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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number: 33-74254
COGENTRIX ENERGY, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1853081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9405 Arrowpoint Boulevard, Charlotte, North Carolina 28273-8110
(Address of principal executive offices) (Zip code)
(704) 525-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [ ] No
On May 17, 1999, there were 282,000 shares of common stock, no par value, issued
and outstanding.
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COGENTRIX ENERGY, INC.
Page No.
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Part I: Financial Information
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at March 31, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II: Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(dollars in thousands)
March 31, December 31,
1999 1998
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48,793 $ 48,207
Restricted cash 56,035 40,604
Accounts receivable 67,827 66,586
Inventories 17,893 18,697
Other current assets 3,617 4,061
---------- ----------
Total current assets 194,165 178,155
NET INVESTMENT IN LEASES 498,996 498,614
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: March 31, 1999, $235,333; December 31, 1998, $225,928 463,761 473,065
LAND AND IMPROVEMENTS 3,991 3,981
DEFERRED FINANCING, START-UP AND ORGANIZATION
COSTS, net of accumulated amortization: March 31, 1999, $16,699
December 31, 1998, $15,557 36,260 37,007
NATURAL GAS RESERVES 1,345 1,557
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 252,498 251,312
OTHER ASSETS 58,490 56,160
---------- ----------
$1,509,506 $1,499,851
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 103,403 $ 86,255
Accounts payable 19,551 25,511
Accrued compensation 6,025 8,096
Accrued interest payable 17,732 7,729
Accrued dividends payable -- 7,398
Other accrued liabilities 15,487 13,492
---------- ----------
Total current liabilities 162,198 148,481
LONG-TERM DEBT 1,101,247 1,127,184
DEFERRED INCOME TAXES 58,540 52,306
MINORITY INTERESTS 64,967 61,167
OTHER LONG-TERM LIABILITIES 24,297 22,850
---------- ----------
1,411,249 1,411,988
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding 130 130
Accumulated earnings 98,127 87,733
---------- ----------
98,257 87,863
---------- ----------
$1,509,506 $1,499,851
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands, except for earnings per common share)
Three Months Ended
March 31,
---------------------------
1999 1998
--------- ---------
OPERATING REVENUE:
Electric $ 74,408 $ 73,935
Steam 6,712 7,341
Lease 11,161 1,314
Service revenue under sales-type capital leases 11,870 1,296
Income from unconsolidated investments in power projects 5,410 923
Other 3,878 2,410
--------- ---------
113,439 87,219
--------- ---------
OPERATING EXPENSES:
Fuel 16,506 19,419
Operations and maintenance 16,976 15,789
Cost of services under sales-type capital leases 13,671 1,398
General, administrative and development 12,649 9,355
Depreciation and amortization 10,871 10,174
--------- ---------
70,673 56,135
--------- ---------
OPERATING INCOME 42,766 31,084
OTHER INCOME (EXPENSE):
Interest expense (23,732) (13,243)
Investment and other income, net 2,091 2,376
Equity in net (loss) income of affiliates, net (39) 444
--------- ---------
INCOME BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS 21,086 20,661
MINORITY INTERESTS IN INCOME BEFORE
EXTRAORDINARY LOSS (3,826) (1,955)
--------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 17,260 18,706
PROVISION FOR INCOME TAXES (6,866) (7,323)
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 10,394 11,383
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of minority interest and income tax benefit of $473 -- (743)
--------- ---------
NET INCOME $ 10,394 $ 10,640
========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 36.86 $ 40.37
Extraordinary loss -- (2.64)
--------- ---------
$ 36.86 $ 37.73
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 282,000 282,000
========= =========
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands)
Three Months Ended
March 31,
---------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,394 $ 10,640
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,871 10,174
Deferred income taxes 6,234 2,730
Extraordinary loss on early extinguishment of debt, non-cash portion -- 2,145
Minority interests in income, net of dividends 3,767 (18,771)
Equity in net income of unconsolidated affiliates, net of dividends (1,186) 19
Minimum lease payments received 10,779 1,242
Amortization of unearned lease income (11,161) (1,314)
Decrease (increase) in accounts receivable (1,241) 2,621
Decrease in inventories 1,016 121
Decrease in accounts payable (5,960) (3,633)
Increase in accrued liabilities 9,927 1,024
Increase in other (238) (2,640)
--------- ---------
Net cash flows provided by operating activities 33,202 4,358
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions, net (208) (574)
Decrease in marketable securities -- 42,118
Investments in unconsolidated affiliates -- (106)
Acquisition of Facilities, net of cash acquired -- (155,324)
Decrease (increase) in restricted cash (15,431) 6,872
--------- ---------
Net cash flows used in investing activities (15,639) (107,014)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (7,398) (2,140)
Proceeds from issuance of debt 15,000 150,250
Repayments of debt (24,184) (64,530)
Increase in deferred financing costs (395) (1,050)
--------- ---------
Net cash flows provided by (used in) financing activities (16,977) 82,530
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 586 (20,126)
CASH AND CASH EQUIVALENTS, beginning of period 48,207 71,833
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 48,793 $ 51,707
========= =========
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. Principles of Consolidation and Basis of Presentation
The accompanying consolidated condensed financial statements include
the accounts of Cogentrix Energy, Inc. ("Cogentrix Energy") and its subsidiary
companies (collectively, the "Company"). Wholly-owned and majority-owned
subsidiaries, including a 50%-owned joint venture in which the Company has
effective control through majority representation on the board of directors of
the managing general partner, are consolidated. Less-than-majority-owned
subsidiaries, ("Cogentrix Energy") and subsidiaries for which control is deemed
to be temporary are accounted for using the equity method. Investments in
unconsolidated affiliates in which the Company has less than a 20% interest and
does not exercise significant influence over operating and financial policies
are accounted for under the cost method. All material intercompany transactions
and balances among Cogentrix Energy, its subsidiary companies and its
consolidated joint ventures have been eliminated in the accompanying
consolidated condensed financial statements.
Information presented as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 is unaudited. In the opinion of management,
however, such information reflects all adjustments, which consist of normal
recurring adjustments necessary to present fairly the financial position of the
Company as of March 31, 1999, and the results of operations and cash flows for
the three months ended March 31, 1999 and 1998. The results of operations for
these interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the fiscal year as a whole.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "Commission"). Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although management believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these unaudited consolidated condensed
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's most recent
report on Form 10-K for the year ended December 31, 1998, which the Company
filed with the Commission on March 31, 1999.
2. Cogentrix of Pennsylvania, Inc.
In January, 1998, the Company signed an agreement with Pennsylvania
Electric Company ("Penelec") to terminate the Ringgold Facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buy-back or restructure power sales agreements issued to all major operating
independent power producer projects in Penelec's territory in April, 1997. The
termination agreement with Penelec provides for a payment to the Company of
approximately $22 million which will be sufficient to retire all of Cogentrix of
Pennsylvania, Inc.'s ("CPA") outstanding project debt. The buy-back of the power
purchase agreement is subject to the issuance of an order by the Pennsylvania
Public Utility Commission granting Penelec the authority to fully recover from
its customers the consideration paid to CPA under the buyout agreement.
Management does not expect this event to have an adverse impact on the Company's
consolidated results of operations, cash flows or financial position.
3. Acquisitions
Whitewater and Cottage Grove Acquisition
In March, 1998, the Company acquired from LS Power Corporation (the "LS
Acquisition") an approximate 74% ownership interest in two partnerships which
own and operate electric generating facilities located in Whitewater, Wisconsin
and Cottage Grove, Minnesota. Each of the Cottage Grove and Whitewater
Facilities is a 245-megawatt gas-fired, combined-cycle cogeneration facility.
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Commercial operations of both of these facilities commenced in the last half of
calendar 1997. The Cottage Grove Facility sells capacity and energy to Northern
States Power Company under a 30-year power sales contract terminating in 2027.
The Whitewater Facility sells capacity and energy to Wisconsin Electric Power
Company under a 25-year power sales contract terminating in 2022. Each of the
power sales contracts has characteristics similar to a lease in that the
agreement gives the purchasing utility the right to use specific property, plant
and equipment. As such, each of the power sales contracts is accounted for as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases."
The Company accounted for the LS Acquisition using the purchase method
of accounting. The accompanying consolidated balance sheets as of March 31, 1999
and December 31, 1998 reflect 100% of the assets and liabilities of the
partnerships acquired. The minority owner's share of the partnerships' net
assets is included in "minority interests" on the accompanying consolidated
condensed balance sheets as of March 31, 1999 and December 31, 1998. The
accompanying consolidated statement of income for the three months ended March
31, 1998 includes the results of operations of the acquired facilities since the
closing date of the LS Acquisition on March 20, 1998. The accompanying
consolidated statement of income for the three months ended March 31, 1999
includes the results of operations of the acquired facilities for three months.
Batesville Acquisition
In August, 1998, the Company acquired an approximate 52% interest in an
800-megawatt, gas-fired electric generating facility (the "Batesville Facility")
under construction in Batesville, Mississippi (the "Batesville Acquisition").
The Company has committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (i) the
incurrence of construction costs after all project financing has been expended,
(ii) an event of default under the project subsidiary's financing arrangements
or (iii) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit provided under the Company's corporate credit facility. The
Company expects the Batesville Facility, which will be operated by the Company,
to commence commercial operation in June, 2000. Electricity generated by the
Batesville Facility will be sold under long-term power purchase agreements with
two investment-grade utilities. The Company accounts for its interest in the
Batesville Facility using the equity method, as its 52% ownership is deemed to
be temporary.
Bechtel Asset Acquisition
In October, 1998, the Company acquired from Bechtel Generating Company,
Inc. ("BGCI") ownership interests in 12 electric generating facilities,
comprising a net equity interest of approximately 365 megawatts, and one
interstate natural gas pipeline in the United States (the "Bechtel
Acquisition").
The Bechtel Acquisition was accounted for using the purchase method of
accounting, which resulted in the recognition of a net purchase premium of
approximately $66.5 million. The purchase premiums or discounts related to the
Bechtel Acquisition are being amortized over the remaining lives of the
facilities or over the remaining terms of the power purchase agreements. The
Company is using the equity method of accounting to account for its ownership
interests in eight of these twelve facilities and will use the cost method of
accounting for its ownership interests in the other four.
4. Pending Claims and Litigation
Effective September, 1996, the Company amended the power sales
agreements on its Elizabethtown, Lumberton, Kenansville, Roxboro and Southport
facilities. Under the amended terms of these power sales agreements, the
purchasing utility has exercised its right of economic dispatch resulting in
significant reductions in fuel requirements at each of these facilities. In
response to this reduction in fuel requirements, one of the coal suppliers
initiated an arbitration proceeding, and another filed a civil action against
certain subsidiaries of the Company. The Company has resolved a subsequent
contract dispute with the coal supplier for the Elizabethtown, Lumberton and
Kenansville Facilities. The dispute was arbitrated in March, 1999 resulting in
an award to the coal supplier in the amount of approximately $8.0 million
payable in 1999. Approximately $3.0 million of this $8.0 million award relates
to the reduction in purchase quantities at these facilities prior to the
arbitration, and approximately $5.0 million relates to the reduction in purchase
quantities from the date of the arbitration award through the balance of the
term of the coal contract, which ends in September, 2001. The future reduction
in coal purchase quantities provides a future economic benefit to the Company.
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The Company has resolved the contract dispute with the coal supplier at
the Southport Facility concerning the reduction in coal requirements. The
dispute was arbitrated in October, 1997 in favor of the Company and against the
coal supplier. The coal supplier challenged the arbitration award in federal
district court, which vacated the award and ordered a new arbitration be
conducted. On April 1, 1999, the district court's decision was reversed on
appeal, and the award was reinstated in favor of the Company.
Effective December, 1997, the Company amended the power sales agreement
at its Portsmouth facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch which has led to significant reductions
in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth facility filed a civil action
in federal district court against a project subsidiary of the Company. In March,
1999, a project subsidiary of the Company entered into a comprehensive
settlement with the coal supplier which became final in May, 1999. Under the
terms of the settlement, the project subsidiary has agreed to take a stated
minimum quantity of coal in each of the five years remaining under the terms of
the coal contract. If the project subsidiary fails to make these purchases, the
project subsidiary will make a payment to the coal supplier based on the
shortfall quantity at an agreed upon price per ton.
Indirect, wholly-owned subsidiaries of Cogentrix Energy are also
parties to certain product liability claims related to the sale of coal
combustion by-products for use in various construction projects. Management
cannot currently estimate the range of possible loss, if any, the Company will
ultimately bear as a result of these claims. However, management believes -
based on its knowledge of the facts and legal theories applicable to these
claims and after consultations with various counsel retained to represent these
subsidiaries in their defense of such claims - that the ultimate resolution of
these claims should not have a material adverse effect on the Company's
consolidated financial position or results of operations or Cogentrix Energy's
ability to generate sufficient cash flow to service its outstanding debt.
In addition, the Company experiences other routine litigation in the
normal course of its business. Management is of the opinion that none of this
routine litigation should have a material adverse effect on its consolidated
financial position or results of operations.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements.
The information called for by this item is hereby incorporated herein
by reference to pages 3 through 8 of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In addition to discussing and analyzing our 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 us
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 our actual results to differ
materially from the forward-looking statements.
General
Cogentrix Energy, Inc. is an independent power producer that, through
its direct and indirect subsidiaries, acquires, develops, owns and operates
electric generating plants, principally in the United States. We derive most of
our revenue from the sale of electricity, but we also produce and sell steam. We
sell the electricity we generate, principally under long-term power purchase
agreements, to regulated electric utilities. We sell the steam we produce to
industrial customers with manufacturing or other facilities located near our
electric generating plants. We were one of the early participants in the market
for electric power generated by independent power producers that developed as a
result of energy legislation the United States Congress enacted in 1978. We
believe we are one of the largest independent power producers in the United
States based on our total project megawatts in operation.
We currently own - entirely or in part - a total of 25 electric
generating plants in the United States. Our 25 plants are designed to operate at
a total production capability of approximately 4,000 megawatts. After taking
into account our part interests in the 16 plants that are not wholly-owned by
us, which range from 3.3% to approximately 74.0%, our net equity interest in
the total production capability of our 25 electric generating plants is
approximately 1,690 megawatts. We developed, constructed and currently operate
10 of our plants, which, with one exception, are located in either North
Carolina or Virginia.
When our plant currently under construction in Batesville, Mississippi
begins operation, we will have ownership interests in a total of 26 domestic
electric generating plants that are designed with a total production capability
of 4,800 megawatts. Our net equity interest in the total production capability
of those 26 facilities will be approximately 2,110 megawatts.
Unless the context requires otherwise, references in this report to
"we", "us", "our", or "Cogentrix", refer to Cogentrix Energy, Inc. and its
subsidiaries, including subsidiaries that hold investments in other corporations
or partnerships whose financial results are not consolidated with us. The term
"Cogentrix Energy" refers only to Cogentrix Energy, Inc., which is a development
and management company that conducts its business primarily through
subsidiaries. Cogentrix Energy's subsidiaries that are engaged in the
development, ownership or operation of cogeneration facilities are sometimes
referred to individually as a "project subsidiary" and collectively as "project
subsidiaries".
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Results of Operations - Three Months Ended March 31, 1999 and 1998
Three Months Ended March 31,
--------------------------------------------
1999 1998
------------------- -------------------
Total operating revenues $113,439 100.0% $ 87,219 100.0%
Operating costs 47,153 41.5 36,606 42.0
General, administrative and development 12,649 11.2 9,355 11.0
Depreciation and amortization 10,871 9.6 10,174 11.0
-------- ------ -------- ------
Operating income $ 42,766 37.7% $ 31,084 36.0%
======== ====== ======== ======
Total operating revenues increased 30.0% to $113.4 million for the
first quarter of 1999 as compared to the first quarter of 1998. This increase
was primarily attributable to the $23.0 million aggregate amount of lease
revenue and service revenue earned under the power sales agreements for the
Cottage Grove and Whitewater facilities in which we acquired our interests on
March 20, 1998. Lease and service revenues include a full three months of
activity for the Cottage Grove and Whitewater facilities in the quarter ended
March 31, 1999, as compared to less than one month in the quarter ended December
31, 1998. The increase in revenues also relates to a $2.2 million increase
during the quarter as compared to the previous year fiscal quarter in equity
earnings from interests in eight of the twelve power projects acquired in the
Bechtel Acquisition in October, 1998. The increase in equity in earnings was
partially offset by a decrease in earnings from the Birchwood facility. In
addition, the increase in operating revenues was related to an increase in sales
of excess gas supply to third parties at the Cottage Grove and Whitewater
facilities. To a lesser extent, operating revenues were impacted by an increase
in electric revenue from the Richmond facility related to an increase in
megawatt hours sold to the purchasing utility. These increases in electric
revenue were partially offset by a decrease in revenue at the Southport facility
related to a decrease in capacity payments received in the first quarter of 1999
as compared to the first quarter of 1998.
Our operating costs increased 28.8% to $47.2 million for the first
quarter of 1999 as compared to the first quarter of 1998. This increase resulted
primarily from the significant increase in cost of services at the Cottage Grove
and Whitewater facilities, interests in which we acquired our interests on March
20, 1998. Operating costs include a full three months of activity for the
Cottage Grove and Whitewater facilities in the quarter ended March 31, 1999, as
compared to less than one month in the quarter ended March 31, 1998. The
increase in operating costs is also related to increased operating expenses at
the Elizabethtown, Lumberton, Kenansville, Southport and Roxboro Facilities. The
increase at the Elizabethtown, Lumberton and Kenansville facilities primarily
relates to expenses incurred related to the settlement of litigation in March,
1999. See "Part II - Item 1. Legal Proceedings" for a further explanation. The
increase in operating expenses at the Southport and Roxboro facilities was due
to routine maintenance costs incurred in the first quarter of 1999. The increase
in operating expenses was partially offset by a significant reduction in the
fuel expense at the Hopewell facility associated with the restructuring of its
power sales agreement and a decrease in maintenance costs incurred at the
Richmond facility related to routine maintenance performed during the first
quarter of 1998. To a lesser extent, the increase in operating costs was offset
by a decrease in costs incurred by ReUse Technology, Inc., a wholly-owned
subsidiary of Cogentrix Energy, engaged in coal ash disposal.
General, administrative and development expense increased 35.2% to
$12.6 million for the first quarter of 1999 as compared to the first quarter of
1998. This increase related primarily to an increase in incentive compensation
expense and the buyout of a former executive's profit sharing agreement. To a
lesser extent, the increase is due to an increase in consulting expenses related
to development activity.
Interest expense increased 79.2% to $23.7 million for the quarter ended
March 31, 1999 as compared to the first quarter of 1998. Our average long-term
debt increased to $1.2 billion, with a weighted average interest rate of 8.12%
for the first quarter of 1999, as compared to weighted average long-term debt of
$729 million, with a weighted average interest rate of 7.27% for the first
quarter of 1998. The increases in interest expense and weighted average debt
outstanding were related to the inclusion of the project finance debt of the
Cottage Grove and Whitewater facilities acquired in March, 1998. The increases
also relate to our issuance of $255 million of 8.75% senior notes in October and
November, 1998, and $15.0 million of outstanding borrowings under a revolving
credit facility at a project subsidiary. The increase in interest expense
discussed above was partially offset by a decrease in
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interest expense at several of our project subsidiaries due to the scheduled
repayment of outstanding project finance debt.
The decrease in equity in net (loss) income of affiliates related to
the decrease in earnings recognized from our interest in partnerships operating
greenhouses in the states of New York and Texas. We entered into an agreement in
December, 1998 to sell our interests in these partnerships.
The increase in minority interest in income for the first quarter of
1999 as compared to the first quarter of 1998 related primarily to an increase
in earnings at the Hopewell facility due to the restructuring of the power sales
agreement in February, 1998. In addition, the increase related to an increase in
earnings associated with the Cottage Grove and Whitewater Facilities, interests
in which we acquired on March 20, 1998. The results of operation for the quarter
ended March 31, 1999 include a full three months of earnings for the Cottage
Grove and Whitewater facilities, as compared to less than one month for the
three month period ended March 31, 1998.
The extraordinary loss on early extinguishment of debt for the first
quarter of 1998 related to the refinancing of the Hopewell facility's project
debt in January, 1998. The loss consisted of a write-off of the deferred
financing costs on the Hopewell facility's original project debt and a swap
termination fee on an interest rate swap agreement hedging the original project
debt.
Liquidity and Capital Resources
The principal components of operating cash flow for the first quarter
of 1999 were net income of $10.4 million, increases due to adjustments for
depreciation and amortization of $10.9 million, deferred income taxes of $6.2
million, minority interest in income, net of dividends, of $3.8 million, and a
net $3.5 million adjustment to cash reflecting changes in other working capital
assets and liabilities, which were partially offset by amortization of unearned
lease income, net of minimum lease payments received, of $0.4 and $1.2 million
equity in net income (loss) of unconsolidated affiliates, net of dividends. Cash
flow provided by operating activities of $33.2 million, and proceeds from
borrowings of $15.0 million were primarily used to purchase property, plant and
equipment of $0.2 million, repay project finance borrowings of $24.2 million,
pay deferred financing costs of $0.4 million, pay a common stock dividend of
$7.4 million and fund $15.4 million of escrow.
Historically, we have financed each facility primarily under financing
arrangements and related documents, which generally require the extensions of
credit to be repaid solely from the project's revenues and provide that the
repayment of the extensions of credit (and interest thereon) is secured solely
by the physical assets, agreements, cash flow and, in certain cases, the capital
stock of or the partnership interest in that project subsidiary. This type of
financing is generally referred to as "project financing". The project financing
debt of our subsidiaries and joint ventures (aggregating $832.3 million as of
March 31, 1999) is non-recourse to Cogentrix Energy and our other project
subsidiaries, except in connection with certain transactions where Cogentrix
Energy has agreed to certain limited guarantees and other obligations with
respect to such projects. These limited guarantees and other obligations include
agreements for the benefit of the project lenders to three project subsidiaries
to fund cash deficits that the projects may experience as a result of incurring
certain costs, subject to an aggregate cap of $51.9 million.
In addition, Cogentrix Inc., which is an indirect subsidiary of
Cogentrix Energy, has guaranteed two project subsidiaries' obligations to the
purchasing utility under five power sales agreements. Three of these power
sales agreements provide that in the event of early termination that is not for
cause, the project subsidiary must pay the utility a termination charge equal
to the excess paid for capacity and energy over what would have been paid to
the utility under the utility's published five-year capacity credit and
variable energy rates plus interest. The remaining two power sales agreements
provide that in the event of early termination, the project subsidiary must pay
the utility the cost of replacing the electricity from a third party for the
remainder of the agreement's term. Because these project subsidiaries'
obligations do not by their terms stipulate a maximum dollar amount of
liability, the aggregate amount of potential exposure under these guarantees
cannot be quantified. If we or our subsidiary were required to satisfy all of
these guarantees and other obligations or even one or more of the significant
ones, it could impair Cogentrix Energy's ability to service its outstanding
debt.
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Any projects we develop in the future, and those independent power
projects we may seek to acquire, are likely to require substantial capital
investment. Our ability to arrange financing on a substantially non-recourse
basis and the cost of such capital are dependent on numerous factors. In order
to access capital on a substantially non-recourse basis in the future, we may
have to make larger equity investments in, or provide more financial support
for, the project entity.
The ability of our project subsidiaries and the project entities in
which we have an investment to pay dividends and management fees periodically to
Cogentrix Energy, Inc. is subject to certain limitations in our respective
project credit documents. Such limitations generally require that: (i) project
debt service payments be current, (ii) project debt service coverage ratios be
met, (iii) all project debt service and other reserve accounts be funded at
required levels and (iv) there be no default or event of default under the
relevant project credit documents. There are also additional limitations that
are adapted to the particular characteristics of each project subsidiary and
project entities in which we have an investment.
As of March 31, 1999, we had long-term debt (including the current
portion thereof) of approximately $1.2 billion. With the exception of the $355
million of senior notes currently outstanding, substantially all of such
indebtedness is project financing debt, a large portion of which is non-recourse
to Cogentrix Energy. Future annual maturities of long-term debt range from $54.7
million to $86.3 million in the five-year period ending December 31, 2003. We
believe that our project subsidiaries and the project entities in which we have
an investment will generate sufficient cash flow to pay all required debt
service on the project financing debt and to allow us to pay management fees and
dividends to Cogentrix Energy periodically in sufficient amounts to allow
Cogentrix Energy to pay all required debt service on outstanding balances under
the corporate credit facility, the senior notes, to fund a significant portion
of development activities and meet other obligations. If, as a result of
unanticipated events, our ability to generate cash from operating activities is
significantly impaired, we could be required to curtail our development
activities to meet our debt service obligations.
We have a corporate credit facility to provide for direct advances to,
or the issuance of letters of credit for, our benefit in an amount up to $125
million. The corporate credit facility is unsecured and imposes covenants on us
substantially the same as the covenants contained in the indentures as well as
certain financial condition covenants. We have used approximately $60 million of
the credit availability under the corporate credit facility for letters of
credit issued in connection with the Bechtel Acquisition and the Batesville
Acquisition. The balance of the commitment under the corporate credit facility
is available, subject to any limitations imposed by the covenants contained
therein and in the indentures, to be drawn upon by us to repay other outstanding
indebtedness or for general corporate purposes, including equity investments in
new projects or acquisitions of existing electric generating facilities or those
under development.
As a result of a March 1999 arbitration award related to a contract
dispute with a coal supplier, we are obligated to pay the coal supplier
approximately $8 million in 1999. Approximately $3 million of this award
relates to the reduction in purchase quantities for prior periods and
approximately $5 million relates to the reduction in purchase quantities from
the date of the award through the balance of the term of the coal contract,
which ends in September 2001. The future reduction in purchase quantities
provides a future economic benefit to our project subsidiary. The amount of
damages awarded will not materially reduce the projected amount of cash flow to
Cogentrix Energy for the current fiscal year and should not, therefore, have a
material adverse impact on Cogentrix Energy's ability to service its
outstanding debt.
For the fiscal year ended December 31, 1998, our board of directors
declared a dividend on our outstanding common stock of $7.4 million. The
dividend was paid in March, 1999. The board of directors' policy, which is
subject to change at any time, provides for a dividend payout ratio of no more
than 20% of our net income for the immediately preceding fiscal year. In
addition, under the terms of the indentures for the senior notes and the
corporate credit facility, our ability to pay dividends and make other
distributions to our shareholders is restricted.
Impact of Energy Price Changes, Interest Rates and Inflation
Energy prices are influenced by changes in supply and demand, as well
as general economic conditions, and therefore tend to fluctuate significantly.
Through various hedging mechanisms, we have attempted to mitigate the impact of
changes on the results of operations of most of our projects. The basic hedging
mechanism against increased fuel and transportation costs is to provide
contractually for matching increases in the energy payments our project
subsidiaries receive from the utility purchasing the electricity generated by
the facility.
Under the power sales agreements for certain of our facilities, energy
payments are indexed, subject to certain caps, to reflect the purchasing
utility's solid fuel cost of producing electricity or provide periodic,
scheduled increases in energy prices that are designed to match periodic,
scheduled increases in fuel and transportation costs that are included in the
fuel supply and transportation contracts for the facilities.
Changes in interest rates could have a significant impact on us.
Interest rate changes affect the cost of capital needed to construct projects as
well as interest expense of existing project financing debt. As with fuel price
escalation risk, we attempt to hedge against the risk of fluctuations in
interest rates by arranging either fixed-rate financing or variable-rate
financing with interest rate swaps, collars or caps on a portion of its
indebtedness.
Although hedged to a significant extent, our financial results will
likely be affected to some degree by fluctuations in energy prices, interest
rates and inflation. The effectiveness of the hedging techniques implemented by
us is dependent, in part, on each counterparty's ability to perform in
accordance with the provisions of the relevant contracts. We have sought to
reduce the risk by entering into contracts with creditworthy organizations.
Interest Rate Sensitivity
We routinely enter into derivative financial instruments and other
financial instruments to hedge our risk against interest rate fluctuations. As
of March 31, 1999, there have been no significant changes in the portfolio of
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instruments as disclosed in our report on Form 10-K for the year ended
December 31, 1998, filed with the Commission on March 31, 1999.
Year 2000 Compliance
We continue to assess our readiness with the Year 2000 issue, and
expect that all of our business critical systems such as corporate, embedded
technology systems, business partners and vendor systems will be Year 2000
compliant by June 30, 1999. Non-compliance with the embedded technology systems,
or business partner and vendor systems could result in temporary shutdown of the
facilities and equipment damage. The investigation, analysis, remediation and
contingency planning for the embedded technology at the power generation
facilities was completed before January 1, 1999. The investigation and analysis
identified no significant Year 2000 issues. The power generation facilities as
currently configured require no action to be Year 2000 operational, but certain
remediation is under way and scheduled for completion by October 21, 1999, which
will address certain non-operational Year 2000 functions. We will continue to
communicate with critical suppliers, vendors, joint venture partners and major
customers to assess their compliance efforts and our exposure to their efforts.
We have not incurred any significant additional expenses related to the Year
2000 issue in the quarter ended March 31, 1999. At this time, we do not expect a
major impact from non-compliant Year 2000 suppliers, vendors, joint venture
partners or major customers. We have developed contingency plans for all of the
critical systems. These plans were developed to address our most likely worse
case scenario, the inability of the plants to produce and distribute power.
These plans have been tested, and appear to be adequate. Despite our current
expectations, there can be no assurances that there will not be interruptions or
other limitations of financial and operating system functionality or that we
will not ultimately incur significant, unplanned costs to avoid such
interruptions or limitations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disputes with Coal Suppliers
Under the terms of the amended power sales agreements for our
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities, the
purchasing utility has exercised its right to suspend or reduce purchases of
energy resulting in significantly reduced fuel requirements at each of these
facilities. Coal is supplied to the Elizabethtown, Lumberton and Kenansville
Facilities by James River Coal Sales, Inc., and one of its affiliates. Coal was
supplied to the Southport Facility until November, 1997 when the contract term
expired by Coastal Coal Sales, Inc. The coal sales agreements for the
Elizabethtown, Lumberton and Kenansville Facilities provide for the sale and
purchase of the coal requirements of those facilities through September, 2001.
Under the amended power sales agreement for our Portsmouth Facility,
Virginia Power has from time to time, since December, 1997, exercised its right
to suspend or reduce purchases of energy resulting in significantly reduced fuel
requirements at the facility. Coal is supplied to the Portsmouth Facility by
Arch Coal Sales Company, Inc. The coal sales agreement provides for the sale and
purchase of the coal requirements of the Portsmouth Facility through April,
2003.
As a result of the purchasing utility exercising its right to suspend
or reduce purchases of energy from these facilities and the consequent reduction
in fuel requirements, our project subsidiaries operating these facilities are
purchasing significantly less coal. In response the coal suppliers sought to
recover damages and, in some cases, sought injunction relief. A summary of the
resolution of each of these disputes is set forth below.
We recently resolved the contract dispute with James River Coal
concerning reduction in coal requirements at the Elizabethtown, Lumberton and
Kenansville Facilities, which has been pending since November, 1996. The issue
was arbitrated in March, 1999 with the coal supplier's claims for an amount in
excess of $24 million reduced to an award in favor of the coal supplier in the
amount of approximately $8 million. The arbitration award was satisfied by the
project subsidiary and the pending lawsuit by James River Coal against the
project subsidiary in the United States District Court was dismissed with
prejudice on May 6, 1999. Approximately $3 million of this $8 million award
relates to the reduction in purchase quantities prior to the arbitration and
approximately $5 million relates to the reduction in purchase quantities from
the arbitration award date through the balance of the term of the coal contract,
which ends in September, 2001. The future reduction in coal purchase quantities
provides future economic benefit to this project subsidiary.
We also recently resolved the contract dispute with Coastal Coal Sales
concerning reduction in coal requirements at the Southport Facility that has
been pending since October, 1996. The dispute was arbitrated in October, 1997
and the decision was in favor of our project subsidiary and against the coal
supplier. The successor company to Coastal Coal Sales challenged the arbitration
award in the United States District Court. In April, 1998 the District Court
issued an order vacating the arbitration award and directing a new arbitration
be conducted. We appealed the District Court's order to the United States Court
of Appeals for the Fourth Circuit, which by order dated April 1, 1999 reversed
the District Court and remanded the matter with direction to reinstate the
arbitration award in favor of the company. A subsequent request by the coal
supplier for reconsideration by the Court of Appeals has been denied.
We also recently resolved the contract dispute with Arch Coal Sales
concerning reduction in coal requirements at the Portsmouth Facility that has
been pending since February, 1998. In March, 1999 we entered into a
comprehensive settlement with this coal supplier which became final in May,
1999. Under the settlement agreement, our project subsidiary has agreed to take
a stated minimum quantity of coal in each of the five years remaining under the
term of the coal contract and, failing such purchases, to make a payment based
upon the shortfall quantity at an agreed upon price per ton. Given the projected
coal requirements for electric and steam production over that five year period,
we believe any required shortfall payments should not have a material adverse
effect on the projected aggregate amount of cash flow to Cogentrix Energy from
its project subsidiaries and unconsolidated affiliates.
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The amount paid to satisfy the arbitration award in favor of James
River Coal, even when combined with the amounts we expect to pay in the current
year under the settlement with Arch Coal Sales, will not materially reduce the
projected amount of cash flow to Cogentrix Energy for the current fiscal year.
The payment of these amounts should not, therefore, have a material adverse
effect on Cogentrix Energy's ability to service its outstanding debt.
Other Litigation
In addition to the litigation described above, we experience other
litigation in the normal course of business. Several of our indirect,
wholly-owned subsidiaries are parties to certain product liability claims
related to the sale of coal combustion by-products for use in various
construction projects. We cannot currently estimate the range of possible loss,
if any, we will ultimately bear as a result of these claims. However, our
management believes - based on its knowledge of the facts and legal theories
applicable to these claims and after consultations with various counsel retained
to represent these subsidiaries in its defense of such claims - that the
ultimate resolution of these claims should not have a material adverse effect on
our consolidated financial position, results of operations or ability to
generate sufficient cash flow to service its outstanding debt.
In addition, we experience other routine litigation in the normal
course of its business. Our management is of the opinion that none of this
routine litigation should have a material adverse effect on our financial
position or results of operation.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Articles of Incorporation of Cogentrix Energy, Inc. (3.1) (1)
3.2 Amended and Restated Bylaws of Cogentrix Energy, Inc., as amended.
4.1 Indenture, dated as of March 15, 1994, between Cogentrix Energy,
Inc. and First Union National Bank of North Carolina, as Trustee,
including form of 8.10% 2004 Senior Note. (4.1) (2)
4.2 Indenture, dated as of October 20, 1998, between Cogentrix Energy,
Inc. and First Union National Bank, as Trustee, including form of
8.75% Senior Note. (4.2) (3)
4.3 First Supplemental Indenture, dated as of October 20, 1998,
between Cogentrix Energy, Inc. and First Union National Bank, as
Trustee. (4.3) (3)
4.4 Registration Agreement, dated as of October 20, 1998, by and
among Cogentrix Energy, Inc., Salomon Smith Barney Inc., Goldman,
Sachs & Co. and CIBC Oppenheimer Corp. (4.4) (3)
4.5 Registration Agreement, dated as of November 25, 1998, between
Cogentrix Energy, Inc. and Salomon Smith Barney, Inc. (4.5) (3)
4.6 Amendment No. 1 to the First Supplemental Indenture, dated as of
November 25, 1998, between Cogentrix Energy, Inc. and First Union
National Bank, as Trustee. (4.6) (4)
10.1 Operation and Maintenance Agreement by and between LSP - Whitewater
Limited Partnership as Owner and LSP - Whitewater I, Inc. as
Operator dated as of April 15, 1999. (10.1) (*) (5)
10.2 Operation and Maintenance Agreement by and between LSP - Cottage
Grove, L.P. as Owner and LSP - Cottage Grove, Inc. as Operator dated
as of April 15, 1999. (10.2) (*) (5)
27 Financial Data Schedule, which is submitted electronically to the
U.S. Securities and Exchange Commission for information only and
is not filed.
- -------------
* Certain portions of this exhibit have been deleted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
(1) Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 33-74254) filed January 19, 1994. The number designating the
exhibit on the exhibit index to such previously-filed report is enclosed
in parentheses at the end of the description of the exhibit above.
(2) Incorporated herein by reference to the Form 10-K (File No. 33-74254) filed
September 28, 1994. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(3) Incorporated herein by reference to the Registration Statement on Form S-4
(File No. 33-67171) filed November 12, 1998. The number designating the
exhibit on the exhibit index to such previously-filed report is enclosed
in parentheses at the end of the description of the exhibit above.
(4) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement on Form S-4 (File No. 33-67171) filed January 27, 1999. The
number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(5) Incorporated by reference to the Form 10-Q (File No. 33-95928) filed by LS
Power Funding Corporation, LSP - Whitewater Limited Partnership and LSP -
Cottage Grove, L.P. on May 17, 1999. The number designating the exhibit on
the exhibit index to such previously-filed report is endorsed in parentheses
at the end of the description of the exhibit above.
(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 report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGENTRIX ENERGY, INC.
(Registrant)
May 17, 1999 /s/ Thomas F. Schwartz
-------------------------------------
Thomas F. Schwartz
Senior Vice President - Finance
Treasurer
(Principal Financial and Accounting
Officer)
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