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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 June 30, 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 incorporation or organization) (I.R.S. Employer Identification Number)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NORTH CAROLINA 28273-8110
(Address of principal executive offices) (Zipcode)
(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 August 16, 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 June 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Income for the Three-Months and Six-Months
Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six-Months
Ended June 30, 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 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(dollars in thousands)
June 30, December 31,
1999 1998
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,342 $ 48,207
Restricted cash 42,995 40,604
Accounts receivable 69,435 66,586
Inventories 17,795 18,697
Other current assets 5,318 4,061
---------- ----------
Total current assets 179,885 178,155
NET INVESTMENT IN LEASES 499,387 498,614
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: June 30, 1999, $244,676; December 31, 1998, $225,928 454,559 473,065
LAND AND IMPROVEMENTS 3,991 3,981
DEFERRED FINANCING AND ORGANIZATION
COSTS, net of accumulated amortization: June 30, 1999, $17,884
December 31, 1998, $15,557 35,458 37,007
NATURAL GAS RESERVES 1,138 1,557
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 288,364 251,312
OTHER ASSETS 62,911 56,160
---------- ----------
$1,525,693 $1,499,851
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 88,262 $ 86,255
Accounts payable 20,483 25,511
Accrued compensation 2,794 8,096
Accrued interest payable 8,095 7,729
Accrued dividends payable -- 7,398
Other accrued liabilities 13,795 13,492
---------- ----------
Total current liabilities 133,429 148,481
LONG-TERM DEBT 1,136,726 1,127,184
DEFERRED INCOME TAXES 58,540 52,306
MINORITY INTERESTS 64,326 61,167
OTHER LONG-TERM LIABILITIES 25,073 22,850
---------- ----------
1,418,094 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 107,469 87,733
---------- ----------
107,599 87,863
---------- ----------
$1,525,693 $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 and Six-Months Ended June 30, 1999 and 1998 (Unaudited)
(dollars in thousands, except for earnings per common share)
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
OPERATING REVENUE:
Electric $ 70,958 $ 72,433 $ 145,366 $ 146,368
Steam 6,199 6,364 12,911 13,705
Lease 11,170 11,119 22,331 12,433
Service revenue under sales-type capital leases 11,024 11,956 22,894 13,252
Income from unconsolidated investments in power projects 5,322 874 10,732 1,797
Other 4,225 4,891 8,103 7,301
--------- --------- --------- ---------
108,898 107,637 222,337 194,856
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel 18,957 18,979 35,463 38,014
Operations and maintenance 17,243 17,009 34,219 33,182
Cost of services under sales-type capital leases 12,509 13,941 26,180 15,339
General, administrative and development 8,181 9,797 20,830 19,152
Depreciation and amortization 10,905 10,441 21,776 20,615
--------- --------- --------- ---------
67,795 70,167 138,468 126,302
--------- --------- --------- ---------
OPERATING INCOME 41,103 37,470 83,869 68,554
OTHER INCOME (EXPENSE):
Interest expense (23,575) (19,842) (47,307) (33,085)
Investment and other income, net 929 1,489 3,020 3,865
Equity in net loss of affiliates (67) (529) (106) (85)
INCOME BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS 18,390 18,588 39,476 39,249
MINORITY INTERESTS IN INCOME BEFORE
EXTRAORDINARY LOSS (2,656) (3,658) (6,482) (5,613)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 15,734 14,930 32,994 33,636
PROVISION FOR INCOME TAXES (6,393) (6,082) (13,259) (13,405)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 9,341 8,848 19,735 20,231
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of minority interest and income tax benefit of $473 -- -- -- (743)
--------- --------- --------- ---------
NET INCOME $ 9,341 $ 8,848 $ 19,735 $ 19,488
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 33.12 $ 31.38 $ 69.98 $ 71.74
Extraordinary loss -- -- -- (2.63)
--------- --------- --------- ---------
$ 33.12 $ 31.38 $ 69.98 $ 69.11
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 282,000 282,000 282,000 282,000
========= ========= ========= =========
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 Six-Months Ended June 30, 1999 and 1998 (Unaudited)
(dollars in thousands)
Six-Months Ended
June 30,
---------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,735 $ 19,488
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,776 20,615
Deferred income taxes 6,234 6,192
Extraordinary loss on early extinguishment of debt, non-cash portion -- 2,145
Minority interests in income, net of dividends 3,028 (18,909)
Equity in net income of unconsolidated affiliates, net of dividends 2,800 1,716
Minimum lease payments received 21,558 11,742
Amortization of unearned lease income (22,331) (12,433)
Increase in accounts receivable (2,849) (2,939)
(Increase) decrease in inventories 1,321 (787)
Decrease in accounts payable (5,028) (1,989)
Decrease in accrued liabilities (4,633) (4,208)
Increase in other (5,522) (2,827)
--------- ---------
Net cash flows provided by operating activities 36,089 17,806
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions, net (592) (1,994)
Decrease in marketable securities -- 42,118
Investments in unconsolidated affiliates (39,852) (146)
Acquisition of Facilities, net of cash acquired -- (155,324)
Decrease (increase) in restricted cash (2,391) 12,716
--------- ---------
Net cash flows used in investing activities (42,835) (102,630)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (7,398) (2,140)
Proceeds from issuance of debt 54,280 150,400
Repayments of debt (43,223) (102,640)
Increase in deferred financing costs (778) (1,018)
--------- ---------
Net cash flows provided by financing activities 2,881 44,602
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,865) (40,222)
CASH AND CASH EQUIVALENTS, beginning of period 48,207 71,833
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 44,342 $ 31,611
========= =========
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, 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 June 30, 1999 and for the three-months and
six-months ended June 30, 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 June 30, 1999, and the results of operations for the
three-month and six-month periods ended June 30, 1999 and 1998 and cash flows
for the six-months ended June 30, 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. These unaudited consolidated condensed financial statements should
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.
Certain reclassifications have been made to the prior year's financial
statements to conform with the classification used in the financial statements
as of June 30, 1999, and for the three-months and six-months ended June 30,
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 $22.0 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.
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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.
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 condensed balance sheets as of June
30, 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 June 30, 1999 and December 31, 1998. The
accompanying consolidated statements of income for the three-months and
six-months ended June 30, 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 statements of income for the three-months
and six-months ended June 30, 1999 includes the results of operations of the
acquired facilities for six months.
Batesville Acquisition
In August, 1998, the Company acquired an approximate 53% interest in an
800-megawatt, gas-fired electric generating 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 53% ownership is deemed to
be temporary.
Bechtel Asset Acquisition
In October, 1998, the Company acquired from Bechtel Generating Company,
Inc. ("BGCI") ownership interests in twelve 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.
On June 4, 1999, the Company entered into an agreement to purchase an
additional 40% interest in one of these twelve electric generating facilities.
The agreement calls for the purchase to be made during 1999 in three phases, the
first of which, the purchase of a 19.9% interest, occurred on June 4, 1999. The
first phase of the acquisition was accounted for as a purchase, and resulted in
a premium of approximately $19.6 million, that will be amortized over the
remaining life of the facility. The two remaining phases will be completed
during September and
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October, 1999. The Company will account for the acquisition of these additional
interests as a purchase, and will use the equity method of accounting to account
for its entire ownership in the facility.
4. PENDING CLAIMS AND LITIGATION
Three 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
counsels retained to represent these subsidiaries in defense of such claims -
that the ultimate resolution of these claims should not have a material adverse
effect on our consolidated financial position or results of operations or
Cogentrix Energy's ability to generate sufficient cash flow to service its
outstanding debt.
In addition, we experience other routine litigation in the normal
course of our business. Our management is of the opinion that none of this
routine litigation should have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
5. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheets as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized in current earnings unless specified
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" delaying the effectiveness of SFAS No. 133 to fiscal
quarters of all fiscal years beginning after June 15, 2000.
The Company has not yet quantified the impacts of adopting SFAS No.
133 on the consolidated financial statements and has not determined the timing
or method of adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings.
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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 1,766 megawatts. We currently operate 12 of our plants, 10 of
which we developed and constructed.
When our plant 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 2,186 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 AND SIX-MONTHS ENDED JUNE 30, 1999 AND 1998
THREE-MONTHS ENDED JUNE 30, SIX-MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
1999 1998 1999 1998
------------------------------------------ ------------------------------------------
Total operating revenues $108,898 100% $107,637 100% $222,337 100% $194,856 100%
Operating costs 48,709 45 49,929 46 95,862 43 86,535 44
General, administrative
and development 8,181 7 9,797 9 20,830 9 19,152 10
Depreciation and amortization 10,905 10 10,441 10 21,776 10 20,615 11
-------- ----- -------- ----- -------- ----- -------- -----
Operating income $ 41,103 38% $ 37,470 35% $ 83,869 38% $ 68,554 35%
======== ===== ======== ===== ======== ===== ======== =====
Total operating revenues increased 1.2% to $108.9 million for the
second quarter of 1999 as compared to the second quarter of 1998. This increase
was primarily attributable to $4.5 million in earnings in the second quarter of
1999 from the power projects acquired in the Bechtel Acquisition in October,
1998. To a lesser extent, operating revenues were impacted by an increase in
electric revenue from the Richmond and Rocky Mount facilities related to an
increase in megawatt hours sold to the purchasing utility. These increases in
operating revenue were partially offset by decreases in electric revenue at the
other facilities resulting from reduced megawatt hours sold to the purchasing
utilities.
Our operating revenues for the six-month period ended June 30, 1999,
which increased 14.1% to $222.3 million as compared to $194.9 million for the
six-month period ended June 30, 1998, were largely influenced by the same
factors discussed above: the Bechtel Acquisition, the increase in electric
revenue at the Richmond and Rocky Mount facilities, and the decrease in megawatt
hours sold to the purchasing utilities at the other facilities. The increase in
operating revenues for the six-month period ended June 30, 1999 was also
attributable to the lease 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
six-months of activity for the Cottage Grove and Whitewater facilities in the
six-month period ended June 30, 1999 as compared to less than four months in the
six-month period ended June 30, 1998.
Our operating costs decreased 2.4% to $48.7 million for the second
quarter of 1999 as compared to the second quarter of 1998. This decrease
resulted primarily from the decrease in cost of services at the Cottage Grove
and Whitewater facilities, and a decrease in fuel expense as a result of a
decrease in megawatt hours sold to the purchasing utilities at the Lumberton,
Kenansville, Southport and Roxboro facilities. The decrease in operating costs
was partially offset by routine maintenance expenses incurred at the Hopewell
facility in the three-months ended June 30, 1999 and an increase in fuel expense
as a result of an increase in megawatt hours sold to the purchasing utility at
the Richmond and Rocky Mount facilities. The decrease in operating expenses were
further offset by expenses incurred at the Elizabethtown, Lumberton, Kenansville
and Portsmouth facilities related to the settlement in March, 1999 of claims
brought by the fuel suppliers of these facilities.
The Company's operating costs for the six-month period ended June 30,
1999, increased 10.8% to $95.9 million as compared to $86.5 million for the
six-month period ended June 30, 1998. This increase was primarily the result of
a significant increase in the year to date costs of services incurred at the
Cottage Grove and Whitewater facilities, in which we acquired out interests on
March 20, 1998. Costs of services included a full six months of activity in the
six-month period ended June 30, 1999 as compared to less than four months in the
six-month period ended June 30, 1998. The increase in operating costs were also
attributable to the factors discussed above: the settlement of the fuel
litigation at the Portsmouth, Elizabethtown, Lumberton and Kenansville
facilities, routine maintenance expenses incurred at the Hopewell facility and
an increase in fuel expense as a result of an increase in megawatt hours sold to
the purchasing utility at the Richmond and Rocky Mount facilities. The increase
in operating expenses were partially offset by the factor discussed above: a
decrease in fuel expense as a result of a decrease in the megawatt hours sold to
the purchasing utility at the Lumberton, Kenansville, Southport and Roxboro
facilities.
General, administrative and development expense decreased 16.5% to $8.2
million for the second quarter of 1999 as compared to the second quarter of
1998. This decrease related primarily to a decrease in incentive
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compensation expense related to the restructuring of a retirement plan agreement
with a former executive officer expensed in the second quarter of 1998 and a
decrease in travel expenses related to international development activity.
General, administrative and development expenses increased 8.8% to $20.8 million
for the six-month period ended June 30, 1999 as compared to the corresponding
period of 1998. The increase is primarily attributable to increased costs
related to payroll and employee benefits. The increase in general,
administrative and development costs for the six-months ended June 30, 1999 was
partially offset by the factors discussed above: the expense recorded in the
six-months ended June 1998 related to the restructuring of a retirement plan
agreement with a former executive officer, and a decrease in travel expenses
related to a reduction in international development activity.
Interest expense increased 18.8% to $23.6 million for the quarter ended
June 30, 1999 and 43.0% to $47.3 million for the six-months ended June 30, 1999
as compared to the corresponding periods of 1998. Our weighted average long-term
debt increased to $1.2 billion, with a weighted average interest rate of 7.76%
through the second quarter of 1999, as compared to weighted average long-term
debt of $860 million, with a weighted average interest rate of 7.70% through the
second 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 $53.8 million of borrowings incurred during the
first six months of 1999 under revolving credit facilities at some subsidiaries.
The increase in interest expense discussed above was partially offset by a
decrease in interest expense at several of our project subsidiaries due to the
scheduled repayment of outstanding project finance debt.
The decrease in minority interest in income for the second quarter of
1999 as compared to the second quarter of 1998 related primarily to a decrease
in earnings at the Hopewell facility related to routine maintenance expenses
incurred during the three-months ended June 30, 1999. The increase in minority
interest in income for the six-month period ended June 30, 1999 as compared to
the corresponding period of 1998 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 operations for the six-month period ended June
30, 1999 include a full six months of earnings for the Cottage Grove and
Whitewater facilities, as compared to less than four months for the six-month
period ended June 30, 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 February, 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 six-month
period ended June 30, 1999 were net income of $19.7 million, increases due to
adjustments for depreciation and amortization of $21.8 million, deferred income
taxes of $6.2 million, minority interest in income, net of dividends, of $3.0
million, and equity in net income of unconsolidated affiliates, net of dividends
of $2.8 million, which were partially offset by amortization of unearned lease
income, net of minimum lease payments received, of $0.8 million and a net $16.6
million use of cash reflecting changes in other working capital assets and
liabilities. Cash flow provided by operating activities of $36.1 million,
proceeds from borrowings of $54.3 million and cash on hand at the beginning of
the period of $3.9 million were primarily used to purchase property, plant and
equipment of $0.6 million, repay project finance borrowings of $43.2 million,
pay deferred financing costs of $0.8 million, pay a common stock dividend of
$7.4 million, fund $2.4 million of escrow, and purchase additional interest in
unconsolidated affiliates of $39.9 million.
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 some 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 $813.7 million as of
June 30, 1999, is non-recourse to Cogentrix Energy and our other project
subsidiaries, except in connection with transactions in which Cogentrix Energy
has agreed to certain limited
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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 some types of 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 have a material adverse effect on our results of operations,
financial position or cash flows.
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 limitations in their project credit
documents. These limitations generally require that: (a) project debt service
payments be current, (b) project debt service coverage ratios be met, (c) all
project debt service and other reserve accounts be funded at required levels and
(d) 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 June 30, 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
to $86.3 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 and the senior notes, to fund a significant portion of its development
activities and to meet its 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 that provides direct advances to
us, 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, under
which we issued our outstanding senior notes due 2004 and 2008, as well as
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, under which we issued our outstanding senior
notes due 2004 and 2008, 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.
Several of our subsidiaries maintain revolving credit facilities.
These facilities, which are non-recourse to Cogentrix Energy, aggregate $68.5
million. As of June 30, 1999, we had no remaining funds available under these
facilities.
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As a result of a March, 1999 arbitration award related to a contract
dispute with a coal supplier, we were obligated to pay the coal supplier
approximately $8 million in 1999. This payment was made from cash on hand in the
second quarter of 1999. Approximately $3 million of this award related 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.
In June, 1999, we entered into an agreement to purchase an additional
40% ownership interest in the Indiantown Cogeneration facility in a three phase
transaction. We paid $39.8 million to acquire a 19.9% interest in the facility
in June, 1999. We funded the purchase of this interest with proceeds from
revolving credit facilities at certain of our subsidiaries. The acquisition of
an additional 20.1% interest in the facility for a purchase price of $40.2
million is scheduled to be completed in September and October, 1999.
For the fiscal year ended December 31, 1998, our board of directors
declared a dividend on our outstanding common stock of $7.4 million which 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 our outstanding senior notes due 2004 and 2008 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 our
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 June 30, 1999, there have been no significant changes in the portfolio of
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.
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OTHER FINANCIAL RATIO DATA
Set forth below are certain other financial data and ratios for the
periods indicated (in thousands, except ratio data):
LAST TWELVE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------------ ----------------
Parent EBITDA $64,143 $35,941
Parent Fixed Charges 25,322 16,150
Parent EBITDA/Parent Fixed Charges 2.53 2.23
Parent EBITDA represents cash flow to Cogentrix Energy prior to debt
service and income taxes of Cogentrix Energy. Parent Fixed Charges include cash
payments made by Cogentrix Energy related to outstanding indebtedness of
Cogentrix Energy and the cost of funds associated with Cogentrix Energy's
guarantees of some of its subsidiaries' indebtedness. Parent EBITDA is not
presented here as a measure of operating results. Our management believes Parent
EBITDA is a useful measure of Cogentrix Energy's ability to service debt. Parent
EBITDA should not be construed as an alternative either (a) to operating income
(determined in accordance with generally accepted accounting principles) or (b)
to cash flows from operating activities (determined in accordance with generally
accepted accounting principles).
YEAR 2000 COMPLIANCE
We continue to assess our readiness with the Year 2000 issue. Our
corporate business critical systems were year 2000 compliant at June 30, 1999.
We expect that our other business critical systems, such as embedded technology
systems, business partners and vendor systems will be Year 2000 compliant by the
fourth quarter of 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 embedded technology at the facilities was completed
before January 1, 1999. The investigation and analysis identified no significant
Year 2000 issues. Our facilities, as currently configured, require no action to
be Year 2000 operational, but remediation is underway and scheduled for
completion by October, 1999 to address 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 June 30, 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 which is the inability of our facilities to produce
and distribute power. These plans have been tested, and appear to be adequate.
Despite our current expectations, we cannot guarantee that no interruptions or
other limitations of financial and operating system functionality will occur 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
Three 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 counsels retained to represent these subsidiaries in defense of
such claims - that the ultimate resolution of these claims should not have a
material adverse effect on our consolidated financial position or results of
operations, or on Cogentrix Energy's ability to generate cash flow to service
its outstanding debt.
In addition, we experience other routine litigation in the normal
course of our business. Our management is of the opinion that none of this
routine litigation should have a material adverse effect on our consolidated
financial position, results of operation, or cash flows.
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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. (3.2)(5)
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 Second Amendment, dated as of April 20,
1999, to Coal Sales Agreement, dated as of
December 15, 1986, by and between Cogentrix
Virginia Leasing Corporation and Arch Coal
Sales Company. (*)
10.2 Amendment No. 1 to the Third Amended and
Restated Loan Agreement dated December 22,
1997 between Cogentrix Virginia Leasing
Company and several banks and other
financial institutions.
10.3 Steam Purchase Contract, effective as of
January 1, 1999, by and between Celanese
Chemical Inc. and Cogentrix Virginia
Leasing Corporation. (*)
10.4 Steam Purchase Contract, effective as of
January 1, 1999, by and between BASF
Corporation and Cogentrix Virginia Leasing
Corporation. (*)
27 Financial Data Schedule, which is submitted
electronically to the U.S. Securities and
Exchange Commission for information only and
is not filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this report.
(*) 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 by reference to 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.
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(2) Incorporated 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 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 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.
33-74254) filed May 17, 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.
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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)
August 16, 1999 /s/Thomas F. Schwartz
--------------------------------------------
Thomas F. Schwartz
Senior Vice President - Finance
Treasurer
(Principal Financial and Accounting Officer)
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