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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 EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number: 33-74254
COGENTRIX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1853081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NORTH CAROLINA 28273-8110
(Address of principal executive offices) (Zip code)
(704) 525-3800
(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 period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [ ] No
On May 15, 1997, there were 282,000 shares of common stock, no par value, issued
and outstanding.
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COGENTRIX ENERGY, INC.
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at March 31, 1997 (Unaudited)
and June 30, 1996 3
Consolidated Statements of Operations for the Three Months and Nine
Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996
(dollars in thousands)
MARCH JUNE
31, 1997 30, 1996
======== ========
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 92,467 $ 33,351
Restricted cash 26,506 42,203
Accounts receivable 59,921 57,331
Inventories 18,086 19,086
Other current assets 1,790 2,883
-------- --------
Total current assets 198,770 154,854
PROPERTY, PLANT AND EQUIPMENT,
Net of accumulated depreciation: $181,778 and $156,215, respectively 523,922 604,491
LAND AND IMPROVEMENTS 2,424 2,424
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS,
Net of accumulated amortization: $21,743 and $19,653, respectively 23,399 25,105
RESTRICTED INVESTMENTS 20,000 63,695
NATURAL GAS RESERVES 3,002 3,611
INVESTMENTS IN AFFILIATES 77,727 56,028
OTHER ASSETS 16,050 11,433
-------- --------
$865,294 $921,641
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 60,962 $ 48,416
Accounts payable 30,278 21,453
Accrued interest payable 1,312 4,063
Accrued dividends payable 0 4,759
Other accrued liabilities 9,688 13,209
-------- --------
Total current liabilities 102,240 91,900
LONG-TERM DEBT 645,649 670,900
DEFERRED INCOME TAXES 25,267 46,971
MINORITY INTEREST IN JOINT VENTURE 13,721 22,044
OTHER LONG-TERM LIABILITIES 19,401 6,816
-------- --------
806,278 838,631
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding 130 130
Accumulated earnings 58,886 82,880
-------- --------
59,016 83,010
-------- --------
$865,294 $921,641
======== ========
The accompanying notes to consolidated condensed financial statements are
an integral part of these balance sheets.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(dollars in thousands, except for earnings per common share)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
========================= =========================
1997 1996 1997 1996
========= ========= ========= =========
OPERATING REVENUE:
Electric $ 76,897 $ 91,064 $ 239,806 $ 269,751
Steam 7,177 8,515 20,461 20,515
Other 2,897 8,954 7,505 20,827
--------- --------- --------- ---------
86,971 108,533 267,772 311,093
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel expense 28,111 44,732 99,461 129,649
Operations and maintenance 16,465 19,078 53,463 56,404
General, administrative and development expenses 7,283 6,201 23,300 20,956
Depreciation and amortization 10,568 9,418 29,270 28,415
Loss on impairment and cost of removal of cogeneration facilities 0 0 65,628 0
--------- --------- --------- ---------
62,427 79,429 271,122 235,424
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 24,544 29,104 (3,350) 75,669
OTHER INCOME (EXPENSE):
Interest expense (13,383) (15,179) (41,527) (44,727)
Investment and other income, net 2,790 1,169 7,276 5,434
Gain on sale of investment in Bolivian Power, net (106) 0 3,137 0
Equity in net income (loss) of affiliates, net 174 2,252 (474) 2,343
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN
INCOME OF JOINT VENTURE, INCOME TAXES
AND EXTRAORDINARY LOSS 14,019 17,346 (34,938) 38,719
MINORITY INTEREST IN INCOME OF JOINT VENTURE (1,143) (3,466) (2,757) (4,208)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 12,876 13,880 (37,695) 34,511
BENEFIT (PROVISION) FOR INCOME TAXES (4,491) (5,719) 14,404 (14,058)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 8,385 8,161 (23,291) 20,453
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of income tax benefit of $470 0 0 (703) 0
--------- --------- --------- ---------
NET INCOME (LOSS) $ 8,385 $ 8,161 ($ 23,994) $ 20,453
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE $ 29.73 $ 28.94 ($ 85.09) $ 72.53
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 282,000 282,000 282,000 282,000
========= ========= ========= =========
The accompanying notes to consolidated condensed financial statements are
an integral part of these statements.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(dollars in thousands)
NINE MONTHS ENDED
MARCH 31,
==========================
1997 1996
======== ========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($23,994) $ 20,453
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 29,270 28,415
Loss on impairment and cost of removal of cogeneration facilities 65,628 0
Deferred income taxes (21,704) 8,418
Extraordinary loss on early extinguishment of debt 1,173 0
Gain on sale of investment in Bolivian Power (3,137) 0
Minority interest in income of joint venture, net of dividends (8,323) 2,865
Equity in net income of affiliates, net of dividends 7,613 (1,870)
Loss on sale of securities, net 0 890
Increase in accounts receivable (2,590) (32)
Decrease in inventories 1,609 3,046
Increase in accounts payable 8,825 4,283
Increase (decrease) in accrued liabilities (6,272) 711
Decrease (increase) in other 238 (345)
-------- --------
Net cash flows provided by operating activities 48,336 66,834
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,481) (969)
Decrease (increase) in marketable securities 43,695 (12,461)
Investments in affiliates (51,572) (6,281)
Proceeds from sale of investment in Bolivian Power, net 25,398 0
Decrease (increase) in restricted cash 15,697 (246)
-------- --------
Net cash flows provided by (used in) investing activities 30,737 (19,957)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 70,661 358
Repayments of debt (83,147) (37,773)
Increase in deferred financing costs (2,712) 0
Common stock dividends paid (4,759) (4,235)
-------- --------
Net cash flows used in financing activities (19,957) (41,650)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 59,116 5,227
CASH AND CASH EQUIVALENTS, beginning of period 33,351 34,073
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 92,467 $ 39,300
======== ========
The accompanying notes to consolidated condensed financial statements are
an integral part of these statements.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include
the accounts of Cogentrix Energy, Inc., its subsidiary companies and a 50% owned
joint venture in which the Company has effective control through majority
representation on the board of directors of the managing general partner.
Investments in other affiliates in which the Company has a 20% to 50% interest
and/or the ability to exercise significant influence over operating and
financial policies are accounted for on the equity method. All material
intercompany transactions and balances among Cogentrix Energy, Inc., its
subsidiary companies and its consolidated joint venture have been eliminated in
the accompanying consolidated condensed financial statements.
Information presented as of March 31, 1997 and for the three months and
nine months ended March 31, 1997 and 1996 is unaudited. In the opinion of
management, however, such information reflects all adjustments, which consist of
normal recurring adjustments necessary to present fairly the financial position
of the Company as of March 31, 1997, the results of operations for the three
months and nine months ended March 31, 1997 and 1996, and cash flows for the
nine months ended March 31, 1997 and 1996. The results of operations for these
interim periods are not necessarily indicative of results which may be expected
for any other interim period or for the fiscal year as a whole.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although management believes that the disclosures made are adequate
to make the information presented not misleading. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's most recent Annual Report on Form 10-K, which was filed with the
Securities and Exchange Commission on October 11, 1996.
2. JAMES RIVER REFINANCING
In July 1996, James River Cogeneration Company ("James River"), a joint
venture owned 50% by the Company, which owns a cogeneration facility in
Hopewell, Virginia (the "Hopewell facility"), renegotiated the Hopewell
facility's project financing arrangements. The amended agreements resulted in a
$13 million increase in the amount of James River's outstanding debt and
extended the final maturity date of the loan by 21 months. The amended project
debt accrues interest at an annual rate equal to the applicable LIBOR as chosen
by the Company, plus .875% per annum through July 1999 and 1.125% thereafter.
Principal is payable quarterly with interest payable the earlier of the maturity
of the applicable LIBOR term or quarterly through June 2002. James River
transferred substantially all of the additional funds borrowed (net of
transaction costs) to its partners. The distribution received by Cogentrix
Energy, Inc. related to the refinancing was approximately $6.1 million.
3. AMENDMENTS TO POWER SALES AGREEMENTS AND PROJECT DEBT AGREEMENTS
Effective in September 1996, the Company amended the power sales
agreements on its Lumberton, Elizabethtown, Kenansville, Roxboro and Southport
facilities. These amendments provide the purchasing utility additional rights
related to the dispatch of the facilities and eliminate the purchase options
which the utility held related to the Roxboro and Southport facilities. In
connection with the amendment of these power sales agreements, the Company
refinanced the existing project debt on the Lumberton, Elizabethtown and
Kenansville facilities, as well as the project debt on the Roxboro and Southport
facilities.
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The project debt on the Elizabethtown, Lumberton and Kenansville
facilities, which consisted of a senior loan with a syndicate of banks and a
subordinated credit facility with a financial institution, was refinanced with
the proceeds of a $39 million senior credit facility and a $5.5 million capital
contribution by Cogentrix Energy, Inc. The senior credit facility accrues
interest at an annual rate equal to the applicable LIBOR rate, as chosen by the
Company, plus .875% through September 1997 and 1% thereafter. Principal is
payable quarterly with interest payable at the earlier of the maturity of the
applicable LIBOR term or quarterly through September 2000. The senior credit
facility also provides for a $3.3 million letter of credit to secure the
project's obligations to pay debt service. An extraordinary loss of $1.2 million
related to the write-off of unamortized deferred financing costs from the
original senior loan and subordinated credit facility is shown net of an income
tax benefit of $470,000 in the accompanying consolidated statements of
operations for the nine months ended March 31, 1997.
The project debt for the Roxboro and Southport facilities consisted of
a note payable to banks, which was refinanced with the proceeds of a senior
credit facility. This senior credit facility accrues interest at an annual rate
equal to the applicable LIBOR rate, as chosen by the Company, plus .875% through
September 1997, 1% through September 2001 and 1.125% thereafter. Principal is
payable quarterly with interest payable at the earlier of the maturity of the
applicable LIBOR term or quarterly through June 2002. The senior credit facility
also provides for a $6.5 million letter of credit to secure the project's
obligations to pay debt service. The revised credit facility for the Roxboro and
Southport Facilities increased outstanding borrowings $18.4 million, the
proceeds of which (net of transaction costs of $1.3 million and accrued interest
payments of $400,000) were paid as a distribution to Cogentrix Energy, Inc. In
connection with the refinancing, Cogentrix Energy, Inc. has entered into an
agreement for the benefit of the project lenders to fund cash deficits the
subsidiary that operates the Roxboro and Southport facilities could experience
as a result of incurring certain costs, subject to a cap of $11.3 million.
4. LOSS ON IMPAIRMENT AND COST OF REMOVAL OF COGENERATION FACILITIES
During the second quarter of fiscal 1997, the Company undertook an
analysis of the post-contract operating environment for all of its operating
facilities in light of the dramatic market changes that are taking place in the
power generation industry. The analysis included assumptions regarding future
levels of operations, operating costs and market prices for equivalent
generation available from other sources. As a part of this analysis, in
accordance with the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company assessed whether any impairment of the Company's
facilities had occurred. This assessment included comparing the projected future
cash flows to be provided by these assets to the net book value of such assets.
Based on this assessment, the Company determined that an impairment loss had
occurred on the Elizabethtown, Lumberton, Kenansville and Ringgold facilities.
This loss on impairment of cogeneration facilities of $57.3 million, which was
recorded in the second quarter of fiscal 1997, represents the excess of the net
book value of these cogeneration facilities over their current fair value,
determined by discounting to present value projected future cash flows to be
provided by such assets. The Company believes that its projections of future
cash flows are based upon reasonable assumptions about the future performance of
these assets. Because of the risks and uncertainties associated with any
projections, there can be no assurances, however, that actual events will be
consistent with the assumptions made, and future cash flows may be greater or
less than those projected. The analysis also resulted in the recognition of an
$8.3 million liability related to the Company's estimated cost of removal
obligations under the land leases for the Elizabethtown, Lumberton and
Kenansville facilities. The total impairment loss and cost of removal of $65.6
million has been reflected in the accompanying statement of operations for the
nine months ended March 31, 1997. Also in connection with the overall assessment
of the post-contract operating environment for its cogeneration facilities, the
Company concluded that, effective January 1, 1997, the Lumberton, Elizabethtown,
Kenansville, Roxboro and Southport facilities would be depreciated over the
remaining term of these facilities' power sales agreements.
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5. SALE OF INVESTMENT IN BOLIVIAN POWER
In December 1996, the Company sold its investment in Bolivian Power
Company Limited ("Bolivian Power") pursuant to a cash tender offer made for all
of the outstanding common stock of Bolivian Power at a price of $43 per share.
The Company received proceeds from the sale of $25.4 million, net of transaction
costs, which included payments made to certain unaffiliated individuals who
performed development activities for Bolivian Power. The resulting book gain of
$3.1 million is reflected in the accompanying statement of operations for the
nine months ended March 31, 1997.
6. PENDING CLAIMS AND LITIGATION
The Company is a party to certain matters which have resulted in
litigation and arbitration proceedings. Management believes that the resolution
of these matters will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
The information called for by this item is hereby incorporated herein
by reference to pages 3 through 8 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to discussing and analyzing the Company's 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 the Company 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 the
Company's actual results to differ materially from the forward-looking
statements.
GENERAL
Cogentrix Energy, Inc. and subsidiary companies (collectively, the
"Company") are primarily engaged in the development, ownership and operation of
independent power generating facilities (individually, a "facility" or
collectively, the "facilities"). The Company's consolidated revenues are derived
and costs are incurred primarily from the generation and sale of electricity
and, to a lesser extent, from the production and sale of thermal energy
(primarily steam) and other commodities related to its cogeneration operations.
Other revenues and costs arise from fees earned and costs incurred in connection
with the development of power generating facilities, ash transport, ash
by-products, and environmental consulting services.
As of March 31, 1997, Cogentrix Energy, Inc. owned, through its
subsidiaries, eleven operating facilities in the United States with an aggregate
installed capacity of approximately 1,150 megawatts ("MW"). Two of the eleven
facilities are owned 50% by the Company and 50% by other independent power
producers.
Effective in September 1996, the Company amended the power sales
agreements with Carolina Power & Light Company ("CP&L") on the Elizabethtown,
Lumberton, Kenansville, Roxboro and Southport facilities. Under the amended
terms, the power sales agreements are dispatchable contracts which provide the
utility the ability to suspend or reduce purchases of energy from the facilities
if CP&L determines it can operate its system for a designated period more
economically. The amended power sales agreements are structured so that the
Company will continue to receive capacity payments during any period of economic
dispatch. Capacity payments cover project debt service, fixed operating costs
and constitute a substantial portion of the profit component of the power sales
agreements. Energy payments, which will be reduced or eliminated as a result of
economic dispatch, primarily cover variable operating and maintenance costs as
well as coal and rail transportation costs. The impact of the amendments to
these power sales agreements will be a significant reduction in the Company's
electric revenues, which will be offset by reduced fuel costs and operations and
maintenance expense at these facilities in future years. In addition to
providing CP&L additional dispatch rights, the amendments eliminate the purchase
options for the Roxboro and Southport facilities, which CP&L had given notice
they were going to exercise.
Unusual weather conditions, unanticipated levels of demand for steam by
a facility's steam host and the needs of each facility to perform routine or
unanticipated facility maintenance involving planned or forced turbine outages
may have an effect on interim financial results. In addition, power sales
agreements at seven of the Company's facilities permit the utility customer to
significantly dispatch the related plant (i.e., direct the plant to deliver a
reduced amount of electrical output). However, even when dispatched, such
facilities' capacity payments, which are structured to cover fixed operating
costs and debt service and constitute a substantial portion of the profits of
these facilities, are not reduced.
The activities of the Company are subject to stringent environmental
regulations by federal, state, local and (for future non-U.S. projects) foreign
governmental authorities. The Clean Air Act Amendments of 1990 require states to
impose permit fees on certain emissions, and Congress may consider proposals to
restrict or tax certain
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emissions, which proposals, if adopted, could impose additional costs on the
operation of the Company's facilities. There can be no assurance that the
Company's business and financial condition would not be materially and adversely
affected by the cost of compliance with future changes in domestic or foreign
environmental laws and regulations or additional requirements for reduction or
control of emissions imposed by regulatory authorities in connection with
renewals of required permits. The Company maintains a comprehensive program to
monitor its project subsidiaries' compliance with all applicable environmental
laws, regulations, permits and licenses.
All of the Company's operating facilities are wholly-owned by the
Company except for the Hopewell and Birchwood cogeneration facilities, in which
the Company has a 50% ownership interest. The Company's consolidated condensed
financial statements include the accounts of the Hopewell facility as the
Company has effective control of the facility through majority representation on
the board of directors of the managing general partner. The "minority interest
in income of joint venture" on the Company's consolidated statements of
operations for the three months and nine months ended March 31, 1997 and 1996
reflects the Company's joint venture partner's interest in the net income of the
Hopewell facility. The Company accounts for its investment in the Birchwood
facility using the equity method.
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND
1996
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------------------
1997 1996 1997 1996
----------------- --------------- ------------------- -----------------
(dollars in thousands, unaudited)
Total operating revenues $86,971 100% $108,533 100% $267,772 100% $311,093 100%
Operating costs 44,576 51 63,810 58 152,924 57 186,053 60
General, administrative and
development 7,283 9 6,201 6 23,300 9 20,956 7
Depreciation and amortization 10,568 12 9,418 9 29,270 11 28,415 9
Loss on impairment and cost
of removal of cogeneration
facilities 0 0 0 0 65,628 24 0 0
------- --- -------- --- ------- --- -------- --
Operating income (loss) $24,544 28% $ 29,104 27% $(3,350) (1)% $ 75,669 24%
======= === ======== === ======= === ======== ==
Total operating revenues decreased 19.9% to $87 million for the third
quarter of fiscal 1997 as compared to the third quarter of fiscal 1996. This
decrease was primarily attributable to the significant decreases in electric
revenues resulting from the amendment of the Company's power sales agreements
with CP&L on the Elizabethtown, Lumberton, Kenansville, Roxboro and Southport
facilities. The decrease in operating revenue is also attributable to the $7.5
million payment received in the third quarter of fiscal 1996 from the utility
purchasing the electrical output of the Hopewell facility in connection with
such utility's buy-down of the Hopewell facility's rated capacity from 100
megawatts to 88.5 megawatts. To a lesser extent, the decrease in operating
revenues is also due to a $1.4 million decrease in steam revenues at the
Hopewell and Southport facilities resulting from a decrease in demand for steam
by these facilities' steam hosts and a $1.3 million decrease in electric revenue
at the Richmond facility resulting from a decrease in megawatt hours sold to the
purchasing utility. These decreases in operating revenues were partially offset
by a $1.8 million increase in electric revenues at the Hopewell facility due to
an increase in megawatt hours provided to the purchasing utility in the third
quarter of fiscal year 1997.
The Company's operating revenues decreased 13.9% to $267.8 million for
the first nine months of fiscal 1997 as compared to the first nine months of
fiscal year 1996. This decrease was primarily attributable to the significant
decreases in electric revenues associated with the amendment of the Company's
power sales agreements with CP&L on the Elizabethtown, Lumberton, Kenansville,
Roxboro and Southport facilities. The decrease is also attributable to the
payment received in the first quarter of fiscal year 1996 upon the execution of
a joint development agreement with China Light & Power Company Limited ("CLP")
related to the development of the Company's India project, the $5 million fee
earned by the Company in the second quarter of fiscal 1996 related to the
pre-construction development phase of an electric generation facility for Public
Utility District No. 1 of Clark County, Washington ("Clark"), and the $7.5
million capacity buy-down payment received in the third quarter of fiscal 1996
from the utility purchasing the electrical output of the Hopewell facility.
These decreases in operating revenues for the first nine months of fiscal 1997
were partially offset by an increase in electric revenues associated
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with an increase in on-peak megawatt hours sold at the Portsmouth and Hopewell
facilities, as well as escalation/inflation adjustment provisions in certain
power sales agreements.
Operating costs decreased 30.1% to $44.6 million for the third quarter
of fiscal 1997 as compared to the third quarter of fiscal 1996. This decrease
resulted primarily from the significant decrease in operating expenses at the
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities
associated with the amendment of their power sales agreements with CP&L. The
decrease in operating costs in the third quarter of fiscal 1997 also related to
decreases in maintenance costs at the Rocky Mount, Hopewell and Richmond
facilities, at which facilities the Company performed routine maintenance during
the third quarter of fiscal 1996.
Operating costs decreased 17.8% to $152.9 million for the first nine
months of fiscal 1997 as compared to the first nine months of fiscal 1996. This
decrease resulted primarily from the significant decrease in operating expenses
at the Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities
associated with the amendment of their power sales agreements with CP&L, as well
as a decrease in fuel expense at the Richmond and Rocky Mount facilities
associated with a decrease in megawatt hours sold. The decrease in operating
expense is also due to reductions in maintenance costs at the Hopewell,
Portsmouth, and Southport facilities, at which facilities the Company performed
routine maintenance during the first nine months of fiscal 1996. These decreases
were partially offset by an increase in maintenance costs at the Richmond
facility associated with routine maintenance performed during the first nine
months of fiscal year 1997 and an increase in operating costs incurred by ReUse
Technology, Inc., a wholly-owned subsidiary of the Company, related to third
party agreements during the first nine months of fiscal 1997.
General, administrative and development expenses increased 17.4% to
$7.3 million for the third quarter of fiscal 1997 and 11.2% to $23.3 million for
the nine months ended March 31, 1997 as compared to the corresponding periods of
fiscal 1996. These increases relate primarily to an increase in performance
bonuses, as well as a general increase in payroll expense during the first nine
months of fiscal 1997. These increases were partially offset during the first
six months of fiscal 1997 by a reduction in development expenses incurred on a
project the Company is developing in Idaho.
During the second quarter of fiscal 1997, the Company undertook an
analysis of the post-contract operating environment for all of its operating
facilities in light of the dramatic market changes that are taking place in the
power generation industry. The analysis included assumptions regarding future
levels of operations, operating costs and market prices for equivalent
generation available from other sources. As a part of this analysis, in
accordance with the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company assessed whether any impairment of the Company's
facilities had occurred. This assessment included comparing the projected future
cash flows to be provided by these assets to the net book value of such assets.
Based on this assessment, the Company determined that an impairment loss had
occurred on the Elizabethtown, Lumberton, Kenansville and Ringgold facilities.
This loss on impairment of cogeneration facilities of $57.3 million, which was
recorded in the second quarter of fiscal 1997, represents the excess of the net
book value of these cogeneration facilities over their current fair value,
determined by discounting to present value, projected future cash flows to be
provided by such assets. The Company believes that its projections of future
cash flows are based upon reasonable assumptions about the future performance of
these assets. Because of the risks and uncertainties associated with any
projections, there can be no assurances, however, that actual events will be
consistent with the assumptions made, and future cash flows may be greater or
less than those projected. The analysis also resulted in the recognition of an
$8.3 million liability related to the Company's estimated cost of removal
obligations under the land leases for the Elizabethtown, Lumberton and
Kenansville facilities. The total impairment loss and cost of removal of $65.6
million has been reflected in the accompanying statement of operations for the
nine months ended March 31, 1997. Also in connection with the overall assessment
of the post-contract operating environment for its cogeneration facilities, the
Company concluded that, effective January 1, 1997, the Lumberton, Elizabethtown,
Kenansville, Roxboro and Southport facilities would be depreciated over the
remaining term of these facilities' power sales agreements.
The Company's long-term debt averaged $710 million with a weighted
average interest rate of 7.8% for the nine months ended March 31, 1997 as
compared with an average of $743 million with a weighted average interest rate
of 7.94% for the nine months ended March 31, 1996. The decrease in weighted
average debt outstanding, which relates to the scheduled maturities of the
Company's project finance debt, was partially offset by
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an increase in project debt outstanding at the Hopewell facility and Roxboro and
Southport facilities related to refinancings completed during the first quarter
of fiscal 1997.
Investment income increased 138.7 % to $2.8 million for the third
quarter of fiscal 1997 and 33.9% to $7.3 million for the first nine months of
fiscal 1997 as compared to the corresponding periods of fiscal 1996. These
increases in investment income are related to larger cash and investment
balances maintained by the Company during fiscal 1997 as compared to fiscal
1996, as well as the recognition of a net loss on the sale of marketable
securities of approximately $900,000 during the first nine months of fiscal
1996.
In December 1996, the Company sold its investment in Bolivian Power
Company Limited ("Bolivian Power") to NRG Generating Holdings (No. 9) B.V., a
wholly owned subsidiary of NRG Energy, Inc. ("Holdings"), pursuant to a cash
tender offer which Holdings made for all of the outstanding common stock of
Bolivian Power at a price of $43 per share. The Company recognized a $3.1
million gain on the sale of its investment in Bolivian Power, net of transaction
costs, which included payments made to certain unaffiliated individuals who
performed development activities for Bolivian Power.
The decrease in equity in net income of affiliates from $2.3 million in
the third quarter of fiscal 1996 to $0.2 million in the third quarter of fiscal
1997 is primarily attributable to the Company selling its investment in Bolivian
Power in December 1996. The Company recognized approximately $2.6 million in
equity in net income of affiliates in the third quarter of fiscal 1996 related
to Bolivian Power, which included the Company's share of a one-time gain
recognized by Bolivian Power on the sale of its distribution assets. This
decrease in equity in net income of affiliates was partially offset by earnings
generated by the Company's investment in a greenhouse facility in Texas, which
commenced commercial operations in late calendar 1996, and a reduction in
development costs associated with the termination in December 1996 of funding
for a partnership pursuing development opportunities in Latin America.
The equity in net loss of affiliates for the first nine months of
fiscal 1997 was $0.5 million as compared to equity in net income of affiliates
of $2.3 million for the first nine months of fiscal 1996. This decrease was
largely influenced by the same factors discussed above: the sale of the
Company's investment in Bolivian Power, partially offset by the Texas greenhouse
commencing commercial operations in late calendar 1996 and the termination in
December 1996 of funding for the partnership pursuing development opportunities
in Latin America.
The decrease in minority interest in income of joint venture for the
three months and nine months ended March 31, 1997 as compared to the same
periods of fiscal 1996 related to the decrease in net income of the Hopewell
facility. The decrease in net income of the Hopewell facility resulted primarily
from the $7.5 million capacity buy-down payment received in the third quarter of
fiscal 1996 from the utility purchasing the electrical output of the Hopewell
facility. This decrease was partially offset by a reduction in maintenance costs
incurred at the Hopewell facility in fiscal 1997 as compared to fiscal 1996.
The benefit for income taxes for the first nine months of fiscal 1997
represents an effective rate of 38.2% of loss before benefit for income taxes as
compared to an effective rate of 40.7% of income before income taxes for the
first nine months of fiscal 1996. The decrease in the effective rate in fiscal
1997 relates to the reduced recognition of current year losses for state income
tax purposes.
The extraordinary loss on early extinguishment of debt in the first
nine months of fiscal 1997 relates to the write-off of the deferred financing
costs on the Elizabethtown, Lumberton and Kenansville facilities' original
project debt, which was refinanced in September 1996.
LIQUIDITY AND CAPITAL RESOURCES
The principal components of operating cash flow for the nine months
ended March 31, 1997 were generated by a net loss of $24 million, increases due
to adjustments for depreciation and amortization of $29.2 million, loss on
impairment and cost of removal of cogeneration facilities of $65.6 million,
extraordinary loss on early extinguishment of debt of $1.2 million,
distributions from and equity in net loss of unconsolidated affiliates of $7.6
million and a net $1.8 million source of cash reflecting changes in other
working capital assets and liabilities, which were partially offset by deferred
taxes of $21.7 million, gain on the sale of the investment in Bolivian Power
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of $3.1 million and minority interest in income of joint venture, net of
dividends, of $8.3 million. Cash flow provided by operating activities of $48.3
million, net of proceeds from the sale of the investment in Bolivian Power of
$25.4 million, proceeds from project finance borrowings of $70.7 million, and
$0.3 million of cash escrows and restricted marketable securities released were
primarily used to purchase equipment of $2.5 million, to make investments in
affiliates of $51.6 million, to repay project finance borrowings of $83.1
million, to pay deferred financing costs of $2.7 million and to pay common stock
dividends of $4.8 million.
Historically, the Company has financed the capital costs of each of its
facilities under financing arrangements that, with certain exceptions, are
substantially non-recourse to Cogentrix Energy, Inc. and its other project
subsidiaries. Based upon the Company's current level of operations, the Company
believes that its project subsidiaries will generate sufficient revenue to pay
all required debt service on the project financing debt and to allow them to pay
management fees and dividends to Cogentrix Energy, Inc. periodically in
sufficient amounts to allow the Company to pay all existing debt service, fund a
significant portion of its development activities and meet its other
obligations. If, as a result of unanticipated events, the Company's ability to
generate cash from operating activities is significantly impaired, the Company
could be required to curtail its development activities to meet its debt service
obligations.
In December 1994, the Company acquired a 50% interest in Birchwood
Power Partners, L.P. ("Birchwood Power"), a partnership formed to own a 220
megawatt coal-fired cogeneration facility (the "Birchwood facility") in King
George County, Virginia, from two indirect wholly-owned subsidiaries of The
Southern Company. The Birchwood facility, which commenced commercial operations
in November 1996, sells electricity to Virginia Electric and Power Company and
provides thermal energy to a 36-acre greenhouse under long-term contracts. The
purchase price of the 50% interest in Birchwood Power was approximately $29.5
million and was funded with a portion of the net proceeds of the sale of $100
million of the Company's Senior Notes due 2004 (the "Senior Notes"). In
addition, pursuant to the equity funding obligation under Birchwood Power's
project financing arrangements, the Company also provided an equity contribution
to Birchwood Power of approximately $43.7 million in March 1997.
In December 1994, the Company executed an engineering, procurement and
construction agreement (the "Construction Agreement") with Clark. Under this
Construction Agreement, the Company is currently engineering, procuring
equipment for and constructing a 248 megawatt combined-cycle, gas-fired electric
generation facility (the "Clark facility"). In October 1995, the Company
delivered to Clark a $20 million letter of credit, provided by a bank, which is
collateralized by a pledge of marketable securities. This letter of credit will
support the Company's contingent obligations under certain performance
guarantees and late construction completion payments under the Construction
Agreement. The Company is also obligated to pay 50% of costs and expenses, if
any, incurred in constructing the facility in excess of the contract amount.
Pursuant to the Construction Agreement, the contract amount of $117 million may
be adjusted as a result of a force majeure event, scope change, certain delays
in schedule or change in law. The Company will earn a construction fee of $5
million upon completion of the Clark facility. The Company will also share in
50% of the amount, if any, equal to the excess of the contract amount over the
costs and expenses in constructing the Clark facility. Cogentrix of Vancouver,
Inc. ("CVC"), an indirect wholly-owned subsidiary of Cogentrix Energy, Inc.,
performed the development and preliminary engineering of the Clark facility and
received a development fee of $5 million in October 1995. The Company
anticipates that construction on the Clark facility will be completed in late
calendar 1997. Upon commencing commercial operations, CVC will operate and
maintain the Clark facility pursuant to a two-year operations and maintenance
agreement.
In July 1995, the Company executed a joint development agreement with a
subsidiary of CLP (the "Joint Venture") which provides for the Company and CLP
to co-develop a 1,000 megawatt coal-fired facility in India and to share equally
in the direct development expenses related to the project. Additionally, the
Company is currently seeking other international partners for the purpose of
making equity investments in the project. The Company currently anticipates
requiring funds, in addition to amounts payable by CLP to the Company at
financial closing of the project, in an amount ranging from $50 to $80 million
for the purpose of making its equity investment in the India project. The
Company expects to fund this equity commitment from corporate cash balances.
In July 1996, the Company renegotiated the project financing
arrangements for its Hopewell facility, in which it owns a 50% interest. The
amended agreements resulted in a $13 million increase in the amount of
outstanding indebtedness of James River and extended the final maturity date of
the loan by 21 months. James River transferred substantially all of the
additional funds borrowed (net of transaction costs) to its partners. The
distribution received by Cogentrix Energy, Inc. related to the refinancing was
approximately $6.1 million.
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In September 1996, the Company renegotiated the project financing
arrangements for its Roxboro and Southport facilities. The amended agreements
resulted in an approximate $18.4 million increase in the amount of indebtedness
outstanding and extended the final maturity date of the loan by 7 months. The
Company's project subsidiary operating the Roxboro and Southport facilities
transferred substantially all of the additional funds borrowed (net of
transaction costs) to Cogentrix Energy, Inc., which utilized $5.5 million to
make a capital contribution to the project subsidiary operating the
Elizabethtown, Lumberton and Kenansville facilities in connection with the
refinancing of its project debt in September 1996. The remainder of the proceeds
were distributed to Cogentrix Energy, Inc.
In December 1996, the Company sold its investment in Bolivian Power
pursuant to a cash tender offer received for all of the outstanding common stock
of Bolivian Power at a price of $43 per share. The Company received proceeds of
$25.4 million from the sale of its investment in Bolivian Power, net of
transaction costs, which included payments made to certain unaffiliated
individuals who performed development activities for Bolivian Power. See
"Results of Operations" for the financial reporting impact of the sale of the
investment in Bolivian Power.
Any projects the Company develops in the future, and those independent
power projects it may seek to acquire, are likely to require substantial capital
investment. The Company's ability to arrange financing on a substantially
non-recourse basis and the cost of such capital are dependent on numerous
factors. In order to access capital on a substantially non-recourse basis in the
future, the Company may have to make larger equity investments in, or provide
more financial support for, its project subsidiaries.
The ability of the Company's project subsidiaries to declare and pay
dividends and management fees periodically to Cogentrix Energy, Inc. is subject
to certain limitations in their respective project credit documents. Such
limitations generally require that: (i) project debt service payments be
current, (ii) project debt service coverage ratios be met, (iii) all project
debt service and other reserve accounts be funded at required levels, and (iv)
there be no default or event of default under the relevant project credit
documents. There are also additional limitations that are adapted to the
particular characteristics of each project subsidiary.
In September 1996, the Company paid a $4.8 million dividend for the
fiscal year ended June 30, 1996 to the common shareholders of the Company. The
Board of Directors has adopted a policy, which is subject to change at any time,
of maintaining a dividend payout ratio of no more than 20% of the Company's net
income for the immediately preceding fiscal year. Under the terms of the
Indenture for the Senior Notes, the Company's ability to pay dividends and make
other distributions to its shareholders is restricted.
IMPACT OF ENERGY PRICE CHANGES, INTEREST RATES AND INFLATION
Energy prices are influenced by changes in supply and demand, as well
as economic conditions, and generally tend to fluctuate significantly. Through
various hedging mechanisms, the Company has attempted to mitigate the impact of
such changes on the results of operations of most of its projects. The basic
hedging mechanism against increased fuel and transportation costs is to provide
contractually for matching increases in the energy payments the Company's
project subsidiaries receive from the utility purchasing the electricity
generated by the facility.
Under the power sales agreements for two of the Company's facilities,
energy payments are indexed, subject to certain caps, to reflect the purchasing
utility's solid fuel cost of producing electricity. The Company's other power
sales agreements provide periodic, scheduled increases in energy prices that are
designed to match periodic, scheduled increases in fuel and transportation costs
that are included in the fuel supply and transportation contracts for the
facilities.
Changes in interest rates could have a significant impact on the
Company. Interest rate changes affect the cost of capital needed to construct
projects, as well as interest expense of existing project financing debt. As
with fuel price escalation risk, the Company has substantially hedged against
the risk of fluctuations in interest rates by arranging either fixed-rate
financing or variable-rate financing with interest rate swaps, collars or caps.
As of March 31, 1997, approximately 87.3% of the Company's project financing
debt was hedged, of which 17.6% was hedged with interest rate caps which were
above the prevailing market rate at March 31, 1997 and therefore subject to
interest rate volatility.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Under the recently amended terms of the power sales agreements for the
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities, the
purchasing utility, CP&L, has exercised its right of economic dispatch resulting
in significantly reduced fuel requirements at each of these facilities. Coal is
supplied to the Elizabethtown, Lumberton and Kenansville facilities
(collectively, the "ELK facilities") by James River Coal Sales, Inc. ("James
River Coal") and its affiliate, Bell County Coal Corporation. The coal sales
agreement for the ELK facilities provides that the Company's subsidiary
operating the ELK facilities will purchase, and James River Coal will provide,
all of such subsidiary's coal requirements through the end of the contract term.
In November 1996, James River Coal and its affiliate instituted an action
against Cogentrix Eastern Carolina Corporation ("CECC"), an indirect
wholly-owned subsidiary of Cogentrix Energy, Inc., claiming breach of contract
and fraud in the inducement based on the reduction in fuel requirements at the
ELK facilities as a consequence of the recent amendments to the power sales
agreements. James River Coal and its affiliate seek specific performance and, in
the alternative, an unspecified amount of damages. The lawsuit is pending in the
United States District Court for the Eastern District of Kentucky. The coal
sales agreement for the ELK facilities contains an arbitration provision
requiring disputes to be submitted to arbitration in North Carolina, which CECC
intends to seek to enforce with respect to these claims. Motions to dismiss the
Kentucky suit have been filed, briefed and are pending oral argument before the
court on August 1, 1997.
In October 1996, Coastal Sales, Inc. ("Coastal"), the coal supplier to
the Southport facility under a similar requirements contract, initiated an
arbitration proceeding against Cogentrix of North Carolina, Inc., an indirect
wholly-owned subsidiary of Cogentrix Energy, Inc., through the American
Arbitration Association in Charlotte, North Carolina. The notice of arbitration
alleges breach of contract based on the reduction in fuel requirements at the
Southport facility as a consequence of the recent amendment to the power sales
agreement. Coastal is seeking an unspecified amount of damages. The arbitration
panel has been selected and the proceedings are scheduled for July 8 - 11, 1997.
Management believes that in some instances there is no basis for these
claims, and, as to the others, there are meritorious defenses. The Company
intends to defend the lawsuit and arbitration proceeding vigorously. In the
opinion of management, the ultimate outcome of the litigation, or any
arbitration proceeding relating to these claims, will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
ITEM 5. OTHER INFORMATION
The Company recently made changes in the ranks of its most senior
management to better position the Company for the current and anticipated
challenges in the rapidly changing electric power supply industry. Frank J.
Benner, President and Chief Operating Officer, and Bruce C. McMillen, Chief
Financial Officer, voluntarily resigned to facilitate the orderly transition to
a senior management team with skills and experience better suited to meet these
challenges.
Mark F. Miller has been elected President and Chief Operating Officer,
as well as a member of the Board of Directors, and will succeed Mr. Benner in
the overall management of the Company's operations. Mr. Miller joins the
Company from Northrop Grumman Corporation where he held the position of Vice
President Business Management, Electronics & Systems Integration Division in
Bethpage, New York. Mr. Miller joined Northrop in 1982 and held positions in
both the law and material departments before his promotion to Vice President
Business Management in 1994. Mr. Miller holds a Masters Degree in Management
from Massachusetts Institute of Technology where he was an Alfred P. Sloan
Fellow, a Juris Doctor Degree from the Law School of University of Puget Sound,
where he was an Editor of the Law Review, and received a Bachelor of Arts
Degree in Biology from Willamette University. He is an active member of the
Washington State Bar Association as well as the National Contract Management
Association.
James R. Pagano, formerly the Company's Group Senior Vice President of
Project Finance, has been promoted to the position of Group Senior Vice
President and Chief Financial Officer and succeeds to the duties and
responsibilities of Bruce C. McMillen. Mr. Pagano has been with the Company
since 1992 and has been responsible for securing financing for all the
Company's development projects as well as negotiating the refinancing of the
long-term debt on existing projects.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Agreement of Limited Partnership, dated as of March 10, 1997,
of Pocono Village Farms, L.P. by and among Cogentrix of
Pocono, Inc., Cogentrix Greenhouse Investments, Inc., Village
Farms of Delaware, L.L.C. and Village Farms, L.L.C.
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and is not filed.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered
by this report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGENTRIX ENERGY, INC.
(Registrant)
May 15, 1997 /s/ James R. Pagano
-------------------------------------
James R. Pagano
Group Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
May 15, 1997 /s/ Thomas F. Schwartz
-------------------------------------
Thomas F. Schwartz
Vice President - Finance
Treasurer
(Principal Accounting Officer)
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