1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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.)
1105 North Market Street, Suite 1108, Wilmington, DE 19801, (302) 427-8494
(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 Numbers)
9405 Arrowpoint Boulevard, Charlotte, North Carolina 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
2
LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
Index to Amendment No. 1 on Form 10-Q/A
To the Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 1997
PART I
Page
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Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
INTRODUCTION
Amendment No.1 on Form 10-Q/A (this "Amendment") to the Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997 filed January 14, 1998 (the
"September 1997 10-Q") of LS Power Funding Corporation ("Funding") is being
filed by Funding to amend Items 1 and 2 of Part I of the September 1997 10-Q as
set forth below and in the pages attached hereto.
Item 1 of the September 1997 10-Q is hereby amended to restate LSP-Whitewater
Limited Partnership's ("Whitewater") financial statements as of and for the
three months ended September 30, 1997 to reflect the application of "sales-type"
capital lease accounting treatment to Whitewater's power purchase agreement in
accordance with Statement of Financial Accounting Standards (SFAS) No. 13,
"Accounting for Leases".
Item 2 of the September 1997 10-Q is hereby amended to make certain revisions to
Management's Discussion and Analysis of Financial Condition and Results of
Operations that are required as a result of accounting for the Whitewater power
purchase agreement as a sales-type capital lease.
Except as described above, this amendment makes no changes to Items 1 and 2 of
Part I of the September 1997 10-Q.
Pursuant to Rule 12b-15 of the Rules and Regulations under the Securities
Exchange Act of 1934, the complete text of Items 1 and 2, as amended, are
included in this Amendment.
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PART I/ITEM 1. FINANCIAL STATEMENTS
The unaudited financial statements contained herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "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 LS Power Funding
Corporation ("Funding") LSP-Cottage Grove, L.P. ("Cottage Grove") and
LSP-Whitewater Limited Partnership ("Whitewater" and, together with Cottage
Grove, the "Partnerships") believe that the disclosures made are adequate to
make the information presented not misleading, these 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, 1996, filed by
Funding, Cottage Grove and Whitewater.
PART I/ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Cottage Grove is a single purpose Delaware limited partnership established
on December 14, 1993 to develop, finance, construct, own, operate and manage a
gas-fired cogeneration facility located in Cottage Grove, Minnesota (the
"Cottage Grove Power Plant"). Whitewater is a single purpose Delaware limited
partnership established on December 14, 1993 to develop, finance, construct,
own, operate and manage a gas-fired cogeneration facility located in Whitewater,
Wisconsin (the "Whitewater Power Plant", and collectively with the Cottage Grove
Power Plant, the "Power Plants" or "Projects"). Since their formation in 1993,
the Partnerships have been developing and constructing their respective power
plants. The Whitewater Power Plant and Cottage Grove Power Plant commenced
commercial operation on September 18, 1997 and October 1, 1997, respectively.
COTTAGE GROVE
Power Plant Construction
The Cottage Grove Power Plant is being constructed by Westinghouse Electric
Corporation ("Westinghouse Electric" or the "Contractor") pursuant to a turnkey
construction contract (the "Cottage Grove Construction Contract"). Westinghouse
Electric had agreed to complete the construction and start-up of the Cottage
Grove Power Plant to specified performance levels by May 31, 1997. Westinghouse
began construction of the Cottage Grove Power Plant on June 30, 1995.
At September 30, 1997 engineering, procurement, and construction were
substantially complete. Effective October 1, 1997, the Cottage Grove Power Plant
commenced commercial operation. The Contractor had experienced a number of
equipment difficulties, which had delayed the completion of construction and
start-up. These difficulties included (i) inability to meet performance and
emission requirements when running the Power Plant on fuel oil and (ii)
increased utilization of catalyst to control emissions. These difficulties had
caused a more lengthy start-up period than originally anticipated.
As a result of the Contractor's failure to complete construction and
start-up of the Cottage Grove Power Plant by May 31, 1997, the Contractor was
required, until completion of construction, to reimburse Cottage Grove for
extension fees paid under its power purchase agreement ("PPA"), and to pay
certain liquidated damages. The milestone extension period ended on October 1,
1997 with commencement of commercial operation. Cottage Grove has recorded
receivables from the Contractor of $3,011,667 at September 30, 1997, which
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is comprised of reimbursable extension fees of $266,667 and delay liquidated
damages of $2,745,000. Subsequent to September 30, 1997, these receivables have
been satisfied. In addition, Cottage Grove had received from Westinghouse cash
of $1,066,668 and $2,327,729 of reimbursable extension fees and delay liquidated
damages, respectively, and had retained construction contract payments (in the
form of cash and an irrevocable letter of credit) totaling $10,886,514.
In order to demonstrate that construction of the Power Plant was complete,
the Contractor was required to demonstrate, with the concurrence of Cottage
Grove and R.W. Beck, the independent engineer, that: (i) the Power Plant was
mechanically and electrically sound and free from known defects or deficiencies
that could affect the safety and reliability of the Power Plant, (ii) the Power
Plant met certain performance and emissions guarantees, (iii) the Power Plant
successfully completed testing designed to demonstrate the Power Plant's
reliability, and (iv) the Power Plant successfully completed testing required by
Cottage Grove's PPA with Northern States Power Company ("NSP").
Effective September 30, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Power Plant's construction,
extension of certain warranty periods and certain financial concessions.
During the October 27, 1997 scheduled outage of the Power Plant, the
Contractor identified one cracked blade and a number of cracked vanes in the
combustion turbine unit. The damaged components were replaced and the unit was
placed on-line as scheduled on November 10, 1997. As a result of this apparent
defect in the Power Plant and the significant difficulties the Contractor
encountered in achieving commercial operation, the Partnership notified the
Contractor that the Power Plant may not meet the full requirements of the
Construction Contract. The Contractor has initially rejected this assertion. The
ultimate outcome of this dispute is unknown at the present time.
Liquidity and Capital Resources
For the three months ended September 30, 1997, Cottage Grove capitalized
construction costs totaling approximately $2,504,127. At September 30, 1997,
Cottage Grove's investments held by trustee totaled $26,872,969, of which
$6,043,000 was held in a fund reserved for debt service, and $1,425,950 was held
in a contingency fund to pay for project cost overruns. Cottage Grove
transferred $6,231,346 from the contingency fund during the third quarter of
1997 to fund estimated increases to budgeted construction costs.
WHITEWATER
General
The Whitewater Power Plant commenced commercial operations on September
18, 1997. The Whitewater PPA meets the criteria of a "sales-type" capital lease
as described in Statement of Financial Accounting Standards (SFAS) No. 13,
"Accounting for Leases." Whitewater recognized a gain on sales-type capital
lease for the difference between the estimated fair market value and the
historical cost of the Power Plant as of the commencement of the lease term
(commencement of commercial operations). The Partnership recorded a net
investment in lease which reflects the present value of future minimum lease
payments. Future minimum lease payments represent the amount of capacity
payments due from the utility under the PPA in excess of fixed operating costs
(i.e. executory costs). The difference between the undiscounted future minimum
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lease payments due from the utility and the net investment in lease represents
unearned income. This unearned income will be recognized as lease revenue over
the term of the PPA using the effective interest rate method. The Partnership
will also recognize service revenue related to the reimbursement of costs
incurred in operating the Power Plant and providing electricity and thermal
energy. The amount of service revenue recognized by the Partnership will be
directly related to the level of dispatch of the Power Plant by the utility and
to a lesser extent the level of thermal energy required by the steam host.
Power Plant Construction
The Whitewater Power Plant is being constructed by Westinghouse Electric
Corporation ("Westinghouse Electric" or the "Contractor") pursuant to a turnkey
construction contract (the "Whitewater Construction Contract"). Westinghouse
Electric had agreed to complete the construction and start-up of the Whitewater
Power Plant to specified performance levels by May 31, 1997. Westinghouse began
construction of the Whitewater Power Plant on June 30, 1995.
At September 30, 1997, engineering, procurement, and construction were
substantially complete. Effective September 18, 1997, the Whitewater Power Plant
commenced commercial operation. The Contractor had experienced a number of
equipment difficulties, which had delayed the completion of construction and
start-up. These difficulties included (i) inability to meet performance and
emission requirements when running the Power Plant on fuel oil, (ii) increased
utilization of catalyst to control emissions and (iii) a leak in the
high-pressure section of the steam turbine. These difficulties had caused a more
lengthy start-up period than originally anticipated.
In order to demonstrate that construction of the Power Plant was complete,
the Contractor was required to demonstrate, with the concurrence of Whitewater
and R.W. Beck, the independent engineer, that: (i) the Power Plant was
mechanically and electrically sound and free from known defects or deficiencies
that could affect the safety and reliability of the Power Plant, (ii) the Power
Plant met certain performance and emissions guarantees, (iii) the Power Plant
successfully completed testing designed to demonstrate the Power Plant's
reliability, and (iv) the Power Plant successfully completed testing required by
Whitewater's PPA with Wisconsin Electric Power Company ("WEPCO").
As a result of the Contractor's failure to complete construction and
start-up of the Whitewater Power Plant by May 31, 1997, the Contractor was
required, until completion of construction, to reimburse Whitewater for
extension fees paid under its PPA, and to pay certain liquidated damages. The
milestone extension period ended on September 18, 1997 with commencement of
commercial operation. Whitewater has recorded receivables from the Contractor of
$2,195,001, which is comprised of reimbursable extension fees of $35,001, and
delay liquidated damages of $2,160,000 at September 30, 1997. Subsequent to
September 30, 1997, these receivables have been satisfied. In addition,
Whitewater had received from Westinghouse cash of $75,001 and $2,378,764 of
reimbursable extension fees and delay liquidated damages, respectively, and had
retained construction contract payments (in the form of cash and an irrevocable
letter of credit) totaling $11,173,742.
Effective September 18, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Power Plant's construction,
extension of certain warranty periods and certain financial concessions.
As a result of the inspection of the Cottage Grove combustion turbine unit,
the Contractor conducted a boroscopic inspection of the Whitewater combustion
turbine unit. During the inspection, the Contractor
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identified one cracked blade and a number of cracked vanes in the combustion
turbine unit. The damaged components were replaced and the unit was placed
on-line November 24, 1997. The inspection and repair of the unit resulted in the
November scheduled outage being extended from two weeks to three weeks. As a
result of this apparent defect in the Power Plant and the significant
difficulties the Contractor encountered in achieving commercial operation, the
Partnership notified the Contractor that the Power Plant may not meet the full
requirements of the Construction Contract. The Contractor has initially rejected
this assertion. The ultimate outcome of this dispute is unknown at the present
time.
Results of Operations
Commercial operations commenced September 18, 1997. For the period
September 18, 1997 through September 30, 1997 Whitewater recognized
revenues of $1,392,505. Revenues consisted of lease revenue of $752,000 and
service revenue of $640,505.
Operating expenses were $629,551 for the period September 18, 1997 through
September 30, 1997. Operating expenses consisted of cost of services of $253,991
and greenhouse operating expenses of $375,560.
Whitewater recognized a gain on sales-type capital lease described above of
$97,041,781 on September 18, 1997. This gain represents the difference between
the estimated fair market value of the Power Plant of approximately $261.7
million and the historical cost of the Power Plant of approximately $164.7
million.
Interest expense for the period September 18, 1997 through September
30, 1997 was $507,984. Interest incurred during the construction phase of the
Whitewater Power Plant, as well as amortization of deferred financing costs,
were capitalized as part of construction in process.
Liquidity and Capital Resources
For the three months ended September 30, 1997, Whitewater capitalized
construction costs totaling approximately $6,416,361. At September 30, 1997,
Whitewater's investments held by trustee totaled $26,308,573, of which
$6,900,000 was held in a fund reserved for debt service, and $338,502 was held
in a contingency fund to pay for project cost overruns. Whitewater transferred
$7,367,547 from the contingency fund during the third quarter of 1997 to fund
estimated increases to budgeted construction costs.
Power Sales
In accordance with Whitewater's PPA, Whitewater was responsible for
reimbursing WEPCO for the actual increased costs of capacity and energy acquired
to replace the capacity and energy which were to be provided by the Whitewater
Power Plant. Whitewater's obligation to reimburse WEPCO for these "Replacement
Power" costs began on June 23, 1997 and continued through September 17, 1997.
Whitewater had an obligation for Replacement Power costs if WEPCO's actual costs
of capacity and energy exceeded the amounts, which would have been paid to
Whitewater under the PPA. For the period from June 23, 1997 through September
30, 1997, WEPCO has provided invoices for Replacement Power costs in the
aggregate amount of approximately $3,200,000. This amount has been reflected in
Whitewater's balance sheet as of September 30, 1997, and in its statements of
cash flows for the periods then ended. Whitewater's obligation for Replacement
Power costs is a project cost and will be payable from the project's
construction fund.
The Partnership and WEPCO disagree on the methodology to be used to
determine Committed Capacity of the Power Plant, as defined. The disagreement
centers around three major criteria: (i) the use of evaporative coolers, steam
injection and duct burners, (ii) the determination of the ambient condition
adjustment and (iii) the requirement to demonstrate Committed Capacity while
operating on fuel oil. Settlement discussions are ongoing; however, if a
settlement cannot be reached the use of Dispute Resolution procedures as defined
in the Power Purchase Agreement will be required. The ultimate outcome of this
disagreement is unknown at the present time.
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Greenhouse
Whitewater has a construction contract with Dominion Growers/Whitewater,
L.C. ("Dominion") to design, engineer, interconnect, construct and start-up a
greenhouse (the "Greenhouse") adjacent to the Whitewater site. Construction of
the Greenhouse was substantially completed on June 2, 1997. On June 6, 1997, an
amendment to the construction contract was executed to clarify Dominion's fee
for construction of the Greenhouse and to reflect other revisions to the
construction contract. Final completion of Greenhouse construction is
anticipated by January 31, 1998.
Whitewater had a lease agreement with Dominion (the "Dominion Lease").
Under the Dominion Lease, Whitewater had agreed to lease to Dominion the
Greenhouse and an approximate 38-acre parcel of land upon which the Greenhouse
has been constructed. The Dominion Lease was to commence upon substantial
completion of construction of the Greenhouse and expire on the later of (i) the
25th anniversary of the Whitewater Commercial Operations Date, and (ii) May 31,
2022. In connection with the Dominion Lease, Whitewater also had a hot water
supply agreement with Dominion to supply the hot water requirements of the
Greenhouse.
Due to changed circumstances occurring in 1996, Whitewater and Dominion
agreed to terminate the Dominion Lease and the related hot water supply
agreement with Dominion. To replace these Dominion arrangements, Whitewater has
entered into an operational services agreement (the "Greenhouse Operational
Services Agreement") with FloriCulture, Inc. ("FloriCulture"), an affiliate of
Whitewater, to operate the Greenhouse for the benefit of Whitewater.
Under the terms of the Greenhouse Operational Services Agreement,
FloriCulture is required to provide all the services necessary to produce,
market, and sell horticultural products and to operate and maintain the
Greenhouse facility. As compensation for its services, FloriCulture is
reimbursed on a monthly basis for its approved costs in connection with
conducting the Greenhouse business and operating the Greenhouse facility, and
will receive an annual management fee equal to 12% of Whitewater's net profit
from the operation of the Greenhouse. The term of the Greenhouse Operational
Services Agreement expires on May 31, 2022, unless terminated earlier by mutual
written agreement of Whitewater and FloriCulture.
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(A) EXHIBITS
See the Exhibits Index at EI-1.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
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 of the
undersigned thereunto duly authorized.
LS POWER FUNDING CORPORATION
By: /s/ James R. Pagano
Name: James R. Pagano
Title: Managing Director, Treasurer and Director
Date: April 15, 1998
LSP-COTTAGE GROVE, L.P.
By: LSP-Cottage Grove, Inc.
Its: General Partner
By: /s/ James R. Pagano
Name: James R. Pagano
Title: Managing Director, Treasurer and Director
Date: April 15, 1998
LSP-WHITEWATER LIMITED PARTNERSHIP
By: LSP-Whitewater I, Inc.
Its: General Partner
By: /s/ James R. Pagano
Name: James R. Pagano
Title: Managing Director, Treasurer and Director
Date: April 15, 1998
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
FINANCIAL STATEMENT INDEX
Page
----
LS POWER FUNDING CORPORATION
Balance sheets as of September 30, 1997 and December 31, 1996 ....................... F-2
Statements of income for the three months ended September 30, 1997 and 1996,
and for the nine months ended September 30, 1997 and 1996 ......................... F-3
Statements of cash flows for the nine months ended September 30, 1997 and 1996 ...... F-4
Notes to financial statements ....................................................... F-5
LSP-COTTAGE GROVE, L.P. ..................................................................
Balance sheets as of September 30, 1997 and December 31, 1996 ....................... F-8
Statements of cash flows for the nine months ended June 30, 1997 and 1996,
and the period from Inception (December 14, 1993) to September 30, 1997 ........... F-9
Notes to financial statements ....................................................... F-10
LSP-WHITEWATER LIMITED PARTNERSHIP
Balance sheets as of September 30, 1997 and December 31, 1996 ....................... F-12
Statements of income for the three and nine months ended September 30,
1997 and 1996 ..................................................................... F-13
Statements of cash flows for the three and nine months ended September 30,
1997 and 1996 ..................................................................... F-14
Notes to financial statements ....................................................... F-15
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LS POWER FUNDING CORPORATION
BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 1,000 $ 1,000
Interest receivable on First Mortgage Bonds 6,471,549 --
------------ ------------
Total current assets 6,472,549 1,000
INVESTMENTS IN FIRST MORTGAGE BONDS 332,000,000 332,000,000
------------ ------------
Total Assets $338,472,549 $332,001,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITY - Interest payable on Senior
Secured Bonds $ 6,471,549 $ --
SENIOR SECURED BONDS PAYABLE 332,000,000 332,000,000
------------ ------------
Total liabilities 338,471,549 332,000,000
------------ ------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 1,000 shares authorized,
100 share issued and outstanding 1 1
Additional paid-in-capital 999 999
------------ ------------
Total Stockholders' Equity 1,000 1,000
Total Liabilities and Stockholders' Equity $338,472,549 $332,001,000
============ ============
See accompanying notes to financial statements.
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LS POWER FUNDING CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
Interest income $6,471,549 $6,471,549 $19,414,647 $19,414,647
Interest expense 6,471,549 6,471,549 19,414,647 19,414,647
---------- ---------- ----------- -----------
Net income $ -- $ -- $ -- $ --
========== ========== =========== ===========
See accompanying notes to financial statements.
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LS POWER FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------ ------
Cash Flows From Operating Activities $ -- $ --
------ ------
Cash Flows From Investing Activities -- --
------ ------
Cash Flows From Financing Activities -- --
------ ------
Increase in cash -- --
Cash, beginning of period 1,000 1,000
------ ------
Cash, end of period $1,000 $1,000
====== ======
See accompanying notes to financial statements.
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LS POWER FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1997 and the statements of income
and cash flows for the periods ended September 30, 1997 and 1996 have been
prepared by LS Power Funding Corporation ("Funding"), without audit. In the
opinion of management, these financial statements include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly its
financial position as of September 30, 1997, and the results of its operations
and its cash flows for the periods ended September 30, 1997 and 1996.
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the 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 Funding believes that the disclosures made are adequate to make
the information presented not misleading, these 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 year ended December 31, 1996.
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 (the "Cottage Grove Project") and the other located in Whitewater,
Wisconsin (the "Whitewater Project"). LSP-Cottage Grove, L.P. ("Cottage Grove")
and LSP-Whitewater Limited Partnership ("Whitewater") are Delaware limited
partnerships established to develop, finance, construct, own, operate and manage
the facilities at Cottage Grove and Whitewater, respectively. Cottage Grove and
Whitewater each own 50% of the outstanding stock of Funding. Funding's sole
business activities are limited to maintaining its organization and activities
necessary pursuant to the offering of debt securities and its acquisition of
debt securities issued by Cottage Grove and Whitewater.
3. CONSTRUCTION
COTTAGE GROVE
The Partnership has a $109 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Cottage Grove Project
to specified performance levels by May 31, 1997 and is required under the
contract to reimburse the Partnership for extension fees paid under its power
sales contract with NSP, and to pay certain liquidated damages in the event of a
delay. The Partnership has recorded receivables from Westinghouse Electric of
$3,011,667 at September 30, 1997, which is comprised of reimbursable extension
fees of $266,667 and delay liquidated damages of $2,745,000. Subsequent to
September 30, 1997, these receivables have been satisfied. In addition, Cottage
Grove had received from Westinghouse cash of $1,066,668 and $2,327,729 of
reimbursable extension fees and delay liquidated damages, respectively. The
construction and start-up of the Cottage Grove Project was substantially
complete and commercial operation commenced on October 1, 1997.
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Effective September 30, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Power Plant's construction,
extension of certain warranty periods and certain financial concessions.
During the October 27, 1997 scheduled outage of the Power Plant, the
Contractor identified one cracked blade and a number of cracked vanes in the
combustion turbine unit. The damaged components were replaced and the unit was
placed on-line as scheduled on November 10, 1997. As a result of this apparent
defect in the Power Plant and the significant difficulties the Contractor
encountered in achieving commercial operation, the Partnership notified the
Contractor that the Power Plant may not meet the full requirements of the
Construction Contract. The Contractor has initially rejected this assertion. The
ultimate outcome of this dispute is unknown at the present time.
WHITEWATER
The Partnership has a $118 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Whitewater Project to
specified performance levels by May 31, 1997 and is required under the contract
to reimburse the Partnership for extension fees paid under its power sales
contract with WEPCO, and to pay certain liquidated damages in the event of a
delay. The Partnership has recorded receivables from Westinghouse Electric of
$2,195,001 at September 30, 1997, which is comprised of reimbursable extension
fees of $35,001 and delay liquidated damages of $2,160,000. Subsequent to
September 30, 1997, these receivables have been satisfied. In addition,
Whitewater had received cash of $75,001 and $2,378,764 of reimbursable extension
fees and delay liquidated damages, respectively. The construction and start-up
of the Whitewater Project was substantially completed and commercial operation
commenced on September 18, 1997.
Effective September 18, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation.
In addition, the Contractor committed to certain future modifications in
the Power Plant's construction, extension of certain warranty periods and
certain financial concessions.
15
As a result of the inspection of the Cottage Grove combustion turbine unit,
the Contractor conducted a boroscopic inspection of the Whitewater combustion
turbine unit. During the inspection, the Contractor identified one cracked blade
and a number of cracked vanes in the combustion turbine unit. The damaged
components were replaced and the unit was placed on-line November 24, 1997. The
inspection and repair of the unit resulted in the November scheduled outage
being extended from two weeks to three weeks. As a result of this apparent
defect in the Power Plant and the significant difficulties the Contractor
encountered in achieving commercial operation, the Partnership notified the
Contractor that the Power Plant may not meet the full requirements of the
Construction Contract. The Contractor has initially rejected this assertion. The
ultimate outcome of this dispute is unknown at the present time.
4. POWER PURCHASE AGREEMENT
COTTAGE GROVE
Cottage Grove has a 30-year power purchase agreement with NSP. The power
purchase agreement was subject to termination if specified construction, energy
delivery and other milestone deadlines were not met. The construction milestone
was met with commencement of commercial operation on October 1, 1997.
WHITEWATER
Whitewater has a 25-year power purchase agreement with WEPCO. The power
purchase agreement was subject to termination if specified construction, energy
delivery and other milestone deadlines were not met. The construction milestone
was met with commencement of commercial operation on September 18, 1997.
The Partnership and WEPCO disagree on the methodology to be used to
determine Committed Capacity of the Power Plant, as defined. The disagreement
centers around three major criteria: (i) the use of evaporative coolers, steam
injection and duct burners, (ii) the determination of the ambient condition
adjustment and (iii) the requirement to demonstrate Committed Capacity while
operating on fuel oil. Settlement discussions are ongoing; however, if a
settlement cannot be reached the use of Dispute Resolution procedures as defined
in the Power Purchase Agreement will be required. The ultimate outcome of this
disagreement is unknown at the present time.
16
LSP-COTTAGE GROVE, L.P.
(A DELAWARE LIMITED PARTNERSHIP IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSET - Cash $ 371,201 $ 103,224
INVESTMENTS HELD BY TRUSTEE, stated at cost
which approximates market value 31,723,789 28,108,244
CONSTRUCTION IN PROCESS 147,575,377 125,596,814
DEBT ISSUANCE AND FINANCE COSTS 6,582,559 6,773,753
OTHER ASSETS 500 500
------------ ------------
Total Assets $186,253,426 $160,582,535
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 10,064,070 $ 5,581,535
Interest payable on First Mortgage Bonds 3,021,356 --
------------ ------------
Total current liabilities 13,085,426 5,581,535
FIRST MORTGAGE BONDS PAYABLE 155,000,000 155,000,000
------------ ------------
Total Liabilities 168,085,426 160,581,535
CONTINGENCIES
PARTNERS' CAPITAL 18,168,000 1,000
------------ ------------
Total Liabilities and Partners' Capital $186,253,426 $160,582,535
============ ============
See accompanying notes to financial statements.
17
LSP-COTTAGE GROVE, L.P.
(A DELAWARE LIMITED PARTNERSHIP IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
December 14,
1993 (Inception)
Nine Months Ended September 30, To September 30,
1997 1996 1997
------------ ------------ ----------------
Cash Flows From Investing Activities:
Acquisition of land and improvements $ -- $ -- $ (97,590)
Payments on construction in process (25,338,551) (62,267,572) (152,784,765)
Investments held by trustee (18,167,000) -- (173,167,000)
Investments drawn for construction 25,606,528 62,402,584 160,375,195
Investment in LS Power Funding
Corporation -- -- (500)
------------ ------------ -------------
Cash provided by (used in) investing
activities (17,899,023) 135,012 (165,674,660)
------------ ------------ -------------
Cash Flows From Financing Activities:
Debt issuance and financing costs -- (153,348) (7,122,139)
Proceeds from First Mortgage Bonds -- -- 155,000,000
Capital contributions 18,167,000 -- 18,168,000
------------ ------------ -------------
Cash provided by (used in) financing
activities 18,167,000 (153,348) 166,045,861
------------ ------------ -------------
Increase (decrease) in cash 267,977 (18,336) 371,201
Cash, beginning of period 103,224 55,030 --
------------ ------------ -------------
Cash, end of period $ 371,201 $ 36,694 $ 371,201
============ ============ =============
RECONCILIATION OF CHANGES IN
CONSTRUCTION IN PROCESS
Increase in total construction in process $(21,978,563) $(63,366,687) $(147,477,787)
Amortization of debt issuance and
financing costs 191,194 178,766 539,580
Interest income on investments held
by trustee (1,181,496) (3,556,984) (9,058,317)
Decrease in other current assets -- 12,926 --
(Increase) in pre-operation accounts
receivable (4,850,820) -- (4,850,820)
Pre-operation cash receipts (5,022,757) -- (5,022,757)
Increase in accounts payable 4,482,535 1,443,051 10,064,070
Increase in interest payable 3,021,356 3,021,356 3,021,356
------------ ------------ -------------
Payments on construction in process $(25,338,551) $(62,267,572) $(152,784,675)
============ ============ =============
See accompanying notes to financial statements.
18
LSP-COTTAGE GROVE, L.P.
(A DELAWARE LIMITED PARTNERSHIP IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1997, and the statements of cash
flows for the periods ended September 30, 1997 and 1996 have been prepared by
LSP-Cottage Grove, L.P. (the "Partnership"), without audit. In the opinion of
management, these financial statements include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly its financial position
as of September 30, 1997, and its cash flows for the periods ended September 30,
1997 and 1996.
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the 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 the Partnership believes that the disclosures made are adequate
to make the information presented not misleading, these 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 year
ended December 31, 1996.
2. ORGANIZATION
The Partnership is a Delaware limited partnership that was formed on
December 14, 1993 to develop, finance, construct, own and operate a gas-fired
cogeneration facility with a design capacity of approximately 245 megawatts to
be located in Cottage Grove, Minnesota (the "Cottage Grove Project"). 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 in connection with
financing construction of the Cottage Grove Project and a similar gas-fired
cogeneration facility to be located in Whitewater, Wisconsin (the "Whitewater
Project"). On June 30, 1995, a portion of the proceeds from the offering and
sale of the debt securities issued by Funding was used to purchase $155 million
of debt securities issued simultaneously by the Partnership.
3. INVESTMENTS HELD BY TRUSTEE
Investments held by trustee consists of:
September 30, December 31,
1997 1996
----------- -----------
Overnight repurchase obligations $26,872,969 $28,108,244
Accounts receivable - Westinghouse 3,011,667 --
Accounts receivable - Northern States Power Company 1,580,442 --
Accounts receivable - Other 258,711 --
----------- -----------
$31,723,789 $28,108,244
=========== ===========
Overnight repurchase obligations are secured by U.S. Treasury notes.
Accounts receivable - Westinghouse represents amounts due from Westinghouse
Electric Corporation ("Westinghouse
19
Electric"), the Partnership's construction contractor, for reimbursement of
extension fees paid to Northern States Power Company ("NSP") under the
Partnership's power sales contract with NSP, and for delay liquidated damages
due as a result of Westinghouse Electric's failure to complete the construction
and start-up of the Cottage Grove Project by May 31, 1997. Accounts receivable -
Northern States Power Company represents amounts due for test energy delivered
to NSP during start-up of the Cottage Grove Project. Revenues earned during
construction and start-up, including amounts related to the aforementioned
receivables, were capitalized as a reduction of construction in progress.
The use of funds held by the trustee is restricted to payment of project
costs, including payment of interest on the First Mortgage Bonds. Investments
held by trustee are carried at cost, which approximated market at September 30,
1997 and December 31, 1996.
4. CONSTRUCTION
The Partnership has a $109 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Cottage Grove Project
to specified performance levels by May 31, 1997 and is required under the
contract to reimburse the Partnership for extension fees paid under its power
sales contract with NSP, and to pay certain liquidated damages in the event of a
delay. The Partnership has recorded receivables from Westinghouse Electric of
$3,011,667 at September 30, 1997, which is comprised of reimbursable extension
fees of $266,667 and delay liquidated damages of $2,745,000. Subsequent to
September 30, 1997, these receivables have been satisfied. In addition, Cottage
Grove had received cash of $1,066,668 and $2,327,729 of reimbursable extension
fees and delay liquidated damages, respectively. The construction and start-up
of the Cottage Grove Project was substantially completed and commercial
operation commenced on October 1, 1997.
Effective September 30, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Power Plant's construction,
extension of certain warranty periods and certain financial concessions.
During the October 27, 1997 scheduled outage of the Power Plant, the
Contractor identified one cracked blade and a number of cracked vanes in the
combustion turbine unit. The damaged components were replaced and the unit was
placed on-line as scheduled on November 10, 1997. As a result of this apparent
defect in the Power Plant and the significant difficulties the Contractor
encountered in achieving commercial operation, the Partnership notified the
Contractor that the Power Plant may not meet the full requirements of the
Construction Contract. The Contractor has initially rejected this assertion. The
ultimate outcome of this dispute is unknown at the present time.
5. POWER PURCHASE AGREEMENT
The Partnership has a 30-year Power Purchase Agreement with NSP. The Power
Purchase Agreement was subject to termination if specified construction, energy
delivery and other milestone deadlines were not met. The construction milestone
was met with commencement of commercial operation on October 1, 1997.
20
LSP-WHITEWATER LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 296,951 $ 101,114
Accounts receivable - trade 1,361,505 --
Accounts receivable - other 2,195,001 --
Fuel inventory and other current assets 1,196,143 575
------------ ------------
Total current assets 5,049,600 101,689
INVESTMENTS HELD BY TRUSTEE, stated at
cost which approximates market value 26,745,939 34,414,528
NET INVESTMENT IN LEASE 261,771,000 --
CONSTRUCTION IN PROCESS -- 149,232,431
GREENHOUSE FACILITY, NET 8,028,486 --
DEBT ISSUANCE AND FINANCE COSTS, NET 6,673,931 6,868,561
OTHER ASSETS 500 500
------------ ------------
Total Assets $308,269,456 $190,617,709
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES :
Accounts payable $ 9,958,565 $ 13,616,709
Interest payable on First Mortgage Bonds 3,450,193 --
------------ ------------
Total current liabilities 13,408,758 13,616,709
FIRST MORTGAGE BONDS PAYABLE 177,000,000 177,000,000
------------ ------------
Total Liabilities 190,408,758 190,616,709
CONTINGENCIES
PARTNERS' CAPITAL 117,860,698 1,000
------------ ------------
Total Liabilities and Partners' Capital $308,269,456 $190,617,709
============ ============
See accompanying notes to financial statements.
21
LSP-WHITEWATER LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
(UNAUDITED)
Three and Nine Months Ended
-------------------------------
September 30, September 30,
1997 1996
------------ ------------
OPERATING REVENUES:
Lease revenue $ 752,000 $ --
Service revenue 640,505 --
------------ ----------
1,392,505 --
OPERATING EXPENSES:
Cost of services 253,991 --
Greenhouse operating expenses 375,560 --
------------ ----------
629,551 --
OPERATING INCOME 762,954 --
------------ ----------
NON-OPERATING INCOME (EXPENSE):
Gain on sales-type capital lease 97,041,781 --
Interest expense (507,984) --
Other income, net 6,947 --
------------ ----------
NET INCOME $ 97,303,698 $ --
============ ==========
See accompanying notes to financial statements.
22
LSP-WHITEWATER LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- ------------
Cash Flows From Operating Activities:
Net income $ 97,303,698 $ -- $ 97,303,698 $ --
Adjustments to reconcile net
income to net cash used in
operating activities:
Gain on sales-type capital lease (97,041,781) -- (97,041,781) --
Amortization of unearned lease income (752,000) -- (752,000) --
Amortization of debt issuance and
financing costs 9,621 -- 9,621
Minimum lease payments received 721,000 -- 721,000 --
Depreciation 13,894 -- 13,894 --
Increase in accounts receivable - trade (1,361,505) -- (1,361,505) --
Increase in fuel inventory and
other current assets (1,196,143) -- (1,196,143) --
Increase in accounts payable 894,741 -- 894,741 --
------------- ------------ ------------- ------------
Net cash used in operating activities (1,408,475) -- (1,408,475) --
------------- ------------ ------------- ------------
Cash Flows From Investing Activities:
Acquisition of land and improvements -- -- -- (2,146,986)
Deposits for land purchases -- -- -- 2,001,221
Proceeds from land sale 939,399 -- 939,399 --
Payments on construction in process (8,655,272) (24,298,972) (35,127,799) (67,522,392)
Investments held by trustee -- -- (20,556,000) --
Investments drawn for construction 8,973,663 24,319,151 35,792,712 67,836,907
------------- ------------ ------------- ------------
Net cash provided by (used in) investing
activities 1,257,790 20,179 (18,951,688) 168,750
------------- ------------ ------------- ------------
Cash Flows From Financing Activities:
Debt issuance and deferred
financing costs -- -- -- (153,348)
Capital contributions -- -- 20,556,000 --
------------- ------------ ------------- ------------
Net cash provided by (used in)
financing activities -- -- 20,566,000 (153,348)
------------- ------------ ------------- ------------
Net increase (decrease) in cash (150,685) 20,179 195,837 15,402
Cash, beginning of period 447,636 66,664 101,114 71,441
------------- ------------ ------------- ------------
Cash, end of period $ 296,951 $ 86,843 $ 296,951 $ 86,843
============= ============ ============= ============
RECONCILIATION OF CHANGES IN
CONSTRUCTION IN PROCESS
Decrease (increase) in total
construction in process $ 163,725,356 $(26,952,700) $ 145,694,150 $(68,707,425)
Construction in process sold in
lease transaction (170,141,717) -- (170,141,717) --
Amortization of debt issuance
and financing costs 56,987 61,514 185,009 182,062
Interest income on investments
held by trustee (406,258) (1,038,366) (1,272,158) (4,062,078)
Decrease in other current assets -- -- 575 --
Increase in pre-operation accounts
receivable (716,920) -- (2,632,367) --
Pre-operation cash receipts (5,858,599) -- (5,858,599) --
Increase (decrease) in accounts
payable 1,235,686 180,387 (4,552,885) 1,614,856
Increase in interest payable 3,450,193 3,450,193 3,450,193 3,450,193
------------- ------------ ------------- ------------
Payments on construction in process $ (8,655,272) $(24,298,972) $ (35,127,799) $(67,522,392)
============= ============ ============= ============
See accompanying notes to financial statements.
23
LSP-WHITEWATER LIMITED PARTNERSHIP
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1997, and the statements of
income and cash flows for the periods ended September 30, 1997 and 1996 have
been prepared by LSP-Whitewater Limited Partnership (the "Partnership"), without
audit. In the opinion of management, these financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly its financial position as of September 30, 1997, the results of its
operations and its cash flows for the periods ended September 30, 1997 and 1996.
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the 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 the Partnership believes that the disclosures made are adequate
to make the information presented not misleading, these 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 year
ended December 31, 1996.
2. ORGANIZATION
The Partnership is a Delaware limited partnership that was formed on
December 14, 1993 to develop, finance, construct, own and operate a gas-fired
cogeneration facility with a design capacity of approximately 245 megawatts to
be located in Whitewater, Wisconsin (the "Whitewater Project"). 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 in connection with financing
construction of the Whitewater Project and a similar gas-fired cogeneration
facility to be located in Cottage Grove, Minnesota (the "Cottage Grove
Project"). On June 30, 1995, a portion of the proceeds from the offering and
sale of the debt securities issued by Funding was used to purchase $177 million
of debt securities issued simultaneously by the Partnership.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Partnership had been in the development stage since its inception
through September 17, 1997. Construction and start-up of the Whitewater Project
was substantially completed and commercial operation commenced September 18,
1997.
COMMENCEMENT OF POWER PURCHASE AGREEMENT
The power purchase agreement described in Note 8 has characteristics
similar to a lease in that the agreement confers to the purchasing utility the
right to use specific property, plant and equipment. At the commencement of
commercial operations on September 18, 1997, 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 7).
24
CONSTRUCTION IN PROCESS
Prior to commercial operation, all costs incurred to develop and construct
the Power Plant, including net costs associated with performance testing prior
to the commercial operation date, as well as interest costs (including
amortization of debt issuance and financing costs), net of interest income on
excess proceeds, were capitalized and classified as construction in process. In
recording the Partnership's gain on sales-type capital lease, all construction
in process costs related to the Power Plant were included in the historical cost
basis of the Power Plant. All interest costs subsequent to the commencement of
commercial operations have been charged to expense. As of September 30, 1997,
capitalized interest including amortization of debt issuance and financing costs
was $20,873,600 ($20,333,713 before amortization). Cash paid for interest was
$27,601,541 since inception and $0 for the three months ended September 30,
1997.
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 revenue represents reimbursement to the Partnership of costs
incurred to operate the Power Plant and to provide variable electric energy to
the purchasing utility and thermal energy to the steam purchaser.
COST OF SERVICES
Cost of services represent expenses related to operating the Power Plant
and providing variable electric energy to the purchasing utility as well as
thermal energy to the steam purchaser.
GREENHOUSE OPERATING EXPENSES
Greenhouse operating expenses include all operating costs specifically
related to greenhouse activities including depreciation on the Greenhouse
Facility.
25
4. ACCOUNTS RECEIVABLE - OTHER
Accounts receivable - other represents amounts due from Westinghouse
Electric Corporation ("Westinghouse Electric"), the Partnership's construction
contractor, for delay liquidated damages and extension fees due as a result of
Westinghouse Electric's failure to complete the construction and start-up of the
Power Plant by May 31, 1997. Such liquidated damages and extension fees were
capitalized as a reduction of construction in process.
5. INVESTMENTS HELD BY TRUSTEE
Investments held by trustee consist of:
September 30, December 31,
1997 1996
------------- ------------
Overnight repurchase obligations $26,308,573 $34,414,528
Accounts receivable - Wisconsin
Electric Power Company 380,518 --
Accounts receivable - Other 56,848 --
----------- -----------
$26,745,939 $34,414,528
=========== ===========
Overnight repurchase obligations are secured by U.S. Treasury notes.
Accounts receivable - Wisconsin Electric Power Company represents amounts due
for test energy delivered to Wisconsin Electric Power Company ("WEPCO") during
start-up of the Whitewater Project. Revenues earned during construction and
start-up, including amounts related to the aforementioned receivables, were
capitalized as a reduction of construction in progress.
The use of funds held by the trustee is restricted to payment of project
costs, including payment of interest on the First Mortgage Bonds. Investments
held by trustee are carried at cost, which approximated market at September 30,
1997 and December 31, 1996.
6. CONSTRUCTION
The Partnership had a $118 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Whitewater Project to
specified performance levels by May 31, 1997 and is required under the contract
to reimburse the Partnership for extension fees paid under its power sales
contract with WEPCO, and to pay certain liquidated damages in the event of a
delay. The Partnership has recorded receivables from Westinghouse Electric of
$2,195,001 at September 30, 1997, which are comprised of
26
reimbursable extension fees of $35,001 and delay liquidated damages of
$2,160,000. Subsequent to September 30, 1997, these have been satisfied. In
addition, Whitewater had received cash of $75,001 and $2,378,764 of reimbursable
extension fees and delay liquidated damages, respectively. The construction and
start-up of the Whitewater Project was substantially completed and commercial
operation commenced on September 18, 1997.
Effective September 30, 1997, the Partnership and the Contractor, with the
concurrence of R.W. Beck, the independent engineer, agreed to a Construction
Contract change order. Under the change order, certain nonmaterial modifications
were made to the Contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
the Partnership to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Power Plant's construction,
extension of certain warranty periods and certain financial concessions.
As a result of the inspection of the Cottage Grove combustion turbine unit,
the Contractor conducted a boroscopic inspection of the Whitewater combustion
turbine unit. During the inspection, the Contractor identified one cracked blade
and a number of cracked vanes in the combustion turbine unit. The damaged
components were replaced and the unit was placed on-line November 24, 1997. The
inspection and repair of the unit resulted in the November scheduled outage
being extended from two weeks to three weeks. As a result of this apparent
defect in the Power Plant and the significant difficulties the Contractor
encountered in achieving commercial operation, the Partnership notified the
Contractor that the Power Plant may not meet the full requirements of the
Construction Contract. The Contractor has initially rejected this assertion. The
ultimate outcome of this dispute is unknown at the present time.
7. SALES-TYPE CAPITAL LEASE
Upon the commercial operations date of the Power Plant, 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 Power Plant. The interest rate implicit
in the lease is 9.79%. The estimated residual value of the Power Plant at the
end of the lease term is $0. The components of the net investment in lease at
September 30, 1997 are as follows:
Gross investment in lease $ 621,015,000
Unearned income on lease (359,244,000)
-------------
Net investment in lease $ 261,771,000
=============
Gross investment in lease represents total capacity payments receivable
over the life of the power purchase agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
27
8. POWER PURCHASE AGREEMENT
The Partnership has a 25-year Power Purchase Agreement with WEPCO. The
Power Purchase Agreement was subject to termination if specified construction,
energy delivery and other milestone deadlines were not met. The construction
milestone was met with commencement of commercial operation on September 18,
1997.
In accordance with the Power Purchase Agreement with WEPCO, the Partnership
is responsible for reimbursing WEPCO for the actual increased costs of capacity
and energy acquired to replace the capacity and energy, which were to be
provided by the Whitewater Project. The Partnership's obligation to reimburse
WEPCO for these "Replacement Power" costs began on June 23, 1997 and continued
until September 17, 1997. The Partnership has an obligation for Replacement
Power costs if WEPCO's actual costs of capacity and energy exceed the amounts,
which would have been paid to the Partnership under the PPA. For the period from
June 23, 1997 through September 17, 1997, WEPCO has provided invoices for
Replacement Power costs in the aggregate amount of approximately $3,200,000.
This amount has been reflected in the Partnership's balance sheet as of
September 30, 1997, and in its statements of cash flows for the periods then
ended. Whitewater's obligation for Replacement Power costs is a project cost and
will be payable from the project's construction fund.
The Partnership and WEPCO disagree on the methodology to be used to
determine Committed Capacity of the Power Plant, as defined. The disagreement
centers around three major criteria: (i) the use of evaporative coolers, steam
injection and duct burners, (ii) the determination of the ambient condition
adjustment and (iii) the requirement to demonstrate Committed Capacity while
operating on fuel oil. Settlement discussions are ongoing; however, if a
settlement cannot be reached the use of Dispute Resolution procedures as defined
in the Power Purchase Agreement will be required. The ultimate outcome of this
disagreement is unknown at the present time.