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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 AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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 incorporation or organization) (I.R.S. Employer Identification No.)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NC 28273, (704) 525-3800
(Address, including zip code, and
telephone number, including area code,
of registrant's principal executive offices)
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
DELAWARE 81-0493289
DELAWARE 81-0493287
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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 MARCH 31, 1999
PART I
Page
Item 1. Condensed Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Financial Statement Index F-1
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3
PART I/ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed financial statements contained herein have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While the management of LS Power Funding Corporation ("Funding"),
LSP-Cottage Grove, L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership
("Whitewater") (Cottage Grove and Whitewater sometimes referred to herein
individually as a "Partnership" and collectively as the "Partnerships") believe
that the disclosures made are adequate to make the information presented not
misleading, these unaudited condensed financial statements should be read in
conjunction with the audited financial statements included in the Annual Report
on Form 10-K for the year ended December 31, 1998, filed by Funding and the
Partnerships.
PART I/ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to discussing and analyzing Funding and the Partnerships'
recent historical financial results and condition, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes statements concerning certain trends and other forward-looking
information affecting or relating to Funding and the Partnerships which are
intended to qualify for the protections afforded "Forward-Looking Statements"
under the Private Securities Litigation Reform Act of 1995, Public Law 104-67.
The forward-looking statements made herein are inherently subject to risks and
uncertainties which could cause Funding's and the Partnerships' actual results
to differ materially from the forward-looking statements.
GENERAL
Cottage Grove is a single purpose Delaware limited partnership
established in December 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. ("Cogentrix Energy"). The other limited partner is TPC Cottage
Grove, Inc. ("TPC Cottage Grove") and is not affiliated with Cogentrix Energy.
Whitewater is a single purpose Delaware limited partnership established in
December 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. The other
limited partner is TPC Whitewater, Inc. ("TPC Whitewater") and is not affiliated
with Cogentrix Energy. The Partnerships sell electric capacity and energy
generated by their Facilities to two utilities under separate long-term power
purchase agreements (individually, the "Power Purchase Agreement" and,
collectively, the "Power Purchase Agreements"). Whitewater sells up to 236.5
megawatts of electric capacity and associated energy generated by the Whitewater
Facility to Wisconsin Electric Power Company ("WEPCO") pursuant to a 25-year
Power Purchase Agreement. Whitewater may also sell to third parties up to 12
megawatts of electric capacity and any energy not dispatched by WEPCO. All of
the electric capacity and energy generated by the Cottage Grove Facility is sold
to Northern States Power Company ("NSP") pursuant to a 30-year Power Purchase
Agreement. The Partnerships also have long-term steam supply agreements with
steam hosts to supply thermal energy produced by the Facilities.
The Whitewater Facility commenced commercial operations on September
18, 1997, and the Cottage Grove Facility commenced commercial operations on
October 1, 1997. The Whitewater and Cottage Grove Power Purchase Agreements meet
the criteria of a "sales-type" capital lease as described in Statement of
Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Cottage
Grove and Whitewater each recognized a gain on sales-type capital lease for the
difference between the estimated fair market value and the historical cost of
the Facilities as of the commencement of each respective Power Purchase
Agreement's terms (commencement of commercial operations). The Partnerships each
recorded a net investment in lease that reflects the present value of future
minimum lease payments. Future minimum lease payments represent the amount of
capacity payments due from the utilities under the Power Purchase Agreements in
excess of fixed operating costs (i.e., executory costs). The difference between
the undiscounted future minimum lease payments due from the utilities and the
net investment in lease represents unearned income. This unearned income will be
recognized as lease revenue over the respective terms of the Power Purchase
Agreements using the effective interest rate method. The Partnerships will also
recognize service revenue related to the reimbursement of costs incurred in
operating the Facilities and providing electricity and thermal energy. The
amount of service revenue recognized by each Partnership will be directly
related to the level of dispatch of the Facilities by the utility and to a
lesser extent the level of thermal energy required by the steam hosts.
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Funding
Funding was organized in June, 1995 as a special purpose Delaware
corporation to issue debt securities in connection with financing the
construction of the Facilities. Funding's sole business activities are limited
to maintaining its organization and activities necessary pursuant to the
offering of the Senior Secured Bonds (defined below) and its acquisition of the
First Mortgage Bonds (defined below) from the Partnerships.
The Senior Secured Bonds are the following:
7.19% Senior Secured Bonds Due 2010, Series A of LS Power
Funding Corporation
8.08% Senior Secured Bonds Due 2016, Series A of LS Power
Funding Corporation
The First Mortgage Bonds are the following:
7.19% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2010
8.08% First Mortgage Bonds of LSP-Cottage Grove, L.P. Due 2016
7.19% First Mortgage Bonds of LSP-Whitewater Limited
Partnership Due 2010
8.08% First Mortgage Bonds of LSP-Whitewater Limited
Partnership Due 2016
Cottage Grove and Whitewater each own 50% of the outstanding stock
of Funding.
RESULTS OF OPERATIONS
Whitewater
Operating revenues increased approximately 4.0% for the first quarter
of 1999 as compared to the first quarter of 1998. This increase was primarily
the result of an increase in service revenue. The increase in service revenue
resulted from a slight increase in megawatt hours provided to the purchasing
utility. This increase was partially offset by a decrease in other revenue
resulting from a decrease in excess fuel sales to third party purchasers.
Cost of services remained fairly consistent for the first quarter of
1999 as compared to the first quarter of 1998. Although the number of megawatt
hours produced in the first quarter of 1999 as compared to the first quarter of
1998 increased slightly, the Whitewater Facility took advantage of lower gas
prices in the first quarter of 1999. This decrease in gas prices resulted in a
decline in fuel expense, a component of cost of services, for the first quarter
of 1999 as compared to the first quarter of 1998.
Interest expense consists primarily of interest expense on the First
Mortgage Bonds and amortization of the costs incurred to issue the bonds.
Cottage Grove
Operating revenues increased approximately 21.4% for the first quarter
of 1999 as compared to the first quarter of 1998. This increase was primarily a
result of an increase in service revenue and other revenue. The increase in
service revenue resulted from an increase in megawatt hours provided to the
purchasing utility. The increase in other revenue resulted primarily from an
increase in remarketed fuel sales to third party purchasers.
Cost of services increased approximately 39.3% for the first quarter of
1999 as compared to the first quarter of 1998. This increase is primarily the
result of a $1.6 million increase in fuel expense, a component of cost of
services, related to the increase in megawatt hours provided to the purchasing
utility. The increase in fuel expense was partially offset by the Cottage Grove
Facility taking advantage of lower fuel prices in the first quarter of 1999 as
compared to the first quarter of 1998. The increase in cost of services, to a
lesser extent, is also a result of an increase in general and administrative
expenses related to the increased production of electricity.
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Interest expense consists primarily of interest expense on the First
Mortgage Bonds and amortization of the costs incurred to issue the bonds.
FACILITY CONSTRUCTION
The Whitewater Facility
Effective September 18, 1997, Whitewater and Westinghouse Electric
Corporation (the "Contractor"), with the concurrence of R.W. Beck, the
independent engineer, agreed to a construction contract change order. Under the
change order, certain nonmaterial modifications were made to the Whitewater
construction contract and certain guarantees were deferred until final
completion, which allowed the Contractor to achieve substantial completion and
Whitewater to commence commercial operation. In addition, the Contractor
committed to certain future modifications in the Whitewater Facility's
construction, extension of certain warranty periods and certain financial
concessions. As of March 31, 1999, Whitewater had retained construction contract
payments (in the form of cash and an irrevocable letter of credit) totaling
approximately $11,174,000.
The Cottage Grove Facility
Effective September 30, 1997, Cottage Grove and the Contractor, with
the concurrence of R.W. Beck, the independent engineer, agreed to a construction
contract change order. Under the change order, certain nonmaterial modifications
were made to the Cottage Grove construction contract and certain guarantees were
deferred until final completion, which allowed the Contractor to achieve
substantial completion and Cottage Grove to commence commercial operation. In
addition, the Contractor committed to certain future modifications in the
Cottage Grove Facility's construction, extension of certain warranty periods and
certain financial concessions. As of March 31, 1999, Cottage Grove had retained
construction contract payments (in the form of cash and an irrevocable letter of
credit) totaling approximately $10,886,000.
OPERATIONS AND MAINTENANCE
Operations and Maintenance Agreements
Each of the Cottage Grove and Whitewater Facilities has been operated
by Westinghouse Operating Services Company, Inc. ("Westinghouse Services")
pursuant to a seven-year operations and maintenance agreement (an "O&M
Agreement" and collectively, the "O&M Agreements").
On March 16, 1999, each Partnership exercised an option under its O&M
Agreement to terminate the O&M Agreement with Westinghouse Services effective
April 15, 1999. In connection with the exercise of such option, Cottage Grove
and Whitewater each made a payment to Westinghouse Services pursuant to its O&M
Agreement in an amount approximately equal to $320,000. Each O&M Agreement has
been replaced with a similar agreement, in all material respects identical to
the applicable O&M Agreement, executed with LSP-Whitewater I, Inc. and
LSP-Cottage Grove, Inc. respectively, each of which is an indirect subsidiary of
Cogentrix Energy.
LIQUIDITY AND CAPITAL RESOURCES
Whitewater
The principal components of operating cash flow for the three-month
period ended March 31, 1999 were net income of $2.2 million, a net $4.3 million
of cash provided by changes in other working capital assets and liabilities, and
a $0.2 million adjustment for depreciation and amortization of debt issuance and
financing costs, which were partially offset by amortization of unearned lease
income, net of minimum lease payments received of $0.1 million. Cash flow
provided by operating activities of $6.6 million and a portion of the cash on
hand at the beginning of the period of $0.3 million were primarily used to fund
$6.9 million of restricted cash.
Cottage Grove
The principal components of operating cash flow for the three-month
period ending March 31, 1999 were net income of $2.1 million, a $0.1 million
adjustment for amortization of debt issuance and financing costs and a net $4.7
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 $0.3 million. Cash flow
provided by operating activities of $6.6 million was primarily used to make
partner distributions of $0.2 million, lend $0.5 million to an affiliate and
fund $5.9 million of restricted cash.
The $332,000,000 of proceeds received by Funding from the sale of the
Senior Secured Bonds were used by Funding to acquire (i) $155,000,000 of Cottage
Grove First Mortgage Bonds and (ii) $177,000,000 of Whitewater First Mortgage
Bonds. In addition to the proceeds of the First Mortgage Bonds, the Partnerships
each received equity contributions from TPC Cottage Grove and TPC Whitewater in
1997, in the respective amounts of $18,167,000 for Cottage Grove and $20,556,000
for Whitewater (the "Equity Contribution Amounts"). The net proceeds from the
sale of the Partnerships' First Mortgage Bonds and the Equity Contribution
Amounts together with other sources of funds available to the Partnerships were
used to: (i) finance the development, design, engineering, construction,
testing, inspection and start-up of the Facilities, (ii) pay interest on the
Partnerships' First Mortgage Bonds during construction and (iii) maintain a debt
service reserve fund as required by certain financing
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documents (currently equal to $6,585,000 and $6,900,000 for Cottage Grove and
Whitewater, respectively). During the year ended December 31, 1998, the
Partnership transferred the cash held in the debt service reserve fund to an
affiliate of one of the limited partners, Cogentrix Energy, Inc. The required
funds are included on the respective balance sheets as a Note Receivable from
Affiliate. The receivables are backed by an irrevocable letter of credit issued
on behalf of Cogentrix Energy.
As required by the financing documents, both Cottage Grove and
Whitewater have set aside certain funds to pay for project cost overruns,
including change orders to the construction contracts and any other reasonable
contingencies, during construction and through final completion of the
Facilities (the "Contingency Fund"). At March 31, 1999, the balances of the
Contingency Fund accounts were $1,426,000 for Cottage Grove and $345,000 for
Whitewater.
In addition to funds received through the acquisition of the First
Mortgage Bonds by Funding and through the Equity Contribution Amount, each
Partnership may each receive on its behalf certain letters of credit to be
issued pursuant to a letter of credit facility. Each letter of credit facility
provides for letters of credit in a face amount not to exceed $5,000,000 for
Whitewater and $5,500,000 for Cottage Grove, which may be drawn on by the
respective Partnership from time to time. Such letters of credit will satisfy
certain requirements of the Partnerships under various project agreements.
Cottage Grove has issued a $500,000 letter of credit under the letter of credit
facility to secure certain obligations of Cottage Grove under the Cottage Grove
Power Purchase Agreement.
In order to provide for the Partnerships' working capital needs, the
Partnerships have each entered into a working capital facility. Each working
capital facility will provide for working capital loans in an aggregate
principal amount not to exceed $3,000,000 for each Partnership. At March 31,
1999, 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 substantial majority of their
revenues. Under and subject to the terms of the Power Purchase Agreements, each
utility is obligated to purchase electric capacity made available to it and
energy that it requests from the related Partnership. 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 Commission.
The Power Purchase Agreements are dispatchable contracts that 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. Each Partnership is dependent on capacity payments under its Power
Purchase Agreement to meet its fixed obligations, including the payment of debt
service under each Partnership's First Mortgage Bonds (which will be Funding's
sole source of revenues for payment of debt service under the Senior Secured
Bonds). Capacity payments by each of NSP and WEPCO are based on the tested
capacity and availability of the Facilities and are unaffected by levels of
dispatch. Each Facility's capacity is subject to semi-annual verification
through testing. Capacity payments are subject to reduction if a Facility is
operating at reduced or degraded capacity at the time of such test, although
each Facility is permitted a retest subject to certain retest limitations. Also,
capacity payments for each Facility are subject to rebate or reduction if the
respective Facility does not maintain certain minimum levels of availability.
Under the Cottage Grove Power Purchase Agreement, capacity payments are further
adjusted by, among other things, the capacity loss factor which is determined in
accordance with procedures jointly agreed to by Cottage Grove and NSP. The
Partnerships expect to achieve the minimum capacity and availability levels;
however, any material shortfall in tested capacity or availability over a
significant period could result in a shortage of funds to the Partnerships.
Each Partnership presently believes that funds available from cash and
investments on hand, restricted funds, operations and letter of credit and
working capital facilities will be more than sufficient to liquidate each
Partnership's obligations as they come due, pay project debt service and make
required contributions to project reserve accounts.
As with any power generation facility, operation of the Facilities will
involve certain risks, including the performance of a Facility below expected
levels of output or efficiency, interruptions in fuel supply, pipeline
disruptions, disruptions in the supply of thermal or electrical energy, power
shut-downs due to the breakdown or failure of equipment or processes, violation
of permit requirements (whether through operation, or change in law), operator
error, labor disputes or catastrophic events such as fires, earthquakes,
explosions, floods or other similar
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occurrences affecting a Facility or its power purchasers, thermal energy
purchasers, fuel suppliers or fuel transporters. The occurrence of any of these
events could significantly reduce or eliminate revenues generated by a Facility
or significantly increase the expenses of that Facility, thereby impacting the
ability of a Partnership to make payments of the amounts necessary to fund
principal of and interest on its First Mortgage Bonds, and, consequently,
Funding's ability to make payments of principal of and interest on the Senior
Secured Bonds. Not all risks are insured and the proceeds of such insurance
applicable to covered risks may not be adequate to cover a Facility's lost
revenues or increased expenses. In addition, extended unavailability under the
Power Purchase Agreements, which may result from one or more of such events, may
entitle the respective power purchaser to terminate its Power Purchase
Agreement.
IMPACT OF ENERGY PRICE CHANGES, INTEREST RATES AND INFLATION
The Partnerships have attempted to mitigate the risk of increases in
fuel and transportation costs by providing contractually for matching increases
in the energy payments the Partnerships receive from the utilities purchasing
electricity generated by the Facilities. In addition, the Partnerships have
hedged against the risk of fluctuations in interest rates by arranging fixed
rate financing.
YEAR 2000 COMPLIANCE
The Partnerships continue to assess their readiness with the Year 2000
issue, and expect that all the 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 Partnerships will
continue to communicate with critical suppliers, vendors, joint venture partners
and major customers to assess their compliance efforts and the Partnership's
exposure to their efforts. The Partnerships have not incurred any significant
additional expenses related to the Year 2000 issue in the quarter ended March
31, 1999. At this time, the Partnerships do not expect a major impact from
non-compliant Year 2000 suppliers, vendors, joint venture partners or major
customers. The Partnerships have developed contingency plans for all of the
critical systems. These plans were developed to address their 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 management's
current expectations, there can be no assurances that there will not be
interruptions or other limitations of financial and operating system
functionality or that the Partnerships will not ultimately incur significant,
unplanned costs to avoid such interruptions or limitations.
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PART 2/ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of LS Power Funding Corporation. (1)
3.2 Bylaws of LS Power Funding Corporation. (1)
3.3 Certificate of Limited Partnership of LSP-Cottage Grove, L.P. (1)
3.4 Amended and Restated Partnership Agreement dated as of June 30,
1995 among LSP-Cottage Grove, Inc., Granite Power Partners, L.P.
and TPC Cottage Grove, Inc. (1)
3.4.1 Amendment #1 to the Cottage Grove Partnership Agreement. (2)
3.4.2 Consent, Waiver and Amendment No. 2 dated March 20, 1998 to the
Amended and Restated Limited Partnership Agreement of LSP-Cottage
Grove, L.P. (3)
3.4.3 Third Amendment, dated December 11, 1998, to the Amended and
Restated Limited Partnership Agreement of LSP-Cottage
Grove, L.P. (3)
3.5. Certificate of Limited Partnership of LSP-Whitewater Limited
Partnership. (1)
3.6 Amended and Restated Partnership Agreement dated as of June 30,
1995 among LSP-Whitewater I, Inc., Granite Power Partners, L.P.
and TPC Whitewater, Inc. (1)
3.6.1 Consent, Waiver and Amendment No. 1 dated March 20, 1998 to the
Amended and Restated Limited Partnership Agreement of
LSP-Whitewater Limited Partnership. (3)
3.6.2 Second Amendment, dated December 11, 1998, to the Amended and
Restated Limited Partnership Agreement of LSP-Whitewater Limited
Partnership. (3)
4.1 Trust Indenture dated as of May 1, 1995 by and among LS Power
Funding Corporation and IBJ Schroder Bank & Trust Company, as
Trustee, with respect to the Senior Secured Bonds (as supplemented
by the First Supplemental Indenture dated as of May 1, 1995 by and
among LS Power Funding Corporation and IBJ Schroder Bank & Trust
Company, as Trustee). (1)
4.2 Trust Indenture dated as of May 1, 1995 by and among LSP-Cottage
Grove, L.P. and IBJ Schroder Bank & Trust Company, as Trustee,
with respect to the Cottage Grove First Mortgage Bonds (as
supplemented by the First Supplemental Indenture dated as of May 1,
1995 by and among LSP-Cottage Grove, L.P. and IBJ Schroder Bank &
Trust Company, as Trustee). (1)
4.3 Trust Indenture dated as of May 1, 1995 by and among LSP-Whitewater
Limited Partnership and IBJ Schroder Bank & Trust Company, as
Trustee, with respect to the Whitewater First Mortgage Bonds (as
supplemented by the First Supplemental Indenture dated as of May 1,
1995 by and among LSP-Whitewater Limited Partnership and IBJ
Schroder Bank & Trust Company, as Trustee). (1)
.
4.4 Registration Rights Agreement dated as of June 30, 1995 by and
among Chase Securities, Inc., Morgan Stanley & Co. Incorporated,
LS Power Funding Corporation, LSP-Cottage Grove, L.P. and
LSP-Whitewater Limited Partnership (1)
4.5 Form of Senior Secured Bond (included in Exhibit 4.1). (1)
4.6 Form of Cottage Grove First Mortgage Bond (included in Exhibit
4.2). (1)
4.7 Form of Whitewater First Mortgage Bond (included in Exhibit
4.3). (1)
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.(*)
10.2 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.(*)
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
- -------------
(*) 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-4
(File No. 33-95928) filed by LS Power Funding Corporation, LSP-Cottage
Grove, L.P. and LSP-Whitewater Limited Partnership on August 16, 1995, as
amended, or to the Form 10-K (File No. 33-95928) filed for the fiscal year
ended December 31, 1995 by LS Power Funding Corporation, LSP-Cottage Grove,
L.P. and LSP-Whitewater Limited Partnership.
(2) Incorporated herein by reference to the Form 10-Q (File No. 33-95928) filed
August 14, 1996.
(3) Incorporated herein by reference to the Form 10-K (File No. 33-95928) filed
April 15, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
LS POWER FUNDING CORPORATION
By: /s/ Thomas F. Schwartz
----------------------------
Name: Thomas F. Schwartz
Title: Vice President and Assistant Treasurer
Date: May 17, 1999
LSP-COTTAGE GROVE, L.P.
By: LSP-Cottage Grove, Inc.
Its: General Partner
By: /s/ Thomas F. Schwartz
----------------------------
Name: Thomas F. Schwartz
Title: Vice President and Assistant Treasurer
Date: May 17, 1999
LSP-WHITEWATER LIMITED PARTNERSHIP
By: LSP-Whitewater I, Inc.
Its: General Partner
By: /s/ Thomas F. Schwartz
----------------------------
Name: Thomas F. Schwartz
Title: Vice President and Assistant Treasurer
Date: May 17, 1999
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LS POWER FUNDING CORPORATION
LSP-COTTAGE GROVE, L.P.
LSP-WHITEWATER LIMITED PARTNERSHIP
FINANCIAL STATEMENT INDEX
Page
----
LS POWER FUNDING CORPORATION
Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 F-2
Statements of Income for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-3
Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-4
Notes to Condensed Financial Statements (unaudited) F-5
LSP-COTTAGE GROVE, L.P.
Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 F-6
Statements of Income for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-7
Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-8
Notes to Condensed Financial Statements (unaudited) F-9
LSP-WHITEWATER LIMITED PARTNERSHIP
Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 F-12
Statements of Income for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-13
Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (unaudited) F-14
Notes to Condensed Financial Statements (unaudited) F-15
F-1
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LS POWER FUNDING CORPORATION
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(dollars in thousands)
MARCH 31, DECEMBER 31,
1999 1998
-------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 1 $ 1
Interest receivable on First Mortgage Bonds 6,472 --
-------- --------
Total current assets 6,473 1
INVESTMENT IN FIRST MORTGAGE BONDS 332,000 332,000
-------- --------
Total assets $338,473 $332,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITY - Interest payable on Senior Secured Bonds $ 6,472 $ --
SENIOR SECURED BONDS PAYABLE 332,000 332,000
-------- --------
Total liabilities 338,472 332,000
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 1,000 shares authorized,
100 shares issued and outstanding -- --
Additional paid-in capital 1 1
-------- --------
Total stockholders' equity 1 1
-------- --------
Total liabilities and stockholders' equity $338,473 $332,001
======== ========
The accompanying notes to the financial statements are an integral part
of these balance sheets.
F-2
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LS POWER FUNDING CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
Interest income $ 6,472 $ 6,472
Interest expense 6,472 6,472
----------- -----------
Net income $ -- $ --
=========== ===========
The accompanying notes to the financial statements are an integral part
of these statements.
F-3
12
LS POWER FUNDING CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ -----------
CASH PROVIDED BY OPERATING ACTIVITIES $ -- $ --
CASH PROVIDED BY INVESTING ACTIVITIES -- --
CASH PROVIDED BY FINANCING ACTIVITIES -- --
------------ -----------
NET INCREASE (DECREASE) IN CASH -- --
CASH, beginning of period 1 1
------------ -----------
CASH, end of period $ 1 $ 1
============ ===========
The accompanying notes to the financial statements are an integral
part of these statements.
F-4
13
LS POWER FUNDING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1999 and the statements of income and
cash flows for the periods ended March 31, 1999 and 1998 have been prepared by
LS Power Funding Corporation ("Funding"), without audit. In the opinion of
management, these unaudited condensed financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Funding's financial position as of March 31, 1999, and the results of its
operations and its cash flows for the periods ended March 31, 1999 and 1998.
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, 1998.
2. ORGANIZATION
Funding was established on June 23, 1995 as a special purpose Delaware
corporation to issue debt securities in connection with financing construction
of two gas-fired cogeneration facilities, one located in Cottage Grove,
Minnesota and the other located in Whitewater, Wisconsin. LSP-Cottage Grove,
L.P. ("Cottage Grove") and LSP-Whitewater Limited Partnership ("Whitewater") are
single purpose Delaware limited partnerships established to develop, finance,
construct and own the facilities located in 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, the offering of the Senior Secured Bonds, and its acquisition
of the First Mortgage Bonds issued by Cottage Grove and Whitewater.
F-5
14
LSP-COTTAGE GROVE, L.P.
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 $ 928 $ 918
Restricted cash 13,704 7,827
Accounts receivable - trade 4,610 4,560
Accounts receivable - other 702 1,227
Fuel inventories 303 1,448
Fuel held for resale 203 401
Spare parts inventories 423 486
Other current assets 237 280
-------- --------
Total current assets 21,110 17,147
NET INVESTMENT IN LEASE (Note 4) 235,829 235,566
DEBT ISSUANCE AND FINANCING COSTS, net of accumulated
amortization: March 31, 1999 (unaudited), $936;
December 31, 1998, $867 6,186 6,255
NOTE RECEIVABLE FROM AFFILIATE (Note 3) 6,585 6,043
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
Total assets $269,711 $265,012
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 688 $ 2,122
Retainage payable 5,443 5,443
Interest payable 3,021 --
Accrued expenses 1,459 243
-------- --------
Total current liabilities 10,611 7,808
FIRST MORTGAGE BONDS PAYABLE 155,000 155,000
-------- --------
Total liabilities 165,611 162,808
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 104,100 102,204
-------- --------
Total liabilities and partners' capital $269,711 $265,012
======== ========
The accompanying notes to the financial statements are an integral part of
these balance sheets.
F-6
15
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
OPERATING REVENUES:
Lease $ 5,306 $ 5,273
Service 5,475 4,067
Other 1,430 721
-------- --------
12,211 10,061
OPERATING EXPENSES:
Cost of services 7,203 5,172
-------- --------
OPERATING INCOME 5,008 4,889
NONOPERATING INCOME (EXPENSE):
Interest expense (3,096) (3,087)
Interest income 204 327
-------- --------
Net income $ 2,116 $ 2,129
======== ========
The accompanying notes to the financial statements are an integral part of
these statements.
F-7
16
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,116 $ 2,129
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of unearned lease income (5,306) (5,273)
Minimum lease payments received 5,043 4,902
Amortization of debt issuance and financing costs 69 65
Decrease (increase) in accounts receivable - trade (50) 42
Decrease in accounts receivable - other 525 3,012
Decrease in fuel inventories 1,343 1,469
Increase (decrease) in spare parts inventories 63 (53)
Increase (decrease) in other current assets 43 (111)
Decrease in accounts payable (1,434) (1,976)
Increase in interest payable 3,021 3,021
Increase in accrued expenses 1,216 1,288
------- -------
Net cash flows provided by operating activities 6,649 8,515
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (45)
Increase in restricted cash (5,877) (7,799)
------- -------
Net cash used in investing activities (5,877) (7,844)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Partner distributions (220) --
Increase in receivable from affiliate (542) --
------- -------
Net cash used in financial activities 762 --
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 10 671
CASH AND CASH EQUIVALENTS, beginning of period 918 8,816
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 928 $ 9,487
======= =======
The accompanying notes to the financial statements are an integral part of these
statements.
F-8
17
LSP-COTTAGE GROVE, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1999 and the statements of income and
cash flows for the periods ended March 31, 1999 and 1998 have been prepared by
LSP-Cottage Grove, L.P. (the "Partnership"), without audit. In the opinion of
management, these unaudited condensed financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Partnership's financial position as of March 31, 1999, and the
results of its operations and its cash flows for the periods ended March 31,
1999 and 1998.
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,
1998.
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
located in Cottage Grove, Minnesota (the "Facility"). Construction and start-up
of the Facility was substantially completed and commercial operation commenced
October 1, 1997 (the "Commercial Operations Date"). The 1% general partner of
the Partnership is LSP-Cottage Grove, Inc., a wholly-owned subsidiary of
Cogentrix Cottage Grove, LLC ("Cogentrix Cottage Grove"). Cogentrix Cottage
Grove and TPC Cottage Grove, Inc. are the sole limited partners of the
Partnership, owning approximately 72% and 27% limited partnership interests,
respectively. The ultimate parent of Cogentrix is Cogentrix Energy, Inc.
("Cogentrix Energy"), a North Carolina corporation.
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 funding corporation to issue debt securities (the "Senior
Secured Bonds") in connection with financing construction of the Facility and a
similar gas-fired cogeneration facility located in Whitewater, Wisconsin. On
June 30, 1995, a portion of the proceeds from the offering and sale of the
Senior Secured Bonds issued by Funding was used to purchase $155 million of
First Mortgage Bonds issued simultaneously by the Partnership.
All of the electric capacity and energy generated by the Facility is
sold to Northern States Power Company (the "Utility") under a 30-year power
purchase agreement (the "Power Purchase Agreement"). The thermal energy
generated by the Facility is sold in the form of steam to Minnesota Mining and
Manufacturing Company (the "Steam Purchaser") under a 30-year thermal energy
sales agreement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include
unrestricted short-term investments with original maturities of three months or
less.
F-9
18
RESTRICTED CASH
The majority of the revenue received by the Partnership is required to
be deposited into accounts administered by the trustee under the trust indenture
for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in
these accounts at the direction of the Partnership. The funds are invested in
commercial paper, high grade government money market funds and overnight
repurchase obligations secured by U.S. Treasury Notes. The investments are
carried at cost, which approximates market at March 31, 1999 and 1998. In
addition, special accounts are established to provide for debt service reserves
and payments, and major maintenance reserves. Amounts held by the Trustee in
accounts designated for debt service, major maintenance and construction, which
might otherwise be considered cash equivalents, are treated as restricted cash.
NOTE RECEIVABLE FROM AFFILIATE
At March 31, 1999, the Partnership had a note receivable from Cogentrix
Energy. The amount of the note receivable is equal to the amount of funds
required to be on deposit in the debt service reserve account. The note
receivable is backed by a letter of credit issued to the Partnership. The note
receivable bears interest at the three-month LIBOR rate plus 0.25%, and is due
December 15, 2016.
RETAINAGE PAYABLE
As of March 31, 1999 (unaudited) and December 31, 1998, the amount in
retainage payable represented project costs and are eligible for payment from
funds held by the Trustee, which are included in restricted cash in the
accompanying balance sheets.
COMMENCEMENT OF POWER PURCHASE AGREEMENT
All of the electric capacity and energy generated by the Facility is
sold to 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).
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 Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchaser.
OTHER REVENUES
Other revenues consist primarily of commodity sales of excess natural
gas fuel inventory, including amounts remarketed directly to third parties.
COST OF SERVICES
Cost of services represent expenses related to operating the Facility
and providing variable electric energy to the Utility as well as thermal energy
to the Steam Purchaser.
F-10
19
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sales-type capital lease of $87.1 million reflecting the
difference between the estimated fair market value ($233.6 million) and the
historical cost ($146.5 million) of the Facility. The interest rate implicit in
the lease is 9.01%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at March 31,
1999, are as follows (dollars in thousands):
Gross Investment in Lease $ 542,764
Unearned Income on Lease (306,935)
----------
Net Investment in Lease $ 235,829
==========
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.
F-11
20
LSP-WHITEWATER LIMITED PARTNERSHIP
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 $ 829 $ 1,181
Restricted cash 13,210 6,289
Accounts receivable - trade 4,363 4,512
Accounts receivable - other 1,675 1,885
Fuel inventories 332 743
Spare parts inventories 677 641
Other current assets 787 552
-------- --------
Total current assets 21,873 15,803
NET INVESTMENT IN LEASE (Note 4) 263,167 263,048
GREENHOUSE FACILITY, net 8,065 8,172
DEBT ISSUANCE AND FINANCE COSTS, net of accumulated
amortization: March 31, 1999 (unaudited), $962; December 31, 1998, $882 6,261 6,341
NOTE RECEIVABLE FROM AFFILIATE (Note 3) 6,900 6,900
INVESTMENT IN UNCONSOLIDATED AFFILIATE 1 1
-------- --------
Total assets $306,267 $300,265
-------- --------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 921 $ 2,177
Retainage payable 5,587 5,587
Interest payable 3,451 --
Accrued expenses 2,954 1,386
-------- --------
Total current liabilities 12,913 9,150
FIRST MORTGAGE BONDS PAYABLE 177,000 177,000
-------- --------
Total liabilities 189,913 186,150
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL 116,354 114,115
-------- --------
Total liabilities and partners' capital $306,267 $300,265
======== ========
The accompanying notes to the financial statements are an integral part of these
balance sheets.
F-12
21
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
OPERATING REVENUES:
Lease $ 5,855 $ 5,834
Service 6,395 5,790
Other 281 427
-------- --------
12,531 12,051
-------- --------
OPERATING EXPENSES:
Cost of services 6,792 6,827
Greenhouse operating expenses 196 175
-------- --------
6,988 7,002
-------- --------
OPERATING INCOME 5,543 5,049
NON-OPERATING INCOME (EXPENSE):
Interest expense (3,533) (3,517)
Interest income 229 297
-------- --------
Net income $ 2,239 $ 1,829
======== ========
The accompanying notes to the financial statements are an integral part of
these statements.
F-13
22
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(dollars in thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,239 $ 1,829
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of unearned lease income (5,855) (5,834)
Minimum lease payments received 5,736 5,598
Amortization of debt issuance and financing costs 80 66
Depreciation 107 96
Decrease (increase) in accounts receivable - trade 149 (424)
Decrease in accounts receivable - other 210 2,195
Decrease in fuel inventories 411 1,166
Increase in spare parts inventories (36) (30)
Decrease (increase) in other current assets (235) 52
Decrease in accounts payable (1,256) (3,562)
Increase in interest payable 3,451 3,450
Increase in accrued expenses 1,568 1,702
------- -------
Net cash provided by operating activities 6,569 6,304
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- (1,015)
Increase in restricted cash (6,921) (4,984)
------- -------
Net cash used in investing activities (6,921) (5,999)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES -- --
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (352) 305
CASH AND CASH EQUIVALENTS, beginning of period 1,181 7,749
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 829 $ 8,054
======= =======
The accompanying notes to the financial statements are an integral part of these
statements.
F-14
23
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The balance sheet as of March 31, 1999 and the statements of income and
cash flows for the periods ended March 31, 1999 and 1998 have been prepared by
LSP-Whitewater Limited Partnership (the "Partnership"), without audit. In the
opinion of management, these unaudited condensed financial statements include
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Partnership's financial position as of March 31, 1999 and the
results of its operations and its cash flows for the periods ended March 31,
1999 and 1998.
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,
1998.
2. ORGANIZATION
LSP-Whitewater Limited 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 located in Whitewater, Wisconsin (the "Facility"). Construction and
start-up of the Facility was substantially completed and commercial operation
commenced September 18, 1997 (the "Commercial Operations Date"). The 1% general
partner of the Partnership is LSP-Whitewater I, Inc., a wholly-owned subsidiary
of Cogentrix Whitewater, LLC ("Cogentrix Whitewater"). Cogentrix Whitewater and
TPC Whitewater, Inc. are the sole limited partners of the Partnership, owning
approximately 73% and 26% limited partnership interests, respectively. The
ultimate parent of Cogentrix Whitewater is Cogentrix Energy, Inc. ("Cogentrix
Energy").
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 (the "Senior
Secured Bonds") in connection with financing construction of the Facility and a
similar gas-fired cogeneration facility located in Cottage Grove, Minnesota. On
June 30, 1995, a portion of the proceeds from the offering and sale of the
Senior Secured Bonds issued by Funding was used to purchase $177 million of
First Mortgage Bonds issued simultaneously by the Partnership.
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Facility to Wisconsin Electric Power Company
("WEPCO" or, as the context requires, the "Utility") pursuant to a 25-year power
purchase agreement (the "Power Purchase Agreement"). The Partnership may also
sell to third parties up to 12 megawatts of electric capacity and any energy
that is not dispatched by WEPCO. The thermal energy generated by the Facility is
provided in the form of steam to the University of Wisconsin - Whitewater
under a steam supply agreement expiring on June 30, 2005 and in the form of
hot water to a greenhouse (the "Greenhouse Facility") owned by the Partnership
(collectively, the "Steam Purchasers").
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include
unrestricted short-term investments with original maturities of three months or
less.
F-15
24
RESTRICTED CASH
The majority of the revenue received by the Partnership is required to
be deposited into accounts administered by the trustee under the trust indenture
for the First Mortgage Bonds (the "Trustee"). The Trustee invests funds held in
these accounts at the direction of the Partnership. The funds are invested in
commercial paper, high grade government money market funds and overnight
repurchase obligations secured by U.S. Treasury Notes. In addition, special
accounts are established to provide for debt service reserves and payments, and
major maintenance reserves. Amounts held by the Trustee in accounts designated
for debt service, major maintenance and construction, which might otherwise be
considered cash equivalents, are treated as restricted cash.
NOTE RECEIVABLE FROM AFFILIATE
At March 31, 1999 (unaudited), the Partnership had a note receivable
from Cogentrix Energy. The amount of the note receivable is equal to the amount
of funds required to be on deposit in the debt service reserve account. The note
receivable is backed by a letter of credit issued to the Partnership. The note
receivable bears interest at the three-month LIBOR rate plus 0.25%, and is due
December 15, 2016.
GREENHOUSE FACILITY
Depreciation on the Greenhouse Facility and related equipment is
computed using the straight-line method over 25 years and 10 years,
respectively.
RETAINAGE PAYABLE
As of March 31, 1999 (unaudited) and December 31,1998, the amount in
retainage payable represented project costs and are eligible for payment from
funds held by the Trustee, which are included in restricted cash in the
accompanying balance sheets.
COMMENCEMENT OF POWER PURCHASE AGREEMENT
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Facility to the Utility pursuant to 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).
LEASE REVENUE
Lease revenue represents the amortization of unearned income on lease
using the effective interest rate method as well as contingent rentals that
result from changes in payment escalators occurring subsequent to the Commercial
Operations Date. These contingent rentals are not expected to materially change
the lease revenue recognized over the life of the Power Purchase Agreement.
SERVICE REVENUE
Service revenues represent reimbursement to the Partnership of costs
incurred to operate the Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchaser.
COST OF SERVICES
Cost of services represent expenses related to operating the Facility
and providing variable electric energy to the Utility as well as thermal energy
to the Steam Purchasers.
F-16
25
4. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sales-type capital lease of $97.0 million reflecting the
difference between the estimated fair market value ($261.7 million) and the
historical cost ($164.7 million) of the Facility. The interest rate implicit in
the lease is 9.79%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at March 31,
1999 are as follows (dollars in thousands):
Gross Investment in Lease $ 587,361
Unearned Income on Lease (324,194)
------------
Net Investment in Lease $ 263,167
============
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.
F-17