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 September 30, 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 Numbers)
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 (I.R.S. Employer
of incorporation or organization) Identification Numbers)
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 [ ]
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
Index
To the Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 1998
Page No.
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Part I: Financial Information
Item 1. Condensed Financial Statements 3
Item 2. Management's Discussion and Analysis of 3
Financial Condition and Results of Operations
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Financial Statement Index F-1
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PART I - FINANCIAL STATEMENTS
Item 1. Condensed 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 Fiscal Year Ended December 31, 1997, filed by Funding,
Cottage Grove and Whitewater.
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"). The 1% general partner, LSP-Cottage Grove, Inc. and
the 72% limited partner, Cogentrix Cottage Grove, LLC, are indirect subsidiaries
of Cogentrix Energy, Inc., a North Carolina corporation. The other limited
partner is TPC Cottage Grove, Inc., a Delaware corporation, and is not
affiliated with Cogentrix Energy, Inc. 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 1% general partner, LSP-Whitewater I, Inc. and
the 73% limited partner, Cogentrix Whitewater, LLC, are indirect subsidiaries of
Cogentrix Energy, Inc., a North Carolina corporation. The other limited partner
is TPC Whitewater, Inc., a Delaware corporation, and is not affiliated with
Cogentrix Energy, Inc. 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
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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 the Partnerships will be directly related to the level of dispatch
of the Facilities by the utilities and, to a lesser extent, the level of thermal
energy required by the steam hosts.
Results of Operations
Whitewater
Revenues for the three-month and nine-month periods ended
September 30, 1998 were approximately $12.5 million and $38.1 million,
respectively, as compared to the three-month and nine-month periods ended
September 30, 1997 of $1.4 million. The increase is attributable to the fact
that the Whitewater Power Purchase Agreement term commenced September 18, 1997,
and prior to that date, Whitewater recognized no revenues. Revenues for the
three-month and nine-month periods ended September 30, 1998 consisted primarily
of lease revenue of approximately $5.8 million and $17.5 million, respectively,
and service revenue of approximately $ 6.4 million and $ 19.2 million,
respectively, as compared to the three-month and nine-month periods ended
September 30, 1997 of $.8 million and $ .6 million.
Operating expenses for the three-month and nine-month periods
ended September 30, 1998 were approximately $ 6.8 million and $ 21.1 million,
respectively, as compared to the three-month and nine-month periods ended
September 30, 1997 of $ .6 million. The increase is attributable to the fact
that the Whitewater Power Purchase Agreement term commenced September 18, 1997,
and prior to that date, Whitewater recognized no expenses. Operating expenses
consisted primarily of cost of services related to operating the Whitewater
Facility.
Interest expense for the three-month and nine-month periods ended
September 30, 1998 was approximately $3.5 million and $10.6 million,
respectively as compared to the three-month and nine-months periods ended
September 30, 1997 of approximately $.5 million. Interest expense consisted
primarily of interest expense on the First Mortgage Bonds and was not charged to
operations until the Whitewater Power Purchase Agreement term commenced on
September 18, 1997. Prior to September 18, 1997, all interest costs were
capitalized as a component of the Whitewater Facility.
Interest income for the three-month and nine-month periods ended
September 30, 1998 was approximately $.2 million and $.7 million, respectively.
Interest income consisted primarily of interest earned on investments held by
the trustee under the trust indenture for the First Mortgage Bonds.
Upon the commercial operations date of the facility (September
18, 1997), Whitewater recognized a gain on "sales-type" capital lease of
approximately $ 97.0 million. The Power Purchase Agreement met the criteria of a
"sales-type" capital lease as described in SFAS No. 13, "Accounting for Leases."
The gain represented the difference between the estimated fair market value and
the historical cost of the Whitewater Facility.
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-month and nine-month periods ended
September 30, 1998 were approximately $12.5 million and $34.2 million,
respectively. Revenues for the three-month and nine-month periods ended
September 30, 1998 consisted primarily of lease revenue of approximately $5.3
million and $15.8 million, respectively and service revenue of approximately
$6.3 million and $15.3 million, respectively.
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Operating expenses for the three-month and nine-month periods
ended September 30, 1998 were approximately $7.6 million and $19.6 million,
respectively. Operating expenses represented cost of services related to
operating the Cottage Grove Facility.
Interest expense for the three-month period and nine-month
periods ended September 30, 1998 was approximately $3.1 million and $9.2
million, respectively. Interest expense consisted primarily of interest expense
on the First Mortgage Bonds. Prior to October 1, 1997, all interest costs were
capitalized into the cost of the Cottage Grove Facility.
Interest income for the three-month and nine-month periods ended
September 30, 1998 was approximately $.3 million and $.9 million, respectively.
Interest income consisted primarily of interest earned on investments held by
the trustee under the trust indenture for the First Mortgage Bonds.
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 September 30, 1998, Whitewater had retained construction
contract payments in the form of cash of approximately $5,600,000 and an
irrevocable letter of credit, issued by the Contractor, of approximately
$5,600,000.
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 September 30, 1998, Cottage
Grove had retained construction contract payments in the form of cash of
approximately $5,400,000 and an irrevocable letter of credit, issued by the
Contractor, of approximately $5,400,000.
Liquidity and Capital Resources
Whitewater
The principal components of operating cash flow for the
nine-months ended September 30, 1998 were net income of $7.1 million, a $.4
million adjustment for depreciation and amortization and a net $2.6 million of
cash provided by changes in other working capital assets and liabilities, which
were partially offset by amortization of unearned lease income, net of minimum
lease payments received of $.7 million. Cash flow provided by operating
activities of $9.4 million, as well as a portion of the cash on hand at the
beginning of the period of $6.6 million, was primarily used to make partner
distributions of $11.4 million, fund cash escrows of $4.4 million, and purchase
property, plant and equipment of $.2 million.
Cottage Grove
The principal components of operating cash flow for the
nine-months ended September 30, 1998 were net income of $6.2 million, a $.2
million adjustment for amortization of debt issuance and financing costs, and a
net $5.2 million of cash provided by changes in working capital assets and
liabilities, which were partially offset by amortization of unearned lease
income, net of minimum lease payments received of $1.1 million. Cash flow
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provided by operating activities of $10.5 million, as well as a portion of the
cash on hand at the beginning of the period of $8.3 million, was primarily used
to make partner distributions of $12.5 million and to fund cash escrows of $6.3
million.
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 debt service reserve funds 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 September 30, 1998, the balances of the
Contingency Fund accounts were approximately $1,426,000 for Cottage Grove and
approximately $339,000 for Whitewater.
In addition to funds received through the acquisition of the
First Mortgage Bonds by Funding and through the Equity Contribution Amounts, the
Partnerships may each receive on their 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 its 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 September 30, 1998, no loans were
outstanding under the working capital facilities.
The Partnerships expect that payments from the utilities under
the Power Purchase Agreements will provide the 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 semiannual 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, in the unlikely event any
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material shortfall in tested capacity or availability over a significant period
occurs, the result could lead to a shortage of funds to the Partnerships.
The Partnerships presently believe 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 the
Partnerships' obligations as they come due, pay project debt service and make
required contributions to project reserve accounts.
As with any electric generating 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 shutdowns 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 principal and interest payments on its First Mortgage Bonds, and
consequently affect Funding's ability to make principal and interest payments 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.
Year 2000 Compliance
The Year 2000 issue exists because many computer systems and
applications, including those embedded in equipment and facilities, use two
digit rather than four digit date fields to designate an applicable year. As a
result, the systems and applications may not properly recognize the year 2000 or
process data which includes such date, potentially causing data miscalculations,
inaccuracies or operational malfunctions or failures. The Partnerships initiated
assessments in 1998 to identify the issues required to be resolved to assure
business critical systems successfully operate upon and beyond the turn of the
century. The assessments include reviewing information technology and systems
utilizing embedded technology. Plans for achieving Year 2000 compliance have
been finalized and remediation work is underway.
Replacement of the Partnerships' core financial systems with Year
2000 compliant client-server software is virtually complete. Investigation,
analysis, remediation and contingency planning for embedded technology at the
power generation facilities operated by the Partnerships are also in process.
The investigation and analysis of potential Year 2000 issues is nearing
completion at both facilities. The results of the investigation and analysis to
date indicate the majority of the facilities' operating systems are Year 2000
compliant. For those that have been identified as non-compliant, the
Partnerships have either established a remediation plan or contingency plan to
address the areas of non-compliance. The remediation of these systems, as well
as testing of contingency plans, is expected to be completed by June 30, 1999.
The total capital and operating costs to bring the operating systems at the
plant facilities fully compliant with Year 2000 are currently expected to be
immaterial.
The Partnerships are communicating with critical suppliers,
vendors and major customers to assess their compliance efforts and the
Partnerships' exposure resulting from Year 2000 issues. At this time, the
Partnerships do not expect a major impact from non-compliant Year 2000
suppliers, vendors or major customers. In the event that any of the
Partnerships' significant suppliers, vendors or major customers do not
successfully and timely achieve Year 2000 compliance, the Partnerships' business
or operations could be adversely affected.
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The Partnerships expect that their business critical systems will
be Year 2000 compliant by December 31, 1999, and the Partnerships do not
anticipate costs associated with the Year 2000 issue to have a material impact
on the Partnerships' results of operations or financial position. Despite
management's current expectations, there can be no assurances that there will
not be interruptions or other limitations of financial and operating systems
functionality or that the Partnerships will not ultimately incur significant
unplanned costs to avoid such interruptions or limitations.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
27.1 Financial Data Schedule - LS Power
Funding Corporation
27.2 Financial Data Schedule - LSP -
Cottage Grove, L.P.
27.3 Financial Data Schedule - LSP -
Whitewater Limited Partnership
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by
this report.
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its behalf
by the undersigned thereunto duly authorized.
LS POWER FUNDING CORPORATION
By: /s/ James R. Pagano
----------------------------------------------
Name: James R. Pagano
Title: Managing Director, Treasurer and Director
Date: November 16, 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: November 16, 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: November 16, 1998
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
Financial Statement Index
Page
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LS POWER FUNDING CORPORATION
Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 F-2
Statements of Operations for the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) F-3
Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997 (Unaudited) F-4
Notes to Condensed Financial Statements (Unaudited) F-5
LSP-COTTAGE GROVE, L.P.
Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 F-6
Statements of Income for the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) F-7
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) F-8
Notes to Condensed Financial Statements (Unaudited) F-9
LSP-WHITEWATER LIMITED PARTNERSHIP
Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 F-12
Statements of Income for the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited) F-13
Statements of Cash Flows for the Nine Months Ended
September 30, 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
September 30, 1998 and December 31, 1997
(dollars in thousands)
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSET:
Cash $ 1 $ 1
INVESTMENT IN FIRST MORTGAGE BONDS 332,000 332,000
-------- --------
Total Assets $332,001 $332,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITY - Senior Secured Bonds Payable $332,000 $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 $332,001 $332,001
======== ========
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-2
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LS POWER FUNDING CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1998
and 1997 (Unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME $ 6,472 $ 6,472 $19,415 $19,415
------- ------- ------- -------
INTEREST EXPENSE 6,472 6,472 19,415 19,415
------- ------- ------- -------
NET INCOME $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-3
14
LS POWER FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
-------------------------------
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 1,000 1,000
------ ------
CASH, END OF PERIOD $1,000 $1,000
====== ======
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-4
15
LS POWER FUNDING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the statements of
operations and cash flows for the periods ended September 30, 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 September 30, 1998, and the
results of its operations and its cash flows for the periods ended September 30,
1998 and 1997. The results of operations for these interim periods are not
necessarily indicative of results which may be expected for any other interim
period or the fiscal year as a whole.
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 the
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
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LSP-COTTAGE GROVE, L.P.
BALANCE SHEETS
September 30, 1998 and December 31, 1997
(dollars in thousands)
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 516 $ 8,816
Restricted cash 17,764 11,475
Accounts receivable - trade 4,892 4,598
Accounts receivable - other 0 3,012
Fuel inventories 1,776 1,869
Spare parts inventories 317 443
Other current assets 121 53
-------- --------
Total current assets 25,386 30,266
NET INVESTMENT IN LEASE (Notes 3 and 4) 235,170 234,034
DEBT ISSUANCE AND FINANCING COSTS, net of accumulated
amortization: September 30, 1998, $801; December 31, 1997, $605 6,321 6,517
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
Total assets $266,878 $270,818
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 5,965 $ 8,360
Accrued expenses 4,818 72
-------- --------
Total current liabilities 10,783 8,432
FIRST MORTGAGE BONDS PAYABLE 155,000 155,000
-------- --------
Total liabilities 165,783 163,432
PARTNERS' CAPITAL 101,095 107,386
-------- --------
Total liabilities and partners' capital $266,878 $270,818
======== ========
The accompanying notes to condensed financial statements
are an integral part of these balance sheets.
F-6
17
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30,
1998 and 1997 (Unaudited)
(dollars in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
OPERATING REVENUES:
Lease revenue $ 5,289 $ 0 $ 15,842 $ 0
Service revenue 6,276 0 15,296 0
Other 976 0 3,054 0
-------- -------- -------- --------
12,541 0 34,192 0
OPERATING EXPENSES:
Cost of services 7,559 0 19,577 0
-------- -------- -------- --------
OPERATING INCOME 4,982 0 14,615 0
OTHER INCOME (EXPENSE):
Interest expense (3,065) 0 (9,239) 0
Interest income 253 0 861 0
-------- -------- -------- --------
NET INCOME $ 2,170 $ 0 $ 6,237 $ 0
======== ======== ======== ========
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-7
18
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,237 $ 0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of unearned lease income (15,842) 0
Amortization of debt issuance and financing costs 196 0
Minimum lease payments received 14,706 0
Decrease in accounts receivable 2,718 0
Decrease in inventories 219 0
Increase in other current assets (68) 0
Decrease in accounts payable (2,395) 0
Increase in accrued expenses 4,746 0
-------- --------
Net cash provided by operating activities 10,517 0
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on construction in process 0 (25,339)
Investments drawn for construction 0 25,607
Investments held by trustee 0 (18,167)
Increase in restricted cash (6,289) 0
-------- --------
Net cash used in investing activities (6,289) (17,899)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner distributions (12,528) 0
Capital contributions 0 18,167
-------- --------
Net cash provided by (used in) financing activities (12,528) 18,167
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (8,300) 268
CASH AND CASH EQUIVALENTS, beginning of period 8,816 103
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 516 $ 371
======== ========
RECONCILIATION OF CHANGES IN CONSTRUCTION
IN PROCESS:
Increase in total construction in process $ 0 ($21,979)
Amortization of debt issuance and financing costs 0 191
Interest income on investments held by trustee 0 (1,181)
Increase in pre-operation accounts receivable 0 (4,851)
Pre-operation cash receipts 0 (5,023)
Increase in interest payable 0 3,021
Increase in accounts payable 0 4,483
-------- --------
Payments on construction in process $ 0 ($25,339)
======== ========
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-8
19
LSP-COTTAGE GROVE, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the statements of
income and cash flows for the periods ended September 30, 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 September 30, 1998,
and the results of its operations and its cash flows for the periods ended
September 30, 1998 and 1997. The results of operations for these interim periods
are not necessarily indicative of results which may be expected for any other
interim period or the fiscal year as a whole.
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.
F-9
20
In recording the Partnership's gain on sales-type capital lease,
all construction 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.
Lease Revenue
Lease revenue represents the amortization of unearned income on
the lease using the effective interest rate method, as well as contingent
rentals that result from changes in payment escalators occurring subsequent to
the Commercial Operations Date. These contingent rentals are not expected to
materially change the lease revenue recognized over the life of the Power
Purchase Agreement.
Service Revenue
Service revenue represents reimbursement to the Partnership of
costs incurred to operate the 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 represents 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
approximately $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 September 30,
1998 are as follows (dollars in thousands):
Gross Investment in Lease $ 562,518
Unearned Income on Lease (327,348)
---------
Net Investment in Lease $ 235,170
=========
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 September 30, 1998, the Partnership had retained construction
contract payments (in the form of cash and an irrevocable letter of credit)
totalling approximately $10,886,000.
F-10
21
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.
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.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheets as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized in current earnings unless specified hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. Early adoption is allowed. SFAS No. 133 must be applied to derivative
instruments and certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
The Partnership does not expect the adoption of SFAS No. 133 to
have a material impact on its financial statements.
F-11
22
LSP-WHITEWATER LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1998 and December 31, 1997
(dollars in thousands)
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,207 $ 7,749
Restricted cash 18,115 13,752
Accounts receivable - trade 5,657 4,983
Accounts receivable - other 643 2,195
Fuel inventories 948 1,361
Spare parts inventories 620 432
Other current assets 439 682
-------- --------
Total current assets 27,629 31,154
NET INVESTMENT IN LEASE (Notes 3 and 4) 262,796 262,072
GREENHOUSE FACILITY, net 8,257 8,281
DEBT ISSUANCE AND FINANCE COSTS, net of accumulated
amortization: September 30, 1998, $816; December 31, 1997, $616 6,407 6,607
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
$305,090 $308,115
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 6,116 $ 11,492
Accrued expenses 6,677 64
-------- --------
Total current liabilities 12,793 11,556
FIRST MORTGAGE BONDS PAYABLE 177,000 177,000
-------- --------
Total liabilities 189,793 188,556
PARTNERS' CAPITAL 115,297 119,559
-------- --------
Total liabilities and partners' capital $305,090 $308,115
======== ========
The accompanying notes to condensed financial statements
are an integral part of these balance sheets.
F-12
23
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Three Months and Nine Months Ended
September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
OPERATING REVENUES:
Lease revenue $ 5,845 $ 752 $ 17,518 $ 752
Service revenue 6,426 641 19,219 641
Greenhouse revenue 109 0 1,530 0
Other 214 0 950 0
-------- -------- -------- --------
12,594 1,393 39,217 1,393
OPERATING EXPENSES:
Cost of services 6,782 254 21,102 254
Greenhouse operating expenses 103 376 1,153 376
-------- -------- -------- --------
6,885 630 22,255 630
-------- -------- -------- --------
OPERATING INCOME 5,709 763 16,962 763
OTHER INCOME (EXPENSE):
Gain on sales-type capital lease 0 97,042 0 97,042
Interest expense (3,517) (508) (10,551) (508)
Other income 155 7 700 7
-------- -------- -------- --------
NET INCOME $ 2,347 $ 97,304 $ 7,111 $ 97,304
======== ======== ======== ========
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-13
24
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
----------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,111 $ 97,304
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on sales-type capital lease 0 (97,042)
Amortization of unearned lease income (17,518) (752)
Amortization of debt issuance and finance costs 200 10
Minimum lease payments received 16,794 721
Depreciation 208 14
Decrease (increase) in accounts receivable 878 (1,362)
Decrease (increase) in fuel inventory 413 (1,196)
Increase in spare parts inventory (188) 0
Decrease in other current assets 243 0
Increase (decrease) in accounts payable (5,376) 895
Increase in accrued expenses 6,613 0
--------- ---------
Net cash provided by (used in) by operating activities 9,378 (1,408)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from land sale 0 939
Payments on construction in progress 0 (35,128)
Investments held by trustee 0 (20,556)
Investments drawn for construction 0 35,793
Purchase of equipment (184) 0
Increase in restricted cash (4,363) 0
--------- ---------
Net cash used in investing activities (4,547) (18,952)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner distributions (11,373) 0
Capital contributions 0 20,556
--------- ---------
Net cash (used in) provided by investing activities (11,373) 20,556
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,542) 196
CASH AND CASH EQUIVALENTS, beginning of period 7,749 101
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 1,207 $ 297
========= =========
RECONCILIATION OF CHANGES IN CONSTRUCTION
IN PROCESS:
Decrease in total construction in process $ 0 $ 145,694
Construction in process sold in lease transaction 0 (170,142)
Amortization of debt issuance and financing costs 0 185
Interest income on investments held by trustee 0 (1,272)
Decrease in other current assets 0 1
Increase in pre-operation accounts receivable 0 (2,632)
Pre-operation cash receipts 0 (5,859)
Decrease in accounts payable 0 (4,553)
Increase in interest payable 0 3,450
--------- ---------
Payments on construction in process $ 0 ($ 35,128)
========= =========
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-14
25
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the statements of
income and cash flows for the periods ended September 30, 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 September
30, 1998 and the results of its operations and its cash flows for the periods
ended September 30, 1998 and 1997. The results of operations for these interim
periods are not necessarily indicative of results which may be expected for any
other interim period or the fiscal year as a whole.
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.
F-15
26
In recording the Partnership's gain on sales-type capital lease,
all construction 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.
Lease Revenue
Lease revenue represents the amortization of unearned income on
the lease using the effective interest rate method, as well as contingent
rentals that result from changes in payment escalators occurring subsequent to
the Commercial Operations Date. These contingent rentals are not expected to
materially change the lease revenue recognized over the life of the Power
Purchase Agreement.
Service Revenue
Service revenue represents reimbursement to the Partnership of
costs incurred to operate the Whitewater 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 represents 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 approximately
$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 September 30, 1998 are as
follows (dollars in thousands):
Gross investment in lease $ 609,890
Unearned income on lease (347,094)
---------
Net investment in lease $ 262,796
=========
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 September 30, 1998, the Partnership had retained construction
contract payments (in the form of cash and an irrevocable letter of credit)
totalling approximately $11,174,000.
F-16
27
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"), the operators of the greenhouse, and LSP-Whitewater I, Inc.,
as well as all of the Sellers' limited 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 I,
Inc. and the Partnership.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheets as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized in current earnings unless specified hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. Early adoption is allowed. SFAS No. 133 must be applied to derivative
instruments and certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
The Partnership does not expect the adoption of SFAS No. 133 to
have a material impact on its financial statements.
F-17