1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number: 33-67171
COGENTRIX DELAWARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0352024
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1105 NORTH MARKET STREET, SUITE 1108, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zipcode)
(302) 427-9635
(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. [ ] Yes [X] No
On August 16, 1999, there were 1,000 shares of common stock, no par value,
issued and outstanding.
2
COGENTRIX DELAWARE HOLDINGS, INC.
PAGE NO.
--------
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 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
2
3
COGENTRIX DELAWARE HOLDINGS, 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 $ 39,160 $ 33,027
Restricted cash 34,328 33,253
Accounts receivable 69,132 64,637
Inventories 17,795 18,697
Other current assets 4,546 5,018
----------- -----------
Total current assets 164,961 154,632
NET INVESTMENT IN LEASES 499,387 498,614
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: June 30, 1999, $241,838; December 31, 1998, $223,481 452,505 470,853
LAND AND IMPROVEMENTS 3,984 3,974
DEFERRED FINANCING COSTS,
net of accumulated amortization: June 30, 1999, $15,126
December 31, 1998, $12,371 26,813 28,419
NATURAL GAS RESERVES 1,138 1,557
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 288,364 251,312
NOTES RECEIVABLE FROM PARENT 112,370 57,348
OTHER ASSETS 50,107 50,234
----------- -----------
$ 1,599,629 $ 1,516,943
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 88,262 $ 86,256
Accounts payable 23,655 27,766
Payable to Parent 24,523 15,537
Income taxes payable to Parent 20,756 13,553
Other accrued liabilities 10,278 15,936
----------- -----------
Total current liabilities 167,474 159,048
LONG-TERM DEBT 800,074 791,397
DEFERRED INCOME TAXES 103,403 91,460
MINORITY INTERESTS 64,326 61,167
OTHER LONG-TERM LIABILITIES 14,539 15,879
----------- -----------
1,149,816 1,118,951
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 1 1
Paid in capital 572,230 522,381
Net unrealized loss on available-for-sale securities -- (15)
Accumulated deficit (122,418) (124,375)
----------- -----------
449,813 397,992
----------- -----------
$ 1,599,629 $ 1,516,943
=========== ===========
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
3
4
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE 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 6,128 5,705 11,092 8,901
--------- --------- --------- ---------
110,801 108,451 225,326 196,456
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel 18,957 18,978 35,463 38,014
Operations and maintenance 24,106 22,596 47,342 44,252
Cost of services under sales-type capital leases 12,832 14,273 26,827 15,671
General, administrative and development 34 309 374 773
Depreciation and amortization 10,339 10,073 20,687 19,940
--------- --------- --------- ---------
66,268 66,229 130,693 118,650
--------- --------- --------- ---------
OPERATING INCOME 44,533 42,222 94,633 77,806
OTHER INCOME (EXPENSE):
Interest expense (15,225) (17,340) (30,675) (28,618)
Investment and other income, net 1,320 1,650 2,974 3,927
Equity in net loss of affiliates, net -- (2,090) -- (1,540)
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS 30,628 24,442 66,932 51,575
MINORITY INTERESTS IN INCOME BEFORE
EXTRAORDINARY LOSS (2,656) (3,658) (6,482) (5,613)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 27,972 20,784 60,450 45,962
PROVISION FOR INCOME TAXES (11,172) (7,389) (24,144) (18,367)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 16,800 13,395 36,306 27,595
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of minority interest and income tax benefit -- -- -- (743)
--------- --------- --------- ---------
NET INCOME $ 16,800 $ 13,395 $ 36,306 $ 26,852
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 16,800 $ 13,395 $ 36,306 $ 27,595
Extraordinary loss -- -- -- (743)
--------- --------- --------- ---------
$ 16,800 $ 13,395 $ 36,306 $ 26,852
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,000 1,000 1,000 1,000
========= ========= ========= =========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
4
5
COGENTRIX DELAWARE HOLDINGS, 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 $ 36,306 $ 26,852
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 20,687 19,959
Deferred income taxes 11,943 11,981
Extraordinary loss on early extinguishment of debt -- 2,145
Minority interests in income, net of dividends 3,028 (18,909)
Equity in net (loss) income of unconsolidated affiliates, net of dividends 2,800 3,170
Minimum lease payments received 21,558 11,742
Amortization of unearned lease income (22,331) (12,433)
Increase in accounts receivable (4,495) (3,933)
Increase (decrease) in inventories 1,321 (787)
Decrease in accounts payable (4,111) (650)
Increase in other accrued liabilities 10,531 626
(Increase) decrease in other (1,353) 2,032
-------- ---------
Net cash flows provided by operating activities 75,884 41,795
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (346) (820)
Decrease in marketable securities -- 42,118
Investments in affiliates (39,852) --
Acquisition of facilities, net of cash acquired -- (155,324)
Decrease (increase) in restricted cash (1,075) 640
-------- ---------
Net cash flows used in investing activities (41,273) (113,386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (34,349) (50,932)
Proceeds from issuance of debt 54,280 100,400
Repayments of debt (43,223) (82,641)
Increase in note receivable to parent (55,022) (6,233)
Increase in note receivable -- (20,000)
Capital contribution from parent 49,849 92,428
Increase in deferred financing costs (13) (944)
-------- ---------
Net cash flows (used in) provided by financing activities (28,478) 32,078
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,133 (39,513)
CASH AND CASH EQUIVALENTS, beginning of period 33,027 63,205
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 39,160 $ 23,692
======== =========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
5
6
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. NATURE OF BUSINESS
Cogentrix Delaware Holdings, Inc. ("Holdings") is a Delaware holding
company whose subsidiary companies are principally engaged in the business of
acquiring, developing, owning and operating independent power generating
facilities (individually, a "Facility", or collectively, the "Facilities").
Cogentrix Delaware Holdings, Inc. and subsidiary companies are collectively
referred to as the "Company".
Holdings is a wholly-owned subsidiary of Cogentrix Energy, Inc. (the
"Parent") and has guaranteed all of the Parent's existing and future senior
unsecured debt for borrowed money (the "Guarantee"). This guarantee was given to
the lenders under the Parent's corporate credit facility and terminates, unless
the term of the credit agreement is extended, when the credit agreement for the
corporate credit facility terminates in 2001. As of June 30, 1999, the Parent
had $355 million of senior notes outstanding due 2004 and 2008 and had no
borrowings outstanding under the corporate credit facility. The Guarantee
provides that the terms of the Guarantee may be waived, amended, supplemented or
otherwise modified at any time and from time to time by Holdings and the agent
bank for the lenders under the credit agreement. The Guarantee is not
incorporated in the indenture under which the Parent issued its outstanding
senior notes due 2004 and 2008.
2. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include
the accounts of Holdings and its subsidiary companies. Wholly-owned and
majority-owned subsidiaries, including a 50%-owned joint venture in which
Holdings 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 Holdings 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 Holdings, 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 Holdings 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 Parent's most recent report on Form 10-K for
the year ended December 31, 1998, filed by the Parent with the Commission on
March 31, 1999.
In March, 1999, Holdings filed a registration statement to register the
Guarantee under the Securities Act of 1933. As a result, Holdings is required by
Section 15(d) of the Securities Exchange Act of 1934 to file with the Commission
periodic reports required to be filed pursuant to Section 13 of the Exchange Act
in respect of a security registered pursuant to Section 12 of the Exchange Act.
The duty to file such reports shall be automatically
6
7
suspended as to any fiscal year, other than the current fiscal year, if, at the
beginning of such fiscal year, the securities of each class enjoying the benefit
of the Guarantee are held of record by less than three hundred persons. There
are currently fewer than three hundred holders of record of the outstanding 2004
and 2008 Notes, and Holdings expects that its duty to file periodic reports
under the Exchange Act will be automatically suspended as of the beginning of
the fiscal year ending December 31, 2000.
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.
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 (the "Batesville facility")
under construction in Batesville, Mississippi (the "Batesville Acquisition").
The Company has committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (i) the
incurrence of construction costs after all project financing has been expended,
(ii) an event of default under the project subsidiary's financing arrangements
or (iii) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit provided under the Company's corporate credit facility. The
Company expects the Batesville facility, which will be operated by the Company,
to commence commercial operation in June,
7
8
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 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, the Company 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 Holding'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.
8
9
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
Holdings is a Delaware holding company 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" or "our", refer to Cogentrix Delaware Holdings and its subsidiaries,
including subsidiaries that hold investments in other corporations or
partnerships whose financial results are not consolidated with ours. The term
"Cogentrix" refers only to Cogentrix Energy, Inc., the Parent of Holdings, which
is a development and management company that conducts its business primarily
through subsidiaries, all of which are also subsidiaries of Holdings. Holdings
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".
9
10
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 $110,801 100.0% $108,451 100.0% $225,326 100.0% $196,456 100.0%
Operating costs 55,895 50.4 55,847 51.5 109,632 48.7 97,937 49.9
General, administrative
and development 34 -- 309 .3 374 .2 773 .4
Depreciation and amortization 10,339 9.3 10,073 9.3 20,687 9.2 19,940 10.1
-------- ----- -------- ----- -------- ----- -------- -----
Operating income $ 44,533 40.2% $ 42,222 38.9% $ 94,633 41.9% $ 77,806 39.6%
======== ===== ======== ===== ======== ===== ======== =====
Total operating revenues increased 2.2% to $110.8 million for the
second quarter of 1999 as compared to the second quarter of 1998. The increase
in revenues relates to a $4.5 million increase during the quarter, as compared
to the previous year fiscal quarter, in equity earnings from interests in each
of 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
facilities.
Our operating revenues for the six-month period ended June 30, 1999,
which increased 14.7% to $225.3 million as compared to $196.4 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 remained fairly consistent for the second quarter
of 1999 as compared to the same quarter of 1998. The decrease in megawatt hours
sold to the purchasing utilities at the Lumberton, Kenansville, Southport and
Roxboro facilities resulted in a decrease in fuel expense, a component of
operating costs. This decrease was offset by routine maintenance expenses
incurred at the Hopewell facility in the three-months ended June 30, 1999 and an
increase in megawatt hours sold to the purchasing utility at the Richmond and
Rocky Mount facilities. Decreases to operating costs were also 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 11.9% to $109.6 million as compared to $97.9 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 our 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 factors discussed above: a
decrease in fuel expense as a result of a decrease in megawatt hours sold to the
purchasing utility at the Lumberton, Kenansville, Southport and Roxboro
facilities.
General, administrative and development expenses remained fairly
consistent for the second quarter of 1999 as compared to the second quarter of
1998 as well as the six-months ended June 30, 1999 as compared to the
corresponding period in 1998. The slight decrease primarily resulted from
general decreases in payroll and employee benefits.
10
11
Interest expense increased 12.2% to $15.2 million for the second
quarter of 1999 as compared to the second quarter of 1998. Our weighted average
long-term debt increased to $882.9 million, with a weighted average interest
rate of 6.95% for the second quarter of 1999, as compared to average long-term
debt of $742.6 million, with a weighted average interest rate of 7.66% for 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
increase in interest expense discussed above was partially offset by a decrease
in interest expense at some of our project subsidiaries due to the scheduled
repayment of outstanding project finance debt.
The decrease in equity in net loss of affiliates related to the
decrease in losses recognized from our interest in partnerships operating
greenhouses in the states of New York and Texas. We entered into an agreement in
December, 1998 to sell our interests in these partnerships.
The 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 second quarter
of 1999 were net income of $36.3 million, increases due to adjustments for
depreciation and amortization of $20.7 million, deferred income taxes of $11.9
million, minority interest in income, net of dividends of $3.0 million, equity
in net income of unconsolidated affiliates, net of dividends of $2.8 million and
a net $1.9 million adjustment to cash reflecting changes in other working
capital assets and liabilities, which were partially offset by amortization of
unearned lease income, net of minimum lease payments received of $.8 million.
Cash flow provided by operating activities of $75.8 million, proceeds from
borrowings of $54.3 million, and cash contribution from parent of $49.8 million,
were primarily used to purchase property, plant and equipment of $.3 million,
repay project finance borrowings of $43.2 million, pay a common stock dividend
of $34.4 million, fund $1.1 million of escrow, make an additional investment in
an affiliate of $39.8 million, and lend $55.0 million to an affiliate.
Historically, we have financed each facility primarily under financing
arrangements and related documents that 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 us and our other project subsidiaries, except
in connection with transactions where we have agreed to certain limited
guarantees and other obligations with respect to such projects. These limited
guarantees and other obligations include agreements for the benefit of the
project lenders to three project subsidiaries to fund cash deficits that the
projects may experience as a result of incurring some types of costs, subject to
an aggregate cap of $51.9 million.
In addition, Cogentrix, Inc., which is an indirect subsidiary of
Holdings, 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
11
12
utility under the utility's published five-year capacity credit and variable
energy rates plus interest. The remaining two power sales agreements provide
that in the event of early termination, the project subsidiary must pay the
utility the cost of replacing the electricity from a third party for the
remainder of the agreement's term. Because these project subsidiaries'
obligations do not by their terms stipulate a maximum dollar amount of
liability, the aggregate amount of potential exposure under these guarantees
cannot be quantified. If we or our subsidiary were required to satisfy all of
these guarantees and other obligations or even one or more of the significant
ones, it could impair Holding's ability to pay dividends and management fees to
the Parent.
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 acquisition financing 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
us is subject to limitations in their respective 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 $888.3 million, substantially all of such
indebtedness is project financing debt. Future annual maturities of long-term
debt range from $54.7 million to $86.3 million in the five-year period ending
December 31, 2003. We believe that our project subsidiaries and the project
entities in which we have an investment will generate sufficient cash flow to
pay all required debt service on the project financing debt.
Several of our subsidiaries maintain revolving credit facilities.
These facilities, which are non-recourse to the Parent, aggregate $68.5 million.
As of June 30, 1999, we had no remaining funds available under these facilities.
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
12
13
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 the report on Form 10-K for the year ended December
31, 1998, filed by our Parent with the Commission on June 30, 1999.
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.
13
14
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
Holdings' 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 financial
position, results of operations, or cash flows.
14
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Incorporation of Cogentrix Delaware
Holdings, Inc. (3.3) (1)
3.2 Bylaws of Cogentrix Delaware Holdings, Inc. (3.4) (1)
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) (4)
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)
4.7 Amended and Restated Guarantee, dated as of October
29, 1998, made by Cogentrix Delaware Holdings, Inc.
the Guarantor in favor of the Borrower Creditors
(10.130) (3)
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. (10.1)(*)(5)
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. (10.2)(5)
10.3 Steam Purchase Contract, effective as of January 1,
1999, by and between Celanese Chemical Inc. and
Cogentrix Virginia Leasing Corporation. (10.3)(*)(5)
10.4 Steam Purchase Contract, effective as of January 1,
1999, by and between BASF Corporation and Cogentrix
Virginia Leasing Corporation. (10.4)(*)(5)
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 Amendment No. 3 to
the Registration Statement on Form S-4 (File No.
33-67171) filed with the Securities and Exchange
Commission by Cogentrix Energy, Inc. and Cogentrix
Delaware Holdings, Inc. on March 15, 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.
15
16
(2) Incorporated by reference to the Form 10-K (File No.
33-74254) filed by Cogentrix Energy, Inc. on
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 by
Cogentrix Energy, Inc. on 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 by Cogentrix Energy, Inc. on 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 by Cogentrix Energy, Inc. on August
16, 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.
16
17
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 DELAWARE HOLDINGS, INC.
(Registrant)
August 16, 1999 /s/ Thomas F. Schwartz
--------------------------------------------
Thomas F. Schwartz
President
(Principal Financial and Accounting Officer)
17