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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9208
COGENERATION CORPORATION OF AMERICA
(Exact name of Registrant as Specified in Charter)
DELAWARE 59-2076187
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
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ONE CARLSON PARKWAY, SUITE 240
MINNEAPOLIS, MINNESOTA 55447-4454
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 745-7900
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 shorter 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 19-34 subsequent to the distribution of securities
under a plan confirmed by a court. X Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,857,269 shares
of common stock, $0.01 par value per share (the "Common Stock"), as of April
27, 1999.
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COGENERATION CORPORATION OF AMERICA
FORM 10-Q
MARCH 31, 1999
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements......................................... 3
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998....................... 3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and March 31, 1998....... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and March 31, 1998....... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 24
Signature................................................................. 25
Index to Exhibits......................................................... 26
2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents.................................... $ 4,338 $ 3,568
Restricted cash and cash equivalents......................... 15,364 12,135
Accounts receivable, net..................................... 20,605 14,326
Receivables from related parties............................. 61 130
Inventories.................................................. 2,269 2,683
Other current assets......................................... 304 640
---------------- ----------------
Total current assets....................................... 42,941 33,482
Property, plant and equipment, net of accumulated
depreciation of $50,969 and $47,819, respectively........... 241,733 244,040
Investments in equity affiliates............................. 18,823 18,179
Deferred financing costs, net................................ 6,111 6,503
Other assets................................................. 16,468 16,470
---------------- ----------------
Total assets............................................... $ 326,076 $ 318,674
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of loans and payables due NRG Energy, Inc.... $ 9,591 $ 7,020
Current portion of nonrecourse long-term debt................ 7,849 8,060
Current portion of recourse long-term debt................... 1,509 1,550
Short-term borrowings........................................ 2,128 1,887
Accounts payable............................................. 9,033 8,800
Prepetition liabilities...................................... 811 803
Other current liabilities.................................... 3,653 4,227
---------------- ----------------
Total current liabilities.................................. 34,574 32,347
Loans due NRG Energy, Inc.................................... 42,263 36,123
Nonrecourse long-term debt................................... 187,684 189,848
Recourse long-term debt...................................... 45,225 45,225
Deferred tax liabilities, net................................ 2,793 2,793
Other liabilities............................................ 7,298 8,525
---------------- ----------------
Total liabilities.......................................... 319,837 314,861
Stockholders' equity (deficit):
Common stock, par value $.01, 50,000,000 shares authorized
6,871,069 shares issued, 6,857,269 and 6,836,769 shares
outstanding as of March 31, 1999 and December 31, 1998,
respectively................................................ 68 68
Additional paid-in capital................................... 65,813 65,715
Accumulated deficit. (59,190) (61,590)
Accumulated other comprehensive income (loss)................ (452) (380)
---------------- ----------------
Total stockholder's equity (deficit)....................... 6,239 3,813
---------------- ----------------
Total liabilities and stockholders' equity (deficit)....... $ 326,076 $ 318,674
---------------- ----------------
---------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1999 1998
------------ ------------
REVENUES:
Energy revenues........................... $ 22,745 $ 11,283
Equipment sales and services.............. 3,807 5,471
Rental revenues........................... - 875
------------ ------------
26,552 17,629
COST OF REVENUES:
Cost of energy revenues................... 12,803 3,513
Cost of equipment sales and services...... 3,327 4,739
Cost of rental revenues................... - 650
------------ ------------
16,130 8,902
------------ ------------
Gross profit............................ 10,422 8,727
Selling, general and
administrative expenses.................. 1,683 2,107
------------ ------------
Income from operations.................. 8,739 6,620
------------ ------------
Interest and other income................. 125 218
Equity in earnings of affiliates.......... 670 1,007
Interest and debt expense................. (5,706) (3,553)
------------ ------------
Income before income taxes.............. 3,828 4,292
Provision for income taxes................ 1,428 1,619
------------ ------------
Net income.............................. $ 2,400 $ 2,673
------------ ------------
------------ ------------
Basic earnings per share.................. $ 0.35 $ 0.39
------------ ------------
------------ ------------
Diluted earnings per share................ $ 0.35 $ 0.38
------------ ------------
------------ ------------
Weighted average shares
outstanding (Basic)...................... 6,847 6,837
------------ ------------
------------ ------------
Weighted average shares
outstanding (Diluted).................... 6,918 7,010
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1999 1998
--------------- --------------
Cash Flows from Operating Activities:
Net income................................................... $ 2,400 $ 2,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 3,542 2,106
Equity in earnings of affiliates......................... (644) (1,007)
Gain on disposition of property and equipment............ - (67)
Other, net............................................... - 29
Changes in operating assets and liabilities:
Accounts receivable, net............................... (6,270) (302)
Inventories............................................ 381 3
Receivables from related parties....................... 69 22
Other assets........................................... 339 325
Accounts payable and other current liabilities......... (188) (1,303)
--------------- --------------
Net cash provided by (used in) operating activities.. (371) 2,479
--------------- --------------
Cash Flows from Investing Activities:
Capital expenditures......................................... (2,071) (25,314)
Proceeds from disposition of property and equipment.......... - 71
Collections on notes receivable.............................. - 26
Deposits into restricted cash accounts, net.................. (3,221) (102)
--------------- --------------
Net cash used in investing activities................ (5,292) (25,319)
--------------- --------------
Cash Flows from Financing Activities:
Proceeds from long-term debt................................. 12,874 23,387
Repayments of long-term debt................................. (6,780) (2,176)
Net proceeds of short-term borrowing......................... 241 3,168
Deferred financing costs..................................... - (4)
Purchase of treasury stock................................... (50) -
Proceeds from issuance of common stock....................... 148 -
--------------- --------------
Net cash provided by financing activities............ 6,433 24,375
--------------- --------------
Net increase in cash and cash equivalents..................... 770 1,535
Cash and cash equivalents, beginning of period................ 3,568 3,444
--------------- --------------
Cash and cash equivalents, end of period...................... $ 4,338 $ 4,979
--------------- --------------
--------------- --------------
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 3,786 $ 3,237
Income taxes paid........................................... 38 347
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
COGENERATION CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cogeneration Corporation of America ("CogenAmerica" or the "Company")
is an independent power producer pursuing "inside-the-fence" cogeneration
products in the U.S. The Company is engaged primarily in the business of
developing, owning and managing the operation of cogeneration projects which
produce electricity and thermal energy for sale under long-term contracts
with industrial and commercial users and public utilities. The Company is
currently focusing on natural gas-fired cogeneration projects with long-term
contracts for substantially all of the output of such projects. In addition
the Company sells and rents power generation and standby/peak shaving
equipment and services through several wholly owned subsidiaries operating
under the common name "PUMA".
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of all
majority-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated. Investments in companies, partnerships and
projects that are more than 20% but less than majority-owned are accounted
for by the equity method.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the Company's Report on Form 10-K for the
year ended December 31, 1998. In the opinion of management, the consolidated
financial statements reflect all adjustments necessary for a fair
presentation of the interim periods presented. Results of operations for an
interim period may not give a true indication of results for the year.
NET EARNINGS PER SHARE
Basic earnings per share ("EPS") includes no dilution and is computed
by dividing net income (loss) by the weighted average share of common stock
outstanding. Diluted EPS is computed by dividing net income (loss) by the
weighted average shares of common stock and dilutive common stock equivalents
outstanding. The Company's dilutive common stock equivalents result from
stock options and are computed using the treasury stock method.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------------------------------------------- ----------------------------------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) EPS (NUMERATOR) (DENOMINATOR) EPS
------------------ -------------------- ---------- ------------------ -------------------- ----------
Net income:
Basic EPS $ 2,400 $ 6,847 $ 0.35 $ 2,673 $ 6,837 $ 0.39
Effect of dilutive
stock options - 71 - 173
------------------ -------------------- ------------------ --------------------
Diluted EPS $ 2,400 $ 6,918 $ 0.35 $ 2,673 $ 7,010 $ 0.38
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
6
2. LOANS AND PAYABLES DUE NRG ENERGY, INC.
Amounts owed to NRG Energy, Inc. are comprised of the following:
THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
----------------- -----------------
Long-term debt:
Note due April 30, 2001 $ 2,539 $ 2,539
Grays Ferry note due July 1, 2005 1,900 1,900
Pryor note due September 30, 2004 23,415 23,947
Morris note due December 31, 2004 21,069 12,027
----------------- -----------------
48,923 40,413
Less current portion (6,660) (4,290)
----------------- -----------------
$ 42,263 $ 36,123
----------------- -----------------
----------------- -----------------
Current maturities of loans and accounts payable:
Current maturities:
Morris note $ 4,149 $ 2,104
Pryor note 2,511 2,186
Accounts payable:
Management services, operations and other 2,931 2,730
----------------- -----------------
$ 9,591 $ 7,020
----------------- -----------------
----------------- -----------------
3. COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income and
other comprehensive income, which consists solely of foreign currency
translation adjustments. Income taxes have not been provided on the foreign
currency translation adjustments as the earnings of the foreign subsidiary
are considered permanently reinvested. The components of comprehensive
income, for the first quarter of 1999 and 1998 were as follows:
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
------------- -------------
Net income $ 2,400 $ 2,673
Foreign currency translation (72) 35
gain (loss)
------------- -------------
Comprehensive income $ 2,328 $ 2,708
------------- -------------
------------- -------------
4. INVESTMENT IN EQUITY AFFLIATES
Investments in equity affiliates consist of the following:
MARCH 31, DECEMBER 31,
1999 1998
--------------------------------
Grays Ferry (33% owned) $ 18,234 $ 17,603
PoweRent Limited (50% owned) 589 576
------------- -------------
$ 18,823 $ 18,179,
------------- -------------
------------- -------------
7
GRAYS FERRY
On March 31, 1999, CogenAmerica Schuylkill, a wholly-owned subsidiary
of the Company, had a one-third partnership interest in the Grays Ferry
Cogeneration Partnership("Grays Ferry"). The other partners as of such date
were affiliates of PECO Energy Company ("PECO")and Trigen Energy Corporation
("Trigen"). Grays Ferry has constructed a 150 MW cogeneration facility
located in Philadelphia which began commercial operations in January 1998.
Grays Ferry has a 25-year contract to supply all the steam produced by the
project to an affiliate of Trigen through 2022 and two 20-year contracts
("PPAs") to supply all of the electricity produced by the project to PECO
through 2017.
The Company accounts for its investment in Grays Ferry by the equity
method. The Company's equity in earnings of the partnership was $631 and $986
for the three months ended March 31, 1999 and 1998, respectively.
On April 23, 1999, Grays Ferry and PECO reached final settlement on
the resolution of litigation concerning the parties' Power Purchase
Agreements. Under the terms of the settlement, PECO transferred its one-third
ownership interest in the 150-megawatt project to Grays Ferry. As a result,
the Company's respective interest in Grays Ferry increased to 50% effective
April 23, 1999 (See Note 6). Summarized financial information for Grays Ferry
for the three months ended March 31, 1999 and 1998 is presented below:
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
------------- -------------
Current assets $ 30,595 $ 28,137
Non-current assets $ 157,505 $ 161,944
Current liabilities $ 136,493 $ 151,680
Non-current liabilities $ - $ -
Net revenues $ 19,174 $ 17,033
Cost of sales $ 11,803 $ 10,863
Operating income $ 4,539 $ 5,172
Partnership net income $ 869 $ 2,958
POWERENT LIMITED
PoweRent Limited ("PoweRent") is a 50% owned United Kingdom Company
owned by PUMA that sells and rents power generation equipment. The Company
accounts for its investment by the equity method. The Company's equity in
earnings was $13 and $27 for the three months ended March 31, 1999 and 1998,
respectively.
The Company has determined and previously announced that its equipment
sales, rental and services business is not a part of its strategic plan. The
Company is currently pursuing several avenues for the disposition of PUMA,
which is not expected to have a material adverse effect on the Company's
final position or results of operations.
8
5. SEGMENT INFORMATION
The Company is engaged principally in developing, owning and managing
cogeneration projects and the sale and service of cogeneration related
equipment. The Company has classified its operations in the following
segments: energy, and equipment sales, rental and service. The energy segment
consists of cogeneration and standby/peak shaving projects. The equipment
sales, rental and service segment consists of PUMA, the Company's
wholly-owned subsidiary based in the United Kingdom and O'Brien Energy
Services Company ("OES") until its sale in November 1998. Summarized
information about the Company's operations in each industry segment are as
follows:
QUARTER ENDED MARCH 31, 1999
------------------------------------------------------------------
EQUIPMENT
SALES, RENTAL
ENERGY & SERVICE OTHER TOTAL
---------- -------------- ----------- -----------
Revenues $ 22,745 $ 3,807 $ - $ 26,552
Depreciation & amortization 3,123 27 - 3,150
Other cost of revenues 9,680 3,300 - 12,980
---------- -------------- ----------- -----------
Gross profit 9,942 480 - 10,422
Selling, general & administrative expenses 1,121 354 208 1,683
---------- -------------- ----------- -----------
Income (loss) from operations 8,821 126 (208) 8,739
Interest & other income 76 - 49 125
Interest & debt expense (5,212) (72) (422) (5,706)
Equity in earning of affiliates 630 40 - 670
---------- -------------- ----------- -----------
Income (loss) before taxes $ 4,315 $ 94 $ (581) $ 3,828
---------- -------------- ----------- -----------
---------- -------------- ----------- -----------
Identifiable assets $260,688 $ 7,428 $ 57,960 $ 326,076
Capital expenditures 962 22 3 987
QUARTER ENDED MARCH 31, 1998
------------------------------------------------------------------
EQUIPMENT
SALES, RENTAL
ENERGY & SERVICE OTHER TOTAL
---------- -------------- ----------- -----------
Revenues $ 11,283 $ 6,346 $ - $ 17,629
Depreciation & amortization 1,899 50 - 1,949
Other cost of revenues 1,614 5,339 - 6,953
---------- -------------- ----------- -----------
Gross profit 7,770 957 - 8,727
Selling, general & administrative expenses 1,238 579 290 2,107
---------- -------------- ----------- -----------
Income (loss) from operations 6,532 378 (290) 6,620
Interest & other income 124 5 89 218
Interest & debt expense (3,131) (79) (343) (3,553)
Equity in earning of affiliates 987 20 - 1,007
---------- -------------- ----------- -----------
Income (loss) before taxes $ 4,512 $ 324 $ (544) $ 4,292
---------- -------------- ----------- -----------
---------- -------------- ----------- -----------
Identifiable assets $182,169 $ 9,274 $ 62,240 $ 253,683
Capital expenditures 212 $ 76 $ - $ 288
9
6. SUBSEQUENT EVENTS
SETTLEMENT BETWEEN GRAYS FERRY COGENERATION PARTNERSHIP AND PECO
On April 23, 1999, Grays Ferry and PECO reached a final settlement in
the Common Pleas Court in Philadelphia on the resolution of litigation
concerning the parties' Power Purchase Agreements ("PPAs").
The settlement calls for PECO and Grays Ferry to specifically perform
the existing PPAs as amended, under an order from the Court. This includes
PECO paying for capacity and electric energy purchases from Grays Ferry at the
specific contract prices set out in the PPAs for the 1998-2000 time period.
The energy pricing under the original terms of the PPAs after the year
2000 was based upon a percentage of the PJM market price, which is the local
wholesale market price. This market-based pricing is expected to produce
substantially lower revenues than the more favorable rates of the early
contract years. As part of the settlement, the PPAs were amended to modify
the percentage of the PJM market price to lessen the impact in the early
years of market-index pricing.
Under the terms of the settlement, PECO will also transfer its
one-third ownership interest in the 150-megawatt project to Grays Ferry. As a
result, CogenAmerica and Trigen Energy Corporation's respective interest in
Grays Ferry will increase from 33% to 50%. PECO will transfer its interest to
Grays Ferry at no cost. The transfer is effective with the final settlement
on April 23, 1999.
As a result of the settlement, CogenAmerica will record a one-time
gain in the second quarter of 1999, based upon the fair market value of the
additional ownership interest. Management currently estimates the after-tax
gain will be approximately $5 to $6 million.
Additionally, the settlement resolves litigation against PECO by the
Chase Manhattan Bank and Westinghouse Power Generation and arbitration
between Grays Ferry and Westinghouse regarding the construction contract.
MORRIS OUTAGE
The Morris facility experienced an unscheduled outage on April 20,
1999 which resulted in service and business interruption to Equistar
Chemicals LP ("Equistar"). In January 1999 there were two similar incidents.
CogenAmerica, Equistar and NRG Energy, in its capacity as provider of
construction management services and operation and maintenance services, are
continuing to investigate the matter and are examining their respective
rights and obligations with respect to each other and with respect to
potentially responsible third parties, including insurers. CogenAmerica
believes it is likely that additional capital from the construction
contingency from the project financing will be expended to enhance
reliability. The Company does not believe that there will be a material
adverse impact on the Company's financial statements, however, no assurance
can be given as to the ultimate outcome of this matter.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this Item 2 updates, and should be read
in conjunction with, the information set forth in Part II, Item 7, of the
Company's Report on Form 10-K for the year ended December 31, 1998.
Capitalized terms used in this Item 2 which are not defined herein have the
meaning ascribed to such terms in the Notes to the Company's consolidated
financial statements included in Part I, Item 1 of this Report on Form 10-Q.
All dollar amounts (except per share amounts) set forth in this Report are in
thousands.
Except for the historical information contained in this Report, the
matters reflected or discussed in this Report which relate to the Company's
beliefs, expectations, plans, future estimates and the like are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Without limiting the generality of the
foregoing, the words "believe," "anticipate," "estimate," "expect," "intend,"
"plan," "seek" and similar expressions, when used in this Report and in such
other statements, are intended to identify forward-looking statements. These
forward looking statements include, among others, the Company's estimates of
the impact of the Grays Ferry settlement on its net income and earnings per
share. Such forward-looking statements are subject to risks, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company to differ materially from historical results or
from any results expressed or implied by such forward-looking statements.
Such factors include, without limitation, operating risks and uncertainties
which tend to be greater with respect to new facilities, such as the risk
that the breakdown or failure of equipment or processes or unanticipated
performance problems may result in lost revenues or increased expenses, and
other factors discussed in this Report and the Company's Report on Form 10-K
for the year ended December 31, 1998 in the section entitled "Item 1.
Business -- Risk Factors". Many of such factors are beyond the Company's
ability to control or predict, and readers are cautioned not to put undue
reliance on such forward-looking statements. By making these forward-looking
statements, the Company does not undertake to update them in any manner
except as may be required by the Company's disclosure obligations in filings
it makes with the Securities and Exchange Commission under the Federal
securities laws.
GENERAL
CogenAmerica is an independent power producer pursuing
"inside-the-fence" cogeneration projects in the U.S. The Company is engaged
primarily in the business of developing, owning and managing the operation of
cogeneration projects which produce electricity and thermal energy for sale
under long-term contracts with industrial and commercial users and public
utilities. The Company is currently focusing on natural gas-fired
cogeneration projects with long-term contracts for substantially all of the
output of such projects. The Company's strategy is to develop, acquire and
manage the operation of such cogeneration projects and to provide U.S.
industrial facilities and utilities with reliable and competitively priced
energy from its power projects.
CogenAmerica has substantial expertise in the development and
operation of power projects. The Company's project portfolio as of March 31,
1999 consisted of:
11
(i) a 122 MW cogeneration facility in Parlin, New Jersey (the "Parlin
Project"), which began commercial operation in June 1991 and is
owned through its wholly-owned subsidiary, CogenAmerica Parlin;
(ii) a 58 MW cogeneration facility in Newark, New Jersey (the "Newark
Project"), which began commercial operation in November 1990 and
is owned through its wholly-owned subsidiary, CogenAmerica Newark;
(iii) a 117 MW cogeneration facility in Morris, Illinois (the "Morris
Project"), which began commercial operation in November 1998 and
is owned through its wholly-owned subsidiary, CogenAmerica Morris.
See "Part I - Item 1. - Subsequent Events";
(iv) a 110 MW cogeneration facility in Pryor, Oklahoma (the "Pryor
Project"), which had been in commercial operation prior to
acquisition by the Company in October 1998, and is owned through
the Company's wholly-owned subsidiary, Oklahoma Loan Acquisition
Corporation;
(v) two standby/peak shaving facilities with an aggregate capacity
of 22 MW in Philadelphia, Pennsylvania (the "PWD Project"), which
began commercial operation in September 1993, the principal
project agreements of which are held by O'Brien (Philadelphia)
Cogeneration, Inc., an 83%-owned subsidiary of the Company; and
(vi) a one-third partnership interest in a 150 MW cogeneration facility
located at Grays Ferry in Philadelphia, Pennsylvania (the "Grays
Ferry Project"), which began operation in January 1998.
CogenAmerica's partnership interest increased to 50% on April 23,
1999. See "Part I - Item 1. - Subsequent Events."
Each of the projects is currently producing revenues under long-term
power sales agreements that expire at various times.
Energy and capacity payment rates are generally negotiated during the
development phase of a cogeneration project and are finalized prior to
securing project financing and the start of a plant's commercial operation.
Pricing provisions of each of the Company's project power sales agreements
contain unique features. As a result, different rates exist for each plant
and customer pursuant to the applicable power sales agreement.
However, in general, revenues for each of the Company's cogeneration
projects consist of two components: energy payments and capacity payments.
Energy payments are based on the power plant's actual net electrical output,
expressed in kilowatt-hours of energy, purchased by the customer. Capacity
payments are based on the net electrical output the power plant is capable of
producing (or portion thereof) and which the customer has contracted to have
available for purchase. Energy payments are made for each kilowatt-hour of
energy delivered, while capacity payments, under certain circumstances, are
made whether or not any electricity is actually delivered.
12
The projects' energy and capacity payments are generally based on
scheduled prices and/or base prices subject to periodic indexing mechanisms,
as specified in the power sales agreements. In general terms, energy and
capacity payments are intended to recover the variable and fixed costs of
operating the plant, respectively, plus a return.
A power plant may be characterized as one or more of the following: a
"base-load" facility, a "dispatchable" facility, a combination
"base-load/dispatchable" facility or a "merchant" facility. Such
characterization depends upon the manner in which the plant will be used and
the requirements of the related power sales agreement(s). A "base-load"
facility generally means that the plant is operated continuously to produce a
fixed amount of energy and capacity for one or more customers. A
"dispatchable" facility generally means that the customer(s) purchased the
right to a fixed amount of available capacity, which must be produced if and
when requested by the customer(s). A combination "base-load/dispatchable"
facility is a plant that operates in both modes, with a portion of the
plant's capacity designated as base-load and the remainder available for
dispatch. A "merchant" facility generally refers to a plant that operates and
sells its output to various customers at prevailing market prices rather than
pursuant to a long-term power sales agreement.
Under a power sales agreement with Jersey Central Power and Light
Company ("JCP&L") extending into 2011, CogenAmerica Parlin has committed 114
MW of the Parlin facility's generating capacity to JCP&L, of which 41 MW are
committed as base capacity and 73 MW as dispatchable capacity. JCP&L must
purchase energy from the base capacity whenever such energy is available from
the Parlin facility. Energy from the dispatchable capacity is purchased by
JCP&L only when requested (dispatched) by JCP&L.
The Parlin PPA provides for curtailment by JCP&L under such typical
conditions as emergencies, inspection and maintenance. In addition, JCP&L may
also reduce base capacity during periods of low load on the PJM (the local
wholesale market) by up to 600 hours in any calendar year, of which 400 may
be during on-peak periods, but only when all PJM member utilities are
required to reduce generation to minimum levels and PJM has requested JCP&L
to reduce or interrupt external generation purchases. The Parlin PPA also
provides for an annual average heat rate adjustment that will increase or
decrease JCP&L's payments to CogenAmerica Parlin, depending upon whether the
average heat rate of the Parlin Project is below or above average 9,500 Btu
per kWh (higher heating value). The actual adjustment is calculated by
applying a ratio based on this differential to a fuel cost calculation.
CogenAmerica Newark has a power sales agreement with JCP&L extending
through 2015 whereby it has committed to sell all of the Newark facility's
generating capacity to JCP&L, up to a maximum of 58 MW per hour. The Newark
Project is effectively a base-load unit and JCP&L must purchase the energy
whenever such energy is available from the Newark facility.
Under the terms of the Newark PPA, JCP&L, in its sole discretion, is
allowed to curtail production at the facility for 700 hours per year provided
that the duration of each curtailment is a minimum of six hours and all
curtailments occur only during Saturdays, Sundays and Holidays. Since
contract inception in 1996, JCP&L have fully utilized this curtailment option
annually and the Company expects JCP&L will continue to do so in future
years. JCP&L may also disconnect from CogenAmerica Newark for emergencies,
inspections and maintenance for up to 400 hours per year if all PJM
13
member utilities are required to reduce generation to minimum levels and
JCP&L has been requested by PJM to reduce or interrupt external generation
purchases. The Newark PPA provides for an annual average heat rate adjustment
that will increase or decrease JCP&L's payments to CogenAmerica Newark
depending upon whether the average heat rate of the Newark Project is below
or above 9,750 Btu per kWh (higher heating value). The actual adjustment is
calculated by applying a ratio based upon this differential to a fuel cost
calculation.
Morris LLC has an Energy Service Agreement ("ESA") with Equistar
through 2023 to provide base-load power and steam. Equistar has agreed to
purchase the entire requirements of Equistar's plant (subject to certain
exceptions) for electricity up to the full electric output of two of the
three combustion turbines at the Morris Project. In addition, the Morris
Project has an arrangement with the local utility to provide standby power.
Each combustion turbine at the Morris facility has a nominal rating of 39 MW.
The Morris Project designed redundancy into the energy production capability
of the facility in order to meet Equistar's demand. The cost of installing
and maintaining the reserve capacity was taken into account when the energy
services agreement was negotiated.
CogenAmerica Morris is permitted to arrange for the sale to third
parties of interruptible capacity and/or energy from the third turbine and to
the extent available, any excess power from the two turbines required to
supply Equistar with its actual requirements. CogenAmerica Morris is in the
process of contracting with a third-party power marketer for the sale of this
excess capacity/energy.
CogenAmerica Pryor has a power sales agreement with Oklahoma Gas and
Electric Company ("OG&E") through 2008 to provide 110 MW of dispatchable
capacity, with a maximum dispatch of 1,500 hours per year. The facility also
sells electricity to Public Service Company of Oklahoma ("PSO") when not
dispatched by OG&E. The Pryor Project purchases natural gas from Dynegy and
Aquila. Under the terms of the agreement with PSO, the pricing of energy
sales is indexed to a market fuel rate. Under terms of the agreement with
OG&E, energy sales are linked to the average cost of fuel.
The power sales agreements for the Parlin, Newark, and Morris
projects are structured to avoid or minimize the impact on the Company's
revenues from fluctuations in fuel costs. Since the power sales agreements
were amended in April 1996, JCP&L is responsible for the supply and
transportation of natural gas required to operate the Parlin and Newark
plants. Thus, revenues from the Parlin and Newark plants exclude any amounts
attributable to recovery of fuel costs. Prior to the contract amendments,
Parlin and Newark cost of revenues included fuel and related costs and
contract provisions for delayed recovery of such costs in revenues caused
variability in the projects' gross profit.
Under the terms of the Morris ESA with Equistar, Equistar is the
fuel manager and all of the costs of supplying the fuel are effectively a
pass-through to Equistar. As a result, although fuel costs are included in
the Morris Project revenues and costs of revenues, the Company believes it
has minimized any impact on gross profit from fluctuations in the price of
natural gas purchases and supply for the Morris Project.
The Grays Ferry Project has a gas sales agreement with Aquila
providing for the purchase of natural gas to meet the power plant's
requirements. For the period from
14
commercial operations in January 1998 until the end of the year 2000, the
partnership has purchased a natural gas collar with a cap in order to limit
the volatility of natural gas purchases. Beginning in 2001, the price for
natural gas supplied by Aquila is indexed to a market electricity rate.
During 1998, the Company also sold and rented power generation
equipment and provided related services in the U.S. and international markets
under the names OES and PUMA. As previously announced, the Company has
determined that its equipment sales rental and service segment is no longer a
part of its strategic plan. Accordingly, on November 5, 1998 the Company sold
OES, a wholly-owned subsidiary of the Company, in a stock transaction to an
unrelated third party. The Company is currently pursuing alternatives for the
disposition of its remaining equipment sales and service business operated by
PUMA. The Company expects that the disposition of PUMA will not have a
material adverse effect on the Company's results of operations or financial
condition. Although OES was sold in 1998, the equipment sales, rental and
service segment has not been reported as a discontinued operation in the
financial statements because specific plans regarding the timing and manner
of ultimate disposition of PUMA are still under consideration.
NET INCOME AND EARNINGS PER SHARE
Net income for the 1999 first quarter was $2,400, or diluted
earnings per share of $0.35, compared to first quarter 1998 net income of
$2,673, or diluted earnings per share of $0.38.
The decrease in net income and earnings per share for first quarter
was primarily due to outages at the Newark and Grays Ferry facilities.
REVENUES
Energy revenues for the first quarter of 1999 of $ 22,745 increased
from $11,283 for the comparable period in 1998. Energy revenues primarily
reflect billings associated with the Parlin, Newark, Morris, Pryor and PWD
Projects. The increase in energy revenues was primarily attributable to the
acquisition of the Pryor Project in October 1998, and the commencement of
Morris operations in November 1998. Energy revenues in the first quarter of
1999 were negatively impacted by an outage at the Newark Project.
PROJECT ENERGY REVENUES
THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
1999 1998
--------------- ---------------
Cogeneration Projects
Parlin $ 5,380 $ 5,386
Newark 4,505 4,845
Morris 7,982 -
Pryor 3,834 -
Standby/Peak Shaving Facilities
PWD 1,044 1,052
-------------- --------------
$ 22,745 $ 11,283
-------------- --------------
-------------- --------------
Equipment sales and services revenues for the first quarter 1999 of
$3,807 decreased from $5,471 for the comparable period in 1998. The decrease
was primarily
15
attributable to the sale of OES in November 1998. PUMA equipment sales and
services revenues for the first quarter 1999 of $3,807 increased from $3,223
for the comparable period in 1998. The increase was primarily due to higher
sales volume.
Rental revenues in the 1998 first quarter were attributable to OES,
which was sold in November 1998.
COSTS AND EXPENSES
Cost of energy revenues for the first quarter 1999 of $12,803
increased from $3,513 for the comparable period in 1998. The increase was
primarily the result of commencement of the Morris operations, the Pryor
acquisition and depreciation associated with equipment capitalized at the
Parlin and Newark facilities in 1998.
Cost of equipment sales and services for the first quarter 1999 of
$3,327 decreased from $4,739 for the comparable period in 1998. The decrease
was primarily due to the sale of OES.
Cost of rental revenues in the 1998 first quarter were attributable to
OES, which was sold in November 1998.
The Company's gross profit for the first quarter 1999 of $10,422
(39.3% of sales) increased from the first quarter 1998 gross profit of $8,727
(49.5% of sales). The gross profit increase was primarily attributable to the
addition of the Morris and Pryor Projects. The gross profit decrease, as a
percentage of sales, for the first quarter was primarily attributable to the
addition of the Morris and Pryor Projects which have lower operating margins
than the Newark and Parlin Projects. It is expected that competition will
continue to put pressure on these margins in the future as new projects are
added.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the first
quarter 1999 of $1,683 decreased from first quarter 1998 SG&A expenses of
$2,107. The decrease was primarily due to lower legal expenses.
INTEREST AND OTHER INCOME
Interest and other income for the first quarter 1999 of $125 decreased
from interest and other income of $218 for the comparable period in 1998.
EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates for the first quarter 1999 of $670
decreased from $1,007 in the comparable period in 1998. The decrease was
primarily due to combustion and steam turbine outages at the Grays Ferry
facility. 1999 equity earnings include income of $341 to true up estimated
earnings recorded by the Company in the 1998 fourth quarter. As a result of
the Grays Ferry and PECO settlement, CogenAmerica will record a one-time gain
in the second quarter of 1999 based upon the fair market value of the
additional ownership interest. Management currently estimates the after-tax
gain will be approximately $5 to $6 million.
16
INTEREST AND DEBT EXPENSE
Interest and debt expense for the first quarter 1999 of $5,706
increased from interest and debt expense of $3,553 for the comparable period
in 1998. The increase was primarily attributable to the financing of the
Pryor and Morris Projects, both of which were acquired and commenced
commercial operations, respectively in the fourth quarter of 1998.
INCOME TAXES
Income tax expense for the first quarter of 1999 of $ 1,428 decreased
from $1,619 for the comparable period in 1998. The decrease was primarily due
to lower pre-tax earnings.
The consolidated effective tax rate for the quarters ended March 31,
1999 and 1998 was 37.3% and 37.7%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The development, construction and operation of cogeneration projects
and other power generation facilities requires significant capital.
Historically, the Company has employed substantial leverage at both the
project and parent company level to finance its capital requirements. Debt
financing at the project level is typically nonrecourse to the parent.
Nonrecourse project financing agreements usually require initial equity
investments at the project level. The Company has financed such equity
investments through cash generated from operations and other borrowings,
including borrowings at the parent level.
Almost all of the Company's operations are conducted through
subsidiaries and other affiliates. As a result, the Company depends almost
entirely upon their earnings and cash flow to service consolidated
indebtedness, including indebtedness of the parent, CogenAmerica. The
nonrecourse project financing agreements of certain subsidiaries and other
affiliates generally restrict their ability to pay dividends, make
distributions or otherwise transfer funds to the parent prior to the payment
of other obligations, including operating expenses, debt service and reserves.
At March 31, 1999, cash and cash equivalents totaled $4,338 and
restricted cash totaled $15,364. The restricted cash primarily represents
escrow funds required by the terms of credit agreements for the Newark,
Parlin and Morris projects.
Cash provided by (used in) operating activities was $(371) and $2,479
for the three months ended March 31, 1999 and 1998, respectively. Cash
provided by operating activities decreased primarily due to accounts
receivable balances relating to the Morris Project.
Cash used in investing activities was $5,292 and $25,319 for the three
months ended March 31, 1999 and 1998 respectively. Cash used by investing
activities during the first quarter of 1999 primarily represents net deposits
of $3,221 into restricted cash accounts as required by certain credit
agreements.
Cash provided by financing activities was $6,433 and $24,375 for the
three months
17
ended March 31, 1999 and 1998, respectively. During the first quarter of
1999, proceeds from long-term debt totaled $12,874 consisting of loans due
NRG Energy related to the Morris Project. Repayments of long-term debt
totaled $6,780.
In May 1996, the Company's wholly-owned subsidiaries CogenAmerica
Newark and CogenAmerica Parlin entered into a credit agreement (the "Newark
and Parlin Credit Agreement") which established provisions for a $155,000
fifteen-year loan and a $5,000 five-year debt service reserve line of credit.
The loan is secured by all of CogenAmerica Newark's and CogenAmerica Parlin's
assets and a pledge of the capital stock of such subsidiaries. The Company
has guaranteed repayment of $21,775 of the amount outstanding under the
Credit Agreement. The interest rate on the outstanding principal is variable
based on, at the option of CogenAmerica Newark and CogenAmerica Parlin, LIBOR
plus a 1.125% margin or a defined base rate plus a 0.375% margin, with
nominal margin increases in the sixth and eleventh year. For any quarterly
period where the debt service coverage ratio is in excess of 1.4:1, both
margins are reduced by 0.125%. Concurrently with the Newark and Parlin Credit
Agreement, CogenAmerica Newark and CogenAmerica Parlin entered into an
interest rate swap agreement with respect to 50% of the principal amount
outstanding under the Credit Agreement. This interest rate swap agreement
fixes the interest rate on such principal amount at 6.9% plus the margin. At
March 31, 1999, the principal amount outstanding under the credit agreement
was $132,524.
CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company,
owned as of March 31, 1999, a one-third partnership interest in the Grays
Ferry Project which commenced operation in January 1998. CogenAmerica's
partnership interest increased to 50% on April 23, 1999. See "Part I - Item
1. - Subsequent Events." In March 1996, the Grays Ferry Partnership entered
into a credit agreement with Chase to finance the project. The credit
agreement obligated each of the project's three partners to make a $10,000
capital contribution prior to the commercial operation of the facility. The
Company made its required capital contribution in 1997. NRG Energy entered
into a loan commitment to provide CogenAmerica Schuylkill the funding, if
needed, for the CogenAmerica Schuylkill capital contribution obligation to
the Grays Ferry Partnership. Prior to December 31, 1997, CogenAmerica
Schuylkill had borrowed $10,000 from NRG Energy under this loan agreement, of
which $1,900 remained outstanding to NRG Energy at March 31, 1999.
In connection with its acquisition of the Morris Project, CogenAmerica
Funding, a wholly-owned subsidiary of the Company, assumed all of the
obligations of NRG Energy to provide future equity contributions to the
project, which obligations are limited to the lesser of 20% of the total
project cost or $22,000. NRG Energy has guaranteed to the Morris Project's
lenders that CogenAmerica Funding will make these future equity
contributions, and the Company has guaranteed to NRG Energy the obligation of
CogenAmerica Funding to make these future equity contributions (which
guarantee is secured by a second priority lien on the Company's interest in
the Morris Project). In addition, NRG Energy has committed in a Supplemental
Loan Agreement between the Company, CogenAmerica Funding and NRG Energy to
loan CogenAmerica Funding and the Company (as co-borrowers) the full amount
of such equity contributions by CogenAmerica Funding, subject to certain
conditions precedent, at CogenAmerica Funding's option. Any such loan will be
secured by a second priority lien on all of the membership interests of the
project and will be recourse to CogenAmerica Funding and the Company.
Effective November 30, 1998 the Company and NRG Energy agreed to a First
Amendment to the Supplemental Loan Agreement that allowed the Company to
contribute the $22,000 of
18
equity in installments to match the construction draw payments. At March 31,
1999, the entire $22,000 had been drawn and contributed as equity. The
Supplemental Loan Agreement calls for an interest rate of prime plus 1.5%.
Effective with the First Amendment the interest rate was changed to prime
plus 3.5% until the possible event of default related to the Grays Ferry
Project had been eliminated. On February 16, 1999 NRG Energy agreed to reduce
the interest rate under the loan back to prime plus 1.5%. This adjustment was
made effective January 1, 1999. At March 31, 1999, $21,069 was due NRG Energy
under the Supplemental Loan Agreement.
On September, 15, 1997, Morris LLC (which was at that time an
affiliate of NRG Energy) entered into a $91,000 construction and term loan
agreement (the "Agreement") to provide nonrecourse project financing for a
major portion of the Morris Project. The Company assumed the Agreement in
December 1997 upon acquiring Morris LLC. The Agreement provides $85,600 of
20-month construction loan commitments and $5,400 in letter of credit
commitments (the "LOC Commitment"). Upon satisfaction of all completion
criteria as set forth in the Agreement, the construction loan is due and
payable or, if certain criteria are satisfied, may be converted to a five
year term loan based on a 25-year amortization with a balloon payment at
maturity. Interest on the construction loan is variable based on, at the
Company's option, either the base rate, as defined in the Agreement, or LIBOR
plus 0.75%. The interest rate resets based on the Company's selection of the
borrowing period ranging from one to six months. Borrowings are secured by
CogenAmerica Funding's ownership interest in Morris LLC, its cash flows,
dividends and any other property that CogenAmerica Funding may be entitled to
as owner of Morris LLC. At March 31, 1999, $84,305 was outstanding under the
construction loan and no amounts were pledged under the LOC Commitment.
On December 17, 1997, the Company entered into the MeesPierson Credit
Agreement providing for a $30,000 reducing revolving credit facility. The
facility is secured by the assets and cash flows of the PWD Project as well
as the distributable cash flows of the Parlin and Newark Projects, and the
Grays Ferry Partnership. On December 19, 1997 the Company borrowed $25,000
under this facility. The proceeds were used to repay $16,949 to NRG Energy,
to repay $6,551 of obligations of the PWD Project and $1,500 for general
corporate purposes. The MeesPierson Credit Agreement includes cross default
provisions that cause defaults to occur in the event certain defaults or
other adverse events occur under certain other instruments or agreements
(including financing and other project documents) to which the Company or one
or more of its subsidiaries or other entities in which it owns an ownership
interest is a party. The actions taken by the power purchaser of the Grays
Ferry Project resulted in a cross default under the MeesPierson Credit
Agreement. On August 14, 1998 the lender agreed to waive the default until
July 1, 1999 by imposing a 2.0% increase in the interest rate effective
October 1, 1998. On February 12, 1999 the lender agreed to a permanent waiver
of the Grays Ferry Project cross default and eliminated the 2.0% increase in
the interest rate effective January 1, 1999. The Company also reduced the
size of the facility to $25,000. The repayment of the $25,000 is due in full
on December 17, 2000.
The Company's principal credit agreements (including the Newark and
Parlin Credit Agreement) include cross-default provisions that generally
permit its lenders to accelerate the indebtedness owed thereunder, to decline
to make available any additional amounts for borrowing thereunder, and to
exercise certain other remedies in respect of any collateral securing such
indebtedness in the event certain defaults or other adverse events occur
under certain other instruments or agreements (including
19
financing and other project documents) to which the Company or one or more of
its subsidiaries or other entities in which it owns an ownership interest is
a party. As a result, a default under one such other instrument or agreement
could have a material adverse effect on the Company by causing one or more
cross-defaults to occur under one or more of the Company's principal credit
agreements, potentially having one or more of the effects set forth above and
otherwise adversely affecting the Company's liquidity and capital position.
During 1998 the Company incurred approximately $1,001 of third-party
costs related to a capital markets financing transaction expected to be
completed during 1999. These costs have been deferred and are included in the
balance sheet as "Deferred financing costs, net." If the Company elects to
pursue an alternative financing, such as through the commercial bank market,
or if the financing currently contemplated for the capital markets is
indefinitely delayed or discontinued, the Company will be required to expense
the financing costs that have been deferred.
In October 1998, NRG Energy loaned the Company and CogenAmerica Pryor
approximately $23,900 to finance the acquisition of the Pryor Project. The
loan is a six-year term facility calling for principal and interest payments
on a quarterly basis, based on project cash flows. The interest rate on the
note relating to such loan was initially set at prime rate plus 3.5% and such
rate reduces by two percentage points upon the occurrence of certain events
related to elimination of default risk under the loan. On February 16, 1999
NRG Energy agreed to reduce the interest rate under the loan to prime plus
1.5%. This adjustment was made effective January 1, 1999. At March 31, 1999,
$23,415 was due NRG Energy under the loan.
YEAR 2000
The Year 2000 issue refers generally to the data structure problem
that may prevent systems from properly recognizing dates after the year 1999.
The Year 2000 issue affects information technology ("IT") systems, such as
computer programs and various types of electronic equipment that process date
information by using only two digits rather than four digits to define the
applicable year, and thus may recognize a date using "00" as the year 1900
rather than the year 2000. The issue also affects some non-IT systems, such
as devices which rely on a microcontroller to process date information. The
Year 2000 issue could result in system failures or miscalculations, causing
disruptions of a company's operations. Moreover, even if a company's systems
are Year 2000 compliant, a problem may exist to the extent that the data that
such systems process is not.
The following discussion contains forward-looking statements
reflecting management's current assessment and estimates with respect to the
Company's Year 2000 compliance efforts and the impact of Year 2000 issues on
the Company's business and operations. Various factors, many of which are
beyond the control of the Company, could cause actual plans and results to
differ materially from those contemplated by such assessments, estimates and
forward-looking statements. Some of these factors include, but are not
limited to, representations by the Company's vendors and counterparties,
technological advances, economic considerations and consumer perceptions. The
Company's Year 2000 compliance program is an ongoing process involving
continual evaluation and may be subject to change in response to new
developments.
20
THE COMPANY'S STATE OF READINESS
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 conversions to be
completed on a timely basis. In light of its compliance efforts, the Company
does not believe that the Year 2000 issue will materially adversely affect
operations or results of operations, and does not expect implementation to
have a material impact on the Company's financial statements. However, there
can be no assurance that the Company's systems will be Year 2000 compliant
prior to December 31, 1999, or that the failure of any such system will not
have a material adverse effect on the Company's business, operating results
and financial condition. In addition, to the extent the Year 2000 problem has
a material adverse effect on the business, operations or financial condition
of third parties with whom the Company has material relationships, such as
vendors, suppliers and customers, the Year 2000 problem could have a material
adverse effect on the Company's business, results of operations and financial
condition.
IT SYSTEMS. The Company has reviewed and continues to review all of
its IT systems as they relate to the Year 2000 issue. The Company's
accounting system has been upgraded to alleviate any potential Year 2000
issues. The Company outsources its human resource and payroll systems and is
in the process of working with the outside vendor to identify and correct any
potential Year 2000 issues. This process is expected to be complete and any
changes implemented by December 31, 1999. The Company's billing systems are
either provided by the customer or are performed internally on microcomputer
systems. In these cases, the collection of data is the most important feature
and any impact from a Year 2000 issue is expected to be immaterial.
NON-IT SYSTEMS. As indicated above, the Company is dependent upon some
of its customers for billing data related to the amount of electricity and
steam sold and delivered during the month. For the most part, the collection
of this data is done mechanically rather than electronically. Only data
storage is managed electronically. The collection of this data also occurs
within the control systems of the Company's various facilities. The Company
has requested that the control system vendors audit their software to
identify any potential Year 2000 issues and provide recommendations for
alleviating any potential problems. This process has been completed for all
of the Company's facilities and the various solutions have been implemented.
The Company does not believe that any further upgrades, if necessary, will be
material to its financial condition or results of operation.
YEAR 2000 ISSUES RELATING TO THIRD PARTIES. As described above, the
Company, in some cases, is dependent upon certain customers to provide
billing data. However, the Company also captures and processes this data as a
redundancy. The Company's control systems have been upgraded as described
above and the Company does not believe that any loss of data will occur due
to a Year 2000 issue. In addition, the Company's third parties are major
utilities and sophisticated industrial concerns who are participants in
sophisticated Year 2000 readiness programs. The Company has participated in
vendor surveys to determine the readiness of various Company systems for any
potential Year 2000 issues. In addition, the Company has obtained written
disclosure from a number of vendors relating to their Year 2000 preparedness.
21
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company's costs to review and assess the Year 2000 issue have not
been material. The Company believes that its future costs to implement Year
2000 solutions will also be immaterial to the financial statements.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company believes that its most likely Year 2000 worst case
scenario would be the loss of billing data to utilities and industrial
companies which purchase the Company's electricity and steam. This billing
information, as explained above, is also captured by the Company's control
systems at its various facilities.
THE COMPANY'S CONTINGENCY PLANS
As described above, the contingency plan for the loss of billing data
is to use the data provided by the Company's internal control systems which
are in the process of being upgraded to eliminate any Year 2000 issues.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is required to be adopted
for fiscal years beginning after June 15, 1999 (fiscal year 2000 for the
Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are to be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is the type of hedge transaction.
Management has not yet determined the impact that adoption of SFAS No. 133
will have on its earnings or financial position, but it may increase earnings
volatility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is primarily impacted by changes in interest
rates and changes in natural gas prices. The Company's market risk has not
materially changed from that reported in Part II, Item 7a, of the Company's
Report on Form 10-K for the year ended December 31, 1998.
22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GRAYS FERRY COGENERATION PARTNERSHIP. Trigen-Schuylkill Cogeneration,
Inc., NRGG (Schuylkill) Cogeneration, Inc. and Trigen-Philadelphia Energy
Corp. v. PECO Energy Company, Adwin (Schuylkill) Cogeneration, Inc. and the
Pennsylvania Public Utility Commission, Court of Common Pleas Philadelphia
County, April Term 1998, No. 544, filed April 9, 1998. This matter was
previously reported in the Company's Report on Form 10-K for the year ended
December 31, 1998. On April 23, 1999 the Grays Ferry Cogeneration Partnership
("Grays Ferry") and PECO Energy Company ("PECO") reached a final settlement
of this litigation. The settlement calls for PECO and Grays Ferry to
specifically perform their existing Power Purchase Agreements ("PPAs"), as
amended, under an order from the Court. This includes PECO paying for
capacity and electrical energy purchases from Grays Ferry at the specific
contract prices set out in the PPAs for the 1998-2000 time period. The energy
pricing under the original terms of the PPAs, after the year 2000 was based
upon a percentage of the PJM market price, which is the local wholesale
market price. This market-based pricing is expected to produce substantially
lower revenues than the more favorable rates of the early contract years. As
part of the settlement the PPAs were amended to modify the percentage of the
PJM market price to lessen the impact in the early years of market-index
pricing. Under the terms of the settlement, PECO will also transfer its
one-third ownership interest in the 150-megawatt project to Grays Ferry. As a
result, CogenAmerica and Trigen Energy Corporation's respective interest in
Grays Ferry will increase from 33% to 50%. PECO will transfer its interest to
Grays Ferry at no cost. The transfer is effective with the final settlement
on April 23, 1999.
The Company is subject from time to time to various other claims that
arise in the normal course of business, and management believes that the
outcome of any such matters as currently may be pending (either individually
or in the aggregate) will not have a material adverse effect on the business
or financial condition of the Company.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The "Index to Exhibits" following the signature page is
incorporated herein by reference.
(b) Reports on Form 8-K
On March 30, 1999, the Company filed a Report on Form 8-K/A
dated October 9, 1998, which amended a Report on Form 8-K filed
October 26, 1998, for the purpose of filing financial statements
required under Item 7.
24
SIGNATURE
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 hereunto duly authorized.
Cogeneration Corporation of America
------------------------------------------
Registrant
Date: May 10,1999 By: /s/ Timothy P. Hunstad
------------------------------------------
Timothy P. Hunstad
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial Officer and Duly
Authorized Officer)
25
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company filed
as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998 and incorporated herein by this
reference.
3.2 Preferred Stock Certificate of Designation of the Company filed as
Exhibit 3.3 to the Company's Current Report on Form 8-K dated April 30,
1996 and incorporated herein by this reference.
3.3 Restated Bylaws of the Company filed as Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by this reference.
10.1 Agreement dated January 31, 1999 between the Company and Timothy P.
Hunstad, Vice President and Chief Financial Officer.
10.2 Agreement dated January 31, 1999 between the Company and Richard C.
Stone, Vice President Business Development and Marketing.
10.3 Agreement of Employment dated as of May 1, 1999 between the Company and
Julie A. Jorgensen, President and Chief Executive Officer.
10.4 Second Amendment Agreement dated as of April 23, 1999 between Grays
Ferry Cogeneration Partnership and PECO Energy Company.
27 Financial Data Schedule for the three months ended March 31, 1999 (for
SEC filing purposes only).
26