1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 33-95928
LS POWER FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 81-0502366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 81-0493289
DELAWARE 81-0493287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No[ ]
2
LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
INDEX
TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
PART I
Page
Item 1. Condensed Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II
Item 6. Exhibits and Reports on Form 8-K 7
Signatures 7
Financial Statement Index F-1
2
3
PART I/ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed financial statements contained herein have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While the management of LS Power Funding Corporation ("Funding"),
LSP-Cottage Grove, L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership
("Whitewater" and, together with Cottage Grove, the "Partnerships") believe that
the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the audited financial statements included in the Annual Report
on Form 10-K for the year ended December 31, 1997, filed by Funding, Cottage
Grove and Whitewater.
PART I/ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to discussing and analyzing Funding and the Partnerships'
recent historical financial results and condition, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes statements concerning certain trends and other forward-looking
information affecting or relating to Funding and the Partnerships which are
intended to qualify for the protections afforded "Forward-Looking Statements"
under the Private Securities Litigation Reform Act of 1995, Public Law 104-67.
The forward-looking statements made herein are inherently subject to risks and
uncertainties which could cause Funding's and the Partnerships' actual results
to differ materially from the forward-looking statements.
GENERAL
Cottage Grove is a single purpose Delaware limited partnership
established on December 14, 1993 to develop, finance, construct and own a
gas-fired cogeneration facility located in Cottage Grove, Minnesota (the
"Cottage Grove Facility"). Whitewater is a single purpose Delaware limited
partnership established on December 14, 1993 to develop, finance, construct and
own a gas-fired cogeneration facility located in Whitewater, Wisconsin (the
"Whitewater Facility", and collectively with the Cottage Grove Facility, the
"Facilities"). The Partnerships sell electric capacity and energy generated by
their Facilities to two utilities under separate long-term power purchase
agreements (individually, the "Power Purchase Agreement" and collectively, the
"Power Purchase Agreements"). Whitewater sells up to 236.5 megawatts of electric
capacity and associated energy generated by the Whitewater Facility to Wisconsin
Electric Power Company ("WEPCO") pursuant to a 25-year Power Purchase Agreement.
Whitewater may also sell to third parties up to 12 megawatts of electric
capacity and any energy not dispatched by WEPCO. All of the electric capacity
and energy generated by the Cottage Grove Facility is sold to Northern States
Power Company ("NSP") pursuant to a 30-year Power Purchase Agreement. The
Partnerships also have long-term steam supply agreements with steam hosts to
supply thermal energy produced by the Facilities.
The Whitewater Facility commenced commercial operations on September
18, 1997, and the Cottage Grove Facility commenced commercial operations on
October 1, 1997. The Whitewater and Cottage Grove Power Purchase Agreements meet
the criteria of a "sales-type" capital lease as described in Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Cottage
Grove and Whitewater each recognized a gain on sales-type capital lease for the
difference between the estimated fair market value and the historical cost of
the Facilities as of the commencement of each respective Power Purchase
Agreement's terms (commencement of commercial operations). The Partnerships each
recorded a net investment in lease which reflects the present value of future
minimum lease payments. Future minimum lease payments represent the amount of
capacity payments due from the utilities under the Power Purchase Agreements in
excess of fixed operating costs (i.e., executory costs). The difference between
the undiscounted future minimum lease payments due from the utilities and the
net investment in lease represents unearned income. This unearned income will be
recognized as lease revenue over the respective terms of the Power Purchase
Agreements using the effective interest rate method. The Partnerships will also
recognize service revenue related to the reimbursement of costs incurred in
operating the Facilities and providing electricity and thermal energy. The
amount of service revenue recognized by each Partnership will be directly
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related to the level of dispatch of the Facilities by the utility and to a
lesser extent the level of thermal energy required by the steam host.
RESULTS OF OPERATIONS
Whitewater
The Whitewater Power Purchase Agreement term commenced September 18,
1997. Prior to September 18, 1997, Whitewater recognized no revenues or
expenses.
Revenues for the three months ended March 31, 1998 were approximately
$12.1 million. Revenues consisted primarily of lease revenue of approximately
$5.8 million and service revenue of approximately $5.8 million.
Operating expenses were approximately $7.0 million for the three months
ended March 31, 1998. Operating expenses consisted primarily of cost of services
related to operating the Whitewater Facility of approximately $6.8 million.
Operating expenses also included approximately $0.2 million of expense related
to operating the greenhouse.
Interest expense of approximately $3.5 million for the three months
ended March 31, 1998 consisted primarily of interest expense on the First
Mortgage Bonds. Interest incurred during the construction phase of the
Whitewater Facility and amortization of deferred financing costs were
capitalized as part of construction in process.
Interest income of approximately $0.3 million for the three months
ended March 31, 1998 consisted primarily of interest earned on investments held
by the trustee under the trust indenture for the First Mortgage Bonds. Interest
income earned during the construction phase of the Whitewater Facility was
netted against construction in process. The trust indenture restricts the
investment of available funds to high quality, short-term financial investments.
Cottage Grove
The Cottage Grove Power Purchase Agreement term commenced October 1,
1997. Prior to October 1, 1997, Cottage Grove recognized no revenues or
expenses.
Revenues for the three months ended March 31, 1998 were approximately
$10.1 million. Revenues consisted primarily of lease revenue of approximately
$5.3 million and service revenue of approximately $4.1 million.
Operating expenses were approximately $5.2 million for the three months
ended March 31, 1998. Operating expenses consisted of cost of services related
to operating the Cottage Grove Facility.
Interest expense of approximately $3.1 million for the three months
ended March 31, 1998 consisted primarily of interest expense on the First
Mortgage Bonds. Interest incurred during the construction phase of the Cottage
Grove Facility and amortization of deferred financing costs were capitalized as
part of construction in process.
Interest income of approximately $0.3 million for the three months
ended March 31, 1998 consisted primarily of interest earned on investments held
by the trustee under the trust indenture for the First Mortgage Bonds. Interest
income earned during the construction phase of the Cottage Grove Facility was
netted against construction in process. The trust indenture restricts the
investment of available funds to high quality, short-term financial investments.
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FACILITY CONSTRUCTION
Whitewater
Effective September 18, 1997, Whitewater and Westinghouse Electric
Corporation (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 Whitewater
construction contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
Whitewater to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Whitewater Facility's
construction, extension of certain warranty periods and certain financial
concessions. As of March 31, 1998, Whitewater had retained construction contract
payments (in the form of cash and an irrevocable letter of credit) totaling
approximately $11,174,000.
Cottage Grove
Effective September 30, 1997, Cottage Grove 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 Cottage Grove construction contract and certain guarantees were
deferred until final completion, which allowed the Contractor to achieve
substantial completion and Cottage Grove to commence commercial operation. In
addition, the Contractor committed to certain future modifications in the
Cottage Grove Facility's construction, extension of certain warranty periods and
certain financial concessions. As of March 31, 1998, Cottage Grove had retained
construction contract payments (in the form of cash and an irrevocable letter of
credit) totaling approximately $10,886,000.
LIQUIDITY AND CAPITAL RESOURCES
The $332,000,000 of proceeds received by Funding from the sale of the
Senior Secured Bonds were used by Funding to acquire (i) $155,000,000 of Cottage
Grove First Mortgage Bonds and (ii) $177,000,000 of Whitewater First Mortgage
Bonds. In addition to the proceeds of the First Mortgage Bonds, the Partnerships
each received equity contributions from TPC Cottage Grove and TPC Whitewater in
1997, in the respective amounts of $18,167,000 for Cottage Grove and $20,556,000
for Whitewater (the "Equity Contribution Amounts"). The net proceeds from the
sale of the Partnerships' First Mortgage Bonds and the Equity Contribution
Amounts together with other sources of funds available to the Partnerships were
used to: (i) finance the development, design, engineering, construction,
testing, inspection and start-up of the Facilities, (ii) pay interest on the
Partnerships' First Mortgage Bonds during construction and (iii) maintain a debt
service reserve fund as required by certain financing documents (currently equal
to $6,043,000 and $6,900,000 for Cottage Grove and Whitewater, respectively).
As required by the financing documents, both Cottage Grove and
Whitewater have set aside certain funds to pay for project cost overruns,
including change orders to the construction contracts and any other reasonable
contingencies, during construction and through final completion of the
Facilities (the "Contingency Fund"). At March 31, 1998, the balances of the
Contingency Fund accounts were $1,426,000 for Cottage Grove and $339,000 for
Whitewater.
In addition to funds received through the acquisition of the First
Mortgage Bonds by Funding and through the Equity Contribution Amount, the
Partnerships may each receive on its behalf certain letters of credit to be
issued pursuant to a letter of credit facility. Each letter of credit facility
provides for letters of credit in a face amount not to exceed $5,000,000 for
Whitewater and $5,500,000 for Cottage Grove, which may be drawn on by the
respective Partnership from time to time. Such letters of credit will satisfy
certain requirements of the Partnerships under various project agreements.
Cottage Grove has issued a $500,000 letter of credit under the letter of credit
facility to secure certain obligations of Cottage Grove under the Cottage Grove
Power Purchase Agreement.
In order to provide for the Partnerships' working capital needs, the
Partnerships have each entered into a working capital facility. Each working
capital facility will provide for working capital loans in an aggregate
principal amount not to exceed $3,000,000. At March 31, 1998, no loans were
outstanding under the working capital facilities.
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6
The Partnerships expect that payments from the utilities under the
Power Purchase Agreements will provide the substantial majority of their
revenues. Under and subject to the terms of the Power Purchase Agreements, the
utilities are obligated to purchase electric capacity made available to them and
energy which they request from the Partnerships. For additional information
regarding NSP and WEPCO, reference is made to the respective Annual Reports
filed on Form 10-K, the Quarterly Reports filed on Form 10-Q, proxy, and any
other filings made by NSP and WEPCO with the United States Securities and
Exchange Commission.
The Power Purchase Agreements are dispatchable contracts which provide
the utilities the right to suspend or reduce purchases of electricity from the
Facilities. The Power Purchase Agreements are structured such that the
Partnerships will continue to receive capacity payments during any period of
dispatch. The Partnerships are dependent on capacity payments under the Power
Purchase Agreements to meet their fixed obligations, including the payment of
debt service under their First Mortgage Bonds (which are Funding's sole source
of revenues for payment of debt service under the Senior Secured Bonds).
Capacity payments by each of NSP and WEPCO are based on the tested capacity and
availability of the Facilities and are unaffected by levels of dispatch. Each
Facility's capacity is subject to semi-annual verification through testing.
Capacity payments are subject to reduction if a Facility is operating at reduced
or degraded capacity at the time of such test, although each Facility is
permitted a retest subject to certain retest limitations. Also, capacity
payments for each Facility are subject to rebate or reduction if the respective
Facility does not maintain certain minimum levels of availability. Under the
Cottage Grove Power Purchase Agreement capacity payments are further adjusted
by, among other things, the capacity loss factor which is determined in
accordance with procedures jointly agreed to by Cottage Grove and NSP. The
Partnerships expect to achieve the minimum capacity and availability levels;
however, any material shortfall in tested capacity or availability over a
significant period could result in a shortage of funds to the Partnerships.
Each Partnership presently believes that funds available from cash and
investments on hand, restricted funds, operations and letter of credit and
working capital facilities will be more than sufficient to liquidate each
Partnership's obligations as they come due, pay project debt service and make
required contributions to project reserve accounts.
As with any power generation facility, operation of the Facilities will
involve certain risks, including the performance of a Facility below expected
levels of output or efficiency, interruptions in fuel supply, pipeline
disruptions, disruptions in the supply of thermal or electrical energy, power
shut-downs due to the breakdown or failure of equipment or processes, violation
of permit requirements (whether through operation, or change in law), operator
error, labor disputes or catastrophic events such as fires, earthquakes,
explosions, floods or other similar occurrences affecting a Facility or its
power purchasers, thermal energy purchasers, fuel suppliers or fuel
transporters. The occurrence of any of these events could significantly reduce
or eliminate revenues generated by a Facility or significantly increase the
expenses of that Facility, thereby impacting the ability of a Partnership to
make payments of the amounts necessary to fund principal of and interest on its
First Mortgage Bonds, and consequently Funding's ability to make payments of
principal of and interest on the Senior Secured Bonds. Not all risks are insured
and the proceeds of such insurance applicable to covered risks may not be
adequate to cover a Facility's lost revenues or increased expenses. In addition,
extended unavailability under the Power Purchase Agreements, which may result
from one or more of such events, may entitle the respective power purchaser to
terminate its Power Purchase Agreement.
IMPACT OF ENERGY PRICE CHANGES, INTEREST RATES AND INFLATION
The Partnerships have attempted to mitigate the risk of increases in
fuel and transportation costs by providing contractually for matching increases
in the energy payments the Partnerships receive from the utilities purchasing
electricity generated by the Facilities. In addition, the Partnerships have
hedged against the risk of fluctuations in interest rates by arranging fixed
rate financing.
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PART 2/ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule - LS Power Funding Corporation
27.2 Financial Data Schedule - LSP-Cottage Grove, L.P.
27.3 Financial Data Schedule - LSP-Whitewater Limited Partnership
(b) Reports on Form 8-K
The Registrant filed a Current Report on 8-K, dated March 10, 1998,
with respect to the March 6, 1998 signing of a Securities Purchase Agreement
between Cogentrix Energy, Inc. and certain of its subsidiaries (the
"Purchasers") and LS Power Corporation and Granite Power Partners, L.P. (the
"Sellers") pursuant to which the Purchasers agreed to acquire the Sellers'
ownership interest in certain of its assets, including the Facilities.
The Registrant filed a Current Report on Form 8-K, dated March 31,
1998, with respect to a change in the Registrant's independent accountants from
KPMG Peat Marwick LLP to Arthur Andersen LLP effective March 27, 1998.
SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
LS POWER FUNDING CORPORATION
By: /s/ James R. Pagano
--------------------------------------------------
Name: James R. Pagano
Title: Managing Director, Treasurer and Director
Date: May 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: May 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: May 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 March 31, 1998 (unaudited) and December 31, 1997 F-2
Statements of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-3
Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-4
Notes to Condensed Financial Statements (unaudited) F-5
LSP-COTTAGE GROVE, L.P.
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 F-6
Statements of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-7
Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-8
Notes to Condensed Financial Statements (unaudited) F-9
LSP-WHITEWATER LIMITED PARTNERSHIP
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 F-12
Statements of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-13
Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) F-14
Notes to Condensed Financial Statements (unaudited) F-15
F-1
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LS POWER FUNDING CORPORATION
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(dollars in thousands)
MARCH 31, DECEMBER 31,
1998 1997
----------- ----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 1 $ 1
Interest receivable on First Mortgage Bonds 6,472 0
-------- --------
Total current assets 6,473 1
INVESTMENT IN FIRST MORTGAGE BONDS 332,000 332,000
-------- --------
Total assets $338,473 $332,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITY - Interest payable on Senior Secured Bonds $ 6,472 $ 0
SENIOR SECURED BONDS PAYABLE 332,000 332,000
-------- --------
Total liabilities 338,472 332,000
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 1,000 shares authorized,
100 shares issued and outstanding 0 0
Additional paid-in capital 1 1
-------- --------
Total stockholders' equity 1 1
-------- --------
Total liabilities and stockholders' equity $338,473 $332,001
======== ========
The accompanying notes to condensed financial
statements are an integral part of these balance sheets.
F-2
10
LS POWER FUNDING CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------ ------
Interest Income $6,472 $6,472
Interest Expense 6,472 6,472
------ ------
Net Income $ 0 $ 0
====== ======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-3
11
LS POWER FUNDING CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------ ------
Cash flows from Operating Activities $ 0 $ 0
Cash flows from Investing Activities 0 0
Cash flows from Financing Activities 0 0
------ ------
Increase in cash 0 0
Cash, beginning of period 1 1
------ ------
Cash, end of period $ 1 $ 1
====== ======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-4
12
LS POWER FUNDING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1998 and the statements of income and
cash flows for the periods ended March 31, 1998 and 1997 have been prepared by
LS Power Funding Corporation ("Funding"), without audit. In the opinion of
management, these unaudited condensed financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Funding's financial position as of March 31, 1998, and the results of its
operations and its cash flows for the periods ended March 31, 1998 and 1997.
The unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While management believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with Funding's audited financial statements included in Funding's
Annual Report on Form 10-K for the Fiscal Year ended December 31, 1997.
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 and own the facilities
at Cottage Grove and Whitewater, respectively. Cottage Grove and Whitewater each
owns 50% of the outstanding stock of Funding. Funding's sole business activities
are limited to maintaining its organization and activities necessary pursuant to
the offering of debt securities and its acquisition of debt securities issued by
Cottage Grove and Whitewater.
F-5
13
LSP-COTTAGE GROVE, L.P.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(dollars in thousands)
MARCH 31, DECEMBER 31,
1998 1997
----------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,487 $ 8,816
Restricted cash 19,274 11,475
Accounts receivable - trade 4,556 4,598
Accounts receivable - other 0 3,012
Fuel inventories 400 1,869
Spare parts inventories 496 443
Other current assets 164 53
-------- --------
Total current assets 34,377 30,266
-------- --------
Net investment in lease (Notes 3 and 4) 234,405 234,034
Equipment 45 0
Debt issuance and financing costs, net of accumulated
amortization: March 31, 1998, $670; December 31, 1997, $605 6,452 6,517
Investment in unconsolidated affiliate 1 1
-------- --------
Total assets $275,280 $270,818
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 6,384 $ 8,360
Interest payable 3,021 0
Accrued expenses 1,360 72
-------- --------
Total current liabilities 10,765 8,432
First Mortgage Bonds payable 155,000 155,000
-------- --------
Total liabilities 165,765 163,432
Commitments and contingencies
Partners' capital 109,515 107,386
-------- --------
Total liabilities and partners' capital $275,280 $270,818
======== ========
The accompanying notes to condensed financial
statements are an integral part of these balance sheets.
F-6
14
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- -------
Operating revenues:
Lease revenue $ 5,273 $ 0
Service revenue 4,067 0
Other 721 0
-------- -------
10,061 0
Operating expenses:
Cost of services 5,172 0
-------- -------
Operating income 4,889 0
Non-operating income (expense):
Interest expense (3,087) 0
Interest income 327 0
-------- -------
Net income $ 2,129 $ 0
======== =======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-7
15
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- -------
Cash Flows from Operating Activities:
Net income $ 2,129 $ 0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of unearned lease income (5,273) 0
Amortization of debt issuance and financing costs 65 0
Minimum lease payments received 4,902 0
Decrease in accounts receivable - trade 42 0
Decrease in accounts receivable - other 3,012
Decrease in fuel inventories 1,469 0
Increase in spare parts inventories (53) 0
Increase in other current assets (111) 0
Decrease in accounts payable (1,976) 0
Increase in interest payable 3,021
Increase in accrued expenses 1,288 0
------- -------
Net cash provided by operating activities 8,515 0
------- -------
Cash Flows from Investing Activities:
Purchase of equipment (45) 0
Payments on construction in process 0 (1,936)
Decrease (increase) in restricted cash (7,799) 1,939
------- -------
Net cash provided by (used in) investing activities (7,844) 3
------- -------
Cash Flows from Financing Activities 0 0
------- -------
Increase in cash and cash equivalents 671 3
Cash and cash equivalents, beginning of period 8,816 103
------- -------
Cash and cash equivalents, end of period $ 9,487 $ 106
======= =======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-8
16
LSP-COTTAGE GROVE, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1998 and the statements of income and
cash flows for the periods ended March 31, 1998 and 1997 have been prepared by
LSP-Cottage Grove, L.P. (the "Partnership"), without audit. In the opinion of
management, these unaudited condensed financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Partnership's financial position as of March 31, 1998, and the
results of its operations and its cash flows for the periods ended March 31,
1998 and 1997.
The unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While management believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the Partnership's audited financial statements included in the
Partnership's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1997.
2. ORGANIZATION
The Partnership is a Delaware limited partnership that was formed on
December 14, 1993 to develop, finance, construct and own a gas-fired
cogeneration facility with a design capacity of approximately 245 megawatts to
be located in Cottage Grove, Minnesota (the "Cottage Grove Facility").
Construction and start-up of the Cottage Grove Facility was substantially
completed and commercial operations commenced October 1, 1997 (the "Commercial
Operations Date"). 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 Facility and a similar
gas-fired cogeneration facility to be located in Whitewater, Wisconsin (the
"Whitewater Facility"). 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMMENCEMENT OF POWER PURCHASE AGREEMENT
All of the electric capacity and energy generated by the Cottage Grove
Facility is sold to Northern States Power Company (the "Utility") under a
30-year power purchase agreement (the "Power Purchase Agreement"). The Power
Purchase Agreement has characteristics similar to a lease in that the agreement
confers to the Utility the right to use specific property, plant and equipment.
At the Commercial Operations Date, the Partnership accounted for the Power
Purchase Agreement as a "sales-type" capital lease in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases" (see
Note 4).
CONSTRUCTION IN PROCESS
Prior to commercial operation, all costs incurred to develop and
construct the Cottage Grove Facility, including net costs associated with
performance testing prior to the Commercial Operations 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 were included in the historical cost basis of the
Cottage Grove Facility. All interest costs subsequent to the Commercial
Operations Date have been charged to expense.
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17
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 Cottage Grove Facility and to provide variable electric
energy to the Utility and thermal energy to the steam purchaser.
OTHER REVENUES
Other revenues consist primarily of commodity sales of excess natural
gas fuel inventory, including amounts remarketed directly to third parties.
COST OF SERVICES
Cost of services represent expenses related to operating the Cottage
Grove Facility and providing variable electric energy to the Utility as well as
thermal energy to the steam purchaser.
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Cottage Grove Facility, the
Partnership recognized a gain on sales-type capital lease of $87.1 million
reflecting the difference between the estimated fair market value ($233.6
million) and the historical cost ($146.5 million) of the Cottage Grove Facility.
The interest rate implicit in the lease is 9.01%. The estimated residual value
of the Cottage Grove Facility at the end of the lease term is $0. The components
of the net investment in lease at March 31, 1998, are as follows (dollars in
thousands):
Gross Investment in Lease $ 562,518
Unearned Income on Lease (328,113)
---------
Net Investment in Lease $ 234,405
=========
Gross investment in lease represents total capacity payments receivable
over the term of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
5. FACILITY CONSTRUCTION
Effective September 30, 1997, the Partnership and Westinghouse Electric
Corporation (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 Cottage Grove
construction 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 Cottage Grove Facility's
construction, extension of certain warranty periods and certain financial
concessions. As of March 31, 1998, the Partnership had retained construction
contract payments (in the form of cash and an irrevocable letter of credit)
totaling approximately $10,886,000.
6. CHANGE OF CONTROL
On March 6, 1998, LS Power Corporation ("LS Power") and Granite Power
Partners, L.P. ("Granite") (collectively, the "Sellers") entered into a
securities purchase agreement (the "Securities Purchase Agreement") with
Cogentrix Mid-America, Inc. ("CMA") and Cogentrix Cottage Grove, LLC
(collectively, the "Purchasers") and Cogentrix Energy, Inc. ("Cogentrix
Energy"), which controls each of the Purchasers as wholly-owned indirect
subsidiaries.
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18
On March 20, 1998, pursuant to the Securities Purchase Agreement, the
Sellers sold all of the Sellers' capital stock of LSP-Cottage Grove, Inc. and
all of the Sellers' limited partnership interest in the Partnership to the
Purchasers. As a result, Cogentrix Cottage Grove, LLC, a wholly-owned subsidiary
of CMA, acquired all of the capital stock of LSP-Cottage Grove, Inc., the 1%
general partner of the Partnership, as well as a 72.22% limited partnership
interest in the Partnership, for a combined total ownership interest of 73.22%
in the Partnership.
On the same date that the wholly-owned indirect subsidiaries of
Cogentrix Energy identified above acquired their ownership interests in the
Partnership, Cogentrix Energy and LS Power entered into an Assignment and
Assumption Agreement, by the terms of which LS Power assigned, and Cogentrix
Energy assumed, all of the rights and obligations of LS Power under certain
management services agreements between LS Power and each of LSP-Cottage Grove,
Inc. and the Partnership.
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19
LSP-WHITEWATER LIMITED PARTNERSHIP
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(dollars in thousands)
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
----------- ---------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 8,054 $ 7,749
Restricted cash 18,736 13,752
Accounts receivable - trade 5,407 4,983
Accounts receivable - other 0 2,195
Fuel inventories 195 1,361
Spare parts inventories 462 432
Other current assets 630 682
-------- --------
Total current assets 33,484 31,154
-------- --------
Net investment in lease (Notes 3 and 4) 262,308 262,072
Greenhouse facility, net 9,200 8,281
Debt issuance and finance costs, net of accumulated
Amortization: March 31, 1998, $683; December 31, 1997, $616 6,541 6,607
Investment in unconsolidated affiliate 1 1
-------- --------
Total assets $311,534 $308,115
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 7,930 $ 11,492
Interest payable 3,450 0
Accrued expenses 1,766 64
-------- --------
Total current liabilities 13,146 11,556
First Mortgage Bonds payable 177,000 177,000
-------- --------
Total liabilities 190,146 188,556
Commitments and contingencies
Partners' capital 121,388 119,559
-------- --------
Total liabilities and partners' capital $311,534 $308,115
======== ========
The accompanying notes to condensed financial
statements are an integral part of these balance sheets.
F-12
20
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- -------
Operating revenues:
Lease revenue $ 5,834 $ 0
Service revenue 5,790 0
Other 427 0
-------- -------
12,051 0
-------- -------
Operating expenses:
Cost of services 6,827 0
Greenhouse operating expenses 175 0
-------- -------
7,002 0
-------- -------
Operating income 5,049 0
Non-operating income (expense):
Interest expense (3,517) 0
Interest income 297 0
-------- -------
Net income $ 1,829 $ 0
======== =======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-13
21
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998, AND 1997
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- -------
Cash Flows from Operating Activities:
Net income $ 1,829 $ 0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of unearned lease income (5,834) 0
Amortization of debt issuance and finance costs 66 0
Minimum lease payments received 5,598 0
Depreciation 96 0
Increase in accounts receivable - trade (424) 0
Decrease in accounts receivable - other 2,195
Decrease in fuel inventories 1,166 0
Increase in spare parts inventories (30) 0
Decrease in other current assets 52 0
Decrease in accounts payable (3,562) 0
Increase in interest payable 3,450
Increase in accrued expenses 1,702 0
------- -------
Net cash provided by operating activities 6,304 0
------- -------
Cash Flows from Investing Activities:
Purchase of equipment (1,015) 0
Payments on construction in process 0 (8,970)
Decrease (increase) in restricted cash (4,984) 9,159
------- -------
Net cash provided by (used in) investing activities (5,999) 189
------- -------
Cash Flows from Financing Activities 0 0
------- -------
Net increase in cash and cash equivalents 305 189
Cash and cash equivalents, beginning of period 7,749 101
------- -------
Cash and cash equivalents, end of period $ 8,054 $ 290
======= =======
The accompanying notes to condensed financial
statements are an integral part of these statements.
F-14
22
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1998 and the statements of income and
cash flows for the periods ended March 31, 1998 and 1997 have been prepared by
LSP-Whitewater Limited Partnership (the "Partnership"), without audit. In the
opinion of management, these unaudited condensed financial statements include
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Partnership's financial position as of March 31, 1998 and the
results of its operations and its cash flows for the periods ended March 31,
1998 and 1997.
The unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While management believes
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the Partnership's audited financial statements included in the
Partnership's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1997.
2. ORGANIZATION
The Partnership is a Delaware limited partnership that was formed on
December 14, 1993 to develop, finance, construct and own a gas-fired
cogeneration facility with a design capacity of approximately 245 megawatts to
be located in Whitewater, Wisconsin (the "Whitewater Facility"). Construction
and start-up of the Whitewater Facility was substantially completed and
commercial operations commenced September 18, 1997 (the "Commercial Operations
Date"). 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 Facility and a similar gas-fired
cogeneration facility to be located in Cottage Grove, Minnesota (the "Cottage
Grove Facility"). 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
COMMENCEMENT OF POWER PURCHASE AGREEMENT
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Whitewater Facility to Wisconsin Electric
Power Company (the "Utility") pursuant to a 25-year power purchase agreement
(the "Power Purchase Agreement"). The Power Purchase Agreement has
characteristics similar to a lease in that the agreement confers to the Utility
the right to use specific property, plant and equipment. At the Commercial
Operations Date, the Partnership accounted for the Power Purchase Agreement as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases" (see Note 4).
CONSTRUCTION IN PROCESS
Prior to commercial operation, all costs incurred to develop and
construct the Whitewater Facility, including net costs associated with
performance testing prior to the Commercial Operations 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 cogeneration facility were included
in the historical cost basis of the Whitewater Facility. All interest costs
subsequent to the Commercial Operations Date have been charged to expense.
F-15
23
LEASE REVENUE
Lease revenue represents the amortization of unearned income on lease
using the effective interest rate method as well as contingent rentals that
result from changes in payment escalators occurring subsequent to the Commercial
Operations Date. These contingent rentals are not expected to materially change
the lease revenue recognized over the life of the Power Purchase Agreement.
SERVICE REVENUE
Service revenues represent reimbursement to the Partnership of costs
incurred to operate the Whitewater Facility and to provide variable electric
energy to the Utility and thermal energy to the steam purchaser.
COST OF SERVICES
Cost of services represent expenses related to operating the Whitewater
Facility and providing variable electric energy to the Utility as well as
thermal energy to the steam purchaser.
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Whitewater Facility, the
Partnership recognized a gain on sales-type capital lease of $97.0 million
reflecting the difference between the estimated fair market value ($261.7
million) and the historical cost ($164.7 million) of the Whitewater Facility.
The interest rate implicit in the lease is 8.93%. The estimated residual value
of the Whitewater Facility at the end of the lease term is $0. The components of
the net investment in lease at March 31, 1998 are as follows:
Gross investment in lease $ 609,890
Unearned income on lease (347,582)
---------
Net investment in lease $ 262,308
=========
Gross investment in lease represents total capacity payments receivable
over the term of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
5. FACILITY CONSTRUCTION
Effective September 18, 1997, the Partnership and Westinghouse Electric
Corporation (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 Whitewater
construction 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 Whitewater Facility's
construction, extension of certain warranty periods and certain financial
concessions. As of March 31, 1998, the Partnership had retained construction
contract payments (in the form of cash and an irrevocable letter of credit)
totaling approximately $11,174,000.
6. CHANGE OF CONTROL
On March 6, 1998, LS Power Corporation ("LS Power") and Granite Power
Partners, L.P. ("Granite") (collectively, the "Sellers") entered into a
securities purchase agreement (the "Securities Purchase Agreement") with
Cogentrix Mid-America, Inc. ("CMA") and Cogentrix Whitewater, LLC (collectively,
the "Purchasers") and Cogentrix Energy, Inc. ("Cogentrix Energy"), which
controls each of the Purchasers as wholly-owned indirect subsidiaries.
On March 20, 1998, pursuant to the Securities Purchase Agreement, the
Sellers sold all of the Sellers' capital stock of Floriculture, Inc.
("Floriculture") and LSP-Whitewater I, Inc., as well as all of the Sellers'
limited
F-16
24
partnership interest in the Partnership to the Purchasers. As a result,
CMA acquired all of the capital stock of Floriculture, and Cogentrix Whitewater,
LLC, a wholly-owned subsidiary of CMA, acquired all of the capital stock of
LSP-Whitewater I, Inc., the 1% general partner of the Partnership, as well as a
73.17% limited partnership interest in the Partnership, for a combined total
ownership interest of 74.17% in the Partnership.
On the same date that the wholly-owned indirect subsidiaries of
Cogentrix Energy identified above acquired their ownership interests in the
Partnership, Cogentrix Energy and LS Power entered into an Assignment and
Assumption Agreement, by the terms of which LS Power assigned, and Cogentrix
Energy assumed, all of the rights and obligations of LS Power under certain
management service agreements between LS Power and each of LSP-Whitewater, Inc.
and the Partnership.
F-17