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, 1997
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 333-14495-01
PANDA INTERFUNDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2660915
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4100 Spring Valley Road, Suite 1001, Dallas, Texas 75244
(Address of principal executive offices, including zip code)
(972) 980-7159
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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. Yes [ ] No [X] The Company has not been
subject to filing requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 19, 1997.
Common Stock, Par Value $.01 Per Share 1,000
<PAGE>
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (Unaudited) F-1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Panda Interfunding Corporation and Subsidiaries Condensed Consolidated Financial
Statements:
Condensed Consolidated Balance Sheets as of December 31, 1996
and March 31, 1997 ....................................................... F-2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1997 ..................................... F-3
Condensed Consolidated Statements of Shareholder's Deficit for
the three months ended March 31, 1997 .................................... F-4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1997 ..................................... F-5
Notes to Condensed Consolidated Financial Statements for the
three months ended March 31, 1996 and 1997 ............................... F-6
Panda Interholding Corporation and Subsidiaries Condensed Consolidated Financial
Statements:
Condensed Consolidated Balance Sheet as of December 31, 1996
and March 31, 1997 .................................................. F-8
Condensed Consolidated Statement of Operations for the three
months ended March 31, 1996 and 1997 ................................. F-9
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1997 ................................. F-10
Notes to Condensed Consolidated Financial Statements for the
three months ended March 31, 1996 and 1997 ........................... F-11
F-1
<PAGE>
PANDA INTERFUNDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
DECEMBER 31 MARCH 31
1996 1997
------------- -------------
Current assets:
Cash and cash equivalents ................ $ 828,797 $ 1,191,782
Restricted cash -- current ............... 17,809,921 15,115,215
Accounts receivable ...................... 9,402,685 9,219,619
Fuel oil, spare parts and supplies ....... 7,913,777 6,897,908
Other current assets ..................... 164,905 234,585
------------- -------------
Total current assets .................. 36,120,085 32,659,109
Plant and equipment:
Electric generating facilities ........... 288,716,711 289,097,164
Furniture and fixtures ................... 494,418 496,202
Less: accumulated depreciation ........... (26,539,539) (29,488,416)
------------- -------------
Total plant and equipment, net ........ 262,671,590 260,104,950
Restricted cash -- debt service reserves
and escrow deposits ........................ 31,799,366 31,799,366
Debt issuance costs, net of accumulated
amortization of $165,015 and $338,822,
respectively ............................... 7,570,521 7,530,770
------------- -------------
$ 338,161,562 $ 332,094,195
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses:
Construction costs .................... $ 660,167 $ --
Interest and letter of credit fees .... 6,297,558 2,505,216
Operating expenses and other .......... 6,991,796 5,931,986
Current portion of long-term debt ........ 5,717,623 5,501,823
------------- -------------
Total current liabilities .......... 19,667,144 13,939,025
Long-term debt, less current portion ........ 209,830,918 208,454,461
Capital lease obligation .................... 217,488,645 222,868,697
Commitments and contingencies (Note 3)
Shareholder's deficit:
Common stock, par value $.01; 1,000 shares
authorized, issued and outstanding ...... 10 10
Advances to parent ....................... (63,033,590) (61,240,912)
Accumulated deficit ...................... (45,791,565) (51,927,086)
------------- -------------
Total shareholder's deficit ........... (108,825,145) (113,167,988)
------------- -------------
$ 338,161,562 $ 332,094,195
============= =============
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
PANDA INTERFUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
1996 1997
------------ ------------
Revenue:
Electric capacity and energy sales ........ $ 8,015,442 $ 17,329,693
Steam and chilled water sales ............. 121,548 130,582
Interest income ........................... 185,672 429,727
------------ ------------
8,322,662 17,890,002
------------ ------------
Expenses:
Plant operating expenses .................. 2,441,532 8,261,187
Project development and administrative .... 537,433 1,840,022
Interest expense and letter of credit fees 3,184,745 10,801,629
Depreciation .............................. 1,053,220 2,948,878
Amortization of debt issuance costs ....... 140,907 173,807
Amortization of partnership formation costs 133,275 --
------------ ------------
7,491,112 24,025,523
------------ ------------
Income (loss) before minority interest ....... 831,550 (6,135,521)
Minority interest ............................ (1,718,948) --
------------ ------------
Net loss ..................................... $ (887,398) $ (6,135,521)
============ ============
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
PANDA INTERFUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT FOR THE
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Advances Accumulated Shareholder's
Stock to Parent Deficit Deficit
------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 .................... $10 $(63,033,590) $(45,791,565) $(108,825,145)
Advances from parent ........................ -- 1,792,678 -- 1,792,678
Net loss .................................... -- -- (6,135,521) (6,135,521)
--- ------------ ------------ -------------
Balance, March 31, 1997 ..................... $10 $(61,240,912) $(51,927,086) $(113,167,988)
=== ============ ============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
PANDA INTERFUNDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
1996 1997
------------ -----------
Operating activities:
Net loss ..................................... $ (887,398) $(6,135,521)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest ......................... 1,718,948 --
Depreciation .............................. 1,053,220 2,948,878
Amortization of debt issuance costs ....... 140,907 173,807
Amortization of partnership formation costs 133,275 --
Amortization of loan discount
and deferred interest .................... 47,953 5,380,052
Changes in assets and liabilities:
Accounts receivable ....................... (660,500) 183,066
Fuel oil, spare parts and supplies ........ 281,634 1,015,869
Other current assets ...................... (47,151) (69,680)
Accounts payable and accrued expenses ..... 2,623,451 (4,852,153)
------------ -----------
Net cash provided (used) by operating
activities ............................... 4,404,339 (1,355,682)
------------ -----------
Investing activities:
Restricted cash - current .................... (4,843,722) 2,694,706
Additions to property, plant and equipment ... (21,053,550) (1,042,404)
Restricted cash - debt service reserves and
escrow deposits ............................. 76,776 --
------------ -----------
Net cash provided (used) by investing
activities ............................... (25,820,496) 1,652,302
------------ -----------
Financing activities:
Distributions to minority interest owner ..... (321,124) --
Advances from parent ......................... 646,353 1,792,678
Proceeds from long-term debt ................. 21,488,220 --
Repayment of long-term debt .................. -- (1,592,257)
Debt issuance costs .......................... (199,498) (134,056)
------------ -----------
Net cash provided by financing activities . 21,613,951 66,365
------------ -----------
Increase (decrease) in cash and cash equivalents 197,794 362,985
Cash and cash equivalents, beginning of period .. 1,160,096 828,797
------------ -----------
Cash and cash equivalents, end of period ........ $ 1,357,890 $ 1,191,782
============ ===========
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Interest expense on capital lease obligation .... $ -- $ 5,380,052
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
PANDA INTERFUNDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Panda Interfunding Corporation ("PIC", or collectively with its
subsidiaries the "Company"), a wholly owned subsidiary of Panda Energy
Corporation ("PEC"), which in turn is a wholly owned subsidiary of Panda Energy
International, Inc. ("PEII"), was formed in July 1996 to hold the ownership
interests in two independent power projects which were formerly owned by PEC.
The ownership interests were transferred to the Company at PEC's historical
cost. Because the transfers occurred between entities under common control, the
transactions have been accounted for in a manner similar to a pooling of
interests.
PIC, through its wholly owned subsidiary Panda Interholding Corporation
("Interholding"), holds the Company's ownership interests in the Rosemary
project and the Brandywine project. Because Interholding has no independent
operations other than holding the ownership interests in the Rosemary and
Brandywine projects, Interholding (collectively with its subsidiaries) is
considered the predecessor entity of the Company. The entities holding such
ownership interests include the following: Panda Rosemary Corporation ("PRC"), a
91% general partner in Panda-Rosemary, L.P. ("Panda-Rosemary"); PRC II
Corporation ("PRC II"), a 9% limited partner in Panda-Rosemary; Panda Brandywine
Corporation, a 50% general partner in Panda-Brandywine, L.P.
("Panda-Brandywine"); Panda Energy Corporation (a Delaware corporation), a 50%
limited partner in Panda-Brandywine; and Brandywine Water Company. The Company,
through its general and limited partnership interests, owns 100% of
Panda-Rosemary and Panda-Brandywine. Prior to July 31, 1996, the Company owned
10% of Panda-Rosemary. The Rosemary and Brandywine projects are located in the
United States. Other direct or indirect wholly owned subsidiaries of PIC include
Panda Funding Corporation ("PFC"), Panda-Rosemary Funding Corporation ("PRFC")
and Panda Cayman Interfunding Corporation ("PIC Cayman"), which have been formed
to facilitate the financing of the development and acquisition of independent
power projects.
All material intercompany accounts and transactions have been eliminated
in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and should be read in conjunction with the audited financial statements for the
year ended December 31, 1996. The accompanying unaudited condensed consolidated
financial statements for the three months ended March 31, 1996 and 1997 include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the results for the interim
periods. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The amounts presented in the balance sheet as of
December 31, 1996 were derived from the Company's audited consolidated financial
statements.
ALLOCATION OF ADMINISTRATIVE COSTS -- PEII performs certain accounting,
legal, insurance, and consulting services for the Company. These general and
administrative costs are generally allocated to the Company using the percentage
of time PEII personnel spent performing these services. The expenses allocated
were $266,000 and $555,000 for the three months ended March 31, 1996 and 1997,
respectively, and are included in project development and administrative
expenses in the statement of operations. Management believes the method used to
allocate these costs is reasonable.
3. COMMITMENTS AND CONTINGENCIES
In connection with a previous borrowing from Nova Northwest Inc. ("Nova"),
Nova received a cash flow participation interest in the distributions from the
Rosemary Project for the term of the Panda-Rosemary L.P. partnership agreement.
Such participation interest amounted to 4.33% of the Company's own participation
interest, which was 10% at the time the agreement was entered into. The Company
has filed an action with the District Court of Dallas County, Texas seeking a
declaratory judgment that Nova's cash flow participation is 0.433% of the
Company's 100% interest after the acquisition of the institutional investor's
90% limited partnership interest. Management believes that the resolution of
this dispute will not have a material effect on the financial position, results
of operations or cash flows of the Company. PEII and Nova each have the option
to convert the present value of cash flow participation, as defined by the
agreement, to PEII common stock at $6 a share.
F-6
<PAGE>
In August 1996, Panda-Brandywine and PEPCO commenced discussions
concerning commercial operational requirements of the Brandywine Project and
conversion of the construction loan to long-term financing in the form of a
lease. During these discussions, disagreements arose between Panda-Brandywine
and PEPCO with respect to certain provisions of the Brandywine Power Purchase
Agreement which relate to the determination of the interest rate that is the
basis for reduction in capacity payments thereunder (the "PEPCO Interest Rate
Dispute"). PEPCO and Panda-Brandywine are presently attempting to resolve these
disagreements but there are no assurances that such efforts will be successful.
If the PEPCO Interest Rate Dispute is determined adversely to Panda-Brandywine,
the capacity payments paid by PEPCO under the Brandywine Power Purchase
Agreement (which commenced in January 1997) will be less than originally
anticipated, thereby adversely affecting the revenues realized by
Panda-Brandywine, and consequently, reducing the amount of funds that would be
available for distribution to the Company.
Raytheon Engineers and Constructors, Inc. ("Raytheon") constructed the
Brandywine Project pursuant to a fixed-price, turnkey engineering, procurement
and construction contract (the "Brandywine EPC Agreement") with
Panda-Brandywine. Raytheon completed the construction and start-up of the
Brandywine Project and has met the requirements for commercial operations and
substantial completion under the Brandywine EPC Agreement, although the date on
which commercial operations were achieved and the entitlement of Raytheon to
certain early completion bonuses under the Brandywine EPC Agreement are the
subject of a dispute between Panda-Brandywine and Raytheon. The Company
estimates that the amount in dispute is less than $1 million and believes that
the resolution of this dispute will not have a material adverse effect upon the
financial position, results of operations or cash flows of the Company.
The Company has entered into various long-term contracts for the purchase
and transportation of fuel subject to termination only in certain limited
circumstances. These contracts have remaining terms of 10 to 25 years. The
Company's minimum purchase commitment under these contracts is 2.3 million
British thermal units of gas annually from October 31, 1996 through October 31,
2011. In the aggregate, such commitments are not at prices in excess of the
current market.
PEII is also involved in other legal and administrative proceedings in the
ordinary course of business. Management believes, based on the advice of
counsel, the amount of ultimate liability with respect to these matters will not
have a material affect on the financial position, results of operations or cash
flows of the Company.
F-7
<PAGE>
PANDA INTERHOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
DECEMBER 31 MARCH 31
1996 1997
------------- -------------
Current assets:
Cash and cash equivalents ................. $ 828,797 $ 1,191,772
Restricted cash -- current ................ 8,781,393 11,715,812
Accounts receivable ....................... 9,402,685 9,219,619
Fuel oil, spare parts and supplies ........ 7,913,777 6,897,908
Other current assets ...................... 164,905 234,585
------------- -------------
Total current assets ................... 27,091,547 29,259,696
Plant and equipment:
Electric generating facilities ............ 288,716,711 289,097,164
Furniture and fixtures .................... 494,418 496,202
Less: accumulated depreciation ............ (26,539,539) (29,488,416)
------------- -------------
Total plant and equipment, net ......... 262,671,590 260,104,950
Restricted cash -- debt service reserves
and escrow deposits ........................ 17,357,524 17,357,524
Debt issuance costs, net of accumulated
amortization of $73,986 and $185,595,
respectively ............................... 3,680,902 3,581,477
------------- -------------
$ 310,801,563 $ 310,303,647
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses:
Construction costs ..................... $ 660,167 $ --
Interest and letter of credit fees ..... 1,186,191 1,171,352
Operating expenses and other ........... 6,935,068 5,931,986
Current portion of long-term debt ......... 5,501,823 5,501,823
------------- -------------
Total current liabilities ........... 14,283,249 12,605,161
Long-term debt, less current portion ......... 104,521,718 103,145,260
Capital lease obligation ..................... 217,488,645 222,868,697
Advance from parent .......................... 15,387,447 15,831,864
Commitments and contingencies (Note 3)
Shareholder's deficit:
Common stock, par value $.01; 1,000 shares
authorized, issued and outstanding ...... 10 10
Accumulated deficit ....................... (40,879,506) (44,147,345)
------------- -------------
Total shareholder's deficit ............ (40,879,496) (44,147,335)
------------- -------------
$ 310,801,563 $ 310,303,647
============= =============
See accompanying notes to condensed consolidated financial statements.
F-8
<PAGE>
PANDA INTERHOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
1996 1997
------------ ------------
Revenue:
Electric capacity and energy sales .......... $ 8,015,442 $ 17,329,693
Steam and chilled water sales ............... 121,548 130,582
Interest income ............................. 185,672 171,178
------------ ------------
8,322,662 17,631,453
------------ ------------
Expenses:
Plant operating expenses .................... 2,441,532 8,261,187
Project development and administrative ...... 537,433 1,840,022
Interest expense and letter of credit fees .. 3,184,745 7,737,596
Depreciation ................................ 1,053,220 2,948,878
Amortization of debt issuance costs ......... 140,907 111,609
Amortization of partnership formation costs . 133,275 --
------------ ------------
7,491,112 20,899,292
Income (loss) before minority interest ......... 831,550 (3,267,839)
Minority interest .............................. (1,718,948) --
------------ ------------
Net loss ....................................... (887,398) (3,267,839)
Accumulated deficit, beginning of period ....... (14,788,098) (40,879,506)
------------ ------------
Accumulated deficit, end of period ............. $(15,675,496) $(44,147,345)
============ ============
See accompanying notes to condensed consolidated financial statements.
F-9
<PAGE>
PANDA INTERHOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
1996 1997
------------ -----------
Operating activities:
Net loss ..................................... $ (887,398) $(3,267,839)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest ......................... 1,718,948 --
Depreciation .............................. 1,053,220 2,948,878
Amortization of debt issuance costs ....... 140,907 111,609
Amortization of partnership formation costs 133,275 --
Amortization of loan discount and
deferred interest ........................ 47,953 5,380,052
Changes in assets and liabilities:
Accounts receivable ....................... (660,500) 183,066
Fuel oil, spare parts and supplies ........ 281,634 1,015,869
Other current assets ...................... (47,151) (69,680)
Accounts payable and accrued expenses ..... 2,623,451 (1,017,932)
------------ -----------
Net cash provided by operating activities . 4,404,339 5,284,023
------------ -----------
Investing activities:
Restricted cash - current .................... (4,843,722) (2,934,419)
Additions to property, plant and equipment ... (21,053,550) (1,042,404)
Restricted cash - debt service reserves
and escrow deposits ......................... 76,776 --
------------ -----------
Net cash used in investing activities ..... (25,820,496) (3,976,823)
------------ -----------
Financing activities:
Distributions to minority interest owner ..... (321,124) --
Advances from parent ......................... 646,353 444,417
Proceeds from long-term debt ................. 21,488,220 --
Repayment of long-term debt .................. -- (1,376,458)
Debt issuance costs .......................... (199,498) (12,184)
------------ -----------
Net cash provided by financing activities . 21,613,951 (944,225)
------------ -----------
Increase (decrease) in cash and cash equivalents 197,794 362,975
Cash and cash equivalents, beginning of period .. 1,160,096 828,797
------------ -----------
Cash and cash equivalents, end of period ........ $ 1,357,890 $ 1,191,772
============ ===========
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Interest expense on capital lease obligation .... $ -- $ 5,380,052
See accompanying notes to condensed consolidated financial statements.
F-10
<PAGE>
PANDA INTERHOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Panda Interholding Corporation ("Interholding", or collectively with its
subsidiaries the "Company"), a wholly owned subsidiary of Panda Interfunding
Corporation ("PIC"), which in turn is an indirect wholly owned subsidiary of
Panda Energy International, Inc. ("PEII"), was formed in July 1996 to hold the
ownership interests in two independent power projects which were formerly owned
by another subsidiary of PEII. The ownership interests were transferred to the
Company at PEII's historical cost. Because the transfers occurred between
entities under common control, the transactions have been accounted for in a
manner similar to a pooling of interests.
Interholding, through its wholly owned subsidiaries, holds the Company's
ownership interests in the Rosemary project and the Brandywine project and has
no other independent operations. The entities holding such ownership interests
include the following: Panda Rosemary Corporation ("PRC"), a 91% general partner
in Panda-Rosemary, L.P. ("Panda-Rosemary"); PRC II Corporation ("PRC II"), a 9%
limited partner in Panda-Rosemary; Panda Brandywine Corporation, a 50% general
partner in Panda-Brandywine, L.P. ("Panda-Brandywine"); Panda Energy Corporation
(a Delaware corporation), a 50% limited partner in Panda-Brandywine; and
Brandywine Water Company. The Company, through its general and limited
partnership interests, owns 100% of Panda-Rosemary and Panda-Brandywine. Prior
to July 31, 1996, the Company owned 10% of Panda-Rosemary. The Rosemary and
Brandywine projects are located in the United States.
All material intercompany accounts and transactions have been eliminated
in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and should be read in conjunction with the audited financial statements for the
year ended December 31, 1996. The accompanying unaudited condensed consolidated
financial statements for the three months ended March 31, 1996 and 1997 include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the results for the interim
periods. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The amounts presented in the balance sheet as of
December 31, 1996 were derived from the Company's audited consolidated financial
statements.
ALLOCATION OF ADMINISTRATIVE COSTS -- PEII performs certain accounting,
legal, insurance, and consulting services for the Company. These general and
administrative costs are generally allocated to the Company using the percentage
of time PEII personnel spent performing these services. The expenses allocated
were $266,000 and $555,000 for the three months ended March 31, 1996 and 1997,
respectively, and are included in project development and administrative
expenses in the statement of operations. Management believes the method used to
allocate these costs is reasonable.
3. COMMITMENTS AND CONTINGENCIES
In July 1996, Panda Funding Corporation ("PFC"), a wholly-owned subsidiary
of PIC, issued $105,525,000 of pooled project bonds ("Series A Bonds"). The
Series A Bonds bear interest at a fixed rate of 11-5/8% payable semiannually
commencing February 20, 1997. Scheduled principal payments are required
semiannually commencing February 20, 1997 and will continue through maturity on
August 20, 2012. The Series A Bonds are subject to mandatory redemption prior to
maturity under certain conditions. The Series A Bonds are fully and
unconditionally guaranteed by PIC. Although not direct obligations of the
Company, the Series A Bonds are guaranteed on a limited basis by Interholding up
to a maximum amount specified by the guarantee agreement which approximates
$25.1 million at December 31, 1996 and March 31, 1997. Additionally, the Series
A Bonds are secured by (i) all of the capital stock of PFC, PIC and
Interholding, (ii) PIC's interest in distributions from Interholding, and (iii)
certain other collateral. The Series A Bonds are effectively subordinated to the
obligations of PIC's subsidiaries under project-level financing arrangements.
The indenture contains certain covenants, including limitations on
distributions, additional debt and certain other transactions.
While amounts are outstanding under the Series A Bonds, all distributions
to PIC from Interholding and certain
F-11
<PAGE>
proceeds received by PIC from another subsidiary will be paid to a collateral
agent. On a monthly basis, the collateral agent will remit to PIC remaining
funds available after satisfaction of PIC's debt service obligations (including
amounts withheld, if necessary, to meet future debt service and reserve fund
requirements as required by the indenture) provided that PIC is in compliance
with the debt covenants.
In connection with the issuance of the Series A Bonds, PIC advanced to the
Company (i) approximately $25.1 million to partially fund the acquisition of the
outside investor's limited partnership interest in Panda-Rosemary as discussed
in Note 5 to the Company's audited financial statements for 1996, and (ii)
approximately $26.4 million to retire the term loan as discussed in Note 6 to
the Company's audited financial statements for 1996.
In connection with a previous borrowing from Nova Northwest Inc. ("Nova"),
Nova received a cash flow participation interest in the distributions from the
Rosemary Project for the term of the Panda-Rosemary L.P. partnership agreement.
Such participation interest amounted to 4.33% of the Company's own participation
interest, which was 10% at the time the agreement was entered into. The Company
has filed an action with the District Court of Dallas County, Texas seeking a
declaratory judgment that Nova's cash flow participation is 0.433% of the
Company's 100% interest after the acquisition of the institutional investor's
90% limited partnership interest. Management believes that the resolution of
this dispute will not have a material effect on the financial position, results
of operations or cash flows of the Company. PEII and Nova each have the option
to convert the present value of cash flow participation, as defined by the
agreement, to PEII common stock at $6 a share.
In August 1996, Panda-Brandywine and PEPCO commenced discussions
concerning commercial operational requirements of the Brandywine Project and
conversion of the construction loan to long-term financing in the form of a
lease. During these discussions, disagreements arose between Panda-Brandywine
and PEPCO with respect to certain provisions of the Brandywine Power Purchase
Agreement which relate to the determination of the interest rate that is the
basis for reduction in capacity payments thereunder (the "PEPCO Interest Rate
Dispute"). PEPCO and Panda-Brandywine are presently attempting to resolve these
disagreements but there are no assurances that such efforts will be successful.
If the PEPCO Interest Rate Dispute is determined adversely to Panda-Brandywine,
the capacity payments paid by PEPCO under the Brandywine Power Purchase
Agreement (which commenced in January 1997) will be less than originally
anticipated, thereby adversely affecting the revenues realized by
Panda-Brandywine, and consequently, reducing the amount of funds that would be
available for distribution to the Company.
Raytheon Engineers and Constructors, Inc. ("Raytheon") constructed the
Brandywine Project pursuant to a fixed-price, turnkey engineering, procurement
and construction contract (the "Brandywine EPC Agreement") with
Panda-Brandywine. Raytheon completed the construction and start-up of the
Brandywine Project and has met the requirements for commercial operations and
substantial completion under the Brandywine EPC Agreement, although the date on
which commercial operations were achieved and the entitlement of Raytheon to
certain early completion bonuses under the Brandywine EPC Agreement are the
subject of a dispute between Panda-Brandywine and Raytheon. The Company
estimates that the amount in dispute is less than $1 million and believes that
the resolution of this dispute will not have a material adverse effect upon the
financial position, results of operations or cash flows of the Company.
The Company has entered into various long-term contracts for the purchase
and transportation of fuel subject to termination only in certain limited
circumstances. These contracts have remaining terms of 10 to 25 years. The
Company's minimum purchase commitment under these contracts is 2.3 million
British thermal units of gas annually from October 31, 1996 through October 31,
2011. In the aggregate, such commitments are not at prices in excess of the
current market.
PEII is also involved in other legal and administrative proceedings in the
ordinary course of business. Management believes, based on the advice of
counsel, the amount of ultimate liability with respect to these matters will not
have a material affect on the financial position, results of operations or cash
flows of the Company.
F-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(DOLLAR AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED)
GENERAL
The financial statements included in this Form 10-Q include the
consolidated financial statements of Panda Interfunding Corporation ("PIC", or
collectively with its subsidiaries the "Company") and the consolidated financial
statements of Panda Interholding Corporation ("Interholding"). The financial
statements of Interholding are included because Interholding provides a limited
guarantee of certain indebtedness of PIC as described in Note 6 to the Company's
audited financial statements for the year ended December 31, 1996. The financial
statements reflect the financial data of the entities that held partnership
interests in Panda-Rosemary, L.P. ("Panda-Rosemary") and Panda-Brandywine, L.P.
("Panda-Brandywine") (collectively the "Project Entities", which own the
Rosemary Facility and the Brandywine Facility, respectively, as described in the
following paragraph) during the periods presented. In July 1996, these
partnership interests were transferred to Interholding, which is a wholly owned
subsidiary of PIC, by PIC's parent and recorded at the parent's historical cost.
PIC and Interholding were incorporated in July 1996 and were not in existence
during the first quarter of 1996; however, the entities that currently own such
partnership interests are wholly-owned subsidiaries of PIC and Interholding.
Thus, references herein to financial data of the Company are for convenience of
reference, and it should be understood that all such references are to the
financial information of the entities that held such interests during the
periods presented. Because such entities are direct subsidiaries of
Interholding, Interholding is considered the predecessor of the Company.
The Company owns 100% equity interests in two completed electric power
generation facilities in the United States: the Rosemary Facility, which began
commercial operations in December 1990, and the Brandywine Facility, which began
commercial operations in October 1996. Prior to July 31, 1996, the Company owned
a 10% equity interest in the Rosemary Facility.
RESULTS OF OPERATIONS
The Company's revenues from electric power generation are derived from
long-term contracts which include both a fixed capacity payment and a variable
energy payment. The capacity payments, which are based upon the specified power
generating capacity of a project, are designed to cover fixed costs and to
provide an acceptable return on equity. The energy payments, which are based on
actual electricity output, are designed to cover variable costs including fuel
costs and variable operating expenses incurred in connection with electricity
output. Accordingly, the impact of price fluctuations on the results of
operations is generally not material. The extent to which a facility is
dispatched (i.e., required to deliver electricity), and therefore the actual
electricity output for a given period, are subject to the discretion of the
power purchaser, with certain limitations. The capacity payments are the
predominant source of revenue for the Company. The Company currently believes
that it can meet its liquidity requirements solely from the capacity payments in
the unlikely event that its facilities are not dispatched at all. See "Liquidity
and Capital Resources."
FIRST QUARTER 1997 COMPARED TO 1996
The Company recorded a net loss of $6,136 in the first quarter of 1997 on
revenues of $17,890 compared to net income before minority interest of $832 on
revenues of $8,323 during the same period in 1996. The increase in revenues in
the 1997 period was primarily caused by operations of the Brandywine Facility
(which commenced on October 31, 1996), partially offset by a decrease in
revenues at the Rosemary Facility, and by increased interest income. The 1997
period reflects operations of both the Rosemary and Brandywine facilities,
whereas the 1996 period includes only the Rosemary Facility. For the 1997 and
1996 periods, capacity revenues for the Rosemary Facility were $6,900 and
$7,418, respectively, reflecting a contractual decrease of $518. Energy revenues
for the Rosemary Facility for the 1997 and 1996 periods were $175 and $597,
respectively. The decrease in energy revenues for the Rosemary Facility is
attributable to lower dispatch hours at that facility compared to the 1996
period. During the first quarter of 1997, the
<PAGE>
Rosemary Facility was dispatched 42 hours as compared to 135 hours in the 1996
period. Capacity revenues and energy revenues from Potomac Electric Power
Company for the Brandywine Facility for the first quarter of 1997 were $5,035
and $2,546, respectively. The Brandywine Facility was dispatched 777 hours
during this period. Additionally, the Brandywine Facility had energy revenues of
$2,674 from the sale of natural gas and fuel oil to other purchasers. Plant
operating expenses, which included fuel cost, operation and maintenance expense,
insurance and property taxes, increased to $8,261 (46% of revenues) in the 1997
period from $2,442 (29% of revenues) in 1996, primarily due to low margins
obtained on the sale of natural gas and fuel oil to other purchasers.
Project development and administrative expenses were $1,840 (10% of
revenues) and $537 (6% of revenues) for the 1997 and 1996 periods, respectively.
The increase in 1997 was primarily attributable to additional administrative
activities related to the commencement of commercial operations at the
Brandywine Facility and higher administrative costs required to support the
increased size and complexity of the Company's operations.
Interest expense increased to $10,802 (60% of revenues) in the 1997 period
from $3,185 (38% of revenues) in 1996 as a result of the increase in outstanding
indebtedness from the issuance of $111.4 million original principal amount of
first mortgage bonds for the Rosemary Facility (the "Rosemary Bonds"), $105.5
million original principal amount of pooled project bonds ("Series A Bonds"),
and the capital lease financing for the Brandywine Facility. The impact of such
new indebtedness was partially offset by the refinancing of the taxable revenue
bonds issued in 1989 for the Rosemary Facility and the repayment of other term
loan financing on July 31, 1996 from portions of the proceeds of the Rosemary
Bonds and the Series A Bonds.
Depreciation, amortization of debt issue costs and amortization of
partnership formation costs amounted to $3,122 (17% of revenues) in the 1997
period and $1,327 (16% of revenues) in 1996. The increase was primarily
attributable to depreciation for the Brandywine Facility in 1997.
For the 1996 period, minority interest in net income was $1,719. There is
no minority interest in 1997 due to the Company's acquisition on July 31, 1996
of the minority interest holder's limited partnership interest in
Panda-Rosemary. As a result of this acquisition, the Company owns 100% of
Panda-Rosemary.
As a result of the various factors discussed above, the Company recorded
net losses of $6,136 and $887 for the 1997 and 1996 periods, respectively.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has obtained cash from operations of the Rosemary
Facility and the Brandywine Facility, borrowings under non-recourse project debt
of Panda-Rosemary and Panda-Brandywine, an equity contribution by Ford Motor
Credit Company ("Ford")(a former minority interest partner in Panda-Rosemary),
senior indebtedness issued to Trust Company of the West, and the issuance of the
Rosemary Bonds and the Series A Bonds. The Company utilized this cash to
refinance the project debt of Panda- Rosemary, fund development and construction
of the Brandywine Facility, service its debt obligations, make distributions to
its parent to fund project development efforts, and for general and
administrative expenses. Additionally, on July 31, 1996, the Company repaid all
outstanding senior indebtedness to Trust Company of the West and purchased
Ford's remaining limited partnership interest in Panda-Rosemary.
The principal future cash requirement of the Company will be the payment
of its obligations under the Series A Bonds. Semi-annual principal and interest
payments on the Series A Bonds totaled $7.0 million in the first quarter of 1997
and are expected to total $6.1 million on each of August 20 and February 20
through February 20, 1999, after which time scheduled payments will increase as
more significant principal amortization begins. The amount of principal payments
generally increases over time.
The Company will rely almost exclusively on distributions from the Project
Entities to meet its cash requirements. The Project Entities' ability to make
such distributions will depend upon the financial
<PAGE>
performance of the Rosemary Facility and the Brandywine Facility and will be
subject to a number of limitations on distributions contained in the
project-level debt agreements. The Company currently believes that it will have
sufficient liquidity from the cash flows available for distribution from the
Project Entities, together with amounts held in debt service reserves and other
restricted cash reserves, to satisfy its obligations.
The Project Entities are dependent on capacity payments under their
respective power purchase agreements to meet their fixed obligations, including
payment of project-level debt service, and to make distributions to the Company.
Capacity payments can be adversely affected by a major equipment failure,
resulting in a facility being unavailable for dispatch for an extended period of
time. Capacity payments can also be subject to reduction pursuant to regulatory
disallowance and, under contractual provisions, as a result of events outside
the Company's control. In 1997, 1999 and 2006, the capacity payments for the
Rosemary Facility are scheduled to decrease by approximately $1.8 million
(6.7%), $1.8 million (7.1%) and $5.4 million (23.1%), respectively, based on the
facility's current capacity rating. The capacity payments for the Brandywine
Facility, which commenced in 1997, are subject to specified downward adjustments
in 1998 and 2000, and upward adjustments in 2001 and 2007 through 2021. The
Company currently believes it will be able to continue to meet its obligations
during the periods such reductions are applicable.
Each of the electric energy purchasers under the power purchase agreements
for the Rosemary Facility and the Brandywine Facility has a contractual right to
schedule the facility for dispatch largely at the purchaser's discretion. Thus,
revenues from energy payments will vary depending on the hours these facilities
are dispatched by such purchasers. The Company currently believes that it can
meet its liquidity requirements solely from the capacity payments in the
unlikely event that these facilities are not dispatched at all.
IMPACT OF INFLATION
Inflationary increases in the Company's costs, primarily project
development costs, energy costs, and capital costs, may be offset by increases
in revenue as provided in the various purchase agreements, although competition
may limit the Company's ability to fully recover all such increases. The Company
attempts, where possible, to obtain provisions in its power purchase agreements
whereby certain revenue components, such as energy payments, may be adjusted
with inflationary increases. The Company currently believes that inflation will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows in the foreseeable future.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly
Report on Form 10-Q:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
4.01 Second Supplemental Indenture to Trust Indenture, dated January
6, 1997, among Panda Funding Corporation, Panda Interfunding
Corporation and Bankers Trust Company, as Trustee, filed as
Exhibit 4.03 to the Company's Registration Statement on Form S-1
(Registration No. 333-14495-01) (the "Form S-1") and
incorporated by reference herein.
10.01 Form of Amendment to Service Agreement, effective January 1,
1997, between Transcontinental Gas Pipeline Corporation and
Panda-Rosemary, L.P., filed as Exhibit 10.55.1 to the Form S-1
and incorporated by reference herein.
27.01 Financial Data Schedule.*
- ------------
* Filed herewith.
(b) The Company did not file any reports on Form 8-K during the
quarter for which this report is filed.
<PAGE>
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.
PANDA INTERFUNDING CORPORATION
Date: May 19, 1997 By: /s/ Janice Carter
Janice Carter
Executive Vice President, Secretary and
Treasurer
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
27.01 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from SEC Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 18,638,718 16,306,997
<SECURITIES> 0 0
<RECEIVABLES> 9,402,685 9,219,619
<ALLOWANCES> 0 0
<INVENTORY> 7,913,777 6,897,908
<CURRENT-ASSETS> 36,120,085 32,659,109
<PP&E> 289,211,129 289,593,366
<DEPRECIATION> (26,539,539) (29,488,416)
<TOTAL-ASSETS> 338,161,562 332,094,195
<CURRENT-LIABILITIES> 19,667,144 13,939,025
<BONDS> 209,830,918 208,454,461
0 0
0 0
<COMMON> 10 10
<OTHER-SE> (108,825,145) (113,167,998)
<TOTAL-LIABILITY-AND-EQUITY> 338,161,562 332,094,195
<SALES> 8,136,990 17,460,275
<TOTAL-REVENUES> 8,322,662 17,890,002
<CGS> 2,441,532 8,261,187
<TOTAL-COSTS> 2,978,965 10,101,209
<OTHER-EXPENSES> 3,046,350 3,122,685
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,184,745 10,801,629
<INCOME-PRETAX> (887,398) (6,135,521)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (887,398) (6,135,521)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (887,398) (6,135,521)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
