN>
See Notes to Condensed Consolidated Financial Statements.
5
SELKIRK COGEN PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
consolidate Selkirk Cogen Partners, L.P. and its wholly-owned subsidiary,
Selkirk Cogen Funding Corporation, (collectively the "Partnership"). All
significant intercompany accounts and transactions have been eliminated.
The condensed consolidated financial statements for the interim periods
presented are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the condensed consolidated financial statements reflects all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations
applicable to interim financial statements.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Partnership's December 31, 1996 Annual Report on Form 10-K.
Note 2. Contingency
In connection with transactions in 1994 involving the investment by
affiliates of Cogen Technology, Inc. in the Partnership and the purchase of
J. Makowski Company, Inc. by Beale Generating Company, the Partnership filed
New York State real estate transfer and gains tax returns with New York tax
authorities. The New York tax authorities have raised certain questions and
issues about such tax returns.
Although the New York tax authorities have assessed no additional tax against
the Partnership or any other transferor at this time, the issue currently is
under consideration and it is possible that the New York tax authorities will
assert that additional tax is owed by the Partnership or one or more of the
other transferors in connection with these transactions. The Partnership
presently cannot predict the likelihood of the New York tax authorities
making such an assertion or, if made, the amount of tax that might be
asserted.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
Three Months Ended March 31, 1997 Compared to the Three Months Ended
March 31, 1996:
Net income for the quarter ended March 31, 1997 was approximately $2.8
million as compared to $6.3 million for the corresponding period in the prior
year. The decrease in net income is primarily due to a $7.3 million decrease
in gas resale revenues offset by a $4.8 million net increase in electric and
steam revenues as compared to the corresponding period in the prior year.
Total revenues for the quarter ended March 31, 1997 were approximately $43.9
million as compared to $46.4 million for the corresponding period in the
prior year.
Electric Revenues (dollars and kWh's in millions):
- --------------------------------------------------
For the Three Months Ended
March 31, 1997 March 31, 1996
------------------------------- -------------------------------
Dollars kWh's Capacity Dispatch Dollars kWh's Capacity Dispatch
------- ----- -------- -------- ------- ----- -------- --------
Niagara Mohawk 10.0 161.1 90.31% 100.0% 6.6 46.2 26.48% 42.45%
Con Edison 32.4 485.9 84.88% 98.56% 30.0 446.5 77.15% 97.53%
Revenues from Niagara Mohawk Power Corporation ("Niagara Mohawk") for the
quarter ended March 31, 1997 increased approximately $3.4 million when
compared to the corresponding period in the prior year. An increase in
delivered energy as evidenced by the 63.8% increase in the capacity factor
was the primary contributor to the increase in revenues. During the quarter
ended March 31, 1997, Niagara Mohawk dispatched Unit 1 on-line from January
through March. Energy delivered during January and February was sold at full
contract rates and energy delivered during March was sold under special
dispatch arrangements which called for the pricing of delivered energy at
variable rates less than full contract rates. Had the Partnership not
entered into the special dispatch arrangements, the Unit would have otherwise
been dispatched off-line. During the quarter ended March 31, 1996, Niagara
Mohawk dispatched Unit 1 on-line during January and February, at full
contract rates for January and the majority of February, and off-line for the
entire month of March. Revenues for energy delivered pursuant to special
dispatch arrangements with Niagara Mohawk for the quarter ended March 31,
1997 were approximately $1.2 million as compared to $29.3 thousand for the
corresponding period in the prior year.
7
Revenues from Consolidated Edison Company of New York, Inc. ("Con Edison")
for the quarter ended March 31, 1997 increased approximately $2.4 million
when compared to the corresponding period in the prior year. An increase in
delivered energy as evidenced by the 7.7% increase in the capacity factor and
higher contract energy rates resulting from higher index fuel prices were the
contributing factors to the increase in revenues.
Pursuant to the Steam Sales Agreement General Electric may implement
productivity or energy efficiency projects in its manufacturing processes,
including projects involving the production of steam within the General
Electric plant commencing in 1996. General Electric has informed the
Partnership of its intent to implement an energy efficiency project in 1997
that would reduce the quantity of steam required by the General Electric
plant. Under the energy efficiency project, General Electric anticipates
managing its annual average steam demand at 160,000lbs/hr. Steam revenues
for the quarters ended March 31, 1997 and March 31, 1996 were reduced by an
annual true-up of $0.9 million and $0.3 million, respectively, so that
General Electric would be charged a nominal amount which is the annual
equivalent of 160,000lbs/hr. Steam revenues for the quarter ended March 31,
1997 were approximately $92.3 thousand on 506.343 million pounds of steam
delivered as compared to approximately $1.1 million on 585.991 million pounds
of steam delivered for the corresponding period in the prior year. The
decrease in steam revenues during the quarter ended March 31, 1997 was
primarily due to lower steam demand.
Gas resale revenues for the quarter ended March 31, 1997 were approximately
$1.4 million on sales of approximately 0.5 million MMBtu's as compared to
$8.7 million on sales of approximately 1.8 million MMBtu's for the
corresponding period in the prior year. The decrease in gas resale revenues
was primarily due to lower natural gas resale prices and higher dispatch of
Unit 1, which resulted in lower volumes of natural gas becoming available for
resale at lower prices. The decrease in natural gas resale prices during the
quarter ended March 31, 1997 generally resulted from more moderate
temperatures in the Northeast region as compared to the colder than normal
temperatures, which caused an increase in the demand for natural gas and
resulted in lower than normal gas storage levels during the corresponding
period in the prior year. The Partnership enters into gas resales during
periods when Units 1 and 2 are not operating at full capacity.
Cost of revenues for the quarter ended March 31, 1997 were approximately
$31.3 million on purchases of 6.9 million MMBtu's as compared to $29.8
million on purchases of 7.2 million MMBtu's for the corresponding period in
the prior year. The largest component of the increase for the quarter ended
March 31, 1996 was fuel costs, which increased $1.2 million from the prior
year. The increase in the cost of fuel was primarily due to higher contract
firm fuel rates from higher index fuel prices and rate increases under the
firm transportation contracts. The 0.3 million MMBtu decrease in total fuel
volumes purchased for the quarter ended March 31, 1997 as compared to
corresponding period in the prior year is primarily due to a reduction in
firm fuel purchases from suppliers.
8
Total other operating expenses for the quarter ended March 31, 1997 was
approximately $1.5 million as compared to $1.9 million for the corresponding
period in the prior year. The decrease in other operating expenses is
primarily due to a decrease in other general and administrative expenses.
Net interest expense for the quarter ended March 31, 1997 of approximately
$8.2 million was comparable to the corresponding period in the prior year.
Liquidity and Capital Resources
Net cash flows provided by operating activities decreased from approximately
$15.2 million for the quarter ended March 31, 1996 to $14.3 million for the
quarter ended March 31, 1997. The decrease in net cash flows provided by
operating activities is due primarily to the decrease in net income and
normally recurring cash receipts and disbursements within the Partnership's
operating asset and liability accounts during the quarter ended March 31,
1997.
Net cash flows used in investing activities for the quarter ended March 31,
1997 was approximately $16.1 million as compared to $11.2 million for the
corresponding period in the prior year. Net cash flows used in investing
activities primarily represent monies deposited into funds created pursuant
to the Partnership's Depositary and Disbursement Agreement, administered by
Bankers Trust Company, as depositary agent (the "Funds"). Monies deposited
into the Funds for the quarter ended March 31, 1997 primarily represent
monies set aside for interest and principal payments to Bondholders scheduled
for June 26, 1997. Monies deposited into the Funds for the quarter ended
March 31, 1996 primarily represent monies set aside for interest and
principal payments to Bondholders scheduled for June 26, 1996 offset by a
distribution to the Partners.
Net cash flows used in financing activities decreased from approximately $4.4
million for the quarter ended March 31, 1996 to $17.0 thousand for the
quarter ended March 31, 1997. The decrease in cash flows used in financing
activities is primarily due to a $4.2 million cash distribution to the
Partners during the quarter ended March 31, 1996; whereas there were no cash
distributions to the Partners during the quarter ended March 31, 1997.
9
Con Edison by a letter dated September 19, 1994 claimed the right to acquire
that portion of Unit 2's firm natural gas supply not used in operating Unit
2, when Unit 2 is dispatched off-line or at less than full capability. The
Con Edison Power Purchase Agreement contains no express language granting Con
Edison any rights with respect to such excess natural gas. Nevertheless, Con
Edison has argued that, since payments under the contract include fixed fuel
charges which are payable whether or not Unit 2 is dispatched on-line, Con
Edison is entitled to take delivery of any excess natural gas. The
Partnership vigorously disputes the position adopted by Con Edison, based
notably on the absence of any contractual provision according Con Edison the
claimed rights but also on the fact that the Partnership has assumed the risk
under the Con Edison Power Purchase Agreement that the fuel charges payable
by Con Edison are insufficient to cover the costs actually incurred by the
Partnership. By a letter dated May 23, 1995, Con Edison indicated its
intention to pursue the claim asserted in the September 19, 1994 letter. In
the May 23, 1995 letter, Con Edison reserved the right to claim 100% of the
margins derived from the sales of Unit 2's firm natural gas supply not used
in operating Unit 2 (non-plant gas sales) and requested that the Partnership
reduce the monthly amount invoiced to Con Edison by 50% of a calculated value
of the non-plant gas sales. The Partnership strenuously objected to Con
Edison's contentions and, at a meeting between the Partnership and Con
Edison, Con Edison agreed to continue not to deduct any amount attributable
to non-plant gas sales from payments made upon monthly invoices but stated it
would do so under protest, pending further discussions between the parties.
Since the commencement of commercial operations of Unit 2, the Partnership
made and continues to make, from time to time, excess gas lay-off sales from
Unit 2's gas supply. The Partnership does not intend to adjust the monthly
inv oices issued to Con Edison and continues to assert that Con Edison is not
entitled to any revenues or margins derived from non-plant gas sales. In the
event Con Edison were to pursue its asserted claim, the Partnership would
expect to pursue all available legal remedies, but there can be no certainty
that the outcome of such remedial action would be favorable to the
Partnership or, if favorable, would provide for the Partnership's full
recovery of its damages.
The Partnership's cash flows from the sale of electric output would be
materially and adversely affected if Con Edison were to prevail in its claim
to Unit 2's excess natural gas volumes and the related margins.
On October 6, 1995, Niagara Mohawk filed its "PowerChoice" proposal with the
New York State Public Service Commission ("NYPSC"). On October 12, 1995,
Niagara Mohawk filed a Report on Form 8-K with the Securities and Exchange
Commission (the "Commission") explaining the PowerChoice proposal (the
"PowerChoice Statement"). In the PowerChoice Statement, Niagara Mohawk
describes a number of related proposals to restructure the utility's
business, including the reorganization of its assets and the renegotiation of
its contracts with generators which, like the Partnership, are not regulated
as utilities ("non-utility generators"). In connection with PowerChoice,
Niagara Mohawk filed a Report on Form 8-K on March 10, 1997 with the
Commission in which it announced an agreement in principle to restructure or
terminate 44 power purchase contracts. Among the contracts which is proposed
to be restructured is the Niagara Mohawk Power Purchase Agreement for the
electric output of Unit 1. Pursuant to the agreement in pr inciple and
subject to negotiation as described below, the parties propose to restructure
the Niagara Mohawk Power Purchase Agreement to provide for payments from
Niagara Mohawk which may be under one or more pricing arrangements for up to
12 years in lieu of the rates which would be payable under the current
Niagara Mohawk Power Purchase Agreement.
10
The details of the price arrangements as well as other possible contract
modifications continue to be the subject of extensive negotiations and
implementation of the agreement in principle is subject to a number of
significant conditions, including execution of binding agreements; any
requisite corporate, partnership and stakeholder approvals; NYPSC approval of
the agreement in principle and other related transactions; other state and
federal approvals; the resolution of all tax issues; and obtaining required
amendments or waivers under existing credit agreements and third-party
contracts, including, with respect to the Partnership, satisfying certain
standards under the Indenture relating to the absence of material adverse
changes and the maintenance of required projected debt service coverage
ratios or receiving any required approval of holders of the Bonds or other
creditors.
The Partnership, as a party to the agreement in principle, is committed to
negotiate to reach agreement on a restructured power purchase agreement;
however, the Partnership expresses no opinion with respect to the likelihood
that all of the conditions to implementation of the agreement in principle
will be met or that all of the other elements of PowerChoice will be
realized. Further, the Partnership expresses no opinion with respect to the
viability of Niagara Mohawk's proposed alternatives should PowerChoice fail,
such as Niagara Mohawk's proposal to take possession of independent power
projects through the power of eminent domain and to thereafter sell such
projects or Niagara Mohawk's position that it has not ruled out the ultimate
possibility of a filing for restructuring under Chapter 11 of the U.S.
Bankruptcy Code as set forth in the PowerChoice Statement. Nevertheless, in
the absence of agreement on a definitive restructured power purchase
agreement, the Partnership continues to believe that the Nia gara Mohawk
Power Purchase Agreement is a valid and binding contract with Niagara Mohawk.
Until negotiations on the restructured power purchase agreement advance
further, the Partnership will not be able to determine what effect, if any,
the restructured power purchase agreement or the PowerChoice proposal will
have on the Partnership, its business or net operating revenues. For the
quarter ended March 31, 1997, electric sales to Niagara Mohawk accounted for
approximately 22.8% of total project revenues.
As a result of the announcement of the agreement in principle, Standard &
Poor's has placed the Bonds on credit watch "with negative implications,"
based in part on its analysis of the Current Reports on Form 8-K recently
filed by Niagara Mohawk and the Partnership, respectively, and its belief
that the restructuring has the potential to erode cash flow coverage derived
from long-term contracts supporting the Bonds. As of the date of this
report, Moody's Investors Service has not changed its rating or its previous
"negative outlook" on the Bonds as a result of these recent developments.
11
Future operating results and cash flows from operations are dependent on,
among other things, the performance of equipment and processes as expected,
level of dispatch, fuel deliveries and price as contracted and the receipt of
certain capacity and other fixed payments. A significant change in any of
these factors could have a material adverse effect on the results for the
Partnership.
The Partnership believes that based on current conditions and circumstances
it will have sufficient liquidity available provided by cash flows from
operations to fund existing debt obligations and operating costs.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Description Page No.
----------- ----------- --------
10.1 Letter Agreement, dated as of April 18, 1997, 16
between Selkirk Cogen Partners, L.P. (the
"Partnership") and Niagara Mohawk Power
Corporation ("Niagara Mohawk") which
restricts the ability of Niagara Mohawk to
modify the transmission rate or the transmission
loss determination methodology from those
currently in use under the Transmission Service
Agreement between Niagara Mohawk and the
Partnership and the ability of the Partnership
to seek to challenge those rates or the methodology.
27 Financial Data Schedule
(For electronic filing purposes only)
(B) Reports on Form 8-K
On March 14, 1997, the Registrant filed a report on Form 8-K disclosing the
global agreement reached between Niagara Mohawk Power Corporation and 19
Independent Power Producers.
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the periods covered.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SELKIRK COGEN PARTNERS, L.P.
Date: May 15, 1997 /s/ JMC SELKIRK, INC.
--------------------------
Name: General Partner
Date: May 15, 1997 /s/ JOHN R. COOPER
--------------------------
Name: John R. Cooper
Title: Senior Vice President and
and Chief Financial Officer
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SELKIRK COGEN FUNDING
CORPORATION
Date: May 15, 1997 /s/ JOHN R. COOPER
--------------------------
Name: John R. Cooper
Title: Senior Vice President and
and Chief Financial Officer
15