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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 33-95928
LS POWER FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0502366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 81-0493289
DELAWARE 81-0493287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No[ ]
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
INDEX
TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
PART I
Page
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Item 1. Condensed Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
Financial Statement Index F-1
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PART I/ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed financial statements contained herein have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While the management of LS Power Funding Corporation ("Funding"),
LSP-Cottage Grove, L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership
("Whitewater"), (Cottage Grove and Whitewater sometimes referred to herein
individually as a "Partnership" and collectively as the "Partnerships") believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the audited financial statements included in the Annual Report
on Form 10-K for the year ended December 31, 1999, filed by Funding, and the
Partnerships.
PART I/ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to discussing and analyzing Funding and the Partnerships'
recent historical financial results and condition, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes statements concerning certain trends and other forward-looking
information affecting or relating to Funding and the Partnerships which are
intended to qualify for the protections afforded "Forward-Looking Statements"
under the Private Securities Litigation Reform Act of 1995, Public Law 104-67.
The forward-looking statements made herein are inherently subject to risks and
uncertainties which could cause Funding's and the Partnerships' actual results
to differ materially from the forward-looking statements.
GENERAL
Cottage Grove is a single purpose Delaware limited partnership
established in December 1993 to develop, finance, construct and own a gas-fired
cogeneration facility located in Cottage Grove, Minnesota (the "Cottage Grove
Facility"). The 1% general partner, LSP-Cottage Grove, Inc., and the 72% limited
partner, Cogentrix Cottage Grove, LLC, are indirect subsidiaries of Cogentrix
Energy, Inc. ("Cogentrix Energy"). The other limited partner is TPC Cottage
Grove, Inc. ("TPC Cottage Grove") and is not affiliated with Cogentrix Energy.
Whitewater is a single purpose Delaware limited partnership established in
December 1993 to develop, finance, construct and own a gas-fired cogeneration
facility located in Whitewater, Wisconsin (the "Whitewater Facility", and
collectively with the Cottage Grove Facility, the "Facilities"). The 1% general
partner, LSP-Whitewater I, Inc., and the 73% limited partner, Cogentrix
Whitewater, LLC, are indirect subsidiaries of Cogentrix Energy. The other
limited partner is TPC Whitewater ("TPC Whitewater"), an affiliate of TPC
Cottage Grove that is not affiliated with Cogentrix Energy. The Partnerships
sell electric capacity and energy generated by their Facilities to two utilities
under separate long-term power purchase agreements (individually, the "Power
Purchase Agreement" and collectively, the "Power Purchase Agreements").
Whitewater sells up to 236.5 megawatts of electric capacity and associated
energy generated by the Whitewater Facility to Wisconsin Electric Power Company
("WEPCO") pursuant to a 25-year Power Purchase Agreement. Whitewater may also
sell to third parties up to 12 megawatts of electric capacity and any energy not
dispatched by WEPCO. All of the electric capacity and energy generated by the
Cottage Grove Facility is sold to Northern States Power Company ("NSP") pursuant
to a 30-year Power Purchase Agreement. The Partnerships also have long-term
steam supply agreements with steam hosts to supply thermal energy produced by
the Facilities.
The Whitewater Facility commenced commercial operations on September
18, 1997, and the Cottage Grove Facility commenced commercial operations on
October 1, 1997. The Whitewater and Cottage Grove Power Purchase Agreements meet
the criteria of a "sales-type" capital lease as described in Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Cottage
Grove and Whitewater each recognized a gain on sales-type capital lease for the
difference between the estimated fair market value and the historical cost of
the Facilities as of the commencement of each respective Power Purchase
Agreement's terms (commencement of commercial operations). The Partnerships each
recorded a net investment in lease that reflects the present value of future
minimum lease payments. Future minimum lease payments represent the amount of
capacity payments due from the utilities under the Power Purchase Agreements in
excess of fixed operating costs (i.e., executory costs).
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The difference between the undiscounted future minimum lease payments due from
the utilities and the net investment in lease represents unearned income. This
unearned income will be recognized as lease revenue over the respective terms of
the Power Purchase Agreements using the effective interest rate method. The
Partnerships will also recognize service revenue related to the reimbursement of
costs incurred in operating the Facilities and providing electricity and thermal
energy. The amount of service revenue recognized by each Partnership will be
directly related to the level of dispatch of the Facilities by the respective
utilities and to a lesser extent the level of thermal energy required by the
steam hosts.
Funding
Funding was organized in June 1995 as a special purpose Delaware
corporation to issue debt securities in connection with financing the
construction of the Facilities. Funding's sole business activities are limited
to maintaining its organization and activities necessary pursuant to the
offering of the Senior Secured Bonds (defined below) and its acquisition of the
First Mortgage Bonds (defined below) from the Partnerships.
The Senior Secured Bonds are the following:
7.19% Senior Secured Bonds Due 2010, Series A of LS Power
Funding Corporation
8.08% Senior Secured Bonds Due 2016, Series A of LS Power
Funding Corporation
The First Mortgage Bonds are the following:
7.19% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2010
8.08% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2016
7.19% First Mortgage Bonds of LSP-Whitewater Limited
Partnership Due 2010
8.08% First Mortgage Bonds of LSP-Whitewater Limited
Partnership Due 2016
Cottage Grove and Whitewater each own 50% of the outstanding stock of
Funding.
RESULTS OF OPERATIONS
Cottage Grove
Operating revenues increased approximately 9.1% for the first quarter
of 2000 as compared to the first quarter of 1999. This increase was primarily a
result of an increase in service revenue and commodity sales. The increase in
service revenue resulted from an increase in the variable energy rate charged to
the purchasing utility as a result of an increase in natural gas prices. The
increase in service revenue was partially offset by a decrease in megawatt hours
provided to the purchasing utility. The increase in commodity sales resulted
primarily from an increase in remarketed fuel sales to third party purchasers.
Operating expenses increased approximately 18.4% for the first quarter
of 2000 as compared to the first quarter of 1999. This increase was the result
of increases in cost of services and commodity sales expense. The increase in
cost of services resulted from an increase in fuel expense, a component of cost
of services, as a result of an increase in natural gas prices. The increase in
fuel expense was partially offset by a decrease in other operating expenses
as a result of a decrease in megawatt hours provided to the purchasing utility.
Commodity sales expense increased due to an increase in remarketed fuel sales to
third party purchasers.
Interest expense consists primarily of interest expense on the First
Mortgage Bonds and amortization of the costs incurred to issue the bonds.
Whitewater
Operating revenues increased approximately 16.6% for the first quarter
of 2000 as compared to the first quarter of 1999. This increase was primarily
the result of an increase in service revenue and commodity sales. The increase
in service revenue resulted from an increase in the variable energy rate charged
to the purchasing utility as a result of an increase in natural gas prices,
which was partially offset by a decrease in megawatt hours provided to the
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purchasing utility. Commodity sales expense increased due to an increase in
remarketed fuel sales to third party purchasers.
Operating expenses increased approximately 32.3% for the first quarter
of 2000 as compared to the first quarter of 1999. This increase was primarily
the result of increases in cost of services and commodity sales expense. The
increase in cost of services resulted from an increase in fuel expense, a
component of cost of services, as a result of an increase in natural gas prices,
which was partially offset by decreased megawatt hours sold to the purchasing
utility. Commodity sales expense increased due to an increase in remarketed fuel
sales to third party purchasers.
Interest expense consists primarily of interest expense on the First
Mortgage Bonds and amortization of the costs incurred to issue the bonds.
OPERATIONS AND MAINTENANCE
Operations and Maintenance Agreements
Each of the Cottage Grove and Whitewater Facilities is operated by its
respective general partner pursuant to operations and maintenance agreements (an
"O&M Agreement", and collectively, the "O&M Agreements") expiring in 2004. Under
each O&M Agreement, the general partners are required to provide certain
services during the operation of the Facilities. As compensation for its
services, each general partner is reimbursed under each O&M Agreement on a
monthly basis for certain approved costs incurred in connection with operating
the related Facility. In addition, each general partner will receive an annual
management fee of $350,000 (subject to adjustment each year based on specified
indices). The Partnerships contract directly with certain subcontractors for
materials and services which are outside the scope of the general partners'
obligations under the O&M Agreements, including major maintenance of the
Facilities. The general partners are also subject to an annual performance bonus
or penalty depending upon each Facility's availability relative to certain
performance criteria reflecting aspects of similar criteria contained in each
Facility's Power Purchase Agreement. Furthermore, the general partners are
subject to a penalty payment depending upon each Facility's ability to produce
an uninterrupted supply of thermal energy.
LIQUIDITY AND CAPITAL RESOURCES
Cottage Grove
The principal components of operating cash flow for the three-month
period ending March 31, 2000 were net income of $1.9 million, a $0.1 million
adjustment for amortization of debt issuance and financing costs and a net $4.9
million of cash provided by changes in other working capital assets and
liabilities, which were partially offset by amortization of unearned lease
income, net of minimum lease payments received of $0.1 million. Cash flow
provided by operating activities of $6.8 million was primarily used to fund $6.4
million of restricted cash.
Whitewater
The principal components of operating cash flow for the three-month
period ended March 31, 2000 were net income of $2.1 million, a $0.2 million
adjustment for depreciation and amortization of debt issuance and financing
costs, a net $4.3 million of cash provided by changes in other working capital
assets and liabilities and amortization of unearned lease income, net of minimum
lease payments received of $0.1 million. Cash flow provided by operating
activities of $6.7 million and a portion of the cash on hand at the beginning of
the period of $0.1 million was primarily used to fund $6.8 million of restricted
cash.
The $332,000,000 of proceeds received by Funding from the sale of the
Senior Secured Bonds were used by Funding to acquire (i) $155,000,000 of Cottage
Grove First Mortgage Bonds and (ii) $177,000,000 of Whitewater First Mortgage
Bonds. In addition to the proceeds of the First Mortgage Bonds, the Partnerships
each received equity contributions from TPC Cottage Grove and TPC Whitewater in
1997, in the respective amounts of $18,167,000 for Cottage Grove and $20,556,000
for Whitewater (the "Equity Contribution Amounts"). The net proceeds from the
sale of the Partnerships' First Mortgage Bonds and the Equity Contribution
Amounts together with other sources of funds available to the Partnerships were
used to: (i) finance the development, design,
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engineering, construction, testing, inspection and start-up of the Facilities,
(ii) pay interest on the Partnerships' First Mortgage Bonds during construction
and (iii) maintain a debt service reserve fund as required by certain financing
documents. During 1999 and 1998, the Partnerships transferred the cash held in
their debt service reserve funds to Cogentrix Energy. The funds, currently equal
to $6,585,000 and $7,519,000 for Cottage Grove and Whitewater, respectively, are
included on the respective balance sheets as a Note Receivable from Affiliate.
The receivables are backed by an irrevocable letter of credit issued on behalf
of a subsidiary of Cogentrix Energy.
In addition to funds received through the acquisition of the First
Mortgage Bonds by Funding and through the Equity Contribution Amounts, each
Partnership may each receive on its behalf certain letters of credit to be
issued pursuant to a letter of credit facility which expires in June 2002. Each
letter of credit facility provides for letters of credit in a face amount not to
exceed $5,000,000 for Whitewater and $5,500,000 for Cottage Grove, which may be
drawn on by the respective Partnership from time to time. Such letters of credit
will satisfy certain requirements of the Partnerships under various project
agreements. Cottage Grove has issued a $500,000 letter of credit under the
Cottage Grove letter of credit facility to secure certain obligations of Cottage
Grove under the Cottage Grove Power Purchase Agreement.
In order to provide for the Partnerships' working capital needs, the
Partnerships have each entered into a working capital facility. Each working
capital facility will provide for working capital loans in an aggregate
principal amount not to exceed $3,000,000 for each Partnership. At March 31,
2000, no amounts were outstanding under the working capital facilities.
The Partnerships expect that payments from the utilities under the
Power Purchase Agreements will provide the substantial majority of their
revenues. Under and subject to the terms of the Power Purchase Agreements, each
utility is obligated to purchase electric capacity made available to it and
energy that it requests from the related Partnership. For additional information
regarding NSP and WEPCO, reference is made to the respective Annual Reports
filed on Form 10-K, the Quarterly Reports filed on Form 10-Q, proxy, and any
other filings made by NSP and WEPCO with the Commission.
The Power Purchase Agreements are dispatchable contracts that provide
the utilities the right to suspend or reduce purchases of electricity from the
Facilities. The Power Purchase Agreements are structured such that the
Partnerships will continue to receive capacity payments during any period of
dispatch. Each Partnership is dependent on capacity payments under its Power
Purchase Agreement to meet its fixed obligations, including the payment of debt
service under each Partnership's First Mortgage Bonds (which will be Funding's
sole source of revenues for payment of debt service under the Senior Secured
Bonds). Capacity payments by each of NSP and WEPCO are based on the tested
capacity and availability of the Facilities and are unaffected by levels of
dispatch. Each Facility's capacity is subject to semi-annual verification
through testing. Capacity payments are subject to reduction if a Facility is
operating at reduced or degraded capacity at the time of such test, although
each Facility is permitted a retest subject to certain retest limitations. Also,
capacity payments for each Facility are subject to rebate or reduction if the
respective Facility does not maintain certain minimum levels of availability.
Under the Cottage Grove Power Purchase Agreement, capacity payments are further
adjusted by, among other things, the capacity loss factor which is determined in
accordance with procedures jointly agreed to by Cottage Grove and NSP. The
Partnerships expect to achieve the minimum capacity and availability levels;
however, any material shortfall in tested capacity or availability over a
significant period could result in a shortage of funds to the Partnerships.
Each Partnership presently believes that funds available from cash and
investments on hand, restricted funds, operations and letter of credit and
working capital facilities will be more than sufficient to liquidate each
Partnership's obligations as they come due, pay project debt service and make
required contributions to project reserve accounts.
As with any power generation facility, operation of the Facilities will
involve certain risks, including the performance of a Facility below expected
levels of output or efficiency, interruptions in fuel supply, pipeline
disruptions, disruptions in the supply of thermal or electrical energy, power
shut-downs due to the breakdown or failure of equipment or processes, violation
of permit requirements (whether through operation, or change in law), operator
error, labor disputes or catastrophic events such as fires, earthquakes,
explosions, floods or other similar occurrences affecting a Facility or its
power purchasers, thermal energy purchasers, fuel suppliers or fuel
transporters. The occurrence of any of these events could significantly reduce
or eliminate revenues generated by a
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Facility or significantly increase the expenses of that Facility, thereby
impacting the ability of a Partnership to make payments of the amounts necessary
to fund principal of and interest on its First Mortgage Bonds, and,
consequently, Funding's ability to make payments of principal of and interest on
the Senior Secured Bonds. Not all risks are insured and the proceeds of such
insurance applicable to covered risks may not be adequate to cover a Facility's
lost revenues or increased expenses. In addition, extended unavailability under
the Power Purchase Agreements, which may result from one or more of such events,
may entitle the respective power purchaser to terminate its Power Purchase
Agreement.
IMPACT OF ENERGY PRICE CHANGES, INTEREST RATES AND INFLATION
The Partnerships have attempted to mitigate the risk of increases in
fuel and transportation costs by providing contractually for matching increases
in the energy payments the Partnerships receive from the utilities purchasing
electricity generated by the Facilities. In addition, the Partnerships have
hedged against the risk of fluctuations in interest rates by arranging
fixed-rate financing.
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PART 2/ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of LS Power Funding Corporation
(1)
3.2 Bylaws of LS Power Funding Corporation (1)
3.3 Certificate of Limited Partnership of LSP-Cottage Grove, L.P.
(1)
3.4 Amended and Restated Partnership Agreement dated as of June
30, 1995 among LSP-Cottage Grove, Inc., Granite Power
Partners, L.P. and TPC Cottage Grove, Inc. (1)
3.4.1 Amendment No. 1 to the Cottage Grove Partnership Agreement (2)
3.4.2 Consent, Waiver and Amendment No. 2 dated March 20, 1998 to
the Amended and Restated Limited Partnership Agreement of
LSP-Cottage Grove, L.P. (3)
3.4.3 Third Amendment, dated December 11, 1998, to the Amended and
Restated Limited Partnership Agreement of LSP-Cottage Grove,
L.P. (4)
3.5 Certificate of Limited Partnership of LSP-Whitewater Limited
Partnership (1)
3.6 Amended and Restated Partnership Agreement dated as of June
30, 1995 among LSP-Whitewater I, Inc., Granite Power Partners,
L.P. and TPC Whitewater, Inc. (1)
3.6.1 Consent, Waiver and Amendment No. 1 dated March 20, 1998 to
the Amended and Restated Limited Partnership Agreement of
LSP-Whitewater Limited Partnership (3)
3.6.2 Second Amendment, dated December 11, 1998, to the Amended and
Restated Limited Partnership Agreement of LSP-Whitewater
Limited Partnership (3)
4.1 Trust Indenture dated as of May 1, 1995 by and among LS Power
Funding Corporation and IBJ Schroder Bank & Trust Company, as
Trustee, with respect to the Senior Secured Bonds (as
Supplemented by the First Supplemental Indenture dated as of
May 1, 1995 by and among LS Power Funding Corporation and IBJ
Schroder Bank & Trust Company, as Trustee (1)
4.2 Trust Indenture dated as of May 1, 1995 by and among
LSP-Cottage Grove, L.P. and IBJ Schroder Bank & Trust Company,
as Trustee, with respect to the Cottage Grove First Mortgage
Bonds (as supplemented by the First Supplemental Indenture
dated as of May 1, 1995 by and among LSP-Cottage Grove, L.P.
and IBJ Schroder Bank & Trust Company, as Trustee) (1)
4.3 Trust and Indenture dated as of May 1, 1995 by and among
LSP-Whitewater Limited Partnership and IBJ Schroder Bank &
Trust Company, as Trustee, with respect to the Whitewater
First Mortgage Bonds (as supplemented by the First
Supplemental Indenture dated as of May 1, 1995 by and among
LSP-Whitewater Limited Partnership and IBJ Schroder Bank &
Trust Company, as Trustee) (1)
4.4 Registration Rights Agreement dated as of June 30, 1995 by and
among Chase Securities, Inc., Morgan Stanley & Co.
Incorporated, LS Power Funding Corporation, LSP-Cottage Grove,
L.P., and LSP-Whitewater Limited Partnership (1)
4.5 Form of Senior Secured Bond (included in Exhibit 4.1) (1)
4.6 Form of Cottage Grove First Mortgage Bond (included in Exhibit
4.2) (1)
4.7 Form of Whitewater First Mortgage Bond (included in Exhibit
4.3) (1)
27.1 Financial Data Schedule - LS Power Funding Corporation
27.2 Financial Data Schedule - LSP - Cottage Grove, L.P.
27.3 Financial Data Schedule - LSP - Whitewater Limited Partnership
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
(1) Incorporated herein by reference to the Registration Statement
on Form S-4 (File No. 33-95928) filed by LS Power Funding
Corporation, LSP-Cottage Grove, L.P. and LSP-Whitewater
Limited Partnership on August 16, 1995, as amended, or to the
Form 10-K (File No. 33-95928) filed for the fiscal year ended
December 31, 1995 by LS Power Funding Corporation, LSP-Cottage
Grove, L.P. and LSP-Whitewater Limited Partnership.
(2) Incorporated herein by reference to the Form 10-Q (File No.
33-95928) filed August 14, 1996.
(3) Incorporated herein by reference to the Form 10-K (File No.
33-95928) filed April 15, 1998.
(4) Incorporated herein by reference to the Form 10-K (File No.
33-95928) filed March 31, 1999.
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SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
LS POWER FUNDING CORPORATION
By: /s/ Thomas F. Schwartz
- --------------------------------------------
Name: Thomas F. Schwartz
Title: Group Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2000
LSP-COTTAGE GROVE, L.P.
By: LSP-Cottage Grove, Inc.
Its: General Partner
By: /s/ Thomas F. Schwartz
- --------------------------------------------
Name: Thomas F. Schwartz
Title: Group Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2000
LSP-WHITEWATER LIMITED PARTNERSHIP
By: LSP-Whitewater I, Inc.
Its: General Partner
By: /s/ Thomas F. Schwartz
- --------------------------------------------
Name: Thomas F. Schwartz
Title: Group Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2000
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
FINANCIAL STATEMENT INDEX
Page
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LS POWER FUNDING CORPORATION
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 F-2
Statements of Income for the Three Months Ended March 31, 2000 and 1999 (unaudited) F-3
Statements of Cash Flows for the Three Months Ended March 31, 2000
and 1999 (unaudited) F-4
Notes to Condensed Financial Statements (unaudited) F-5
LSP-COTTAGE GROVE, L.P.
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 F-6
Statements of Income for the Three Months Ended March 31, 2000 and 1999 (unaudited) F-7
Statements of Cash Flows for the Three Months Ended March 31, 2000 and
1999 (unaudited) F-8
Notes to Condensed Financial Statements (unaudited) F-9
LSP-WHITEWATER LIMITED PARTNERSHIP
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 F-12
Statements of Income for the Three Months Ended March 31, 2000 and 1999 (unaudited) F-13
Statements of Cash Flows for the Three Months Ended March 31, 2000 and
1999 (unaudited) F-14
Notes to Condensed Financial Statements (unaudited) F-15
F-1
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LS POWER FUNDING CORPORATION
BALANCE SHEETS
March 31, 2000 and December 31, 1999
(dollars in thousands)
March 31, December 31,
ASSETS 2000 1999
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash $ 1 $ 1
Interest receivable on First Mortgage Bonds 6,472 --
-------- --------
Total current assets 6,473 1
INVESTMENT IN FIRST MORTGAGE BONDS 332,000 332,000
-------- --------
Total assets $338,473 $332,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of Senior Secured Bonds Payable $ 2,322 $ 2,322
Interest payable on Senior Secured Bonds Payable 6,472 --
-------- --------
Total current liabilities 8,794 2,322
SENIOR SECURED BONDS PAYABLE 329,678 329,678
-------- --------
Total liabilities 338,472 332,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 1,000 shares authorized,
100 shares issued and outstanding -- --
Additional paid-in capital 1 1
-------- --------
Total stockholders' equity 1 1
-------- --------
Total liabilities and stockholders' equity $338,473 $332,001
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
F-2
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LS POWER FUNDING CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
For the Three-Months Ended March 31, 2000 and 1999
(dollars in thousands)
Three-Months Ended March 31,
----------------------------
2000 1999
--------- ---------
Interest income $ 6,472 $ 6,472
Interest expense 6,472 6,472
--------- ---------
Net income $ -- $ --
========= =========
Earnings per common share $ -- $ --
========= =========
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-3
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LS POWER FUNDING CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three-Months Ended March 31, 2000 and 1999
(dollars in thousands)
Three-Months Ended March 31,
----------------------------
2000 1999
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES $ -- $ --
--------- ---------
CASH PROVIDED BY INVESTING ACTIVITIES -- --
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES -- --
--------- ---------
NET INCREASE (DECREASE) IN CASH -- --
CASH, beginning of period 1 1
--------- ---------
CASH, end of period $ 1 $ 1
========= =========
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-4
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LS POWER FUNDING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 2000 and the statements of income and
cash flows for the three-month periods ended March 31, 2000 and 1999 have been
prepared by LS Power Funding Corporation ("Funding"), without audit. In the
opinion of management, these unaudited condensed financial statements include
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly Funding's financial position as of March 31, 2000, and the
results of its operations and its cash flows for the three-month periods ended
March 31, 2000 and 1999.
The unaudited condensed financial statements have been prepared pursuant to
the rules and regulations of the United States Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. While management believes that the
disclosures made are adequate to make the information presented not misleading,
these unaudited condensed financial statements should be read in conjunction
with Funding's audited financial statements included in Funding's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
2. ORGANIZATION
Funding was established on June 23, 1995 as a special purpose Delaware
corporation to issue debt securities in connection with financing construction
of two gas-fired cogeneration facilities, one located in Cottage Grove,
Minnesota and the other located in Whitewater, Wisconsin. LSP-Cottage Grove,
L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership ("Whitewater") are
single purpose Delaware limited partnerships established to develop, finance,
construct and own the facilities at Cottage Grove and Whitewater, respectively.
Cottage Grove and Whitewater each owns 50% of the outstanding stock of Funding.
Funding's sole business activities are limited to maintaining its organization,
the offering of the Senior Secured Bonds and its acquisition of the First
Mortgage Bonds issued by Cottage Grove and Whitewater.
3. RECLASSIFICATION
Certain reclassifications have been made to the prior year's financial
statements to conform with the classification used in the financial statements
as of March 31, 2000, and for the three-months ended March 31, 2000.
F-5
15
LSP-COTTAGE GROVE, L.P.
BALANCE SHEETS
March 31, 2000 and December 31, 1999
(dollars in thousands)
March 31, December 31,
ASSETS 2000 1999
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,372 $ 957
Restricted cash 6,631 244
Accounts receivable - trade 4,407 4,591
Accounts receivable - other 126 --
Fuel inventories 266 1,280
Fuel held for resale -- 711
Spare parts inventories 527 511
Other current assets 214 122
-------- --------
Total current assets 13,543 8,416
NET INVESTMENT IN LEASE (Notes 3 and 4) 236,698 236,655
DEBT ISSUANCE AND FINANCING COSTS, net of accumulated
amortization of $1,244 in 2000 and $1,184 in 1999 5,878 5,938
NOTE RECEIVABLE FROM AFFILIATE (Note 3) 6,585 6,585
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
Total assets $262,705 $257,595
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of bonds payable $ 1,084 $ 1,084
Accounts payable 1,994 1,395
Accrued interest payable 3,021 --
Other accrued expenses 422 794
-------- --------
Total current liabilities 6,521 3,273
FIRST MORTGAGE BONDS PAYABLE 153,916 153,916
-------- --------
Total liabilities 160,437 157,189
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 102,268 100,406
-------- --------
Total liabilities and partners' capital $262,705 $257,595
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
F-6
16
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF INCOME (UNAUDITED)
For the Three-Months ended March 31, 2000 and 1999
(dollars in thousands)
Three-Months Ended March 31,
----------------------------
2000 1999
-------- --------
OPERATING REVENUES:
Lease revenue $ 5,329 $ 5,306
Service revenue 6,342 5,475
Commodity sales 1,416 1,197
Other 233 233
-------- --------
13,320 12,211
OPERATING EXPENSES:
Cost of services 7,259 6,064
Commodity sales expense 1,272 1,139
-------- --------
8,531 7,203
OPERATING INCOME 4,789 5,008
NON-OPERATING INCOME (EXPENSE):
Interest expense (3,090) (3,096)
Interest income 163 204
-------- --------
NET INCOME $ 1,862 $ 2,116
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-7
17
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three-Months Ended March 31, 2000 and 1999
(dollars in thousands)
Three-Months Ended March 31,
----------------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,862 $ 2,116
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of debt issuance and financing costs 60 69
Amortization of unearned lease income (5,329) (5,306)
Minimum lease payments received 5,286 5,043
(Increase) decrease in accounts receivable - trade 184 (50)
(Increase) decrease in accounts receivable - other (126) 525
Decrease in fuel inventories 1,725 1,343
(Increase) decrease in spare parts inventories (16) 63
(Increase) decrease in other current assets (92) 43
Increase (decrease) in accounts payable 599 (1,434)
Increase in accrued interest payable 3,021 3,021
Increase (decrease) in accrued expenses (372) 1,216
------- -------
Net cash flows provided by operating activities 6,802 6,649
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (6,387) (5,877)
------- -------
Net cash flows used in investing activities (6,387) (5,877)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner distributions -- (220)
Increase in note receivable from affiliate -- (542)
------- -------
Net cash flows used in financing activities -- (762)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 415 10
CASH AND CASH EQUIVALENTS, beginning of period 957 918
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,372 $ 928
======= =======
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-8
18
LSP-COTTAGE GROVE, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 2000 and the statements of income and
cash flows for the three-month periods ended March 31, 2000 and 1999 have been
prepared by LSP-Cottage Grove, L.P. (the "Partnership"), without audit. In the
opinion of management, these unaudited condensed financial statements include
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Partnership's financial position as of March 31, 2000, and
the results of its operations and its cash flows for the three-month periods
ended March 31, 2000 and 1999.
The unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While management believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the Partnership's audited financial statements included in the
Partnership's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1999.
2. ORGANIZATION
The Partnership is a Delaware limited partnership that was formed on
December 14, 1993 to develop, finance, construct and own a gas-fired
cogeneration facility with a design capacity of approximately 245 megawatts
located in Cottage Grove, Minnesota (the "Facility"). Construction and start-up
of the Facility was substantially completed and commercial operation commenced
October 1, 1997 (the "Commercial Operations Date"). The 1% general partner of
the Partnership is LSP-Cottage Grove, Inc., ("Cottage Grove"), a wholly-owned
subsidiary of Cogentrix Cottage Grove, LLC, ("Cogentrix Cottage Grove").
Cogentrix Cottage Grove and TPC Cottage Grove, Inc., are the sole limited
partners of the Partnership, owning approximately 72% and 27% limited
partnership interests, respectively. The ultimate parent of Cogentrix Cottage
Grove is Cogentrix Energy, Inc. ("Cogentrix Energy"), a North Carolina
corporation.
The Partnership holds a 50% equity ownership interest in LS Power
Funding Corporation ("Funding"), which was established on June 23, 1995 as a
special purpose funding corporation to issue debt securities (the "Senior
Secured Bonds") in connection with financing construction of the Facility and a
similar gas-fired cogeneration facility located in Whitewater, Wisconsin. On
June 30, 1995, a portion of the proceeds from the offering and sale of the
Senior Secured Bonds issued by Funding was used to purchase $155 million of
First Mortgage Bonds issued simultaneously by the Partnership.
All of the electric capacity and energy generated by the Facility is
sold to Northern States Power Company, (the "Utility") under a 30-year power
purchase agreement (the "Power Purchase Agreement"). The thermal energy
generated by the Facility is sold in the form of steam to Minnesota Mining and
Manufacturing Company (the "Steam Purchaser") under a 30-year thermal energy
sales agreement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include
unrestricted short-term investments with original maturities of three months or
less.
F-9
19
RESTRICTED CASH
The majority of the revenue received by the Partnership is required to
be deposited into accounts administered by the trustee under the trust indenture
for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in
these accounts at the direction of the Partnership. The funds are invested in
commercial paper, high grade government money market funds and overnight
repurchase obligations secured by U.S. Treasury Notes. The investments are
carried at cost, which approximates market at March 31, 2000 and December 31,
1999. In addition, special accounts are established to provide for debt service
reserves and payments, and major maintenance reserves. Amounts held by the
Trustee in accounts designated for debt service and major maintenance, which
might otherwise be considered cash equivalents, are treated as restricted cash.
POWER PURCHASE AGREEMENT
All of the electric capacity and energy generated by the Facility is
sold to the Utility under the Power Purchase Agreement. The Power Purchase
Agreement has characteristics similar to a lease in that the agreement confers
to the Utility the right to use specific property, plant and equipment. At the
Commercial Operations Date, the Partnership accounted for the Power Purchase
Agreement as a "sales-type" capital lease in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases" (see
Note 4).
NOTE RECEIVABLE FROM AFFILIATE
At March 31, 2000, the Partnership had a note receivable from Cogentrix
Energy. This amount represents funds required to be on account for debt service.
The note receivable is backed by a letter of credit issued to the Partnership.
The note receivable bears interest at the three-month LIBOR rate plus 0.25%, and
is due December 15, 2016.
LEASE REVENUE
Lease revenue represents the amortization of unearned income on the
lease using the effective interest rate method as well as contingent rentals
that result from changes in payment escalators occurring subsequent to the
Commercial Operations Date. These contingent rentals are not expected to
materially change the lease revenue recognized over the life of the Power
Purchase Agreement.
SERVICE REVENUE
Service revenue represents reimbursement to the Partnership of costs
incurred to operate the Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchaser.
COMMODITY SALES
Commodity sales consist primarily of commodity sales of excess natural
gas fuel inventory, including amounts remarketed directly to third parties.
COST OF SERVICES
Cost of services represents expenses related to operating the Facility
and providing variable electric energy to the Utility as well as thermal energy
to the Steam Purchaser.
INCOME TAXES
Under current tax laws, income or loss of partnerships is included in
the income tax returns of the partners. Accordingly, the Partnership makes no
provision for federal and state income taxes. The tax returns of the Partnership
are subject to examination by federal and state taxing authorities. If such
examinations occur and result in changes with respect to the Partnership
qualification, or in changes in distributable partnership income or loss, the
tax liability of the partners would be changed accordingly.
F-10
20
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to the prior period's
financial statements to conform with the classification used in the financial
statements as of March 31, 2000, and for the three-months then ended.
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sales-type capital lease of $87.1 million reflecting the
difference between the estimated fair market value ($233.6 million) and the
historical cost ($146.5 million) of the Facility. The interest rate implicit in
the lease is 9.01%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at March 31,
2000, are as follows (dollars in thousands):
Gross Investment in Lease $ 522,345
Unearned Income on Lease (285,647)
----------
Net Investment in Lease $ 236,698
==========
Gross investment in lease represents total capacity payments receivable
over the term of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
F-11
21
LSP-WHITEWATER LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 2000 and December 31, 1999
(dollars in thousands)
March 31, December 31,
ASSETS 2000 1999
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,382 $ 1,446
Restricted cash 7,012 253
Accounts receivable - trade 4,916 4,381
Accounts receivable - other 5,303 5,858
Fuel inventories 310 470
Fuel held for resale -- 370
Spare parts inventories 762 758
Other current assets 776 310
-------- --------
Total current assets 20,461 13,846
NET INVESTMENT IN LEASE (Notes 3 and 4) 263,395 263,540
GREENHOUSE FACILITY, net of accumulated
depreciation of $1,053 in 2000 and $953 in 1999 7,716 7,816
DEBT ISSUANCE AND FINANCING COSTS, net of
accumulated amortization of $1,277 in 2000 and $1,205 in 1999 5,946 6,018
NOTE RECEIVABLE FROM AFFILIATE 7,519 7,519
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
Total assets $305,038 $298,740
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of bonds payable $ 1,238 $ 1,238
Accounts payable 777 1,116
Accrued interest payable 3,451 --
Other accrued expenses 7,547 6,457
-------- --------
Total current liabilities 13,013 8,811
FIRST MORTGAGE BONDS PAYABLE 175,762 175,762
-------- --------
Total liabilities 188,775 184,573
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL: 116,263 114,167
-------- --------
Total liabilities and partners' capital $305,038 $298,740
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
F-12
22
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF INCOME (UNAUDITED)
For the Three-Months Ended March 31, 2000 and 1999
(dollars in thousands)
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
OPERATING REVENUES:
Lease revenue $ 5,864 $ 5,855
Service revenue 7,749 6,395
Commodity sales 776 60
Other 225 221
-------- --------
14,614 12,531
OPERATING EXPENSES:
Cost of services 8,361 6,740
Greenhouse operating expenses 194 196
Commodity sales expense 693 52
-------- --------
9,248 6,988
OPERATING INCOME 5,366 5,543
NON-OPERATING INCOME (EXPENSE):
Interest expense (3,531) (3,533)
Interest income 261 229
-------- --------
NET INCOME $ 2,096 $ 2,239
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-13
23
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three-Months ended March 31, 2000 and 1999
(dollars in thousands)
Three-Months Ended March 31,
----------------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,096 $ 2,239
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of debt issuance and financing costs 72 80
Depreciation 100 107
Amortization of unearned lease income (5,864) (5,855)
Minimum lease payments received 6,009 5,736
Increase (decrease) in accounts receivable - trade (535) 149
Decrease in accounts receivable - other 555 210
Decrease in fuel inventories 530 411
Increase in spare parts inventories (4) (36)
Increase in other current assets (466) (235)
Decrease in accounts payable (339) (1,256)
Increase in accrued interest payable 3,451 3,451
Increase in accrued expenses 1,090 1,568
------- -------
Net cash flows provided by operating activities 6,695 6,569
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (6,759) (6,921)
------- -------
Net cash flows used in investing activities (6,759) (6,921)
------- -------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES -- --
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (64) (352)
CASH AND CASH EQUIVALENTS, beginning of period 1,446 1,181
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,382 $ 829
======= =======
The accompanying notes to the condensed financial statements are an integral
part of these statements.
F-14
24
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 2000 and the statements of income and
cash flows for the three-month periods ended March 31, 2000 and 1999 have been
prepared by LSP-Whitewater Limited Partnership (the "Partnership"), without
audit. In the opinion of management, these unaudited condensed financial
statements include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Partnership's financial position as of March 31,
2000 and the results of its operations and its cash flows for the three-month
periods ended March 31, 2000 and 1999.
The unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While management believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the Partnership's audited financial statements included in the
Partnership's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1999.
2. ORGANIZATION
LSP-Whitewater Limited Partnership is a Delaware limited partnership
that was formed on December 14, 1993 to develop, finance, construct and own a
gas-fired cogeneration facility with a design capacity of approximately 245
megawatts located in Whitewater, Wisconsin (the "Facility"). Construction and
start-up of the Facility was substantially completed and commercial operation
commenced September 18, 1997 (the "Commercial Operations Date"). The 1% general
partner of the Partnership is LSP-Whitewater I, Inc., a wholly-owned subsidiary
of Cogentrix Whitewater, LLC ("Cogentrix Whitewater"). Cogentrix Whitewater and
TPC Whitewater, Inc. are the sole limited partners of the Partnership, owning
approximately 73% and 26% limited partnership interests, respectively. The
ultimate parent of Cogentrix Whitewater is Cogentrix Energy, Inc. ("Cogentrix
Energy"), a North Carolina corporation.
The Partnership holds a 50% equity ownership interest in LS Power
Funding Corporation ("Funding"), which was established on June 23, 1995 as a
special purpose Delaware corporation to issue debt securities (the "Senior
Secured Bonds") in connection with financing construction of the Facility and a
similar gas-fired cogeneration facility located in Cottage Grove, Minnesota. On
June 30, 1995, a portion of the proceeds from the offering and sale of the
Senior Secured Bonds issued by Funding was used to purchase $177 million of
First Mortgage Bonds issued simultaneously by the Partnership.
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Facility to Wisconsin Electric Power Company
("WEPCO" or, as the context requires, the "Utility") pursuant to a 25-year power
purchase agreement (the "Power Purchase Agreement"). The Partnership may also
sell to third parties up to 12 megawatts of electric capacity and any energy
that is not dispatched by WEPCO. The thermal energy generated by the Facility is
provided in the form of steam to the University of Wisconsin - Whitewater under
a steam supply agreement expiring on June 30, 2005 and in the form of hot water
to a greenhouse owned by the Partnership (collectively, the "Steam Purchasers").
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include
unrestricted short-term investments with original maturities of three months or
less.
F-15
25
RESTRICTED CASH
The majority of the revenue received by the Partnership is required to
be deposited into accounts administered by the trustee under the trust indenture
for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in
these accounts at the direction of the Partnership. The funds are invested in
commercial paper, high grade government money market funds and overnight
repurchase obligations secured by U.S. Treasury Notes. The investments are
carried at cost, which approximates market at March 31, 2000 and December 31,
1999. In addition, special accounts are established to provide for debt service
reserves and payments, and major maintenance reserves. Amounts held by the
Trustee in accounts designated for debt service and major maintenance, which
might otherwise be considered cash equivalents, are treated as restricted cash.
POWER PURCHASE AGREEMENT
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Facility to the Utility pursuant to the Power
Purchase Agreement. The Power Purchase Agreement has characteristics similar to
a lease in that the agreement confers to the Utility the right to use specific
property, plant and equipment. At the Commercial Operations Date, the
Partnership accounted for the Power Purchase Agreement as a "sales-type" capital
lease in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 13, "Accounting for Leases" (see Note 4).
NOTE RECEIVABLE FROM AFFILIATE
At March 31, 2000, the Partnership had a note receivable from Cogentrix
Energy. This amount represents funds required to be on account for debt service.
The note receivable is backed by a letter of credit issued to the Partnership.
The note receivable bears interest at the three-month LIBOR rate plus 0.25%, and
is due December 15, 2016.
GREENHOUSE FACILITY
Depreciation on the greenhouse facility and related equipment is
computed using the straight-line method over 25 years and 10 years,
respectively.
LEASE REVENUE
Lease revenue represents the amortization of unearned income on lease
using the effective interest rate method as well as contingent rentals that
result from changes in payment escalators occurring subsequent to the Commercial
Operations Date. These contingent rentals are not expected to materially change
the lease revenue recognized over the life of the Power Purchase Agreement.
SERVICE REVENUE
Service revenues represent reimbursement to the Partnership of costs
incurred to operate the Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchaser.
COMMODITY SALES
Commodity sales consist primarily of sales of excess natural gas fuel
inventory, including amounts remarketed directly to third parties and related
parties.
COST OF SERVICES
Cost of services represents expenses related to operating the Facility
and providing variable electric energy to the Utility as well as thermal energy
to the Steam Purchaser.
F-16
26
INCOME TAXES
Under current tax laws, income or loss of partnerships is included in
the income tax returns of the partners. Accordingly, the Partnership makes no
provision for federal and state income taxes. The tax returns of the Partnership
are subject to examination by federal and state taxing authorities. If such
examinations occur and result in changes with respect to the Partnership
qualification, or in changes in distributable partnership income or loss, the
tax liability of the partners would be changed accordingly.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to the prior period financial
statements to conform with the classification used in the financial statements
as of March 31, 2000 and for the three-months then ended.
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sales-type capital lease of $97.0 million reflecting the
difference between the estimated fair market value ($261.7 million) and the
historical cost ($164.7 million) of the Facility. The interest rate implicit in
the lease is 9.79%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at March 31,
2000 are as follows (dollars in thousands):
Gross Investment in Lease $ 564,147
Unearned Income on Lease (300,752)
------------
Net Investment in Lease $ 263,395
============
Gross investment in lease represents total capacity payments receivable
over the term of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
F-17